U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 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 0-23503
InnovaCom, Inc.
(Exact name of registrant as specified in its charter)
Nevada 367 88-0308568
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
3400 Garrett Drive, Santa Clara, California 95054;
408-727-2447 (Address and telephone number of
principal executive offices)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class
- ---------------------
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenues for the year ended December 31, 1998, were approximately $108,000.
As of April 1, 1999, the aggregate market value of the voting common stock held
by non-affiliates was $3,575,803 based on the average bid and ask price of $0.18
per share.
As of April 1, 1999, the number of shares of common stock outstanding was
25,035,796.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one): Yes . No X .
<PAGE>2
With the exception of historical facts stated herein, the following
discussion may contain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ materially
from those anticipated in such forward-looking statements. Factors that could
cause actual results to differ materially include, in addition to other factors
identified in this report, the Company's operating losses, need for additional
capital, its ability to develop new products, the security interest in all of
the Company's assets, and dependence on key personnel, all of which factors are
set forth in more detail in the sections entitled "Certain Considerations" and
"Management's Discussion and Analysis or Plan of Operation" herein. 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.
Part I.
Item 1. Description of Business
BUSINESS
Corporate Information
The Company is a development stage company focusing on digital video
compression, transmission, and processing technology compliant with MPEG-2
standards. It was originally incorporated in Florida in March of 1993 as a
research and development company and was essentially dormant until 1996. In
March of 1996, the Company began to emphasize the development of broadcast
quality encoded video utilizing the Motion Picture Experts Group ("MPEG") second
generation standard for video and audio compression ("MPEG-2") and obtained a
license from FutureTel, Inc to utilize portions of its development of a video
compression chip and related MPEG-2 technology, termed the "Gecko" technology.
From 1993 until 1995, Mr. Mark C. Koz, the Company's founder, was also a
shareholder, an officer, and director of FutureTel and assisted in the
development of the Gecko technology. Mr. Koz terminated his relationship as an
officer, director and shareholder of FutureTel and, in connection with his
departure, FutureTel licensed the Gecko technology to the Company in exchange
for royalties, for a period of seven years and not to exceed $3 million, based
on sales of video compression chips utilizing or derived from the Gecko
technology. The Company applied certain aspects of the Gecko technology in the
project undertaken to development of its single chip video encoder, the DVImpact
Chip. This development project was terminated in June 1998.
In July 1996, the Company merged with Jettson Realty Development
Corporation, a Nevada corporation ("Jettson"). The merger took the form of a
share for share exchange, in which all of the shares of the Company were
exchanged for approximately 52% of Jettson. The merger was accounted for under
the reverse take-over method of accounting. Thereafter, the name of Jettson was
changed to "InnovaCom, Inc." The Company's Common Stock currently trades on the
OTC Bulletin Board under the symbol "MPEG." The merger between the Company and
Jettson is currently the subject of litigation. See "Legal Proceedings."
In May 1997, the Company acquired Sierra Vista Entertainment, Inc., a
Nevada corporation ("Sierra Vista") in a share for share exchange by issuing
8,514,500 shares of its Common Stock to Sierra Vista shareholders. Sierra Vista
<PAGE>3
was a motion picture production company and as a result of the acquisition, the
Company gained access to approximately $3 million of working capital and a
credit facility of up to $5 million. As discussed below, Sierra Vista's
operations were discontinued as part of the Company's re-ordering of priorities
in June 1998.
On May 1, 1998, Thomas E. Burke became the Company's new president,
replacing Mark Koz. On June 5, 1998, Mr. Burke resigned. Shortly afterward, he
filed for arbitration claiming that the Company breached his employment
contract, and filed a related claim for unpaid wages with the California State
Labor Commissioner. The Company maintained that Mr. Burke had breached his
employment contract, and vigorously defended itself against Mr. Burke's actions.
On December 14, 1998, the Company and Mr. Burke settled their respective claims
against each other, such settlement including a payment by each party to the
other. The amount of these payments was not material to the Company.
On June 23, 1998, Frank J. Alioto was elected President and appointed
to the Company's board of directors. In December 1998 Frank Alioto replaced Mark
Koz as the Chairman of the Board of Directors.
Concurrent with the election of Mr. Alioto as President in June 1998,
the Board of Directors decided to focus the Company on those projects that had
the greatest short-term promise, and that were closest to market. Accordingly,
essentially all development effort was focused on the development of video
compression technology products in the areas of video transmission and digital
video disks (DVD) mastering. At the same time the Company terminated or
suspended all non-core activities. The Gecko project was ended, Sierra Vista was
discontinued, and the development of an exhibition facility in China was halted.
At the same time the Company took other steps to reduce expense and conserve
cash, including termination of approximately half of its workforce. One result
was a reduction in the loss reported by the Company in its statements of
operations. The reported loss in the second half of 1998 was approximately 21%
of the loss reported in the first half. In addition, development of shippable
products was enhanced. In the fourth quarter of 1998, the Company shipped the
first of its MPEG-2 transmission systems to a customer.
Certain Considerations
In addition to the other information presented in the Annual Report,
the Company and its business are subject to certain factors as discussed as
follows.
Limited Operating History. Since its inception, the Company has
generated nominal revenues. Its primary activities to date have been the
research and development of MPEG-2 products for digital video compression and
processing technology. The Company's success is dependent upon the development
and marketing of its proposed products, as to which there can be no assurance.
Unanticipated problems, expenses, and delays are frequently encountered in
developing new products. Other factors that may affect the development of
products and their sales include, but are not limited to, new or competing
products developed by competitors, the need to develop customer support
capabilities and market expertise, delays in product development, manufacturing
difficulties, market acceptance, and the success or failure of sales and
marketing activities. The Company has no experience in bringing products to
market in any substantial manner and the failure of the Company to meet any of
the conditions discussed above could have a materially adverse effect upon the
Company's operations. No assurances can be given that the Company can or will
ever be profitable.
<PAGE>4
Operating Losses. Since its inception, the Company has incurred losses.
For the years ended December 31, 1998 and 1997, the Company incurred net losses
of approximately $16,466,000 and $11,065,000 and has accumulated a deficit of
approximately $35,727,000 since inception. The Company expects to continue to
incur losses and to continue to increase its deficit until the Company develops
and markets its products and gains significant market acceptance. Management
anticipates that the Company will continue to incur losses for at least the
first three quarters of 1999. No assurances can be given that the Company will
ever achieve profitability.
Qualified Opinion. The report of the Company's independent accountants
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern. Among the factors cited by the accountants as raising
substantial doubt as to the Company's ability to continue as a going concern
include the fact that the Company has no established source of operating income
and that it has recurring losses from operations.
Need For Additional Capital and Dilution. The Company's future capital
requirements will depend on many factors, including cash flow from operations,
progress in developing new products, competing technological and market
developments, and the Company's ability to successfully market its products.
Because the Company currently does not have significant revenues, and will not
have revenues until it begins to market its products, the Company will be
required to raise additional capital through equity or debt offerings to fund
its operations. Traditionally, the Company has relied on the sale of debt to
meet its capital requirements. Debt financing will result in interest expense,
and if convertible into equity, could also dilute then-existing shareholders.
Any equity financing could result in dilution to the Company's then-existing
stockholders. If the Company is unable to raise additional funds, the Company
may be required to reduce its operations. There can be no assurance that
additional funding will be available when required on terms acceptable to the
Company.
Litigation Involving the Company. The Company and its officers and
directors are involved in a number of legal proceedings. Such litigation
includes an action by the Company against former directors and officers of the
Company and alleged financial consultants to the Company for, among other
things, breach of fiduciary duty, fraud, breach of contract, and RICO. Four
defendants in this action are contesting the Company's complaint, and their
responses include several counter claims. The Company is considering expanding
this suit to name additional defendants. The Company has filed a separate action
against its former auditor and its prior attorneys alleging malpractice and
conflict of interest. Further, several alleged creditors of the Company have
filed actions for the payment of monies. As a result of litigation, the Company
has had to spend a substantial amount of time and fees in prosecuting and
defending itself in these matters, and will continue to do so in the future. The
potential also exists that one or more of the counterclaims made against the
Company will be successful, or that the Company might be forced to settle
counter claims, which in either case could cause financial loss to the Company.
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 addresses in
large part the same issues that the Company raised in its RICO suit discussed
above. The Company is cooperating with the SEC in this investigation. If the SEC
determines that the Company's actions in this matter in 1997 and 1996 were not
proper, the Company might be subject to SEC actions that could negatively affect
its business.
Security Interest in the Company's Assets and Current Default Status.
In December 1997, the Company issued $5,000,000 face value of Convertible
Debentures (the "Debentures", or "Convertible Debentures"). Other Debentures
with similar terms have been issued periodically through January 1999. Three
Demand Notes (the "Demand Notes") have also been issued in March, April, and May
1999. The outstanding principal and interest of the Debentures and Demand Notes
<PAGE>5
is secured by all of the assets of the Company. Therefore, in the event the
Company is unable to repay the Debentures or Demand Notes, the holders will hold
a first-priority security interest in the Company's assets upon default. No
assurances can be made that the Company will be able to repay all amounts due
under the Debentures and Demand Notes when required or that a default will not
occur prior to repayment.
Currently, and for the majority of 1998, the Company is and was in
default on certain elements of the Debenture agreements. If the holders of the
Debentures were to demand that the Company cure these defaults, and if the
Company was unable to comply, the holders of the Debentures could demand
immediate repayment of the Debentures. If the Company was not able to find
replacement financing to satisfy the Debenture holders and to continue the
operations of the Company, it would face the prospect of essential shutdown of
all operations. See also "Possible Change of Control and Dilution From
Convertible Debentures and Warrants."
Competition. The digital video and audio industry contains numerous
small and large competing companies. See: "Competition", below. Additionally,
the Company competes in an industry segment in which numerous competitors have
substantially greater resources than the Company. No assurances can be given
that existing or potential competitors of the Company will not develop products
equal to or better than those developed by the Company or that such products
will not receive greater market acceptance.
Dependence on Independent Manufacturers/Subcontractors and Suppliers of
Components. The Company does not maintain its own manufacturing or production
facilities, aside from final assembly and test, and does not intend to do so in
the foreseeable future. The Company anticipates that major sub-assemblies of its
products will be manufactured and its components will be supplied by independent
companies. Many of these independent companies may also manufacture and supply
products for the Company's existing and potential competitors. The Company does
not have any licensing or other supply agreements with its manufacturers and
suppliers. Therefore, the Company's suppliers could terminate their relationship
with the Company at any time. In the event the Company were to have difficulties
with its manufacturers and suppliers, the Company could experience delays in
supplying products to its customers.
Uncertainty of Market Acceptance. To date, the Company has had minimal
sales of its products. The Company's success will depend upon acceptance of its
products by the technology industry, including independent third party companies
and the general public. Achieving such acceptance will require significant
marketing investment. No assurances can be given that the technology industry
will accept the Company's existing and proposed products or, if accepted, the
level of acceptance.
Dependence on Technology Industries and Technological Obsolescence. The
digital video and audio industry is characterized by extensive research and
development and rapid technological changes, resulting in very short product
life cycles. Further, the video and audio industry is characterized by intense
competition among various technologies and their respective proponents.
Development of new or improved products, processes or technologies may render
the Company's products obsolete or less competitive. The Company will be
required to devote substantial efforts and financial resources to enhance its
existing products and to develop new products. No assurances can be given that
competing products or new products or technology will not be developed by
competing companies rendering the Company's products and technology obsolete.
<PAGE>6
Dependence on MPEG-2 Acceptance and Continuation as Standard. The
Company has focused much of its resources on the MPEG-2 technology and the
success of that standard will dramatically impact the Company's success. No
assurances can be given that the MPEG-2 standard will remain in favor in the
industry. Furthermore, should the standard be modified or replaced, no
assurances can be given that the Company's research and development work will
successfully transfer to an alternative standard.
Reliance on Integrators, Distributors, and OEM Customers. The Company's
success will depend to a significant extent upon its ability to develop a
distribution system with integrators, resellers, and original equipment
manufacturers ("OEMs") to distribute and sell the Company's products in the
marketplace. No assurances can be given that the Company will be successful in
obtaining and retaining the sales channel it requires to market and sell its
products successfully.
Protection of Intellectual Property. The Company has no patents, but
does hold trademarks on the Company's name and the names of certain products.
The Company is considering filing for patent protection for certain elements of
its intellectual property, but is not currently pursuing any significant patent
applications.
No assurances can be given that another company will not attempt to
infringe upon any current or future licenses, patents, patent applications,
trademarks, or copyrights of the Company or its products and technology or that
the Company may not inadvertently infringe upon any current or future licenses,
patents, patent applications, trademarks, or copyrights of another company or
its products and technology. Such infringement could result in protracted and
costly litigation and sales losses. Further, no assurances can be given that
others will not independently develop products or technology that are equivalent
or superior to those of the Company or that such products will not utilize the
same or similar technology developed by the Company, whether protected or
unprotected by a license or patent.
Concentration of Stock Ownership. As of April 1, 1999, the present
directors, executive officers, and stockholders owning more than 5% of the
outstanding Common Stock and their respective affiliates beneficially own
approximately 29.6% of the outstanding Common Stock of the Company. As a result
of their ownership, the directors, executive officers, and more than 5%
stockholders and their respective affiliates collectively will have substantial
control of all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions.
Possible Dilution from Employee, Director, and Other Options. As of
April 1, 1999, there were options outstanding to acquire an aggregate of
6,332,059 shares of the Company's Common Stock. These options, which are held by
current and former employees, directors, and consultants, are exercisable at
prices ranging from $.12 to $3.375 per share, but approximately 75% are at
prices at or below $.26 per share. If these options are exercised, they could
dilute the value of other shareholders' stock, and increase the concentration of
stock ownership in the hands of directors and officers. The presence of these
options could depress the market price of the Company's stock and effect the
cost and terms of future stock placements, if any, by the Company.
Possible Change of Control and Dilution from Convertible Debentures and
Warrants. As of April 1, 1999, the principal balance outstanding of Convertible
Debentures, plus the related interest and penalties due was approximately
$10,708,000. Under the terms of the Convertible Debenture agreements, at that
date, the balance could have been converted into approximately 71,898,000 shares
of Common Stock. The price at which the Convertible Debentures can be converted
into Common Stock in most part depends upon the current market price of the
stock, and in most cases is below the current market price of the Common Stock.
In addition at April 1, 1999, there were Warrants outstanding to purchase
2,987,500 shares of the Company's Common Stock at fixed prices ranging from $.11
<PAGE>7
to $2.43 per share. If these Convertible Debentures are converted into Common
Stock, or the Warrants are exercised, they could dilute the value of other
shareholders' stock. The presence of these Convertible Debentures and Warrants
could depress the market price of the Company's stock and effect the cost and
terms of future stock placements, if any, by the Company.
Conversion of all or a major part of the Convertible Debentures into
stock could give the holders of the Debentures ownership of a controlling
interest in the Company, and control of all matters requiring stockholder
approval. As of April 1, 1999, if the holders of the Convertible Debentures had
converted their Debentures and exercised their Warrants, they would have owned
approximately 76% of the Company's outstanding Common Stock. As of April 1,
1999, the Company did not have sufficient authorized, unissued Common Stock to
satisfy the conversion rights of the Convertible Debentures resulting in a
default on the Debentures. The Company is attempting to cure this default by
amending the Articles of Incorporation to increase the authorized number of
shares of Common Stock at a meeting of shareholders.
Possible Volatility of Securities Prices. The trading price of the
Company's Common Stock could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company, and other events or factors. Moreover, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the market price of the Company's Common
Stock could likely be materially and adversely affected. In addition, the stock
market in general, and the market prices for high-tech related companies in
particular, have experienced extreme volatility that often has been unrelated to
the operating performance of such companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's Common
Stock, regardless of the Company's operating performance.
Penny Stock Regulations. The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define "penny stock" to be
any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. The Company's securities may be covered by the penny stock rules,
which impose additional sales practice requirements on broker-dealers who sell
to persons other than established customers and accredited investors (generally,
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by this rule, the broker-dealers
must make a special suitability determination for the purchase and receive the
purchaser's written agreement of the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's securities and also affect the ability of purchasers to sell their
shares in the secondary market.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the performance of its executive officers and key personnel and on
its ability to retain and motivate such personnel. Competition between high
technology companies for qualified personnel is very high, and opportunities for
key employees to move to other companies, including direct competitors are
continually present. The loss of any of the Company's key personnel could have a
material adverse effect on the Company's business, financial condition and
operating results. The Company's success will also depend upon its ability to
hire and retain additional qualified personnel. No assurance can be given that
the Company will be able to hire or retain such qualified personnel.
<PAGE>8
Digital Video Industry Overview
In the past, video images were transmitted and stored almost
exclusively in analog formats. Digital video technology, including the Company's
technology, has been developed more recently and provides several benefits over
analog. For example, unlike analog, digital video can be compressed, providing
significant storage and transmission efficiencies, and can be duplicated and
transmitted without significant loss of quality. Digital video also allows
editing, indexing, distribution, and storage features not available in analog
formats. With the recent growth of high bandwidth network capacity,
broadcast-quality real-time video over networks using compressed digital video
is rapidly becoming available and cost effective.
The Moving Picture Experts Group ("MPEG") was formed in 1988 to develop
a worldwide industry standard for digital compression of video. In 1991, the
MPEG committee adopted the first technical standard of digital video compression
for full video motion for personal computers, which is known as "MPEG-1." The
MPEG committee determined that a higher quality digital video standard was
needed for broadcast quality video and eventually adopted the second-generation
standard of MPEG for video and audio compression ("MPEG-2"). The MPEG-2 video
compression standard defines the standards applicable to broadcast quality video
for compression, storage and transmission, and is the standard worldwide for
video compression at the professional level. It is the chosen standard for the
FCC-mandated migration to digital video broadcast, for all DVD applications, for
future HDTV and will appear on computing and networking and communication
platforms of all types.
The Company's Products and Technology
The Company develops core technologies and methodologies and
integrates complimentary third party products for digital video compression,
transmission, and processing technology applications. The Company's adheres to
MPEG-2 non-proprietary "open standards" to enhance flexibility and market appeal
for the Company's products. The Company has several products that are either
currently released for shipping, or that are in advanced stages of development
and are scheduled for release in 1999. In addition the Company has multiple
development projects in process or under consideration to enhance the features
of products already released or to develop products in complimentary or closely
related applications.
TransPEG(TM). Until recently, video transmission over network was
restricted to low frame counts, small viewable windows, and low pixel counts
because of data rate limitations within the carriers. Alternatively, carriers
with the bandwidth to achieve higher quality video were too expensive for
widespread usage. The management of the Company believes that the rapidly
increasing data bandwidth now available and becoming available in affordable
networks, including both intranet and internet, has created a demand and
opportunity for substantial growth in video transmission products to supply
real-time, broadcast-quality video.
The Company is currently marketing four such transmission products in
its TransPEG product line. These are interchangeable digital multi-channel
transmissions systems that compress video, transmit in standard carrier formats,
and decompress at the viewer's location. TransPEG products are available for a
variety of standard carriers (ATM, T1/E1, etc.), support unicast, multicast and
broadcast transmission, and feature web based controls.
DVD Impact(TM). DVD Impact is a DVD premastering suite which integrates
MPEG-2 video compression developed by the Company with a number of software
tools developed by third parties and targets corporate and "prosumer" users for
the design of custom DVD's. DVD Impact is currently shipping. This product is
intended to be a price/performance leader with most of the functionality of
competing high-end systems, but at a much lower price.
<PAGE>9
DV-2110. Currently under development, the DV-2110 is an MPEG-2 encoder
board, designed to act as the system interface, I/O manager, and host for third
party MPEG-2 encoder chips. The Company intends to imbed the DV-2110 in
subsequent versions of its TransPEG and DVD Impact products, and to sell the
board as a stand alone component, or packaged with certain Company-developed
software as an OEM product to customers in markets that the Company does not
currently service with its own system level products. The board is intended to
be compatible with personal computers running Windows 95 and NT operating
systems, and to operate with a variety of video compression hardware. Its
modular design and flexible architecture are designed to allow it to function in
a wide range of digital audio and video applications in many different hardware
and software environments.
Sales and Marketing
The Company markets its system-based solutions (TransPeg and DVD
Impact) to the professional video industry through direct sales calls from the
Company's sales force, through professional video dealerships, through system
integrators, and by attendance at national and international trade shows. At
such time, if any, as the DV2110 is completed, the Company intends to add
selected OEM's to its sales channel. Because the Company's products have been in
the development stage until recently, the Company has not achieved significant
revenue from sales.
Market for the Company's Products
The markets for the Company's currently shipping products can be
divided into two areas. The TransPEG products target users of digital video who
wish to transmit this video over standard network carriers. The DVDImpact is
intended for producers of digital video content who need to edit and master
video in preparation for end user consumption of the video. Additional products
under development or under consideration would address the needs of users and
producers of broadcast quality video who are replacing their analog video with
digital video, and who require new tools to replace their analog-based
equipment.
Video Transmission
With the increase in bandwidth in the internet, in many intranets, and
in a variety of available standard point to point carriers, applications in
transmission of broadcast quality digital video are emerging rapidly. The
Company's target applications include: Movement of video within multi-location
video production houses or between multiple contributors to the creation of
video content (video collaboration); real time medical diagnosis or consultation
between multiple locations; deposition or arraignment by video to avoid prisoner
transportation and to reduce costs; education or training from one central
location dispersed to satellite classrooms; surveillance or security in
applications where video quality is essential; and a wide range of other
situations. In general as available carrier bandwidth increases, users are
finding ways to utilize broadcast quality digital video to improve their
operations, and providers are discovering that broadcast quality digital video
is good quality content to fill their pipelines and help justify the pipeline to
potential new users.
Video Content Creation
As the demand for broadcast quality digital video grows, so will the
demand for tools to produce it. The Company's first offering into this market is
<PAGE>10
the DVDImpact, an integrated suite of tools intended for a professional level
customer who plans to edit digital video content into a completed piece ready
for end-user consumption. The target customer includes both the established
trade shop that is converting from analog based video technology to digital
technology, but also corporate, government, and institutional users who create
their own content for internal uses. The Company believes that creation of
digital video content by corporate, government, and institutional users for
internal consumption could increase sharply with the wide acceptance of DVD
format and the rapid decline in the costs associated with the production of
close-to-professional-quality digital video content that is seen currently.
The conversion of the video market from analog to digital is expected
to create demand for a wide range of products to replace software and hardware
tools that were built to service analog-based video. The Company is developing
or considering a number of potential products that are intended to address this
demand, with a user look and feel that mimics that of the analog tools being
replaced.
Competition
The Company faces competition from numerous companies, some of which
are more established, have greater market recognition, and have greater
financial, production, and marketing resources than the Company. The Company's
products compete on the basis of certain factors, including first to market,
product capabilities, product performance, price, support of industry standard,
ease of use, customer support, and user productivity.
The market for the Company's products is competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company faces direct and indirect
competition from a broad range of competitors who offer a variety of products
and solutions to the Company's current and potential customers. Many of the
Company's competitors have longer operating histories, including greater
experience in the market, significantly greater financial, technical, and other
resources than the Company, greater name recognition, and a larger installed
base of customers. Competition to supply the markets identified by the Company
can be expected to grow as the markets mature.
The Company's competitors include Spruce Technologies, Inc., Sonic
Solutions, and Minerva Systems, Inc., which market products that compete with
the DVD Impact; and FVC.COM, Inc. and Lucent Technologies, Inc. which compete
with the Company's TransPEG products. Several other companies market specialized
professional video production boards that are expected to compete with the
DV-2110 board at such time, as any, that the Company begins to ship this as an
OEM product. Numerous other companies offer products that do or will compete
with the Company's products, and the number of competing solutions can be
expected to grow. This growth will come both from new companies founded to
participate in the markets, and from established companies in related markets
widening their product offerings into the markets identified by the Company.
The Company's competitors can be expected to continue to improve the
design and performance of their products, to introduce new products with more
competitive prices and performance features, and to market more aggressively
into the Company's markets. Creating and maintaining technological and other
advantages for the Company's products over its competitors' products will
require a continued high level of investment by the Company in research and
development and in operations. No assurances can be given that the Company will
be able to continue to make such investments or that the Company will be able to
achieve the technological advances necessary to achieve competitive advantages.
<PAGE>11
Research and Development
For the past two years, the majority of the Company's efforts have been
devoted toward the research and development of digital video compression,
transmission, and processing. Product development is performed mostly at the
Company's headquarters in California by engineering and technical employees,
assisted in certain specialized areas by consultants. The Company's total
expenditures for research and development were approximately $3,167,000 and
$4,388,000 for the years ended December 31, 1998 and 1997, respectively.
FutureTel License Agreement
In 1996 the Company entered into an agreement with FutureTel whereby
FutureTel licensed to the Company certain proprietary technology related to
digital video compression in exchange for royalty payments based on sales by the
Company that included this technology. Under the license agreement, FutureTel
granted the Company the right to develop, manufacture and distribute products
using the licensed technology and derivative works. Under the terms of the
license agreement, the Company will also have the right to sublicense the
technology.
This licensed technology was incorporated into the Company's design of
its single chip MPEG-2 Gecko encoder chip, and when the design effort on this
chip was suspended in 1998, the Company ceased using the technology. Aside from
a sale or license by the Company to another party of the Company's encoder chip
design, an event not considered likely by the Company's management, the Company
has no plans to resume use of the technology licensed from FutureTel. No royalty
payments have ever been made by the Company to FutureTel.
Sierra Vista Entertainment, Inc.
Sierra Vista Entertainment, Inc.("Sierra Vista") was incorporated under
the laws of Nevada on April 3, 1996, for purposes of engaging in the production
of television or theatrical feature films. The Company and Sierra Vista entered
into a Plan and Agreement of Reorganization in which the Company acquired 100%
of Sierra Vista's issued and outstanding common stock in exchange for 8,514,500
shares of Common Stock of the Company and Sierra Vista became a wholly-owned
subsidiary of the Company. In June 1998 the Company's operations were reduced to
concentrate on a few products deemed by management to be closest to market
release. As part of the steps taken to reduce the Company's use of cash, Sierra
Vista was closed, its employees terminated, and its assets liquidated. The
operations of Sierra Vista have been presented in the accompanying Financial
Statements as discontinued operations. There are no plans to re-activate Sierra
Vista's production activities in the future.
China Joint Venture
The Company entered into a joint venture agreement with CRI, a Chinese
corporation located in Beijing ("CRI"), in September 1997. The joint venture
intended to establish an exhibition facility in China to display United States
technology and products and to provide a forum for various companies and
individuals to develop potential business relationships and projects. In
connection with entering into the joint venture with CRI, the Board of Directors
approved the issuance of 100,000 shares of Common Stock, a payment of $60,000
per year for ten years, and the opportunity to receive up to 50% of the
Company's joint venture interest to NATV Marketing ("NATV"). In June 1998 the
Company initiated steps to terminate the contracts with both CRI and NATV. In
April 1999, the Company reached agreement with both CRI and NATV to terminate
the contracts between those entities and the Company. As part of the
termination, the Company agreed to issue an additional 100,000 shares of the
Company's Common Stock to the principal of NATV, and made cash payments to both
CRI and NATV. The amount of the payments was not material to the Company.
<PAGE>12
Intelligent Instruments Corporation
In 1997, the Company's Board of Directors tentatively approved the
acquisition of Intelligent Instruments, a company wholly-owned by Mark C. Koz,
the Company's former President and Chief Executive Officer, for 2 million shares
of Common Stock of the Company, subject to certain conditions. In 1998 this
tentative approval was withdrawn and the acquisition did not occur. There are no
plans to resume this acquisition effort.
Technical Systems Associates, Inc.
The Company entered into an interim agreement to acquire Technical
Systems Associates, Inc. ("TSA"), an antenna company located in Orlando,
Florida, in March of 1997. After conducting a due diligence review of TSA, the
Company determined that the acquisition would not likely meet its current
business objectives. In October 1997, the Company entered into an agreement for
a release from the interim agreement. Under this agreement, the Company paid TSA
an aggregate of $300,000, of which approximately $180,000 had previously been
paid, and agreed to provide a certain amount of contingent debt financing in
exchange for an option to be held by the Company to acquire TSA and for the
release. In January 1998, the Company fully terminated the relationship and paid
TSA approximately $58,000 for a discharge of any financing or other obligations
under the previous agreements.
Innovative Technical Solutions, Inc.
In January 1998, the Company entered into a binding letter of intent to
acquire the business and intellectual property of Innovative Technical Services,
Inc. After further review by each party, the parties decided to rescind their
agreement without any obligations to the other.
Employees
As of March 31, 1999, the Company had 26 full-time employees: 4 in
production, 10 in research and development, 6 in sales and marketing, and 6 in
general and administration.
Item 2. Description of Property
The Company is currently renting approximately 18,000 square feet of
space in Santa Clara, California, which includes offices and research space
under a lease agreement that runs through December 2002 with an option for a
three-year extension. The monthly base rent was $28,800 for 1998, increasing by
$900 per month for each year thereafter, plus operating expenses for the common
areas of the entire complex equal to the Company's pro-rata square footage of
the complex (approximately 47% of the building, 27% of the project). The offices
house all of the Company's operations including the assembly and final testing
required for shipment of the Company's products.
Sierra Vista previously occupied approximately 2,800 square feet of
office space in Beverly Hills, California under a three (3) year lease agreement
effective October 1, 1997, which was guaranteed by InnovaCom, Inc. This space
was vacated in 1998 and a replacement occupant is being sought. The monthly base
rent is $5,882 for the first eighteen months and $6,162 thereafter.
Sierra Vista previously leased a single-family residence of
approximately 2,500 square fee in Beverly Hills, California at a cost of $7,000
per month. This lease was terminated in 1998.
<PAGE>13
Item 3. Legal Proceedings
Haynes, et. al. On November 10, 1997, InnovaCom filed suit against
Michael D. Haynes, David S. Jett, Manhattan West, Inc., Marketing Direct
Concepts, Inc., Checkers Foundation, Atlas Stock Transfer Corporation, Arun
Pande, Edwin Reedholm, and others in the Superior Court of the County of San
Francisco (Case Number 990965). The complaint alleges that in connection with
the reverse merger of Jettson Realty Development Corporation and InnovaCom, a
Florida corporation, the Company issued shares of Common Stock to Michael D.
Haynes and David S. Jett and entities controlled by them based upon fraudulent
misrepresentations. Further, the Company is alleging that Manhattan West and
Marketing Direct Concepts and Checkers Foundation, an entity alleged to be
controlled by Messrs. Haynes and Jett, were issued fees, Common Stock, and
options to acquire shares of Common Stock based upon misrepresentations,
including that they could raise capital to assist the Company in its business.
The Company has received monies in connection with a stock purchase agreement
between the Company and Checkers Foundation, but will not issue the shares of
Common Stock until this litigation involving Checkers Foundation has been
resolved. The Company is also alleging that Atlas Stock Transfer, the Company's
former transfer agent, breached its contract in issuing shares of Common Stock
in these transactions. In addition, the Company is alleging that Mr. Pande, a
former director and officer of InnovaCom, violated his fiduciary duty by
receiving shares of InnovaCom Common Stock based upon misrepresentations and
inadequate or no consideration, and made inappropriate and unauthorized
expenditures on behalf of the Company for his personal benefit, and that Mr.
Reedholm, a former director of the Company, received shares of Common Stock of
the Company without the payment of adequate consideration. The Company is also
alleging RICO (Racketeer Influenced Corrupted Organizations Act) against all
defendants. The Company is seeking damages in excess of $26 million plus
punitive damages.
Settlements have been reached with Mr. Pande, Mr. Reedholm, Marketing
Direct Concepts, and with one other defendant for payments of cash by the
defendants and relief of a debt previously owed by the Company to two
defendants, all in the amount of approximately $350,000. In addition as a part
of the settlements, options to purchase 1,098,999 shares of the Company's Common
Stock held by the defendants were cancelled. The settlement with Mr. Reedholm
included release of his claims against the Company in the Decorah Company
lawsuit, discussed below.
A number of defendants have defaulted and InnovaCom has received an
entry of judgment against them. As a result, the Company has cancelled 781,019
shares of its Common Stock, options to purchase 700,000 shares of its Common
Stock, and a liability payable of $135,000. An entry of default against one
other defaulted defendant is being sought which would allow the Company to
cancel an additional 229,310 shares of its Common Stock, and another liability
payable of approximately $112,000. The Company is pursuing efforts to fully
collect its judgment from the defaulted defendants.
Manhattan West has filed a counter-claim against the Company alleging
breach of its consulting contract with InnovaCom. Further, Atlas Stock Transfer
has filed a claim against the Company and all other defendants seeking
indemnity. The Company's management does not believe that these counterclaims
have significant merit, or that they will result in a material loss to the
Company.
This litigation is still in its initial stages and discovery is
continuing.
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,
<PAGE>14
making undisclosed payments to certain registered representatives relating to
sales of the Company's securities, and by manipulating the Company's stock
price. The Company's management does not believe that any sanctions the Company
is likely to receive from the Securities and Exchange Commission based upon this
investigation will materially affect the Company's financial position or
operations. Discovery has been initiated.
Hoffer, et. al. On September 24, 1998, InnovaCom filed suit against its
former auditor and its former attorney in Santa Clara County Superior Court
(Case CV 776606) which has since been transferred to Orange County Superior
Court No. 803328. The complaint alleges malpractice and conflict of interest
with respect to the auditor's and attorney's actions in the time frame covered
by the allegations in the Haynes suit, discussed above. This litigation is still
in its initial stages and discovery has not yet commenced.
Maturi. On October 7, 1996, InnovaCom filed a complaint for declaratory
relief in Santa Clara County Superior Court (Case No. CV 761218) against Gregory
V. Maturi, a former employee. The complaint sought clarification that Mr. Maturi
is not entitled to any further payments or benefits under his employment
agreement with the Company, and that certain payments amounting to approximately
$150,000 made by InnovaCom to Mr. Maturi should be returned to the Company. On
October 18, 1996, Mr. Maturi filed a cross-complaint against the Company for
breach of contract, fraud and deceit, and breach of the implied covenant of good
faith and fair dealing, seeking damages in excess of $5 million. In 1998
settlement was reached with Mr. Maturi in which the Company made a payment to
him that was reimbursed to the Company under the Company's liability insurance.
Decorah Company. On June 9, 1997, the Decorah Company and Edwin
Reedholm, a former director of the Company, filed a complaint against Digital
Hollywood, the Company and Mark C. Koz in the Circuit Court of Cook County,
Illinois County Department, Law Division, Case No. 97L06866. Plaintiffs are
alleging breach of contract in the amount of $7,225 lent to the Company. In
addition, Decorah Company is alleging that it has lent funds to Digital
Hollywood which have not been repaid and is seeking damages of approximately
$900,000. Further, Decorah Company is seeking damages against Mr. Koz because he
guaranteed the repayment of the monies by Digital Hollywood to Decorah Company
by pledging his Common Stock in the Company. In addition, the Company filed suit
against Mr. Reedholm for breach of fiduciary duty in the Haynes, et. al.
litigation. The Company's involvement with this suit was settled in conjunction
with the settlement discussed above of Mr. Reedholm's involvement in the Haynes,
et. al. Lawsuit. Mr Koz and Digital Hollywood have also settled with Mr.
Reedholm and Decorah Company, such settlement to include the transfer of
2,080,000 shares of the Company's stock owned by Mr. Koz, to Decorah Company
pursuant to the pledge.
Collection. The Company has a number of overdue accounts payable to
vendors. Several of these vendors have filed suit against the Company to enforce
collection. To date the Company has been able to reach settlements on most of
these collection actions, but as of April 26, 1999, three of these collection
actions seeking to collect a total of approximately $40,000 were still
outstanding.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>15
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock began trading on the OTC Bulletin Board
under the symbol "MPEG" on July 19, 1996. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The high and low prices of the Company's Common
Stock on a quarterly basis for the past two fiscal years are as follows:
Quarter High Low
-------- ----- ---
March 31, 1997 $6.19 $1.63
June 30, 1997 $5.06 $2.44
September 30, 1997 $4.38 $2.05
December 31, 1997 $3.58 $2.00
March 31, 1998 $2.80 $1.53
June 30, 1998 $2.80 $0.22
September 30, 1998 $0.39 $0.08
December 31, 1998 $0.19 $0.08
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following sections discuss the Company's financial condition and
results of operations based upon the Company's consolidated financial statements
which have been prepared in accordance with generally accepted accounting
principles. The following sections also contain forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Certain Considerations" section and elsewhere in this Annual
Report.
General
The Company is a development stage company focusing on digital video
compression, transmission, and processing technology compliant with MPEG-2
standards. The Company was founded in 1993, and began significant development
efforts on a number of chip, board, and system level products in 1996. In 1997
the Company merged with Sierra Vista, a Nevada corporation in the development
stages of production and distribution of feature length films. In 1997 and the
first half of 1998 the Company also considered or began a number of acquisitions
of other companies in addition to Sierra Vista, none of which were finalized. In
the first half of 1998 the Company significantly expanded employment,
accelerated its efforts to complete the design of its single chip encoder, and
incurred the cost for a major presence at the National Association of
Broadcasters trade show, all of which increased the Company's use of cash.
In June 1998 the Company experienced substantial changes in management
and direction. The Company discontinued its chip development efforts, closed
Sierra Vista, laid off approximately half of its employees, and took substantial
steps to reduce all expenses. At the same time the Company's resources were
focused on the completion of those few board and system level product projects
that management deemed most promising, and closest to market. The effect of
these steps is reflected in the Company's operating results. The reported loss
for the first half of 1998 was approximately $13,577,000 as compared to a loss
of approximately $2,889,000 in the second half of 1998. In the second half of
<PAGE>16
1998, the first of the Company's products were released to production and the
first deliveries were made to customers. In 1999, the Company is scheduled to
release and begin shipment of multiple additional products, and to emerge from
development stage into full production.
Management anticipates that the Company will begin to achieve
profitability from operations by the end of 1999, but that the Company will
experience a loss for 1999 as a whole. The Company will be required to raise
additional capital in 1999 to fund its initial losses and to fund increased
accounts receivable and inventory. No assurances can be given that the Company
will become profitable or that additional funding will be available or, if
available, that it will be on terms favorable to the Company.
Product development in 1999 is planned to finish those projects close
to completion at the end of 1998, and to add functionality and reduce costs with
updated versions of the products released in early 1999 and late 1998. In
addition, the Company will also invest in the development of a limited number of
products complimentary to existing products, or that use existing Company
technology in applications closely related to the Company's current markets.
Management anticipates modest increases in the staffing in its research and
development efforts and in production, marketing, and sales in 1999.
The Company does not believe that inflation will have an impact on its
results of operations and does not believe that its business is seasonal.
Results of Operations
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and the notes thereto and
other financial information included elsewhere in this Annual Report.
Year Ended December 31, 1998 Compared to December 31, 1997
Revenues
Revenues for the year ended December 31, 1998, were approximately
$108,000 as compared to approximately $149,000 for the year ended December 31,
1997. The revenue in 1998 includes sales of approximately $31,000 in the fourth
quarter of the Company's first finished products, and of approximately $77,000
in the first three quarters of pre-production and sample products. The revenues
in 1997 were from shipments of developer systems to five customers who purchased
the systems to begin development of their own software in anticipation of the
Company's commercial release of its encoding products.
Cost of goods sold
Cost of goods sold was approximately $339,000 for the year ended
December 31, 1998, as compared to approximately $53,000 for the year ended
December 31, 1997. This cost in 1997 was principally the material cost of the
developer systems shipped, while in 1998 it also included costs of building and
staffing a production department. Cost of good sold as a percentage of sales as
seen in both 1998 and 1997 is not necessarily representative of the level that
the Company expects to experience at such time, as any, that products ship to
customers in commercial volumes.
<PAGE>17
Research and development
Research and development expense was approximately $3,167,000 in the
year ended December 31, 1998, a decrease of approximately $1,221,000, from the
research and development expense of approximately $4,388,000 for the year ended
December 31, 1997. This reduction results from decreases from 1997 to 1998 of
approximately $1,200,000 in the imputed compensation expense recognized under
APB 25 and $500,000 in expense for purchased technology. These expense
reductions from 1997 to 1998 were partly offset by an increase of approximately
$381,000 in consulting expense in 1998 relative to 1997.
Selling, general and administrative
Selling, general and administrative expenses were approximately
$5,561,000 for the year ended December 31, 1998, as compared to approximately
$4,804,000 during the same period in 1997. The increase from 1997 to 1998 was
due in largest part to an increase of approximately $458,000 in sales and
marketing expenses, particularly for the costs of attending the National
Association of Broadcasters show in 1998. General and administrative payroll
expense also increased, mostly due to the approximately $386,000 paid to or for
Thomas Burke, the Company's former president, and to increased rent expense of
approximately $245,000 caused by the Company's occupation of new space in
January 1998. General and administrative expense in 1997 also included a cost of
approximately $358,000 related to the acquisition of Technical Systems
Associates, which was initiated and then abandoned in 1997. 1998 did not contain
a similar item.
Impairment loss on property and equipment
In June 1998, the Company abandoned its chip development efforts, which
reduced the value of the development equipment and software that had been
purchased for this work. The Company recognized an expense of approximately
$937,000 at that time to write these assets down to their realizable value. No
corresponding expense occurred in 1997.
Interest expense, net of interest income
Interest expense, net of interest income increased from approximately
$1,208,000 during the year ended December 31, 1997, to approximately $4,751,000
for the year ended December 31, 1998. This increase resulted from a substantial
increase in the level of debt outstanding in 1998 relative to 1997, and to a
change in the nature of the debt.
In 1997 interest expense arose principally from advances against a
credit facility that the Company acquired as a result of the acquisition of
Sierra Vista. In 1998, stated interest, and interest expense imputed on this
credit line to reflect its beneficial conversion feature into common stock
totaled approximately $260,000. The balance on this credit line was converted
into Common Stock of the Company in May and June of 1998. The Company induced
the holder of this credit facility to convert its June balance into Common Stock
by allowing conversion at market price at the date of the conversion, which was
substantially below the conversion price specified under the terms of the credit
facility. This beneficial conversion gave rise to approximately $261,000 of
additional expense, which was reported as debt conversion expense in the
statement of operations for 1998.
Interest expense in 1998 also includes amounts related to the
Convertible Debentures, the first of which were issued in December 1997, with
additional Debentures issued in June, August, and December 1998 to the first
<PAGE>18
investor, and to one other investor who is related to the first. Stated interest
on these Debentures was approximately $432,000 in 1998. Interest expense in 1998
also included approximately $3,455,000 of imputed interest, which represents the
value of the beneficial conversion feature of the Debentures and the value of
warrants issued to the Debenture holders and to the brokers who arranged the
financing. Ordinarily this imputed interest would be amortized over the life of
the Debentures, but the Company is in default on the Debentures at December 31,
1998, and accordingly, the gross amount of the Debentures is shown as a current
liability and the entire imputed interest is recognized in 1998. Under the terms
of the Debenture agreements, the Company is obligated to register the Common
Stock underlying the conversion feature within specified periods. The Company
has not done this, and accordingly, approximately $360,000 in penalties has been
accrued in 1998 and is included in interest expense.
Interest income was not material in either 1997 or 1998.
Income Tax Expense
Income tax expense was approximately $1,600 for the two years ended
December 31, 1997 and 1998. This represents the minimum franchise tax payable to
the State of California for the Company and its non-operating Florida
subsidiary.
Loss from discontinued operations
On June 15, 1998, the Company's Board of Directors decided to
discontinue the operations of Sierra Vista, its wholly-owned subsidiary and
entertainment segment of the business. At that date, the Company wrote down
Sierra Vista's assets to disposal value. The effect of this was the loss on
disposal of discontinued operations of approximately $1,155,000 reported in
1998. There was no corresponding item in 1997. The loss from operations of the
discontinued operation decreased from approximately $759,000 in 1997 to
approximately $400,000 in 1998 in largest part because Sierra Vista operated for
a shorter period of time in 1998 than it did in 1997.
Liquidity and Capital Resources
As of December 31, 1998, the Company had negative working capital of
approximately $11,851,000. At this time, the Company has no substantial
revenues, and does not anticipate any substantial revenues until such time, as
any, that products are completed and successfully marketed. Historically, the
Company has funded its operations through sale of equity and debt. The Company
expects to continue to finance its operations in this manner for the immediate
future. The Company is currently in discussions with several investors to
finance the Company through the issuance of stock or convertible debentures, but
no assurance can be given that these discussions and negotiations will culminate
in adequate funding, or any funding at all. In the event that the Company is
unable to obtain adequate financing, there will be a material adverse effect on
the Company's ability to meet its business objectives.
Net cash used in operating activities from continuing operations
totaled approximately $7,182,000 during fiscal 1998 and $6,319,000 during fiscal
1997. Discontinued operations used additional cash of approximately $319,000 and
$787,000 in 1998 and 1997, respectively. This cash usage resulted primarily from
the net losses of approximately $16,466,000 in 1998 and $11,065,000 in 1997. The
net loss during 1998 was offset by non-cash interest expense imputed on the
Convertible Debentures issued in 1997 and 1998, increase in accounts payable and
accrued liabilities, write down of the discontinued assets of Sierra Vista, and
the write down of assets impaired when the Company closed its chip development
efforts. The net loss during 1997 was offset by non-cash items relating to
interest expense from the discount resulting from the beneficial conversion
feature of the credit facility, compensation expense recognized upon the
<PAGE>19
issuance of Common Stock and stock options, and the acquisition of technology
for Common Stock expensed.
Net cash flows from financing activities totaled approximately
$4,603,000 during fiscal 1998 as compared to approximately $9,217,000 during
1997. During 1998 the Company received $4,000,000 from the sale of Convertible
Debentures. Also in 1998 the Company received approximately $778,000 from four
other lenders of which approximately $174,000 was repaid, and approximately
$468,000 converted into Common stock. In 1998 the Company purchased
approximately $1,217,000 of property and equipment. During fiscal 1997, the
Company received approximately $2,917,000 in connection with the acquisition of
Sierra Vista Entertainment, approximately $665,000 from the sale of Common Stock
to an investor, $4,609,000 upon the issuance of debentures and $3,982,000 drawn
down from the credit facility. This cash received was offset by the acquisition
of property and equipment of approximately $768,000.
Between December 1997, and December 31, 1998, the Company issued a
total of $9,000,000 face value of Convertible Debentures to two investors who
are related to each other. The convertible debentures bear interest at 7% and
are due five years after issuance.
At the end of 1998 the Company owed $8,790,000 on Convertible
Debentures which is net of $210,000 converted into Common Stock during 1998, and
another $135,000 on short term notes to related parties. Accrued liabilities
included approximately $798,000 in accrued interest and penalties related to
these debts.
On December 22, 1997, the Company issued $5 million in the aggregate of
Convertible Debentures receiving approximately $4,609,000 in net proceeds. The
convertible debentures bear interest at 7% and are due December 22, 2002. The
debentures are convertible into Common Stock in increments of one-third;
one-third may be convertible upon the earlier of the effective date of a
registration statement or after the 120th day after the original issue date;
one-third after the 120th day of the original issue date but prior to the 150th
day from the original issue date; and one-third after the 150th day from the
original issue date. . The Debentures are convertible into shares of the
Company's Common Stock at a conversion price equal to the lesser of (i) $3.47
and (ii) 85% for conversions prior to 120 days after issuance, 82.5% for
conversions 120-150 days after issuance, and 80% thereafter. In connection with
the private placement, the Company issued five-year warrants to purchase 250,000
shares of Common Stock at $3.00 per share and for 250,000 at $4.00 per share.
During 1998, the holders of these Debentures converted a total of $210,000 face
value, plus approximately $11,000 of accumulated interest, into 1,459,539 shares
of Common Stock.
On June 29, 1998, the Company issued $2 million in the aggregate of
Convertible Debentures that bear interest at 7% and are due June 29, 2003. The
debentures are convertible into the Company's Common Stock at a conversion price
of $.35 per share. In connection with the issuance of these Debentures, the
Company issued the Debenture holder five-year warrants to purchase 500,000
shares of Common Stock at $.50 per share.
On August 28, 1998, the Company issued additional Debentures in the
aggregate principal amount of $500,000, with the right to issue up to an
additional $1 million more Debentures under the same terms. In October and
November of 1998, a total of $1 million more Debentures were issued. 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
<PAGE>20
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. Also in this transaction, the Company canceled
previously issued warrants to purchase up to 250,000 shares of Common Stock at
$3.00 per share and up to 250,000 shares at $4.00 replacing the canceled
warrants with a like number of five-year warrants to purchase Common Stock at a
price of $.50 per share.
On December 15, 1998, the Company issued an additional $500,000 in
Debentures for working capital under the same terms as those issued in August of
1998. In conjunction with the sale of these Debentures, the Company issued to
the Debenture holders five year warrants to purchase up to 125,000 shares of
Common Stock at $.50 per share.
On January 15, 1999, the Company issued an additional $750,000 in
Debentures for working capital under the same terms as those issued in August
and December of 1998. In conjunction with the sale of these Debentures, the
Company issued to the Debenture holders five year warrants to purchase up to
187,500 shares of Common Stock at $.50 per share.
In March, April, and May 1999, the Company borrowed an additional total
of $1,650,000 from the investor who had purchased the majority of the Debentures
evidenced in the form of a three notes. The notes bear interest at 13% and are
due on demand. In conjunction with this funding, the Company issued the holder
of the notes five year warrants to purchase up to 1,000,000 shares of Common
Stock at $.60 per share.
In connection with the sales of the Debentures in December 1997, June
1998, August 1998, November 1998 and January 1999, and the demand notes in
March, April, and May 1999, the Company issued five year warrants to purchase up
to an aggregate total of 1,780,000 shares of common stock at prices ranging from
$2.43 per share to $.11 per share to two investment brokers.
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 Company's operations are now based on software applications that
the Company believes to be Year 2000 compliant. This included recent purchase of
Year 2000 compliant versions of software for its computer, security, and
communications systems, as necessary. 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.
The Company believes that its products are Year 2000 compliant. The
Company has initiated communications with significant suppliers to determine the
extent to which those third parties' failure to remedy Year 2000 issues in their
own operation or in their products might materially effect the Company's
operations or products. The Company has not received any indication from its
suppliers that the Year 2000 Issue may materially effect their ability to
conduct business or supply Year 2000 compliant products to the Company. In
addition, the Company continues to test its products and the third party
software it purchases for Year 2000 compliance.
<PAGE>21
Item 7. Financial Statements.
The financial statements for the Company are attached beginning on page
F-1.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 9. Directors, Executive Officers, Promoters and control Persons;
Compliance With Section 16(a) of the Exchange Act.
Executive Officers and Directors
The directors and executive officers of the Company are as follows:
<TABLE>
<S> <C> <C> <C>
Held Position
Name Age Position Since
- ------------------------------ ------ ----------------------------------- ---------------
Frank J. Alioto 51 President, Chief Executive June 1998
Officer, Director
Stanton Creasey 45 Chief Financial Officer, Director April 1997
Mark C. Koz 44 Director 1993
Tony Low 45 Director October 1996
Robert Sibthorpe 50 Director May 1997
John Champlin, M.D. 43 Director October 1997
</TABLE>
The following sets forth the principal occupations during the past five
years of the directors and executive officers of the Company and it
subsidiaries.
Frank J. Alioto (age 51) has been President and a Director since July
1, 1998, and Chairman since December 1998. From 1993 until 1997, Mr. Alioto was
Chief Operating Officer of Alamar Electronics, a broadcast television equipment
manufacturer that he joined as part of a successful financial turnaround project
that led to eventual acquisition by Philips NV in 1995. Previously, he
co-founded ALTA Group, a manufacturer of advanced digital video systems for
professional use, and served as Vice President of Marketing and Sales until the
company was acquired by Dynatech. Mr. Alioto has over 25 years of experience in
broadcast television, and in management of advanced electronic equipment
manufacturers who service the broadcast and video markets.
Stanton Richard Creasey (age 45) has been Chief Financial Officer since
April 1997 and was appointed to the Board of Directors in January 1999. From
March 1996 through April 1997, Mr. Creasey was an independent consultant and
from September 1994 through March 1996, he was at Purus Inc. Mr. Creasey was
Chief Financial Officer and President of Sixty-Eight Thousand, Inc. from
September 1989 through March 1994, and left that company in April 1994. In June
<PAGE>22
1994, Sixty-Eight Thousand, Inc., a company which made Macintosh compatible
workstations, filed for bankruptcy protection in San Jose, California (Case No.:
94-54123). Mr. Creasey is a CPA with 20 years of experience in finance, both in
public accounting with Arthur Andersen & Co., and with a number of high
technology manufacturing companies.
Mark Koz (age 44) has been a Director since March 3, 1993. Previously
at various times, he was also Chairman, Chief Executive Officer and President,
and Chief Technical Officer of the Company. Mr. Koz was also Chief Executive
Officer, Chief Technical Officer and a Director of FutureTel from 1993 to 1995,
and has been Chief Executive Officer of Intelligent Instruments Corporation
since 1993. Currently he is employed as an independent consultant in the
telecommunication industry. Mr. Koz has five years of technical education at
Florida Technological University (University of Central Florida). In addition,
he is a voting member of the Moving Picture Experts Group, the international
standards-setting body for MPEG.
Tony Low (age 45) has been a Director of the Company since October
1996. Since July 1997, Mr. Low has been Chief Operating Officer of Darwin
Digital, a Saatchi & Saatchi Vision Company involved in interactive advertising
and media buying. Prior to that, from January 1996 through June 1997, Mr. Low
was Director of Business Affairs at the Los Angeles based Saatchi Entertainment
Group, a division of Saatchi & Saatchi, the multinational advertising agency.
From June 1993 through January 1996 he was President of Tercer Mundo, Inc., a
company marketing sound recordings, and from October 1983 through June 1993 he
was Partner and Business Manager at Oberman, Tivoli, Miller and Low, an
entertainment industry accounting firm.
Robert Alan Sibthorpe (age 50) has been a Director of the Company since May
1997. Mr. Sibthorpe has been owner of Mag South Research, Inc., a geological and
financial consulting firm since October 1996. From June 1986 through April 1996
Mr. Sibthorpe was with Yorkton Securities, Inc. involved in investment banking
Mr. Sibthorpe has an MBA in Finance and a Bachelor of Science in Earth Sciences
both from the University of Toronto.
John Joseph Champlin, M.D. (age 43) has been a Director of the Company
since October 1997. He has been owner and president of the Med Center Medical
Clinic in Carmichael, California, since 1993. Prior to founding Med Center
Medical Clinic, he was a medical director of Madison Center from 1988 to 1993.
He is also associate clinical professor, family practice, at the University of
California at Davis since 1986. Mr. Champlin earned his M.D. at the University
of Florida.
Committees of the Board.
The Board has an Audit Committee and a Compensation Committee. The Audit
Committee consists of Messrs. Low and Sibthorpe, and the Compensation Committee
consists of Messrs. Koz and Sibthorpe.
The primary functions of the Audit Committee are to review the scope
and results of audits by the Company's independent auditors, the Company's
internal accounting controls, the non-audit services performed by the
independent accountants, and the cost of accounting services. The audit
committee met in 1999 to review the results of the year ended December 31, 1998,
and to consider the performance and results of the audit.
The Compensation Committee administers the Company's 1996 Incentive and
Nonstatutory Stock Option Plan and approves compensation, remuneration, and
incentive arrangements for officers and employees of the Company.
<PAGE>23
The board previously established a litigation committee, which was
dissolved in 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on the Company's information, none of the directors, officers and
beneficial owners of more than 10% of any class of equity securities have filed
their initial report on Form 3. The Company has informed such persons of their
obligations who intend to file the reports as soon as practicable.
Item 10. Executive Compensation
Executive Compensation.
The following table sets forth the Compensation of all officers who
received annual compensation in excess of $100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards Payouts
-------------- ---------------- -------------- --------------- -----------
Other Restricted Securities
Annual Stock Underlying LTIP
Name and Principal Compensation Award(s) Options Payouts All Other
Position Year Salary ($) ($) (#) ($) Compensation
- --------------------------- ---- --------- ------------- ---------- ------------ -------- -------------
Frank J. Alioto 1998 $67,500 $51,171(1) - 1,300,000 - -
President and CEO
Thomas Burke 1998 $260,624 $125,000(2) - 1,000,000 - -
Former President and CEO
Mark C. Koz 1998 $198,604 $55,269(3) - - - -
Former President and CEO 1997 $241,500 $10,500(4) - 300,000(7) - -
1996 $120,000 - - 2,000,000(5) - -
F. James Anderson 1998 $82,500 $27,500(6) - - - -
Former Executive Director, 1997 $112,500 $37,500(6) - 300,000(7) - -
Corporate Strategy and
Finance
Stanton Creasey 1998 $136,250 - - 200,000(7) - -
CFO 1997 $85,923 $12,000(8) - 300,000(7) - -
Janek Kaliczak 1998 $122,500 - - 150,000(7) - -
Vice President
Steven Levine 1998 $107,292 $15,000(8) - 150,000(7) - -
Vice President
</TABLE>
(1) Effective June 23, 1998, Mr. Alioto was elected president of the Company.
Prior to this date, Mr. Alioto served as a consultant to the Company. The
$51,171 represents consulting fees paid to Mr. Alioto.
<PAGE>24
(2) Compensation relates to $40,000 of moving expenses and $85,000 in legal
expenses.
(3) Represents $8,250 in auto expenses and $47,019 in expenses paid on behalf
of Mr. Koz.
(4) Represents a car allowance of $1,500 per month.
(5) Represents options to acquire 2,000,000 shares of Common Stock at $3.00 per
share.
(6) Represents a $3,500 per month housing allowance and a $1,500 per month car
allowance.
(7) Represents options to acquire shares of Common Stock at $0.26 per share.
(8) Represents a bonus.
Employment Contracts
On June 23, 1998, the Company hired Mr. Frank Alioto to become
President effective July 1, 1998. Pursuant to his employment contract, Mr.
Alioto receives a salary of $135,000 per year along with other benefits granted
to employees of the Company. Additionally, Mr. Alioto received options to
acquire, during a five (5) year term, up to 1,000,000 shares of Common Stock of
the Company at an exercise price equal to $0.26 per share. On June 26, 1998,
options to acquire 166,667 shares of Common Stock vested and became immediately
exercisable. Options to acquire 166,667 shares of Common Stock shall vest on
June 26, 1999, and options to acquire 166,666 shares of Common Stock shall vest
on June 26, 2000. Options to acquire the remaining 500,000 shares of Common
Stock shall vest on June 26, 2003 or earlier as determined by the Compensation
Committee based on performance goals. These options shall remain exercisable
until June 26, 2003, and in addition shall not expire earlier than two (2) years
from the date of any change of control. Finally, pursuant to his employment
contract, Mr. Alioto shall be indemnified and held harmless by the Company in
connection with his serving as President and Chief Executive Officer of the
Company.
Mr. Alioto's employment is on an "at-will" basis. Either the Company or
Mr. Alioto may terminate the employment at any time for any reason. However, in
the event of termination without "cause," the Company shall pay Mr. Alioto a
minimum severance salary, which is equal to three months pay at Mr. Alioto's
then-existing salary as well as twelve (12) additional months of medical and
dental insurance coverage for Mr. Alioto and his dependents. In general, the
term "cause" means a willful breach of the duties Mr. Alioto is required to
perform under the terms of the employment contract, or the commission of such
acts of dishonesty, fraud, or other acts of moral turpitude as would prevent the
effective performance of Mr. Alioto's duties. Mr. Alioto was elected to the
Board of Directors on June 13, 1998, and became Chairman of the Board on
December 15, 1998.
On March 23, 1998, the Company hired Thomas E. Burke to begin
employment as President and Chief Executive Officer effective May 1, 1998.
Pursuant to his employment contract, Mr. Burke received a salary of $250,000 per
year, a signing bonus equal to $200,000 net of taxes, a car allowance equal to
$1,000 per month net of taxes, a housing allowance equal to $7,500 per month net
of taxes, a life insurance policy equal to $1,500,000, and other benefits
granted to employees of the Company. Mr. Burke's employment was for an agreed
term of five years and, upon each anniversary date, was to be automatically
extended by an additional one year term unless either party gave prior notice
not to extend. Mr. Burke was eligible to receive an annual bonus of up to two
times Mr. Burke's annual salary based on achieving certain targets as mutually
agreed upon by Mr. Burke and the Board of Directors. Mr. Burke also received
options to acquire during a ten year term up to 1,000,000 shares of Common Stock
of the
<PAGE>25
Company at an exercise price equal to $1.75 per share. The options vested in
one-third increments with one increment vesting immediately and the remaining
two increments to vest on each anniversary date thereafter. In the event of a
change of control, all the options vested immediately.
On June 5, 1998, Mr. Burke resigned. On July 21, 1998, he filed a
statement of claim with the American Arbitration Association, San Francisco,
California. Mr. Burke claimed the Company 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 responded by claiming Mr. Burke made certain misrepresentations. On
December 14, 1998, the Company and Mr. Burke mutually settled their claims with
each other. Under the terms of the settlement, each party paid the other a sum
of money, which had no significant financial impact on the Company, and Mr.
Burke retained ownership of options to purchase 500,000 shares of the Company's
common stock at a price of $1.75 per share.
On May 15, 1997, the Company and Mr. Koz entered into a five-year
employment contract. Under the terms of Mr. Koz's employment contract, Mr. Koz
served as President and Chief Executive Officer and received a salary of
$240,000 per annum subject to a 7% cost of living increase and other increases
as determined by the Board of Directors. Mr. Koz resigned as President and Chief
Executive Officer on May 1, 1998, but remained as Chief Technology Officer of
the Company and Chairman of the Board. On June 16, 1998, Mr. Koz and the Company
mutually agreed to amend his employment contract to provide for, among other
things, no severance upon termination. On December 10, 1998, Mr. Koz's
employment with the Company ended. On December 15, 1998, Mr. Koz was replaced as
Chairman of the Board but remained as a director.
On May 15, 1997, the Company and Mr. Anderson entered into a five-year
employment contract, under the terms of which Mr. Anderson served as Director of
Strategic Planning and President of the Company's Entertainment Division. Mr.
Anderson's initial salary was $180,000 per annum, subject to a 7% cost of living
increase and increases as determined by the Board of Directors. Effective as of
June 30, 1998, Mr. Anderson and the Company agreed to terminate his employment
contract with the Company without severance pay, but with health care coverage
through June 30, 1999. Mr. Anderson continued as a director of the Company until
his resignation on April 12, 1999.
Options Granted in Last Fiscal Year
The following table sets forth options granted by InnovaCom during the last
fiscal year to the executives listed in the summary compensation table.
<TABLE>
<S> <C> <C> <C> <C>
Option/SAR Grants in Last
Percentage of Total
Options/SARs Granted
Options/SARs Granted to Employees in
Name Fiscal Year Exercise Price $/sh Expiration Date
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Frank Alioto 1,000,000 0.26 06/26/03
300,000 39.20% 0.16 10/13/03
Stanton Creasey 200,000 6.03% 0.26 03/30/03
Janek Kaliczak 40,000 0.26 02/13/03
110,000 4.52% 0.26 06/26/03
Steven Levine 150,000 4.52% 0.26 06/26/03
Thomas Burke 1,000,000 30.15% 1.75 03/30/08
F. James Anderson 0 -- -- --
</TABLE>
<PAGE>26
Aggregate Option Exercise in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth the value of exercised and unexercised options
and SARs held by the executives listed in the summary compensation table at
fiscal year end.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<S> <C> <C> <C> <C>
Value of Unexercised
in-the Money
Options/SARs at Options/ SARs at
Fiscal Year-End Fiscal Year-End
Exercisable (E)/ Exercisable (E)/
Shares Acquired on Subject to Subject to
Name Exercise Value Realized ($) Repurchase (U) Repurchase (U)(1)
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Frank Alioto None None 416,667 / 833,333 None
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Stanton Creasey None None 500,000 / 0 None
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Janek Kaliczak None None 0 / 150,000 None
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Steven Levine None None 0 / 150,000 None
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Thomas Burke None None 500,000 / 0 None
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Mark C. Koz None None 300,000 / 666,666 None
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
F. James Anderson None None 600,000(2)/0 None
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
</TABLE>
(1) As of December 31, 1998, all of the Options held were out of the money.
(2) Includes options to acquire 300,000 shares of Common Stock attributable to
Mr. Anderson's Spouse. Mr. Anderson disclaims beneficial ownership to the
option held by his spouse.
During calendar year 1998, the Board of Directors repriced the exercise
price for stock options to acquire 2,467,233 shares of Common Stock held by
directors, officers, and employees of the Company. The following table sets
forth the ten year option repricing information for the executives named in the
compensation table and directors.
Report on Repricing of Stock Options
During calendar year 1998, the Board of Directors repriced the exercise
price for stock options to acquire 2,467,233 shares of Common Stock held by
directors, officers, and employees of the Company. The following table sets
forth the ten year option repricing information for the executives named in the
compensation table and directors.
<PAGE>27
TEN YEAR OPTION REPRICINGS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Length of
Number of Exercise Original
Securities Market Price Price at Optional
Underlying of Stock at Time of New Term Remaining
Effective Date Options Time of Repricing Exercise at work
Name of Reprice Repriced (#) Repricing ($) ($) Price ($) of Repricing
- ---------------------------- ---------------------- --------------- ---------------- -------------- ------------- ------------------
Stanton Creasey March 30, 1998 300,000 $2.28 $3.38 $1.75 4 years
Chief Financial Officer June 26, 1998 500,000 $.26 $1.75 $.26 3 to 4 years
Mark Koz June 26, 1998 300,000 $.26 $2.59 $.26 4 years
F. James Anderson June 26, 1998 300,000 $.26 $2.59 $.26 4 years
Janek Kaliczak June 26, 1998 40,000 $.26 $2.50 $.26 4 years
</TABLE>
During the first and second quarter of calendar 1998 there was a
substantial decrease in the market price of the Company's Common Stock due, in
part, to the Company's management reorganization and concern about the Company's
ability to raise capital to pay it prior obligations and to fund its future
business operations. As a result, the Board of Directors repriced stock options
in June of 1998. The repricing was done in an effort to retain the Company's
quality employees, officers, and directors who had lost a significant portion of
their financial interest in the Company because their stock options were "out of
the money." In both March and June 1998, the Company completed the Company's
stock option repricing program for directors, officers, and employees of the
Company pursuant to which stock options for 2,467,233 shares of Common Stock,
originally issued with exercise prices ranging from $3.06 to $.50 per share,
were reissued with an exercise price of $0.26 per share, which exercise price
approximated the fair market value of the Company's shares on the date of
repricing.
Stock options are intended to provide incentives to the Company's
directors, officers, and employees. The Board of Directors believes that such
equity incentives are a significant factor in the Company's ability to attract,
retain, and motivate directors, officers, and employees who are critical to the
Company's long-term success. In repricing the stock options, the Board of
Directors considered the fact that directors are not compensated for their
services other than through stock options. Further, many of the Company's
officers and employees have had either to defer their salary or were delayed in
receiving their salary at times during the current and prior calendar year due
to the poor financial condition of the Company. The Board of Directors believes
that the repricing of the options is a form of incentive to the directors,
officers, and employees of the Company to remain with the Company during its
period of financial restructuring, and believes that such repricing is in the
best interests of the Company and its stockholders.
Director Compensation.
Each director receives, on the date of appointment as a director,
options to acquire shares of Common Stock of the Company. The exercise price of
the option is equal to the trading price of a share of Common Stock as of the
date of grant. A director who also serves as an officer of the Company shall be
entitled to options to purchase 300,000 shares of Common Stock. All other
directors receive options to purchase 200,000 shares of Common Stock.
<PAGE>28
Item 11. Security Ownership of Certain Beneficial Owners and Management.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 1, 1999, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (ii) each officer named in the
compensation table, (iii) each director of the Company as of April 1, 1999, and
(iv) directors and executive officers of the Company, as of April 1, 1999, as a
group.
As of April 1, 1999, there were 25,035,796 shares of Common Stock
outstanding.
<TABLE>
<S> <C> <C>
Percentage
of Shares
Number of Beneficially
Name and Address Shares(1) Owned
- --------------------------------------------------------- ---------------------------- -----------------------------
JNC 74,742,047(2) 76.02%
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM 11, Bermuda
- --------------------------------------------------------- ---------------------------- -----------------------------
Microtechnology S.A. 2,962,970 11.83%
P. O. Box 556
Charlestown, Nevis
- --------------------------------------------------------- ---------------------------- -----------------------------
507784 BC Ltd. 5,748,000(3) 22.69%
10th Fl., Four Bentall Centre
P.O. Box 49333
1055 Dunsmuir Street
Vancouver BC V7X 1L4
Canada
- --------------------------------------------------------- ---------------------------- -----------------------------
Frank Alioto 466,667(4) 1.83%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95053
- --------------------------------------------------------- ---------------------------- -----------------------------
Stanton Creasey 800,000(4) 3.10%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
- --------------------------------------------------------- ---------------------------- -----------------------------
John Champlin, MD 300,000(4) 1.18%
4373 Meadow Circle
Rescue, CA 95672
- --------------------------------------------------------- ---------------------------- -----------------------------
<PAGE>29
Robert Sibthorpe 200,000(4) *
6311 E. Naumann Dr.
Paradise Valley, AZ 85253
- --------------------------------------------------------- ---------------------------- -----------------------------
Tony Low 200,000(4) *
Darwin Digital
A Saatchi & Sacctchi Vision Company
735 Battery Street, Suite 200
San Francisco, CA 94111
- --------------------------------------------------------- ---------------------------- -----------------------------
Mark C. Koz 5,748,000(3) 22.69%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
- --------------------------------------------------------- ---------------------------- -----------------------------
Janek Kaliczak 12,000(4) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
- --------------------------------------------------------- ---------------------------- -----------------------------
Steven Levine -0- -0-
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
- --------------------------------------------------------- ---------------------------- -----------------------------
F. James Anderson 600,000(5) 2.34%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
- --------------------------------------------------------- ---------------------------- -----------------------------
Thomas Burke 500,000(4) 1.96%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
- --------------------------------------------------------- ---------------------------- -----------------------------
All officers and directors as a group 8,826,667(6) 31.06%
(10 persons)
- --------------------------------------------------------- ---------------------------- -----------------------------
</TABLE>
*Less than one percent
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed above, based on information furnished by
such owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options or warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options or warrants, but are not
deemed outstanding for purposes of computing the percentage ownership
of any other person.
(2) Includes 71,898,008 shares of Common Stock that may be acquired upon
the conversion of outstanding Debentures, and 1,387,500 shares of
Common Stock that may be acquired upon the exercise of outstanding
Warrants.
<PAGE>30
(3) Includes 1,000,000 shares of Common Stock owned by 507784 BC Ltd. and
4,448,000 shares beneficially owned by Mark C. Koz, all of which are
subject to a voting agreement by and between 507784 BC Ltd. and Mark C.
Koz, wherein Mr. Koz has the right to nominate three (3) members of the
six (6) member board of directors of the Company and 507784 BC Ltd. has
the right to nominate the remaining three (3) members of the six (6)
member board of directors of the Company, and all shares subject to the
voting agreement shall vote in favor of the six (6) nominees. The
voting agreement is for a period of five (5) years, and terminates on
February 26, 2002. The owners of 507784 BC Ltd. are not affiliated with
either the Company or Mr. Koz. The above-listed number also includes
options to purchase 300,000 shares of Common Stock.
(4) Represents shares of Common Stock that may be acquired within sixty
days upon the exercise of options.
(5) Includes options to acquire 300,000 shares of Common Stock exercisable
within 60 days and options to acquire 300,000 shares of Common Stock
attributable to Mr. Anderson's spouse. Mr. Anderson disclaims
beneficial ownership to the options held by his spouse.
(6) Includes 3,378,667 options to acquire shares of Common Stock and
1,000,000 shares subject to a voting agreement as discussed in
footnotes (3) through (5).
Item 12. Certain Relationships and Related Transactions
Micro Technology Credit Facility. In July 1997, a promissory note (the
"Note") was issued to Micro Technology in connection with a credit facility
agreement (the "Credit Facility"). The Credit Facility and Note provided for an
aggregate amount not to exceed $5 million. The Credit Facility terminated and
the Note was due on June 30, 1998 and bore interest at the lower of 10% or the
maximum rate allowed by law (Federal Reserve Bank of San Francisco's rate plus
5%) The Company had the right to prepay the Note. The principal and interest on
the Note might be converted, at the option of the holder, into shares of Common
Stock in an amount equal to 80% of the trading price of a share of Common Stock
on the date an advance of funds was made pursuant to the Credit Facility.
Advances made under the Credit Facility were secured by all of the assets of the
Company including, but not limited to, receivables, goods, equipment, inventory,
contract rights and other property interests.
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.
On June 26, 1998, Micro Technologies converted its remaining balance on
the credit facility of $317,358 into common stock and terminated the credit
facility. As an inducement to Micro Technologies to make this conversion, the
Company allowed Micro Technology to convert into 1,220,608 shares at the then
market price of the stock, $.26 per share, as opposed to the conversion price
under the credit facility, which would have averaged approximately $2.40 per
share.
Through the merger with Sierra Vista, Micro Technology received
2,500,000 shares of Common Stock, which at the time, represented approximately a
14% interest in the Company. Prior to their investment in Sierra Vista, the
owners of Micro Technology were unaffiliated with Sierra Vista and the Company.
<PAGE>31
Acquisition of Intelligent Instruments Corporation. In 1997, the
Company's Board of Directors tentatively approved the acquisition of Intelligent
Instruments, a company wholly-owned by Mark C. Koz, the Company's former
President and Chief Executive Officer for 2 million shares of Common Stock of
the Company, subject to certain conditions. In 1998 this tentative approval was
withdrawn and the acquisition did not occur.
There are no plans to resume this acquisition effort.
FutureTel. The Company has a license ("FutureTel License Agreement")
from FutureTel to manufacture, use, distribute, sell and otherwise deal with the
video compression technology which is the subject of docket numbers 2056 and
2057 for patent applications. Under the FutureTel License Agreement, the Company
has the rights to use, duplicate, distribute, modify and enhance the technology
for the development, manufacture and distribution of its products and to
sublicense the technology to others for the enhancement, development,
manufacture and distribution of its products. The term of the license from
FutureTel to the Company is in perpetuity.
This licensed technology was incorporated into the Company's design of
its single chip MPEG-2 Gecko encoder chip, and when the design effort on this
chip was suspended in 1998, the Company ceased using the technology. Aside from
a sale or license by the Company to another party of the Company's encoder chip
design, an event not considered likely by the Company's management, the Company
has no plans to resume use of the technology licensed from FutureTel.
From 1993 to 1996, Mr. Mark C. Koz was a substantial shareholder of and
Chief Executive Officer and Chairman of the Board of FutureTel. In connection
with his departure from FutureTel, Mr. Koz exchanged his interest in FutureTel
for the remaining interest held by a third party in Intelligent Instruments
Corporation. In addition, FutureTel granted the Company rights under the
FutureTel License Agreement. The Company, with Mark C. Koz and Intelligent
Instruments Corporation, filed a lawsuit against FutureTel and others claiming
fraud by the defendants in the formation of a business venture involving the
development and marketing of multimedia technology. This litigation was settled
in 1997 by the Company paying FutureTel $100,000 and the parties amending the
FutureTel License Agreement to make it irrevocable
Settlement Agreement with Mark Koz. In 1997, the Company entered into a
Settlement Agreement with Mark C. Koz, which was adopted by the Company's
Litigation Committee of the Board of Directors. The Settlement Agreement
concerns the lawsuit filed by the Company against Haynes, et. al. regarding
Jettson Realty Development Corporation and concerns transactions and contracts,
including stock options and consulting agreements, entered into by the Company
while Mr. Koz was an officer and director of the Company. The parties enter into
this settlement in light of their desire to resolve any issues and in light of
the Company's perceived dependence at that time on Mr. Koz for future
technology. Under the terms of the Settlement Agreement, Mr. Koz agreed to
return to the Company for cancellation 500,000 shares of Common Stock in
exchange for a mutual release. See "Legal Proceedings" for a discussion
regarding the Haynes, et. al. litigation.
Other transactions with Mark Koz. In 1998 the Company incurred a liability
of approximately $19,000 to a third party to pay a personal obligation of Mr.
Koz, and paid the obligation in 1999. In 1999 Mr. Koz agreed to compensate the
Company for this item.
In 1998 the Company rented certain items of engineering test equipment
from Mark Koz, or from his wife, for a total rental amount of approximately
$13,000. These rental arrangements were terminated in December 1998.
<PAGE>32
Digital Hollywood, Inc. Beginning in March 1996 and continuing into
1997, the Company made advances to or paid obligations on behalf of Digital
Hollywood, Inc. in the aggregate amount of approximately $139,000. Digital
Hollywood is a corporation owned by Mr. Mark C. Koz, the Company's former
president, and was formed to make and distribute a musical video recorded on a
digital video disk ("DVD") utilizing MPEG-2 compliant compression technology.
Digital Hollywood was unable to sell its video and because all of Digital
Hollywood's assets were secured by another lender, Decorah Company, the Company
wrote off its advances. Digital Hollywood, Mark Koz, the Company, Decorah
Company and Edwin Reedholm, the principal of Decorah and a former Director of
the Company, were in litigation which has been settled. See "Legal Proceedings."
Robert Sibthorpe. In 1998 the Company borrowed $50,000 from Robert
Sibthorpe on an unsecured demand note at an interest rate of 10% per annum. As
of December 31, 1998 the principal balance outstanding on this note was $40,000.
Champlin Turner Enterprises, Inc. In December 1998, the Company
entered into an asset purchase agreement with Champlin Turner Enterprises, Inc.
("CTE"), a corporation in which Dr. John Champlin, a director in the Company,
has an interest in and serves as president. Under the terms of the asset
purchase agreement, the Company transferred to CTE certain applications for the
Company's video encoder and a non-exclusive license in the telemedicine field in
exchange for CTE's obligation to purchase certain parts from the Company,
assumptions of future liabilities associated with the development of the
telemedicine business, and royalty payments. The value of the assets transferred
by the Company was approximately $24,000. In addition, the Company received
a general release from CTE's principals.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation, as amended, of the Company
(originally filed as exhibit 2.1)(1)
3.2 Amended and Restated Bylaws of the Company (originally filed as
exhibit 2.2)(1) 10.1 Plan and Agreement of Reorganization,
dated February 27, 1997, as amended April 1, 1997 and May 14, 1997,
between the Company and Sierra Vista (originally filed as exhibit
6.1)(1)
10.2 License Agreement, dated as of March 7, 1996, between the Company and
FutureTel (originally filed as exhibit 6.2)(1)
10.3 Employment Agreement with Mark C. Koz, dated as of May 15, 1997
(originally filed as exhibit 6.3)(1)
10.4 Employment Agreement with F. James Anderson, dated as of May 15, 1997
(originally filed as exhibit 6.4)(1)
10.5 Escrow Agreement and Instructions between the Company, Sierra Vista
and Bartel Eng Linn & Schroder, dated as of February 27, 1997
(originally filed as exhibit 6.5)(1)
10.6 Lease between Cooperage-Rose Properties II and the Company
(originally filed as exhibit 6.6)(1)
10.7 Credit Facility Agreement between the Company and Micro Technology
S.A., dated as of July 1, 1997 (originally filed as exhibit 6.7)(1)
10.8 Security Agreement between the Company and Micro Technology S.A., dated
as of July 1, 1997 (originally filed as exhibit 6.8)(1)
10.9 Convertible Debenture Purchase Agreement, dated as of December 22,
1997, with JNC (originally filed as exhibit 6.9)(2)
10.10 7% Convertible Debentures, due December 22, 2002, payable to JNC
(originally filed as exhibit 6.10)(2)
10.11 Registration Rights Agreement, dated as of December 22, 1997,
with JNC (originally filed as exhibit 6.11)(2)
10.12 Escrow Agreement, dated December 22, 1997, between the
Company, JNC and Robinson Silverman Pearce Aronsohn & Berman
LP (originally filed as exhibit 6.12)(2)
10.13 Warrants dated December 22, 1997, to purchase up to 500,000 shares of
Common Stock held by JNC(originally filed as exhibit 6.13)(2)
10.14 Warrants dated December 22, 1997, to purchase up to 250,000 shares of
Common Stock held by Cardinal (originally filed as exhibit 6.14)(2)
<PAGE>33
10.15 Addendum to Credit Facility, dated December 18, 1997, with
Micro Technology S.A. (originally filed as exhibit 6.15)(2)
10.16 Settlement Agreement between the Company and Mark Koz (originally
filed as exhibit 6.16)(3) 10.17 Joint Venture contract between the
Company and CRI, dated September 13, 1997 (3)
10.18 Accord and satisfaction and Release Agreement between the
Company and Technical Systems Associates, Inc., dated
January 16, 1998 (3)
10.19 Employment Agreement with Thomas E. Burke, dated March 23, 1998
(3) 10.20 1996 Incentive and Nonstatutory Stock Option Plan (originally
filed as exhibit 3.1)(1) 10.21 Voting Agreement of InnovaCom, Inc.,
dated February 27, 1997, and amended as of April 1, 1997,
May 14, 1997, June 10, 1997, and December 1, 1997, between Mark Koz
and 507784 BC Ltd. (originally filed as exhibit 5.1)(1)
10.22 Convertible Debenture Purchase Agreement dated as of June 29, 1998
between InnovaCom, Inc. and JNC Strategic Fund Ltd.(4)
10.23 Convertible Debenture Purchase Agreement dated August 28, 1998 between
InnovaCom, Inc. and JNC Strategic Fund Ltd. (4)
10.24 Form of Debenture(4)
10.25 Waiver Agreement dated as of September 18, 1998(4)
10.26 Convertible Debenture Purchase Agreement dated December 15, 1998
between InnovaCom, inc. and JNC Strategic Fund Ltd.
10.27 The Second Amended and Restated Security Agreement between the
Company and JNC Strategic Fund Ltd., dated as of December 15, 1998
10.28 Employment Agreement with Frank Alioto, dated March 15, 1998
10.29 Asset Purchase Agreement with John Champlin, MD
10.30 Amended Employment Agreement with Mark Koz, dated April 20, 1998
10.31 Letter Agreement amending the Amended Employment Agreement with Mark
Koz, dated June 16, 1998
16.1 Letter regarding change in certifying accountant(3)
21.1 Subsidiary of the small business issuer(3)
27.1 Financial Data Schedule
- ------------------------------------------------------------------------------
(1) Previously filed with the Company's Form 10-SB on December 12, 1997
(2) Previously filed with the Company's Registration Statement on Form SB-2
filed on February 9, 1998.
(3) Previously filed with the Company's Pre-Effective Amendment No. 1 to
Registration Statement on form SB-2 filed on April 15, 1998.
(4) Previously filed with the Company's Form 10-QSB for the quarterly period
ended March 31, 1998, filed on September 24, 1998.
(b) Reports on Form 8-K.
None
<PAGE>34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
causes this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
InnovaCom, Inc.
/s/ FRANK ALIOTO
---------------------------------------------
By: Frank Alioto, President
In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
May 21, 1999 /s/ FRANK ALIOTO
_____________________________________________
Frank Alioto, President and Chairman of the
Board of Directors (Principal Executive
Officer)
May 21, 1999 /s/ STANTON R. CREASEY
_____________________________________________
Stanton R. Creasey, Chief Financial Officer
(Principal Financial and Accounting Officer)
May 21, 1999 /s/ MARK KOZ
_____________________________________________
Mark Koz, Director
May 21, 1999 /s/ TONY LOW
_____________________________________________
Tony Low, Director
May 21, 1999 /s/ ROBERT SIBTHORPE
_____________________________________________
Robert Sibthorpe, Director
May 21, 1999 /s/ JOHN CHAMPLIN
_____________________________________________
John Champlin, Director
<PAGE>
InnovaCom, Inc.
and Subsidiaries
(A Development Stage Enterprise)
Financial Statements
For the Years Ended
December 31, 1998 and 1997,
and For the Period
From March 3, 1993 (Inception) to
December 31, 1998
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
Independent Auditor's Report.......................................................................................F-2
Consolidated Balance Sheet - December 31, 1998.....................................................................F-3
Consolidated Statements of Operations - For the Years Ended December 31, 1998
and 1997, and For the Period From March 3, 1993 (inception) to December 31, 1998..............................F-4
Consolidated Statement of Stockholders' Equity (Deficit) - For the Period from
March 3, 1993 (inception) to December 31, 1998................................................................F-5
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1998
and 1997, and For the Period from March 3, 1993 (inception) to December 31, 1998..............................F-9
Notes to Consolidated Financial Statements.........................................................................F-11
</TABLE>
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
InnovaCom, Inc. and Subsidiaries (a Development Stage Enterprise)
Santa Clara, California
We have audited the accompanying consolidated balance sheet of InnovaCom, Inc.
and subsidiaries (a Development Stage Enterprise) as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended December 31, 1998 and 1997, and
for the period from March 3, 1993 (inception) to December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of InnovaCom, Inc. and
subsidiaries (a Development Stage Enterprise) as of December 31, 1998, and the
results of their operations and their cash flows for the years ended December
31, 1998 and 1997, and for the period from March 3, 1993 (inception) to December
31, 1998 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
and as of December 31, 1998 has negative working capital of $11,851,398, and has
a stockholders' deficit of $11,510,684, that raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also described in Note 3. The financial statements do not
include any adjustments relating to the recoverability and classification of
reported asset amounts or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
/S/HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
April 8, 1999
<PAGE>F-3
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C> <C>
DECEMBER 31,
1998
---------------------
ASSETS
CURRENT ASSETS:
Cash $ 33,934
Accounts receivable 8,745
Other receivables 78,248
Prepaid expenses 1,746
---------------------
Total current assets $ 122,673
PROPERTY AND EQUIPMENT, NET: 303,514
DEPOSITS: 37,200
---------------------
TOTAL ASSETS: $ 463,387
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable - related parties $ 135,000
Convertible debentures 8,790,000
Accounts payable 1,720,849
Accrued liabilities 1,265,290
Liabilities in excess of assets of
discontinued operations 62,932
---------------------
Total current liabilities $ 11,974,071
---------------------
COMMITMENTS AND CONTINGENCIES: (Notes 3 and 9) -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 50,000,00 shares
authorized, 25,035,615 shares issued and
outstanding $ 25,036
Warrants 1,307,403
Additional paid-in capital 22,883,852
Deficit accumulated during development stage (35,726,975)
---------------------
Total stockholders' (deficit) (11,510,684)
---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): $ 463,387
=====================
See accompanying notes to these consolidated financial statements
</TABLE>
<PAGE>F-4
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OPERATIONS
<TABLE>
<S> <C> <C> <C>
MARCH 3, 1993
FOR THE YEARS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
------------------------------------------ -----------------------
1998 1997 1998
-------------------- ------------------- -----------------------
REVENUES $ 107,632 $ 149,000 $ 256,632
-------------------- ------------------- -----------------------
COSTS AND EXPENSES:
Costs of goods sold 338,763 52,538 391,301
Research and development 3,167,316 4,388,180 10,266,524
Selling, general and administrative 5,561,068 4,804,375 15,838,021
Impairment loss on property and equipment 937,000 - 937,000
-------------------- ------------------- -----------------------
Total costs and expenses 10,004,147 9,245,093 27,432,846
-------------------- ------------------- -----------------------
OPERATING LOSS (9,896,515) (9,096,093) (27,176,214)
-------------------- ------------------- -----------------------
OTHER INCOME (EXPENSE):
Interest income 10,025 10,462 22,109
Interest expense (4,761,319) (1,218,620) (5,990,550)
Debt conversion expense (260,645) - (260,645)
-------------------- ------------------- -----------------------
Total other income (expense) (5,011,939) (1,208,158) (6,229,086)
-------------------- ------------------- -----------------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX EXPENSE AND DISCONTINUED OPERATIONS (14,908,454) (10,304,251) (33,405,300)
INCOME TAX EXPENSE 1,600 1,600 6,400
-------------------- ------------------- -----------------------
LOSS FROM CONTINUING OPERATIONS: (14,910,054) (10,305,851) (33,411,700)
-------------------- ------------------- -----------------------
Loss on disposal of discontinued operations (1,154,980) - (1,154,980)
Loss from operations of discontinued operation,
net of income tax expense of $800, $1600 and $2400 (400,843) (759,452) (1,160,981)
-------------------- ------------------- -----------------------
LOSS FROM DISCONTINUED OPERATIONS (1,555,823) (759,452) (2,315,275)
-------------------- ------------------- -----------------------
NET LOSS $ (16,465,877) $ (11,065,303) $ (35,726,975)
==================== =================== =======================
BASIC AND DILUTED NET LOSS PER SHARE:
Continuing operations $ (0.64) $ (0.58)
Discontinued operations (0.07) (0.04)
-------------------- -----------------
Basic and diluted net loss per share $ (0.71) $ (0.62)
==================== =================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 23,032,965 17,895,305
==================== ===================
</TABLE>
See accompanying notes to these consolidated financial statements
<PAGE>F-5
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1998
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
---------------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
-------------- ------------------ ---------- ---------- ------------- -------------
COMMON STOCK, issued to form company at
$0.0017 per share (March 1993) 5,100,000 $ 5,100 $ - $ 3,400 $ - $ 8,500
Net loss - - - - (800) (800)
----------- ----------- ---------- --------- ---------- -----------
BALANCES, December 31, 1993 5,100,000 5,100 - 3,400 (800) 7,700
Net loss - - - - (800) (800)
----------- ----------- ---------- --------- ---------- -----------
BALANCES, December 31, 1994 5,100,000 5,100 - 3,400 (1,600) 6,900
Net loss - - - - (800) (800)
----------- ----------- ---------- --------- ---------- -----------
BALANCES, December 31, 1995 5,100,000 5,100 - 3,400 (2,400) 6,100
Issuance of common stock at $0.50
per share to directors for services
performed (March 1996) 900,000 900 - 449,100 - 450,000
Acquisition of Jettson Realty
Development, Inc. at $0.30 per
share (June 1996) 561,069 561 - 168,184 - 168,745
Sale of common stock, net of expenses at
$0.16 per share (July 1996) 4,620,015 4,620 - 715,380 - 720,000
Issuance of common stock at $0.50 per
share to employees for services
performed (July 1996) 500,000 500 - 249,500 - 250,000
</TABLE>
<PAGE>F-6
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1998
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
---------------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
-------------- ------------------ ---------- ---------- ------------- -------------
Issuance of common stock at $1.36 per
share for consulting services
performed (July 1996) 250,000 $ 250 $ - $ 388,960 $ - $ 389,210
Sale of common stock at $5.00 per share,
net of expenses (October 1996) 280,000 280 - 1,399,720 - 1,400,000
Compensation recognized upon issuance
of stock options - - - 2,493,873 - 2,493,873
Contribution of product license - - - 1,275,000 - 1,275,000
Net loss - - - - (8,193,395) (8,193,395)
-------- --------- ------ ---------- ----------- -----------
BALANCES, December 31, 1996 12,211,084 12,211 - 7,143,117 (8,195,795) (1,040,467)
Issuance of common stock in exchange for
technology at $5.00 per share (January
1997) 100,000 100 - 499,900 - 500,000
Sale of common stock, net of expenses at
$2.90 per share (February 1997) 229,310 229 - 664,771 - 665,000
Acquisition of Sierra Vista at $0.50 per
share (May 1997) 8,514,500 8,515 - 4,248,735 - 4,257,250
Issuance of common stock at $2.43 per
share for legal services rendered
(June 1997) 7,003 7 - 16,976 - 16,983
</TABLE>
<PAGE>F-7
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1998
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
---------------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
-------------- ------------------ ---------- ---------- ------------- -------------
Shares returned per settlement agreement at
par value (500,000) $ (500) $ - $ 500 $ - $ -
Warrants issued with sale of convertible
debentures (December 1997) - - 968,578 - - 968,578
Allocation of proceeds from notes payable
and long-term liabilities due to
beneficial conversion feature - - - 2,086,988 - 2,086,988
Compensation recognized upon issuance of
stock options - - - 1,558,666 - 1,558,666
Net loss - - - - (11,065,303) (11,065,303)
---------- ----------- ---------- ----------- ----------- ------------
BALANCES, December 31, 1997 20,561,897 20,562 968,578 16,219,653 (19,261,098) (2,052,305)
Issuance of common stock at $1.75 per
share in connection with issuance
of notes payable (May 1998) 125,000 125 - 218,625 - 218,750
Issuance of common stock at $2.40 per share
in connection with conversion of notes
payable - related party (May 1998) 1,742,362 1,742 - 4,179,679 - 4,181,421
Issuance of common stock at $1.39 per
share in connection with conversion of
debentures (May 1998) 7,431 7 - 10,285 - 10,292
Issuance of common stock at $0.26 per share
in connection with conversion of notes
payable - related party (June 1998) 2,057,146 2,057 - 532,800 - 534,857
Issuance of common stock at $0.29 per
share in connection with conversion of
debentures (June 1998) 70,339 71 - 20,638 - 20,709
Issuance of common stock at $0.32 per share
in connection with conversion of
debentures (June 1998) 63,971 64 - 20,624 - 20,688
Issuance of common stock at $0.26 per
share for services (June 1998) 100,000 100 - 25,900 - 26,000
Issuance of common stock at $0.19 per
share in connection with conversion of
debentures (July 1998) 56,184 56 - 10,372 - 10,428
</TABLE>
<PAGE>F-8
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1998
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
---------------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
-------------- ------------------ ---------- ---------- --------------------------
Issuance of common stock at $0.26 per share
in connection with conversion of
debentures (July 1998) 121,654 $ 122 $ - $ 31,021 $ - $ 31,143
Issuance of common stock at $0.17 per share
in connection with conversion of
debentures (September 1998) 60,160 60 - 10,432 - 10,492
Issuance of common stock at $0.10 per share
in connection with conversion of
debentures (October 1998) 110,264 110 - 10,475 - 10,585
Issuance of common stock at $0.11 per share
in connection with conversion of
debentures (November 1998) 969,536 970 - 105,291 - 106,261
Shares canceled from default at par (510,329) (510) - 510 - 0
Shares canceled from default judgement
originally issued for services at
$0.50 per share (500,000) (500) - (249,500) - (250,000)
Compensation recognized upon issuance of - - - 366,303 - 366,303
stock options
Allocation of proceeds from notes payable
and debentures due to beneficial
conversion features - - - 859,140 - 859,140
Warrants issued with sale of convertible
debentures - - 338,825 - 338,825
Debt conversion expense - - - 260,645 - 260,645
Contested proceeds from private placements
reclassified from accrued liabilities
due to defaults - - - 250,959 - 250,959
Net Loss - - - - (16,465,877) (16,465,877)
---------- ---------- ------------ ------------ ------------ ------------
Balances, December 31, 1998 25,035,615 $ 25,036 $ 1,307,403 $ 22,883,852 $(35,726,975) (11,510,684)
=========== =========== ============ ============ ============= ============
See accompanying notes to these consolidated financial statements
</TABLE>
<PAGE>F-9
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<S> <C> <C> <C>
MARCH 3, 1993
FOR THE YEARS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
--------------------------------------------- ---------------------
1998 1997 1998
--------------------- --------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (14,910,054) $ (10,305,851) $ (33,411,700)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 291,363 415,979 728,517
Amortization of discount on long-term debt 2,345,866 - 2,345,866
Impairment loss on property and equipment 937,000 - 937,000
Interest related to beneficial conversion
features of notes payable and convertible
debentures 1,197,965 1,101,107 2,299,072
Compensation recognized upon issuance of
stock and stock options 611,053 1,575,649 5,769,785
Shares canceled from default judgement (250,000) - (250,000)
Contribution of product license - - 1,275,000
Write down of purchased incomplete
research and development - 500,000 500,000
Debt conversion expense 260,645 - 260,645
Write-off of related party receivable - 45,532 139,594
Write-off of acquisition costs 68,364 - 68,364
Changes in operating assets and liabilities:
Cash - restricted 8,481 1,026 -
Accounts receivable (8,745) - (8,745)
Prepaid expenses 96,631 (173,427) (79,996)
Deposits 52,679 (70,581) (37,200)
Accounts payable 1,438,485 299,520 2,132,291
Accrued liabilities 678,309 291,680 1,851,489
----------------- ------------------ ------------------
Net cash used in operating activities from
continuing operations $ (7,181,958) $ (6,319,366) $ (15,480,018)
------------------ ------------------ -------------------
Net loss from discontinued operations (1,555,823) (759,452) (2,315,275)
Loss on disposal of assets 48,568 - 48,568
Write-down of film rights and film costs inventory 277,500 (27,500) 250,000
Write-down of goodwill 848,129 - 848,129
Change in liabilities in excess of assets of
discontinued operations 62,932 - 62,932
--------------------- --------------------- --------------------
Net cash used in operating activities from
discontinued operations $ (318,694) $ (786,952) $ (1,105,646)
------------------ ------------------ -------------------
</TABLE>
<PAGE>F-10
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
See accompanying notes to these consolidated financial statements
<TABLE>
<S> <C> <C> <C>
MARCH 3, 1993
FOR THE YEARS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
--------------------------------------------- --------------------
1998 1997 1998
--------------------- --------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition of Sierra Vista
Entertainment $ - $ 2,916,798 $ 2,916,798
Cost incurred for organization of joint
venture - (68,364) (68,364)
Advance to related party - (45,532) (139,594)
Purchases of property and equipment (1,216,870) (768,181) (2,190,217)
Proceeds from sale of assets - 3,500 3,500
--------------------- ----------------- ------------------
Net cash provided by (used in)
investing activities $ (1,216,870) $ 2,038,221 $ 522,123
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft - (38,574) -
Proceeds from sale of common stock - 665,000 2,897,670
Proceeds from note payable 777,500 3,981,512 4,865,490
Net proceeds from sale of debenture with
detachable warrants 4,000,000 4,608,593 8,608,593
Principal payments on notes payable (174,478) - (274,278)
------------------ ------------------ ------------------
Net cash provided by financing
activities $ 4,603,022 $ 9,216,531 $ 16,097,475
----------------- ------------------ -----------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (4,114,500) 4,148,434 33,934
CASH AND CASH EQUIVALENTS, beginning of
Period 4,148,434 - -
----------------- ------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $ 33,934 $ 4,148,434 $ 33,934
================= ================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ - $ - $ 9,079
================= ================== =================
Income taxes $ 2,400 $ 4,800 $ 6,200
================= ================== =================
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net assets acquired, net of cash, through
acquisition of Sierra Vista Entertainment $ - $ 1,340,452 $ 1,340,452
================ ================== =================
Return of 500,000 shares of common stock
per settlement agreement $ - $ 500 $ 500
================ ================== =================
Acquisition of technology for stock $ - $ 500,000 $ 500,000
================ ================== =================
Conversion of notes payable, debentures and accrued
interest to equity $ 4,936,876 $ - $ 4,936,876
================= =================== =================
</TABLE>
<PAGE>F-11
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
InnovaCom, Inc. (the "Company") was formed to develop digital video
compression and processing technology to provide broadcast quality
video encoding and processing products and systems.
The Company was formed pursuant to a business reorganization effective
July 10, 1996 between Jettson Realty Development, Inc. ("JRD"), a
Nevada corporation formed in 1990 and InnovaCom Corp. (InnovaCom
Florida), a Florida corporation formed in 1993. Under the
reorganization, JRD issued 6,000,000 previously unissued restricted
common shares in exchange for all of the issued and outstanding common
stock of InnovaCom Florida. JRD's board of directors then changed the
name of JRD to InnovaCom, Inc. and InnovaCom Florida became its wholly
owned subsidiary. Prior to the reorganization, JRD had no operations.
This transaction was accounted for as a reverse acquisition of JRD by
InnovaCom Florida.
On May 14, 1997, the Company acquired 100% of the issued and
outstanding shares of Sierra Vista Entertainment, Inc., a Nevada
Corporation ("Sierra Vista"), in exchange for 8,514,500 previously
unissued shares of common stock of the Company. The transaction was
accounted for as a purchase. The fair market value per share of the
common stock issued in the transaction was $0.50. The resulting
purchase price was $4,257,250 with $1,090,452 being allocated to
goodwill. Sierra Vista was formed to acquire, produce and distribute
low-budget feature films. On June 15, 1998 (measurement date), the
Company's Board of Directors decided to discontinue the operations of
Sierra Vista. Accordingly, Sierra Vista is accounted for as a
discontinued operation in the accompanying consolidated financial
statements. All operations from the measurement date to the date of
disposal have been estimated and included in the loss from discontinued
operations as of December 31, 1998. All assets have been written down
to their net realizable value as of December 31, 1998.
Liabilities in excess of assets of discontinued operations consists of
Sierra Vista accounts payable as of December 31, 1998.
Sierra Vista has never generated any revenues.
2 SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Statement of Cash Flows - For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over the
estimated useful lives (3 years) of the respective assets.
<PAGE>F-12
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cost of normal maintenance and repairs is charged to operations as
incurred. Material expenditures which increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of
the asset. The cost of fixed assets sold, or otherwise disposed of, and
the related accumulated depreciation or amortization is removed from
the accounts, and any gains or losses are reflected in current
operations.
Film Rights and Film Cost Inventory - Film rights were stated at the
fair market value of the stock issued upon contribution to the Company,
which had become the cost of the assets, and consisted of screen plays,
foreign films, and other materials related to the film industry. Such
amounts were being amortized to expense over their estimated useful
lives. In compliance with Financial Accounting Standards Board (FASB)
Statement Number 53 "Financial Reporting by Producers and Distributors
of Motion Picture Films," the Company had capitalized production costs
as film cost inventory. Such amounts were being amortized using the
individual-film-forecast-computation method. Due to the discontinuance
of Sierra Vista, film rights and film cost inventory in the amount of
$277,500 were written off during the year ended December 31, 1998.
Debt Issuance Costs - Debt issue costs represent the offering costs
associated with the sale of the debentures (See Note 7) and were being
amortized using the interest method over the life of the debentures.
The Company was in violation of certain covenants under the terms of
the debentures. Consequently, the debentures are classified as current
in the accompanying consolidated financial statements and debt issue
costs of $664,815 capitalized as of December 31, 1997 were written off
during the year ended December 31, 1998. Debt issue costs associated
with debentures sold during the year ended December 31, 1998 were
immediately expensed due to the violation of certain covenants under
the terms of the debentures.
Goodwill - Goodwill, representing the excess of the cost over the net
tangible and identifiable intangible assets of the acquired business,
was stated at cost and was amortized on a straight-line basis, over the
future periods to be benefited estimated to be three years. Due to the
discontinuance of Sierra Vista, goodwill in the amount of $848,129 was
written off during the year ended December 31, 1998.
Research and Development Costs - Research and Development costs are
charged to operations in the period incurred.
Income Taxes - The Company accounts for income taxes under the
liability method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based
on the difference between the financial statements and tax basis of
assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. The
actual results could differ from those estimates.
<PAGE>F-13
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSINANCIAL STATEMENTS
The Company's financial statements are based upon a number of
significant estimates, including the estimated useful lives selected
for property and equipment and the adequacy of valuation allowances.
Due to the uncertainties inherent in the estimation process, it is at
least reasonably possible that these estimates will be further revised
in the near term and such revisions could be material.
Impairment of Long-Lived Assets - In the event that facts and
circumstances indicate that the cost of long-lived assets may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash
flow value is required.
Stock-Based Compensation - The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB25) and related interpretations in accounting for its
employee stock options. In accordance with FASB123 entitled "Accounting
for Stock-Based Compensation"; the Company will disclose the impact of
adopting the fair value accounting of employee stock options.
Transactions in equity instruments with non-employees for goods or
services have been accounted for using the fair value method prescribed
by FASB123.
Concentrations of Credit Risk - Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or groups of counterparties
when they have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly effected by
changes in economic or other conditions. In accordance with FASB105
entitled "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk", the credit risk amounts shown do not take into account
the value of any collateral or security.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments, under FASB107 entitled "Disclosures about Fair
Value of Financial Instruments", are determined at discrete points in
time based on relevant market information. These estimates involve
uncertainties and cannot be determined with precision. The estimated
fair values of the Company's financial instruments, which includes all
cash, accounts receivable, accounts payable, convertible debentures,
and other debt, approximates the carrying value in the consolidated
financial statements at December 31, 1998.
Earnings per Share - Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted average number of shares of common stock outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. All such
securities or other contracts were anti-dilutive for all periods
presented and, therefore, excluded from the computation of earnings per
share.
Impact of Recently Issued Standards - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133 (FASB133), "Accounting for Derivative Instruments
and Hedging Activities". This statement is effective for fiscal years
<PAGE>F-14
beginning after June 15, 1999. Earlier application is encouraged;
however, the Company does not anticipate adopting FASB133 until the
fiscal year beginning January 1, 2000. FASB133 requires that an entity
recognize all derivatives as assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
Company does not believe the adoption of FASB133 will have a material
impact on assets, liabilities or equity. The Company has not yet
determined the impact of FASB133 on the income statement or the impact
on comprehensive income.
FASB132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" and FASB134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" were issued in 1998 and are not
expected to impact the Company's future financial statement
disclosures, results of operations or financial position.
3 BASIS OF PRESENTATION:
The financial statements have been prepared on a going concern basis,
which contemplates, among other things, the realization of assets and
the satisfaction of liabilities in the normal course of business.
However, there is substantial doubt about the Company's ability to
continue as a going concern because of the magnitude of its loss of
$16,465,877 for the year ended December 31, 1998, and its negative
working capital of $11,851,398 and its stockholder's deficit of
$11,510,684 as of December 31, 1998. The Company's continued existence
is dependent upon its ability to raise substantial capital, to generate
revenues and to significantly improve operations.
Management has taken several actions in response to these conditions.
During 1998, the Company sold $4,000,000 of 7% convertible debentures
(See Note 7) and converted $4,936,876 of debt to equity. Also, in June
1998, the Company discontinued its Sierra Vista operation and further
reduced expenses by discontinuing certain development projects and
reducing personnel. Subsequent to December 31, 1998, the Company sold
$750,000 in 7% convertible debentures and borrowed $1,200,000 through
the issuance of 13% notes due on demand and is attempting to raise
additional capital. Management believes that these actions will allow
the Company to continue as a going concern.
Accordingly, the financial statements do not include any adjustments
relating to the recoverabilty and classification of recorded asset
amounts or the amount and classification of liabilities or any other
adjustment that might be necessary should the Company be unable to
continue as a going concern.
4 PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
Computer and equipment $ 332,261
Office equipment and furniture 125,774
------------------
458,035
Accumulated depreciation 154,521
------------------
$ 303,514
==================
<PAGE>F-15
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
Accrued payroll and benefits $ 190,915
Accrued interest 431,229
Other 643,146
------------------
$ 1,265,290
==================
6 NOTES PAYABLE - RELATED PARTIES:
Note payable - related party in the original
amount of $50,000 bearing interest at 10%, due
on demand $ 40,000
Note payable - related party in the original amount of $125,000 bearing
interest at 8% with monthly payments of $10,000, due on demand
95,000
------------------
$ 135,000
==================
In connection with the notes payable - related parties discussed above,
the Company issued 100,000 shares of common stock to the related
parties and has recognized $175,000 in interest expense for the year
ended December 31, 1998 for the fair value of the shares issued.
During 1997, the Company entered into a revolving convertible debt
facility with a shareholder which bore interest at 10% and provided for
the conversion of all amounts outstanding into common stock at a
conversion price equal to 80% of the market price for a share of common
stock at the time a draw is funded. In May 1998, the shareholder
converted $4,181,421 of the amount outstanding into 1,742,362 shares of
common stock. In June 1998, the shareholder converted its remaining
balance outstanding of $317,357 into common stock and terminated the
credit facility. As an inducement to make this conversion, the Company
allowed the shareholder to convert the remaining balance into 1,220,608
shares of common stock based on the market price of the stock of $0.26
per share as opposed to the conversion price of $2.40 per share. The
Company recognized an additional expense of $260,645 for the value of
the additional shares issued to induce the conversion.
7 LONG-TERM DEBT:
In December 1997, the Company issued $5,000,000 of 7% convertible
debentures due in December 2002. The debentures accrue interest at 7%
per annum and are convertible into shares of common stock at a
conversion price equal to the lesser of $3.47 per share or 80% of the
five day average market price per share prior to conversion. As part of
the issuance of the debentures, the Company issued to the debenture
holders five year warrants to purchase 250,000 shares of common stock
at $3.00 per share and 250,000 shares of common stock at $4.00 per
share. In addition, the Company issued a five-year warrant to purchase
250,000 shares of common stock at $2.43 per share as a finders fee.
<PAGE>F-16
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1998, the Company issued $2,000,000 of 7% convertible
debentures due in June 2003. The debentures accrue interest at 7% per
annum and are convertible into shares of common stock at a conversion
price equal to $0.35 per share. As part of the issuance of the
debentures, the Company issued to the debenture holders five-year
warrants to purchase 500,000 shares of common stock at $0.50 per share.
In addition, the Company issued five-year warrants to purchase 400,000
shares of common stock at $0.34 per share as a finders fee.
In August 1998, the Company issued $1,500,000 of 7% convertible
debentures due in August 2003. The debentures accrue interest at 7% per
annum and are convertible into shares of common stock at a conversion
price equal to the lesser of $0.26 per share or 75% of the five day
average market price per share prior to conversion. As part of the
issuance of the debentures, the Company issued to the debenture holders
five year warrants to purchase 75,000 shares of common stock at $0.50
per share, and cancelled the 500,000 warrants issued with the December
1997 debentures and issued new five year warrants to purchase 500,000
shares of common stock at $0.50 per share. In addition, the Company
issued five-year warrants to purchase 300,000 shares of common stock at
$0.21 per share as a finders fee.
In December 1998, the Company issued $500,000 of 7% convertible
debentures due in December 2003. The debentures accrue interest at 7%
per annum and are convertible into shares of common stock at a
conversion price equal to the lesser of $0.18 per share or 75% of the
five day average market price per share prior to conversion. As part of
the issuance of the debentures, the Company issued to the debenture
holders five-year warrants to purchase 125,000 shares of common stock
at $0.50 per share. In addition, the Company issued five-year warrants
to purchase 100,000 shares of common stock at $0.14 per share as a
finder's fee.
All of the debentures are secured by all of the assets of the Company.
The Company was in violation of certain covenants related to the
debentures; consequently all of the debentures have been classified as
current in the accompanying financial statements. The unamortized debt
issuance costs and discount in the amount of $2,345,866 associated with
the December 1997 debentures were written-off during the year ended
December 31, 1998. The Company has also recognized interest expense of
$1,093,879 during the year ended December 31, 1998 which is
attributable to the fair value of the warrants and the beneficial
conversion features associated with the debentures issued during 1998.
During 1998, holders of the December 1997 debentures converted
$210,000 in principal and $10,597 in accrued interest into 1,459,539
shares of common stock.
8 STOCKHOLDERS' EQUITY:
In October 1996, the Company adopted the 1996 Incentive and
Nonstatutory Stock Option Plan (the 1996 Plan) covering 1,500,000
shares. In 1997 this was increased to 3,000,000 shares pending
shareholder approval. Under the plan, the Company can grant to key
employees, directors, and consultants either incentive, non-statutory,
or performance based stock options. The price of the options granted
pursuant to the plan shall not be less than 100% of the fair market
value of the shares on the date of grant. The board of directors will
decide the vesting period of the options, if any, and no option will be
exercisable after ten years from the date granted. Prices for incentive
options granted to employees who own 10% or more of the Company's stock
are at least 110% of market value at date of grant.
<PAGE>F-17
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 1997, the Company purchased the rights to certain
proprietary technology from a third party in exchange for 100,000
shares of the Company's common stock. This technology was valued at
$500,000 or $5.00 per share, which was the current market value of the
Company's common stock. At December 31, 1997, the $500,000 of the
technology cost is included in research and development costs.
During 1997 the Company granted options under the 1996 plan to purchase
1,278,640 shares of common stock to employees who were hired in 1997
and 1996. The options were granted with exercise prices ranging from
$0.50 to $3.75 per share, expire in 2002 and vest over three years from
the date of hire. The Company has recognized $91,824 and $911,531 in
compensation expense related to services provided for the years ending
December 31, 1998 and 1997, respectively. In June 1998, 530,600 of the
options were repriced to the current fair market value of $0.26 per
share. As of December 31, 1998, 748,040 of these options were
forfeited.
In April 1997, the Company granted options to purchase 100,000 shares
of common stock for $3.375 per share for a term of three years in
exchange for consulting services. Compensation expense in the amount of
$272,480 was recognized during the year ended December 31, 1997 for
services provided.
In May 1997, the Company granted options to purchase 1,000,000 shares
of common stock under the 1996 Plan to an officer. The options were
granted with exercise prices ranging from $2.75 to $4.75 per share. All
of these options were forfeited during 1998.
In July 1997, the Company granted 122,160 options to purchase common
stock for prices ranging from $0.50 to $3.00 per share for consulting
services rendered. Consulting expense in the amount of $374,295 was
recorded for the year ending December 31, 1997.
In July 1997, the Company retained the services of an investment
advisor to assist in raising up to $15,000,000 in a private placement.
In connection with these services, the Company granted options to
purchase 400,000 shares of common stock under the Plan at $2.50 per
share. 200,000 of the options were exercisable upon grant; the
remainder were forfeited during 1998.
In October 1997, the Company granted options to purchase 261,233 shares
of common stock to employees under the 1996 plan. The options were
granted with an exercise price equal to market, $3.0625 per share. The
options expire in 2002 and vest over three years or upon attainment of
certain performance criteria. As of December 31, 1998, 230,900 of these
options were forfeited.
In November 1997, the Company granted options to purchase 105,000
shares of common stock to employees under the 1996 Plan. The options
were granted with an exercise price equal to market, $2.5938 per share.
The options expire in 2002 and vest over three years. As of December
31, 1998, 55,000 of these options were forfeited.
In November 1997, the Company granted non-plan options to purchase
1,500,000 shares of common stock to directors of the Company. The
options were granted with an exercise price equal to market, $2.5938
per share, and expire in 2002. In June 1998, the options were repriced
to the current fair market value of $0.26 per share. The options vested
immediately.
<PAGE>F-18
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1997, a former president of the Company returned 500,000
shares of common stock originally issued at par value. The stock was
returned to settle any potential claims the Company may hold against
him relating to the November 10, 1997 legal action described in Note 9.
The return of these shares was recorded based on their original issue
cost.
During 1998, the Company granted options to purchase 1,966,400 shares
of common stock to employees under the 1996 plan. The options were
granted with exercise prices equal to market on the date of grant and
range from $0.26 to $2.50 per share. The options expire in 2003 and
vest over three years.
In March 1998, the Company granted non-plan options to purchase 50,000
shares of common stock to an employee. The options were granted with an
exercise price of $1.75 per share. One third of the options vest
immediately and the remainder vest over two years. Compensation expense
of $8,854 was recognized in the year ended December 31, 1998 for
services provided.
In May 1998, the Company borrowed $217,500 which was converted into
836,538 shares of common stock. In connection with this borrowing the
Company issued 25,000 shares of common stock and recognized $43,750 in
interest expense for the year ended December 31, 1998 for the fair
value of the 25,000 shares issued.
In May 1998, the Company granted options to purchase 1,000,000 shares
of common stock at an exercise price of $1.75 per share in connection
with the hiring of a new president. In December 1998, the Company
settled a claim with this individual in which 500,000 of these options
were forfeited. See Note 9: Litigation.
In October 1998, the Company granted non-plan options to purchase
300,000 shares of common stock to a director. The options were granted
with an exercise price equal to market on the date of grant ($0.16 per
share) and vest immediately.
The following table sets forth activity for all options granted under
the Plan:
<TABLE>
<S> <C> <C>
AVERAGE
EXERCISE PRICE
NUMBER PER SHARE
--------------------- --------------------
BALANCE, December 31, 1996 369,500 $ 1.62
Granted 3,044,873 2.60
Forfeited (606,050) 1.84
Exercised - -
------------------ --------------------
BALANCE, December 31, 1997 2,808,323 2.63
Granted 2,669,833 .31
Forfeited (2,808,323) 2.63
Exercised - -
------------------ -----------------
BALANCE, December 31, 1998 2,669,883 $ .31
================== ===================
</TABLE>
<PAGE>F-19
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998 options to purchase 1,058,547 shares were
exercisable at prices ranging from $0.26 to $2.59 per share. The
remaining 1,611,336 options outstanding become exercisable at $0.26 per
share through June 2001.
If not previously exercised or forfeited, 810,933 and 1,858,950 options
outstanding will expire during the year ended December 31, 2002 and
2003, respectively.
The following is a summary of all of the activity for non-plan options:
<TABLE>
<S> <C> <C>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
--------------------- ---------------------
BALANCE, December 31, 1996 4,200,000 $ 3.00
Vested options granted to consultants 217,500 2.89
Options granted to consultants 4,660 .50
Options granted to directors 1,500,000 2.59
Expired/cancelled options (1,171,667) 3.00
------------------ ---------------------
BALANCE, December 31, 1997 4,750,493 2.86
Vested options granted to consultants - -
Options granted to consultants - -
Options granted to employees 1,050,000 1.75
Options granted to directors 1,800,000 .24
Expired/cancelled options (4,366,665) 2.78
------------------ ---------------------
BALANCE, December 31, 1998 3,233,827 $ 1.24
================== =====================
</TABLE>
At December 31, 1998 options to purchase 2,533,827 shares were
exercisable at prices ranging from $0.16 to $3.37 per share. The
remaining options outstanding become exercisable upon the achievement
of certain performing criteria.
If not previously exercised or forfeited, all options will expire
during the years ended December 31, 2003 through 2008.
As stated in Note 2, the Company has not adopted the fair value
accounting prescribed by FASB123 for employees. Had compensation cost
for stock options issued to employees been determined based on the fair
value at grant date for awards in 1998 and 1997 consistent with the
provisions of FASB123, the Company's net loss and net loss per share
would have been adjusted to the proforma amounts indicated below:
<TABLE>
<S> <C> <C>
1998 1997
--------------------- --------------------
Net loss $ (21,295,706) $ (12,594,406)
===================== =====================
Basic and diluted net loss per common share $ (0.92) $ (0.70)
===================== =====================
</TABLE>
<PAGE>F-20
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option is estimated on the date of grant using
the present value of the exercise price and is pro-rated based on the
percent of time from the grant date to the end of the vesting period.
The weighted-average fair value of the options on the grant date for
1998 and 1997 was $1.41 and $2.10 per share, respectively. The
following assumptions were used for grants in 1998 and 1997: risk-free
interest rates of 5.6% and 6.22%, respectively; expected lives of three
years; dividend yield of 0%; and expected volatility of 140% and
144.0%, respectively.
9 COMMITMENTS AND CONTINGENCIES:
In July 1997, the board of directors approved the Company entering into
an agreement to obtain a 66% interest in a joint venture with China
International Radio Development. As part of this agreement, the Company
will have to fund up to $200,000 of expenses. The purpose of the joint
venture is to develop an exhibition center in China to display new
high-tech products. In connection with obtaining the joint venture
interest, during 1998, the Company issued 100,000 shares of common
stock to a third party as a finder's fee upon closing of the agreement
and recognized $26,000 in expense for services provided. Subsequent to
December 31, 1998, the Company entered into an agreement to obtain a
release from all obligations under the joint venture agreement. In
exchange, the Company will pay $53,000 in cash, cancel the 100,000
shares previously issued as a finders fee and issue 200,000 new shares.
The Company has accrued $77,000 as of December 31, 1998 in connection
with this agreement.
LEASES
The Company leases office space in California and certain office
equipment under long-term operating leases. The Company's leases
include the cost of real property taxes and maintenance expenses.
Insurance and utilities are the Company's responsibility. Future
minimum lease payments for all non-cancelable operating leases are as
follows:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------------
1999 $ 345,600
2000 345,600
2001 345,600
2002 345,600
-------------
$1,382,400
Rent expense was $427,826 and $193,214 for 1998 and 1997, respectively.
EMPLOYMENT AGREEMENT
In connection with the acquisition of Sierra Vista Entertainment, Inc.
(See Note 1), the Company entered into five year employment agreements
with its president and the president of Sierra Vista which provide for
minimum annual salaries totaling $420,000 and other incentives, as well
as severance payments equal to one year's salary for termination
without cause, and three years salary for termination without cause in
connection with a change in control. During 1998, these agreements were
canceled in exchange for a mutual release of all claims.
<PAGE>F-21
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LITIGATION
On October 7, 1996, the Company filed a complaint for declaratory
relief against a former employee. The lawsuit states that the person
breached a written employment agreement between the two parties. In
response to the action, the employee filed a similar cross-complaint,
which was subsequently amended after an unsuccessful mediation process.
The amended cross-complaint seeks damages in excess of $5,000,000 and
2% of the Company's stock outstanding as of April 1996. In August 1998,
the parties reached an agreement whereby the Company paid $4,000.
On December 27, 1996, the Company issued a purchase order to Compass
Design Automation ("Compass") in the amount of $1,021,300 for software
tools. On March 18, 1997, the Company canceled this purchase order
because it believes Compass reneged on certain commitments. In July
1997, Compass made a demand for payment. Company management has had
discussions with Compass to resolve this issue; however, no agreement
has been reached. Management believes, based on current information,
that any settlement would not have a material adverse impact on the
Company.
On November 10, 1997 the Company filed a suit against former officers
and directors of the Company for breach of fiduciary duty and third
parties who were involved in the initial merger between the Company and
Jettson Realty Development as well as the private placements of the
Jettson Realty Development stock. The suit claims fraud, breach of
fiduciary duty and negligence surrounding the acquisition. Management
intends to pursue this lawsuit vigorously and believes that no material
adverse impact will arise as a result of the litigation. During 1997,
the Company has entered into a settlement agreement with the Company's
former president related to this suit whereby the Company's president
agreed to return 500,000 shares of common stock. (See Note 8). During
1998, the Company obtained defaults against certain of the defendants
whereby the Company was awarded approximately $25 million in damages,
was allowed to cancel 1,010,329 shares of its common stock previously
issued to the defendants and retain $250,959 of contested proceeds from
a private placement. The Company has given no accounting recognition to
the $25 million in damages.
As part of the November 10, 1997 lawsuit, a former director of the
Company filed a counterclaim asserting approximately $11 million in
damages. In addition, the suit also sought to remove restrictive
legends on the stock currently owned. During 1998, the Company entered
into a settlement agreement with this former director. In exchange for
a mutual release of all claims, the former director placed 500,000
shares of the Company's common stock previously issued to him into
escrow. These shares were then sold and the proceeds of approximately
$64,000 were used by the Company to pay off certain accounts payable
and legal accruals.
A former consultant has asserted claims against the Company for unpaid
compensation of approximately $30,000 and stock option rights involving
169,500 shares. Settlement discussions are now underway. The unpaid
compensation has been accrued as of December 31, 1997. Management
believes, based on current information, that this lawsuit will not have
any additional material adverse impact on the Company.
Effective in May 1998, the Company hired a new president and entered
into an employment contract with him. In June 1998, the new president
resigned and subsequently filed a claim against the
<PAGE>F-22
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company alleging that his employment contract had been breached. The
Company believed that this individual made certain misrepresentations
and defended itself vigorously. In December 1998, the parties settled
their respective claims including a payment by each party to the other.
The amount of these payments was not material to the Company. In
addition, the Company agreed to allow the individual to keep options to
purchase 500,000 shares of common stock at an exercise price of $1.75
per share. These options vested immediately. The company has recognized
compensation expense of $265,625 in the year ended December 31, 1998
related to these options.
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. Discovery has been initiated. Management believes based on
current information, that there will be no material adverse impact on
the Company as a result of this investigation.
PRODUCT LICENSE
The Company is committed under a license to pay royalties for the use
of technology to develop video encoding systems on a chip to a third
party for a percentage of gross revenue on sublicenses and for a
percentage of the Foundry price for silicon in connection with sales to
end users as follows:
12-MONTH PERIOD
ENDING MARCH 26, PERCENTAGE
--------------------
1998 15%
1999 8%
2000 5%
2001 3%
2002 1%
2003 1%
The maximum amount of royalties to be paid under the license shall not
exceed $3,000,000. No royalties have been earned or paid through
December 31, 1998. The Company has abandoned the use of this technology
during 1998.
<PAGE>F-23
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 INCOME TAXES:
Income tax expenses is comprised of the following:
<TABLE>
<S> <C> <C> <C>
MARCH 3, 1993
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
-------------------------------------------- -----------------------
1998 1997 1998
-------------------- -------------------- -----------------------
Current
Federal $ - $ - $ -
State 2,400 3,200 8,800
---------------- ---------------- -------------------
2,400 3,200 8,800
---------------- ---------------- -------------------
Deferred
Federal - - -
State - - -
---------------- ---------------- -------------------
Income tax expense $ 2,400 $ 3,200 $ 8,800
================ ================ ===================
</TABLE>
Deferred income tax assets (liabilities) are comprised of the following
at December 31, 1998:
Current deferred income tax assets (liabilities):
Accrued vacation $ 21,143
Accrued wages 54,832
Stock based compensation 1,760,219
Accrued settlement 21,112
Other 8,484
-------------------
1,865,790
-------------------
Valuation allowance (1,865,790)
Net current deferred tax asset $ -
===================
Long-term deferred tax assets (liabilities):
Depreciation/amortization $ 549,627
Net operating loss carryforward 9,427,698
Research and development credit 794,320
-------------------
10,771,645
Valuation allowance (10,771,645)
-------------------
Net long-term deferred tax asset $ -
===================
<PAGE>F-24
Total income tax expense differed from the amounts computed by applying
the U.S. federal statutory tax rates to pre-tax income as follows:
<TABLE>
<S> <C> <C> <C>
MARCH 3, 1993
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
-------------------------------------------- ----------------------
1998 1997 1998
-------------------- -------------------- -----------------------
Total expense (benefit)
computed by applying the
U.S. statutory rate (34.0%) (34.0%) (34.0%)
Nondeductible license costs - - 1.3
Nondeductible goodwill 5.7 .7 3.3
Non deductible interest 14.4 - 9.6
Other .4 - .2
Change in beginning balance of
valuation allowance 13.5 33.3 19.6
------------------- ------------------- -----------------
- % - % -%
================== ================== =================
</TABLE>
As of December 31, 1998, the Company has available net operating loss
carryforwards for income taxes of $21,958,000 for Federal purposes and
$22,193,000 for California purposes which begin to expire in the year
2011 and 2001, respectively. The Company has $579,000 and $275,000 of
credit carryforward for federal and California, respectively. The
benefit of the net operating loss and credit carryovers to offset
future taxable income may be subject to limitation as a result of
changes in stock ownership as prescribed in Internal Revenue Code
Section 382.
11 PROFIT SHARING PLAN:
During 1998, the Company established the InnovaCom, Inc. 401(K) Profit
Sharing Plan (the Plan) covering substantially all of its employees.
Management determines, at its discretion, the amount of any matching or
other contributions to the Plan. The Company made no such contributions
to the Plan during the year ended December 31, 1998.
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of December 15, 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 $500,000 of the
Company's 7% Secured Convertible Debentures, due December 15, (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; 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
$500,000. The closing of the purchase and sale of the Debentures (the "Closing")
shall take place at the offices of Robinson Silverman Pearce Aronsohn & Berman
LLP ("Robinson Silverman"), 1290 Avenue of the Americas, New York, New York
10104. The date of the Closing is hereinafter referred to as the "Closing Date."
(ii) At the Closing the parties shall deliver or shall cause to be
delivered the following: (A) the Company shall deliver (1) the Debentures,
registered in the name of the Purchaser, (2) a Common Stock purchase warrant in
the form of Exhibit C (the "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 125,000 shares of Common Stock for an exercise price
(subject to adjustment as set forth therein) of $.50 per share, (3) an executed
Amendment (as defined in Section 3.15), and (4) all other executed instruments,
agreements and certificates as are required to be delivered by the Company at
the Closing, including, without limitation, an executed Registration Rights
Agreement, dated as of the Closing Date, between the Purchaser and the Company
in the form of Exhibit B (the "Registration Rights Agreement"); and (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 Closing, and (2) all other executed instruments, agreements and
certificates as are required to be delivered by the Purchaser at the Closing,
including without limitation, an executed Registration Rights Agreement and an
executed Amendment.
<PAGE>
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. "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 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 Warrant, the Security Agreement (as defined
in Section 3.15) 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, 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
<PAGE>
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 Warrant 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 Warrant. The Debentures and the Warrant 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 Warrant 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 Warrant 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 Warrant. The shares of Common
Stock issuable upon conversion of the Debentures, as payment of interest in
respect thereof and upon exercise of the Warrant are sometimes referred to
herein as the "Underlying Shares," and the Debentures, Warrant 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
<PAGE>
the Warrant, 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 (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
<PAGE>
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. Except as set forth in Schedule 2.1(j), 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; 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
<PAGE>
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 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.
<PAGE>
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 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
<PAGE>
investing in the Securities, (ii) access to information about the Company and
the Company's financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment, and
(iii) the opportunity to obtain such additional information which the Company
possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the investment
and to verify the accuracy and completeness of the information contained in the
Disclosure Materials. Neither such inquiries nor any other investigation
conducted by or on behalf of the Purchaser or its representatives or counsel
shall modify, amend or affect the Purchaser's right to rely on the truth,
accuracy and completeness of the Disclosure Materials and the Company's
representations and warranties contained in the Transaction Documents.
(g) Reliance. The Purchaser understands and acknowledges that (i)
the Securities to be acquired by it hereunder are being offered and sold to it
without registration under the Securities Act in a private placement that is
exempt from the registration provisions of the Securities Act and (ii) the
availability of such exemption, depends in part on, and the Company will rely
upon the accuracy and truthfulness of, the foregoing representations and such
Purchaser hereby consents to such reliance.
The Company acknowledges and agrees that the Purchaser makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements thereof. In connection with any
transfer of any Securities other than pursuant to an effective registration
statement or to the Company, the Company may require the transferor thereof to
provide to the Company an opinion of counsel selected by the transferor, the
form and substance of which opinion shall be reasonably satisfactory to the
Company, to the effect that such transfer does not require registration under
the Securities Act. Notwithstanding the foregoing, the Company hereby consents
to and agrees to register any transfer by the Purchaser to an Affiliate of the
Purchaser or 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
<PAGE>
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 Warrant 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 Warrant 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 Warrant 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
<PAGE>
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.
3.5 Increase in Authorized Shares. (a) The Company shall as soon as
possible and, in any event no later than 90 days following the 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 Warrant 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 Warrant. 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
<PAGE>
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 Warrant 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.
3.7 Conversion Procedures. The Conversion Notice (as defined in Exhibit
A) and Notice of Exercise under the Warrant set forth the totality of the
procedures with respect to the conversion of the Debentures and exercise of the
Warrant, as may be reasonably necessary to enable the Purchaser to convert
Debentures and exercise the Warrant 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) 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 $50,000 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.
<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 Warrant and shall
deliver Underlying Shares in accordance with the respective terms and conditions
and time periods set forth in the Debentures and the Warrant.
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 Warrant 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
<PAGE>
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, 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.
3.14 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.
<PAGE>
(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, as amended on August 28, 1998, by
and between the Company and the Purchaser (the "Security Agreement") 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 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
MISCELLANEOUS
4.1 Fees and Expenses. The Company shall pay the Purchaser at the
Closing, $5,000 for its legal fees and disbursements in connection with the
preparation and negotiation of the Transaction Documents and for its due
diligence expenses and disbursements in connection therewith. Other than the
amounts contemplated by the immediately preceding sentence, and except as set
forth in the Registration Rights Agreement, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company
shall pay all stamp and other taxes and duties levied in connection with the
issuance of the Debentures pursuant hereto. The Purchaser shall be responsible
for its own respective tax liability that may arise as a result of the
investment hereunder or the transactions contemplated by this Agreement.
4.2 Entire Agreement; Amendments. This Agreement, together with
the Exhibits and Schedules hereto, the Debentures, the Security Agreement, the
Registration Rights Agreement and the Warrant 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
<PAGE>
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: 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.
<PAGE>
4.4 Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by both the Company and the Purchaser; or, in the case of a waiver,
by the party against whom enforcement of any such waiver is sought. No waiver of
any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereafter.
4.5 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
4.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Purchaser. Except as set
forth in Section 3.1(a), the Purchaser may 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.
4.7 No Third-Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and, other than with respect to permitted assignees under Section 4.6,
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
4.8 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the 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 Warrant.
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
<PAGE>
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.
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SIGNATURE PAGE FOLLOWS]
<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:
SECOND AMENDED AND RESTATED SECURITY AGREEMENT
THIS SECOND AMENDED AND RESTATED SECURITY AGREEMENT (the "Agreement") is
made and entered into, as of December 15th, 1998, by and between JNC Strategic
Fund Ltd., a Cayman Islands corporation ("JNC") and InnovaCom, Inc., a Nevada
corporation (the "Company").
RECITALS
WHEREAS, on June 29, 1998, JNC and the Company entered into a
Convertible Debenture Purchase Agreement (the "June 29th Purchase Agreement"),
and related documents, pursuant to which JNC purchased an aggregate principal
amount of $2,000,000 of the Company's 7% Convertible Debentures Due June 29,
2003 (the "June 29th Debentures"); and
WHEREAS, in connection with the June 29th Purchase Agreement, the
Company also executed and delivered to JNC a Security Agreement (the "June 29th
Security Agreement") to secure the payment and discharge of all of the Company's
obligations under the Debentures (as defined in the June 29th Purchase
Agreement) and to provide JNC with a continuing security interest, a first lien
upon, and a right of set-off against, all of the Company's right, title, and
interest in the Collateral (as defined in the June 29th Security Agreement), to
which any and all rights and claims of any other parties shall be subordinate;
and
WHEREAS, JNC and the Company subsequently agreed to amend and restate in
its entirety the June 29th Security Agreement (the "August 28th Security
Agreement") in connection with their entering into a Convertible Debenture
Purchase Agreement dated as of August 28th, 1998 (the "August 28th Purchase
Agreement") in order to provide that the obligations of the Company pursuant to
the Company's 7% Convertible Debentures Due August 28, 2003 (the "August 28th
Debentures") and other Transaction Documents (as defined in the August 28th
Purchase Agreement) would also be deemed to be part of the Obligations (as
defined in Section 2 of the June 29th Security Agreement) of the Company under
the June 29th Security Agreement; and
WHEREAS, JNC and the Company have now agreed to amend and restate in its
entirety the August 28th Security Agreement in connection with their entering
into a Convertible Debenture Purchase Agreement dated as of December 15th, 1998
(the "December 15th Purchase Agreement" and together with the June 29th Purchase
Agreement and the August 28th Purchase Agreement, the "Purchase Agreements") in
order to provide that the obligations of the Company pursuant to the Company's
7% Secured Convertible Debentures Due December 15, 2003 (the "December 15th
Debentures and collectively with the June 29th Debentures and the August 28th
Debentures, the "Debentures") and other Transaction Documents (as defined in
Section 2.1(a) of the December 15th Purchase Agreement) shall also be deemed to
be part of the Obligations (as defined in Section 2 of the June 29th Security
Agreement and the August 28th Security Agreement) of the Company under the June
29th Security Agreement and the August 28th Security Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the agreements herein contained and
for other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Definitions. Unless otherwise defined, or unless the context otherwise
requires, capitalized terms used in this Agreement shall have the same
meaning given such terms in the Transaction Documents (as defined in
Section 2.1(a) of the December 15th Purchase Agreement).
a. The following terms shall have the same meaning given such terms
in Article 9 of the Uniform Commercial Code of the State of
California, as amended to the date of this Agreement, and/or any
other applicable law of any jurisdiction (whether or not such
other Uniform Commercial Code applies to the Collateral, as
defined herein)(collectively, the "UCC"): Chattel Paper,
Documents, Goods, Instruments, Accounts, Consumer Goods,
Equipment, Fixtures, Deposit Accounts, Proceeds, General
Intangibles and Inventory.
2. Grant of Security Interest. As security for the full and punctual
satisfaction, payment, and performance of all of the obligations of the
Company pursuant to all of thebTransaction Documents referenced in each
of the Purchase Agreements (collectively, the "JNC Transaction
Documents"), as such obligations may be amended, supplemented, and
modified from time to time (the "Obligations"), the Company does
hereby, unconditionally and irrevocably, pledge, mortgage, assign, set
over, convey, grant, transfer, and deliver (collectively, "Transfer") to
JNC a continuing security interest, a first lien upon, and a right of
set-off against, all of the Company's right, title, and interest of
whatsoever kind and nature in and to the Collateral (as hereinafter
defined)(the "Security Interest"). The Security Interest granted hereby
shall relate back to the date of the June 29th Security Agreement.
3. Collateral. The "Collateral" shall cover and include all right, title,
and interest of the Company in, to, and under all of the following,
whether now existing or hereafter acquired from time to time: (i) all
Accounts; (ii) all receivables; (iii) all General Intangibles; (iv) all
Goods, including, without limitation, all Equipment, and all
Inventory, whether now held or acquired in the future and wherever
located, including, but not limited to Inventory that is repossessed,
returned or acquired as a result of a "trade-in;" and (v) all letters of
credit, notes, drafts, stock and other debt and equity
securities whether or not certificated, and all instruments; (vi) all
Chattel Paper and all Documents including without limitation documents
of title (vii) all Instruments; (viii) all contract rights and all
causes of action; (ix) all Deposit Accounts (general or special) with,
and all credits and other claims against, all-lenders or other financial
institutions; (x) all money; (xi) all property or interests in property
now or hereafter coming into the possession, custody or control of the
Company (whether for safekeeping, deposit,custody, pledge, transmission,
collection or otherwise); (xii) all Proceeds including, without
limitation, all proceeds of any loans, including the Loan and
all insurance proceeds of or relating to any of the foregoing; (xiii)
all books and records relating to any of the foregoing; (xiv) all
Fixtures, accessions and additions to, substitutions for, and
replacements, products and proceeds of any of the foregoing and
(xv) all rights to payment resulting from disposition or other Transfer
of any of the foregoing.
<PAGE>
4. Preservation and Perfection of Security Interests. In connection with
the June 29th Security Agreement, the Company delivered to JNC one or
more Uniform Commercial Code Form 1 Financing Statements (collectively,
"UCC Form 1") with respect to the Security Interest. In addition, the
Company shall, as required from time to time by JNC, execute and deliver
or endorse any and all instruments, documents, conveyances,assignments,
security agreements, additional financing statements, continuation
statements, and other agreements and writings which JNC may request in
order to create, perfect, or continue the Security Interest or which JNC
may otherwise reasonably request in order to secure, protect or enforce
the Security Interest or the rights of JNC under this Agreement (but any
failure to request or assure that the Company execute, deliver or
endorse any such item shall not affect nor impair the validity,
sufficiency or enforceability of this Agreement or any security
interests granted herein, regardless of whether any such item was or was
not executed, delivered or endorsed in a similar context or on a prior
occasion). A carbon, photographic or other reproduction of this Agreement
or of a financing statement is sufficient as a financing statement.
5. Representations and Warranties of the Company. The Company hereby
incorporates by reference those representations and warranties set forth
in the JNC Transaction Documents, and further represents and warrants to
JNC:
a. Except for the rights granted hereunder and the related UCC Form
1, and also except for that certain Writ of Attachment granted on
or about December 8,1998 in favor of Cadence Design Systems,
Inc., a copy of which has been provided to JNC by the Company,
the Company is the sole owner of the Collateral, free and clear
from any liens, security interests, encumbrances, rights or
claims, and is fully authorized to grant the Security Interest in
and pledge the Collateral, and the Collateral is not subject to
any UCC financing statement.
b. This Agreement is fully sufficient to create and transfer to JNC,
and shall create and transfer to JNC, a Security Interest in and
to all of the Company's right, title, and interest in the
Collateral, free and clear of any and all adverse liens, claims,
and encumbrances of any kind or nature, and the Company has not
transferred, and shall not transfer any Security Interest in the
Collateral to any other person, without the prior written consent
of JNC.
c. This Agreement creates a valid and perfected security interest in
the Collateral, securing the performance of the Obligations. All
filings and other actions necessary to perfect and protect such
security interest have been made or taken by the Company.
d. Except for the consent of JNC, which is implicit pursuant to this
Agreement, no consent of any person (including, without
limitation, stock holders or creditors of the Company) is
required for the subjection by the Company of the Collateral to
the terms of this Agreement.
<PAGE>
6. Covenants of the Company. The Company hereby reaffirms and incorporates
those covenants set forth in the JNC Transaction Documents and further
covenants and agrees:
a. To appear and defend any and all actions and proceedings
affecting the Collateral, or otherwise affecting the Security
Interest, against any persons whatsoever, and the Company shall
obtain and furnish to JNC from time to time, upon demand, such
releases and/or subordinations of claims and liens which may be
required to maintain the priority of the Security Interest
hereunder.
b. To permit JNC, its representatives and its agents to inspect the
Collateral at any time, and to make copies of records pertaining
to the Collateral as may be requested by JNC from time-to-time.
c. At all times, to maintain the liens and security interests
provided for hereunder as valid and perfected first priority
liens and security interests in the Collateral hereby granted to
JNC.
d. That all Collateral shall, for the entire term of this Agreement,
be free and clear of any liens, mortgages, pledges, or any other
encumbrances of any kind or nature whatsoever, except only for
the security interests created by this Agreement, or as otherwise
consented to in writing by JNC.
e. Not to sell, lease, transfer or remove the Collateral, or any
part thereof, from its present location without first obtaining
the express written consent of JNC, except in the ordinary course
of business.
f. With respect to that part of the Collateral which is tangible,
the Company will maintain such Collateral in good order and
repair and will not use any part of such Collateral in any manner
injurious or likely to be injurious or which will result in its
unreasonable deterioration or consumption or which will be in
violation of any laws or regulations or any policy of insurance.
With respect to Collateral which is not tangible, the Company
will take all steps reasonably necessary to preserve and protect
the value of such Collateral, and the Company will diligently
pursue and seek to preserve, enforce and collect any rights,
claims, causes of action and accounts receivable.
g. To safeguard and protect all Collateral for the account of JNC
and make no disposition thereof other than in the ordinary course
of business. At the request of JNC, the Company will sign and
deliver to JNC, at any time or from time to time, one or more
financing statements pursuant to the UCC in form satisfactory to
JNC and will pay the cost of filing the same in all public
offices wherever filing is, or is deemed by JNC to be, necessary
or desirable and with respect to the Collateral.
h. To promptly notify JNC in sufficient detail upon becoming aware
of any attachment, garnishment, execution or other legal process
levied against any or all of the Collateral and of any other
information received by the Company that may materially affect
the value of the Collateral, the Security Interest or the rights
and remedies of JNC hereunder.
<PAGE>
i. To maintain insurance on the Collateral against loss or damage by
fire, perils commonly covered under the extended coverage
endorsement, malicious mischief and sprinkler leakage.
7. Defaults. The following events shall be "Events of Default":
a. An Event of Default under any of the JNC Transaction Documents;
or
b. The Company shall fail to observe or perform any of its
obligations hereunder for 20 days after receipt by the Company of
notice of such default from JNC; or
c. Any representation, warranty, certification or statement made by
the Company hereunder shall prove to have been incorrect in any
material respect when made.
8. Duty To Hold In Trust. Upon the occurrence of any Event of Default, the
Company shall, upon receipt by it of any revenue, income, or other sums
(collectively, the "Sums") subject to the Security Interest, whether
payable pursuant to the Debentures or otherwise, or of any check, draft,
note, trade acceptance or other instrument evidencing an obligation to
pay any such sum, hold the same in trust for JNC and shall forthwith
endorse and transfer any such sums or instruments, or both, to JNC for
application to the satisfaction of the Obligations.
9. Rights and Remedies Upon Default. Upon occurrence of any of the above
Events of Default and at any time thereafter, as long as any such Event
of Default shall continue, JNC may exercise any and all of the rights
and remedies conferred hereunder and under any of the JNC Transaction
Documents, including, without limitation, the right, to accelerate
payment under any or all Debentures, and JNC shall have all the rights
and remedies of a secured party under the UCC and shall further have, in
addition to all other rights and remedies provided herein or by law, the
following rights and powers:
a. JNC may enter upon the premises where any of the Collateral may
be located, and take possession of the Collateral, and demand and
receive reconveyance of the Collateral from any person who has
possession thereof, and JNC may take such measures as may be
necessary or proper for the care or protection of the value
thereof, including the right to remove, keep and/or store all or
any portion of the Collateral or put a custodian in charge
thereof; and/or
b. At JNC's request, the Company shall assemble the Collateral and
make it available to JNC at places which JNC shall reasonably
select, whether at the Company's premises or elsewhere, and make
available to JNC, without rent, all of the Company's premises and
facilities for the purpose of JNC taking possession of, removing
or putting the Collateral in saleable or disposable form; and/or
c. With or without taking possession, JNC may sell or cause to be
sold, at any time, and from time to time, as JNC may determine,
any of the Collateral in its entirety or in parcels, either at
public or private sale, at such price and on such terms as JNC
may deem best, at which sale JNC may bid and purchase to the
<PAGE>
extent permitted by law, as now or hereinafter in effect, all
without (except as shall be required by applicable statute and
cannot be waived) advertisement or demand upon or notice to the
Company or right of redemption of the Company, which are hereby
expressly waived. The Company shall have no right of redemption
subsequent to any such sale, and hereby expressly waives any such
right. JNC shall apply the proceeds of any such sale or sales
first to the expenses incident thereto, including reasonable
attorneys' fees, and next to the full and complete satisfaction
of all of the Obligations. The Company shall remain fully liable
to JNC for any deficiency which may exist after any such sale or
sales and the application of the proceeds thereof in accordance
herewith. Any purchaser at any such sale or sales (including
without limitation JNC) shall thereafter hold any of the
Collateral so purchased absolutely free from any claim or right
of any nature whatsoever by any other person or entity (including
without limitation the Company); and/or
i. Upon each such sale, JNC may, unless prohibited by
applicable statute which cannot be waived, purchase all or
any part of the Collateral being sold, free from and
discharged of all trusts, claims, right of redemption and
equities of the Company, which are hereby waived and
released.
ii. The proceeds of any such sale, lease, or other disposition
of the Collateral shall be applied first, to the expenses
of retaking, holding, storing, processing, and preparing
for sale, selling, and the like, and to the reasonable
attorneys' fees and expenses incurred by JNC, and then
to satisfaction of the Obligations, and to the payment of
any other amounts required by applicable law, after which
JNC shall pay to the Company any surplus proceeds. If,
upon the sale, lease or other disposition of the
Collateral, the proceeds thereof are insufficient to pay
all amounts to which JNC is legally entitled, the Company
will be liable for the deficiency, together with interest
thereon, at the rate of 18% per annum (the "Default
Rate"), and the reasonable fees of any attorneys employed
by JNC to collect such deficiency. To the extent
permitted by applicable law, the Company waives all
claims, damages and demands against JNC arising out of the
repossession, removal, retention or sale of the
Collateral, unless due to the gross negligence or willful
misconduct of JNC.
d. Upon the occurrence and during the continuance of an Event of
Default, JNC shall have the right to send notice of the
assignment granted herein and the security interest created
hereunder to any account debtors of the Company or any other
persons obligated on, holding or otherwise concerned with, any of
the receivables, may demand that monies due or to become due be
paid to JNC and thereafter, JNC shall have the sole right to
collect the receivables and all books and records relating
thereto; and/or
e. JNC may institute any proceeding at law, in equity, or otherwise
in order to foreclose upon the Collateral or any part thereof. To
the extent permitted by law, any sale thereof shall be held in
the same manner, with the same effect and subject to the same
terms and conditions as specified in paragraph (c) of this
Section 8. JNC may, in the exercise of its sole and absolute
discretion, from time to time, at any time and in any order,
choose to institute a
<PAGE>
proceeding for foreclosure on some portion of the Collateral
and/or a sale under paragraphs (c) or (d) on other portions of
the Collateral, without being deemed to have made an election of
remedies or to have waived any other rights or remedies, and
without in any other way limiting any remedies or rights which it
may otherwise have; and/or
f. In its name or in the name of the Company or otherwise, JNC may
demand, sue for, collect, or receive any money or property at
any time payable or receivable on account of or in exchange for
or make any compromise or settlement deemed desirable with
respect to, any of the Collateral, but shall be under no
obligation to do so, and JNC may extend the time of payment,
arrange for payment in installments, or otherwise modify the
terms of, or release, any of the Collateral, without thereby
incurring responsibility to, or discharging or otherwise
affecting any liability of, the Company or in any other way
limiting any remedies or rights which JNC may otherwise have;
and/or
g. JNC may, in the event JNC takes possession of the Collateral
pursuant to the exercise of any right or remedy provided for
hereunder or by law, any insurance policy owned by the Company,
together with any unearned or prepaid premium thereon, shall, at
the option of JNC, be assigned by the Company to, and become the
sole property of JNC, provided that the amount of any such
unearned or prepaid premium is thereupon applied to the payment
or satisfaction of the Obligations.
10. Responsibility for Collateral. The Company assumes all liabilities and
responsibility in connection with all Collateral, and the obligation of
the Company hereunder or under any of the JNC Transaction Documents, and
shall in no way be affected or diminished by reason of the loss,
destruction, damage, or theft of any of the Collateral or its
unavailability for any reason.
11. Security Interest Absolute. All rights of JNC and the Security
Interest hereunder, and all Obligations of the Company hereunder,
shall be absolute and unconditional, irrespective of: (a) any
lack of validity or enforceability of any of the JNC Transaction
Documents or this Agreement, and any agreement
entered into in connection with the foregoing, or any portion hereof
or thereof; (b) any change in the time, manner or place of payment or
performance of, or in any other term of, all or any of the
Obligations, or any other amendment or waiver of or any consent to any
departure from the JNC Transaction Documents; (c) any exchange,
release, or nonperfection of any of the Collateral, or any release or
amendment or waiver of or consent to departure from any other
collateral for, or any guaranty, or any other security, for all or any
of the Obligations; (d) any action by JNC to obtain, adjust, settle,
and cancel in its sole discretion any insurance claims or matters made
or arising in connection with the Collateral; or (e) any other
circumstance which might otherwise constitute any legal or equitable
defense available to the Company, or a discharge of all or any part of
the Security Interest granted hereby. Until the Obligations shall have
been paid and performed in full, JNC's rights shall continue even if
the Obligations are barred for any reason, including, without
limitation, the running of the statute of limitations or bankruptcy.
The Company expressly waives presentment, protest, notice of protest,
demand, notice of nonpayment, and demand for performance. This
Agreement shall create a continuing security interest in the
Collateral and shall remain in full force and effect until the
Obligations shall have been paid and performed in full,
<PAGE>
and shall be binding upon the Company and its successors and permitted
transferees and assigns. In the event that at any time any transfer of
any Collateral or any payment received by JNC hereunder shall be deemed
by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or
insolvency laws of the United States, or shall be deemed to be otherwise
due to any party other than JNC, then, in any such event, the Company's
obligations hereunder shall survive cancellation of this Agreement, and
shall not be discharged or satisfied by any prior payment thereof and/or
cancellation of this Agreement, but shall remain a valid and binding
obligation enforceable in accordance with the terms and provisions
hereof. The Company waives all right to require JNC to proceed against
any other person or to apply any Collateral which JNC may hold at any
time, or to marshal assets, or to pursue any other remedy. JNC may, at
its election, exercise any right or remedy it may have against any
security held by JNC, including, without limitation, the right to
foreclose any such security by judicial or nonjudicial sale, without
affecting or impairing in any way the rights of JNC hereunder. The
Company waives any defense arising by reason of the application of the
statute of limitations to any obligation secured hereby.
12. JNC Appointed Attorney-in-Fact. The Company hereby irrevocably makes,
nominates, constitutes and appoints JNC and each of its officers,
agents, successors, or assigns (with full power of substitution and
resubstitution), as the Company's true and lawful attorney-in-fact with
full power to take all actions and sign, execute, acknowledge, record,
and file, in the Company's name and for JNC's use and benefit, all
documents that shall be necessary to accomplish the following on the
occurrence of any Event of Default and at any time thereafter, so long
as such Event of Default shall continue:
a. To receive, open, and dispose of all mail addressed to the
Company which relates to the Collateral, or to endorse and
collect any notes, checks, drafts, money orders, or other
evidences of payment that may come into the possession of JNC;
b. To enforce all rights of the Company under and pursuant to any
agreements or other contractual arrangements relating to the
Collateral, and to enter into such other agreements as may be
necessary to exploit the Collateral;
c. To pay or discharge taxes, liens, security interests, or other
encumbrances at any time levied or placed on or threatened
against the Collateral; to demand, collect, receipt for,
compromise, settle, and sue for monies due in respect of the
Collateral;
d. To execute and perform such other and further agreements,
documents, and instruments of any nature whatsoever, including,
but not limited to, the execution and filing of a UCC Form 1 and
to do any and all other things as JNC may deem necessary or
appropriate for the purpose of preserving, protecting or
maintaining the Collateral and the Security Interest granted to
JNC; and
e. Generally, to do, at the option of JNC and at the Company's
expense, at any time, or from time to time, all acts and things
which JNC deems necessary to protect, preserve, and realize upon
the Collateral and JNC's security interests therein in order to
effect the intent of this Agreement and of the Purchase
Agreements all as fully and effectually as the Company might or
could do.
<PAGE>
The Company hereby ratifies all that said attorney shall lawfully do or
cause to be done by virtue hereof. This power of attorney is coupled
with an interest and shall be irrevocable for the term of this Agreement
and thereafter as long as any of the Obligations shall be outstanding.
13. Duties of JNC.
a. The powers conferred on JNC hereunder are solely to protect its
interests in the Collateral and shall not impose any duty upon it to
exercise any such powers. Except for the safe custody of any
Collateral in its actual possession and the accounting for monies
actually received by it hereunder with respect to which JNC shall act
with reasonable care, JNC shall have no duty as to any Collateral or
as to the taking of any steps necessary to preserve its rights against
prior parties or any other rights pertaining to any Collateral. JNC
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral is
accorded treatment that is substantially equal to that treatment which
JNC accords its own property in the ordinary course of its business.
b. If the Company fails to pay, before delinquency, any taxes or other
governmental charges which may be levied against the Collateral or its
operation or use, or any assessments made against the Collateral, or
fails to make any payment or to take any action required herein or in
the JNC Transaction Documents, or to take any other action necessary
to preserve the priority and value of JNC's rights under this
Agreement, then JNC may (but shall not be obligated to) make such
payments and take all such actions as JNC deems necessary to protect
its security interest in or to protect and preserve the value of the
Collateral, and JNC is hereby authorized (without limiting the general
nature of the authority hereinabove conferred) to pay, purchase,
contest, or compromise any encumbrances, charges, or liens which in
the judgment of JNC appear to be prior to or superior to, or of equal
priority with, the Security Interest. Any amount so paid shall be
included in the Obligations secured hereby and shall bear interest
thereon at the Default Rate from date of payment until repaid, and
shall be secured pursuant to the terms of this Agreement by the
Collateral and shall be repayable by the Company on demand.
14. Expenses. In addition to expenses payable under the Transaction
Documents, the Company agrees to pay all out of pocket fees, costs,
and expenses incurred in the filing of the UCC Form 1 or any other
financing statements, continuation statements, partial releases,
and/or termination statements related thereto or any expenses of any
searches reasonably required by JNC. The Company shall also pay all
other claims and charges which in the reasonable opinion of JNC might
prejudice, imperil, or otherwise affect the Collateral or the Security
Interest therein. All expenses so incurred shall be immediately paid
by the Company upon demand by JNC. The Company will also, upon demand,
pay to JNC the amount of any and all reasonable expenses, including
the reasonable fees and expenses of its counsel and of any experts and
agents, which JNC may incur in connection with (i) the administration
of this Agreement, (ii) the custody or preservation of, or the sale
of, collection from, or other realization upon, any of the Collateral,
(iii) the exercise or enforcement of any of the rights of JNC
hereunder or
<PAGE>
under the JNC Transaction Documents, or (iv) the failure by the Company
to perform or observe any of the provisions contained herein or in the
JNC Transaction Documents. Until so paid, any fees payable hereunder
shall be added to the principal amount of the Obligations and shall bear
interest at the Default Rate.
15. Term of Agreement. This Agreement shall terminate when all payments
under any of the JNC Transaction Documents have been made in full and
all other Obligations have been paid or discharged. Upon such
termination, JNC, at the request and at the expense of the Company, will
join in executing any termination statement with respect to any
financing statement executed and filed pursuant to this Agreement.
16. Other Security. To the extent that the Obligations are now or hereafter
secured by property other than the Collateral or by the guarantee,
endorsement, or property of any other person, firm, corporation, or
other entity, then JNC shall have the right, in its sole discretion, to
pursue, relinquish, subordinate, modify, or take any other action with
respect thereto, without in any way modifying or affecting any of JNC's
rights and remedies hereunder.
17. Miscellaneous.
a. Indemnity. The Company agrees to defend, protect, indemnify, and hold
harmless JNC and each and all of its respective officers, directors,
employees, attorneys, and Agents (collectively called the
"Indemnitees") from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs,
expenses, and disbursements of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements
of counsel for such Indemnitees in connection with any investigative,
administrative, or judicial proceeding, whether or not such
Indemnitees shall be designated a party thereto), which may be imposed
on, incurred by, or asserted against such Indemnitees (whether direct,
indirect, or consequential and whether based on any federal or state
laws or other statutory regulations, including, without limitation,
securities and commercial laws and regulations, common law or at
equitable cause, or contract or otherwise) in any manner relating to
or arising out of this Agreement or the Obligations, or any act,
event, or transaction related or attendant thereto, including, without
limitation, any and all costs and expenses incurred in the enforcement
of this Agreement (collectively, the "Indemnified Matters"). To the
extent that the undertaking to indemnify, pay, and hold harmless set
forth in the preceding sentence may be unenforceable because it is
violative of any law or public policy, the Company shall contribute
the maximum portion which it is permitted to pay and satisfy under
applicable law, to the payment and satisfaction of all Indemnified
Matters incurred by the Indemnitees.
b. Course of Dealing. No course of dealing between the Company and JNC,
nor any failure to exercise, nor any delay in exercising, on the part
of JNC, any right, power, or privilege hereunder or under the JNC
Transaction Documents shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, power, or privilege hereunder
or thereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
<PAGE>
c. Remedies Cumulative. Except as otherwise expressly provided herein, no
remedy conferred by any of the specific provisions of this Agreement
is intended to be exclusive of any other remedy which is otherwise
available at law, in equity, by statute, or otherwise, and except as
otherwise expressly provided for herein, each and every other remedy
shall be cumulative and shall be in addition to every other remedy
given hereunder or otherwise. The election of any one or more of such
remedies by any of the parties hereto shall not constitute a waiver by
such party of the right to pursue any other available remedies.
d. Notices. All notices, requests, demands, deliveries, and other
communications hereunder shall be in writing and, except as otherwise
specifically provided in this Agreement, shall be deemed to have been
duly given, upon receipt, if delivered personally or via fax, or ten
(10) business days after deposit in the mail, if mailed, first class
with postage prepaid to the parties at the following addresses:
If to JNC, to:
JNC Strategic Fund Ltd.
c/o Olympia Capital (Cayman) Ltd.
Williams House
20 Reid Street
Hamilton HM11
Bermuda
Attn: Director
Fax: (441) 295-2305
with a copy to:
Encore Capital Management, LLC
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Attn: Managing Director
Fax: (703) 476-7711
and
Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Attn: Eric L. Cohen, Esq.
Fax: 212-541-4630
If to the Company, to:
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Attn: Frank Alioto, President
Fax: 408-727-8778
<PAGE>
with a copy to:
Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, CA 95814
Attn: Scott E. Bartel, Esq.
Fax: 916-442-3442
d. Headings. The section headings contained in this Agreement are for
convenience only and shall not control or affect the meaning or
construction of any of the provisions of this Agreement.
e. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of New York, except to the extent the validity,
perfection or enforcement of a security interest hereunder in respect
of any particular Collateral are governed by a jurisdiction other than
the State of New York in which case such law shall govern.
The Company and JNC hereby irrevocably submit to the jurisdiction
of any New York State or United States Federal court sitting in
Manhattan county over any action or proceeding arising out of or
relating to this Agreement, and the Company and JNC hereby
irrevocably agree that all claims in respect of such action or
proceeding may be heard and determined in such New York State or
Federal court. The Company and JNC agree that a final judgment in
any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any
other manner provided by law. The Company and JNC further waive
any objection to venue in such State and any objection to an
action or proceeding in such State on the basis of forum non
conveniens.
f. Amendments, etc. Any of the terms and provisions of this Agreement may
be waived at any time by the party which is entitled to the benefit
thereof, but only by a written instrument executed by such party. This
Agreement may be amended only by an agreement in writing executed by
JNC and the Company.
g. Severability. In the event that any provision of this Agreement is
held to be invalid, prohibited or unenforceable in any jurisdiction
for any reason, unless such provision is narrowed by judicial
construction, this Agreement shall, as to such jurisdiction, be
construed as if such invalid, prohibited or unenforceable provision
had been more narrowly drawn so as not to be invalid, prohibited or
unenforceable. If, notwithstanding the foregoing, any provision of
this Agreement is held to be invalid, prohibited or unenforceable in
any jurisdiction, such provision, as to such jurisdiction, shall be
ineffective to the extent of such invalidity, prohibition or
unenforceability without invalidating the remaining portion of such
provision or the other provisions of this Agreement and without
affecting the validity or enforceability of such provision or the
other provisions of this Agreement in any other jurisdiction.
h. Delay, Etc. No delay or omission to exercise any right, power, or
remedy accruing to any party hereto shall impair any such right,
power, or remedy of
<PAGE>
such party nor be construed to be a waiver of any such right, power,
or remedy nor constitute any course of dealing or performance
hereunder.
i. Costs and Attorneys' Fees. If any action, suit, arbitration
proceeding, or other proceeding is instituted arising out of this
Agreement, the prevailing party shall recover all of such party's
costs, including, without limitation, the court costs and
reasonable attorneys' fees incurred therein, including any and
all appeals or petitions therefrom.
j. Counterparts. This Agreement may be executed in one or more
counterparts, each of which may be deemed an original, but all of
which together, shall constitute one and the same instrument.
This Agreement may be executed by a party and sent to the other
parties via facsimile transmission and the facsimile transmitted
copy shall have the same integrity, force, and effect as an
original document.
k. Entire Agreement. This Agreement and the other agreements
referred to herein supersede all prior negotiations and
agreements (whether written or oral) and constitute the entire
understanding among the parties hereto, it being understood that
the August 28th Security Agreement is amended and restated in its
entirety hereby, and that this Agreement relates back to the date
of the June 29th Security Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Second Amended And
Restated Security Agreement to be duly executed and delivered by its officers
thereunto duly authorized effective as of December 15th, 1998.
INNOVACOM, INC.
By:_____________________________________
Frank Alioto
President
Accepted and agreed, effective
as of this 15th day of December, 1998
EMPLOYMENT AGREEMENT
InnovaCom, Inc., a Nevada corporation, located at 3400 Garrett Drive,
Santa Clara, CA 95054, hereinafter referred to as "Employer", and Frank Alioto,
hereinafter referred to as "Employee", in consideration of the mutual promises
made herein, agree as follows:
DUTIES, OBLIGATIONS AND AUTHORITIES OF EMPLOYEE:
Employee shall serve as the President and acting Chief Executive officer of
InnovaCom, inc.. In the capacity and as President of InnovaCom, inc.. Employee
shall and may do and perform all services, acts, or things necessary or
advisable to manage and conduct the business of employer, including the hiring
and firing of all employees other than the officers of Employer, subject at all
times to the policies set by Employer's Board of Directors. The responsibilities
of Employee will include building and supervising the management team for
Employer, selecting the strategic and tactical direction of Employer, and
conducting the necessary oversight to ensure that the Employer meets its
revenue, profitability, and cash-flow goals. Employee will report to the Board
of Directors of InnovaCom, inc..
COMPETITIVE ACTIVITIES:
During the term of this Agreement Employee shall not, directly or
indirectly, engage or participate in any business that is in competition with
the business of Employer. This Agreement shall not be interpreted to prohibit
Employee from making passive personal investment 9.
PLACE OF EMPLOYMENT:
Unless the parties agree otherwise in writing. Employee will perform the
services he is required to perform under this Agreement at Employer's offices in
Santa Clara County; provided, however, that Employer may from time to time
require Employee to travel temporarily to other locations on Employer's
business.
OBLIGATIONS OF EMPLOYER:
Employer shall provide Employee with the compensation, incentives,
benefits, and business expense reimbursement specified elsewhere In the
Agreement and will not unduly interfere with Employee In the exercise of his
responsibilities.
COMPENSATION OF EMPLOYEE:
Annual Salary: As compensation for the services to be performed hereunder.
Employee shall receive a salary at the rate of $135,000 per annum, payable in
accordance with the normal payroll practices of the Employer.
<PAGE>
Salary Continuation During Disability: if Employee tor any reason becomes
disabled so that he is unable to perform the duties prescribed herein. Employee
agrees to first attempt to obtain disability benefits under any applicable
Employer disability income benefit plan in which he Is covered. If the
requirements of such insurance plan for any reason do not provide coverage for
Employee, Employer agrees to pay Employee that amount which Employee would
otherwise have received under the maximum benefits available under such
Insurance plan had he been eligible to receive such benefits. However, payment
of such benefits shall be limited to a maximum amount of twelve (12) months.
This provision does not affect or will be affected by any other benefits which
Employee may be able to otherwise receive under any other private or government
benefits available to Employee. Nor does such disability affect any stock
vesting provisions.
Tax Withholding: Employer shall have the right to deduct or withhold from
the compensation due Employee hereunder any and all sums required for federal
Income and Social Security taxes and all state or local taxes now applicable or
that may be enacted and become applicable in the future.
EMPLOYEE BENEFITS:
Annual Vacation: Employee will be entitled to four weeks of cumulating paid
vacation each twelve-month period, which shall accrue on a prorata basis from
June 26, 1998 (hereinafter referred to as "Commencement Date").
Additional Benefits: During employment. Employee shall be entitled to
receive all other benefits of employment generally available to Employer's other
employees when and as he becomes eligible for them, including, but not limited
to, medical, dental, life and disability insurance benefits, and participation
in Employer's pension plan and profit-sharing plans, stock option or stock
purchase plans, etc..
Expense Reimbursement: During employment, Employer shall reimburse
Employee promptly for reasonable business expenses, including, but not limited
to, travel, entertainment, parking, business meetings, and professional dues,
made and substantiated in accordance with. the policies and procedures
established from time to time by Employer with respect to Employer's other
executive and managerial employees.
STOCK OPTION:
Employer grants Employee an option to purchase 1,000,000 share of
Employer's common stock at a purchase price of $.26 per share. This option vests
and is exercisable in the following increments and times:
1. 16.667% of the Option entitling Employee to purchase 166,667
shares of common stock shall vest and become exercisable on June
26, 1998 (Commencement Date);
<PAGE>
2. 16.667% of the Option, entitling Employee to purchase 166,667
shares of the Company's common stock shall vest and become
exercisable on June 26, 1999;
3. 16.666% of the Option entitling Employee to purchase 166,666
shares of the Company's common stock shall vest and become
exercisable on June 26, 2000;
4. The remaining 500,000 shares of the Option shall vest and become
exercisable on June 26, 2003 (the "Final Vesting Date"). Vesting
of these shares will be accelerated based upon performance goals
to be agreed upon in good faith between the Employee and the
condensation committee of the Employer by September 1, 1998;
5. All 1,000,000 shares will be vested and exercisable immediately
in the event of a Change of Control of Employer or if Employee is
terminated without cause at any time prior to the Final Vesting
Date. For the purposes of this Agreement, a "Change in Control"
shall be deemed to have occurred if and when any of the following
shall occur:
a) individuals who as of the date six months after the
Commencement Date (the "Six Month Date") constitute the
entire Board and any new directors whose election by the
Board, or whose nomination for election by the Employer's
stockholders, shall have been approved by a vote of at
least a majority of the directors then in office whether
they were directors as of the Six Month Date or whose
election or nomination for election shall have been so
approved shall cease for any reason to constitute a
majority of the members of the Board;
b) Any "person" (as such term is used in Section l3(d) and
l4(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") shall after the Commencement
Date become the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the exchange Act), directly or
indirectly, of securities of the Employer representing
thirty percent (30%) or more of the voting power of all
then outstanding securities of the Employer having the
right under ordinary circumstances to vote in an election
of the Board (it being understood and agreed that, for
this purpose, any securities of the Employer that any
person has the right to acquire pursuant to any agreement,
upon exercise of any conversion rights, warrants or
options or by any other means, shall be deemed
beneficially owned by such person);
c) There shall be approved by a vote of the Employer's
shareholders or other appropriate corporate action any
corporate transaction, including a consolidation or
merger, involving the Employer (regardless of whether the
Employer is the continuing or surviving corporation) or
pursuant to which
<PAGE>
shares of the Employer's capital stock are converted into
cash, securities or other property, other than a
consolidation or merger of the Company in which the
holders of the Company's voting stock immediately prior to
the consolidation or merger shall, upon consummation
thereof, own half number of shares of the capital stock of
the continuing or surviving corporation sufficient to
provide such holders with at least fifty-one percent (51%)
of the voting power of all shares of the capital stock of
the continuing or surviving corporation;
d) There shall be approved by a vote of the Employer's
shareholders or other appropriate corporate action any
sale, lease, exchange, or transfer (whether in a single
transaction or a series of related transactions) of all or
substantially all of the assets or business of the
Ernployer or any liquidation, dissolution or winding up of
the Employer.
6. The option shall remain exercisable until, and shall not expire
earlier than two (2) years from the date of change of control.
7. As soon as practical following the Employee's request, the
Employer shall register the shares of common stock subject to the
Option under the federal securities laws and shall take such
other steps as may be necessary to enable such shares to be
offered and sold to the public under the federal securities laws
and any other such laws.
INDEMNIFICATION:
As part of the consideration provided by this Agreement and separate from
any other legal requirements for indemnification of Employee by Employer, the
Employer will indemnify and hold harmless the Employee and his legal
representatives, from and against all judgments, tines, penalties, excise taxes,
amounts paid in settlement, liabilities, losses, costs and expenses, including
reasonable attorneys' fees and legal costs, if the Employee is made, is
threatened to be made, or in good faith expects to be made a party or a witness
to any threatened or pending or completed action, suit, proceeding or
Investigation, whether civil, criminal administrative or otherwise, including an
action by or in the right of the Employer or any of its affiliated companies to
procure a judgment in its favor, by reason of the Employee having provided
services to the Employer or being or having been a director, officer, consultant
or employee of the Employer or by reason of the Employee serving or having
served in any capacity whatsoever (Including as a director, officer or employee)
any other corporation, partnership, joint venture, limited liability company,
trust, employee benefit plan or other enterprise at the request of the Employer.
The Employee's right to Indemnification shall continue after the Employee has
ceased to be a director or officer and shall inure to the benefit of the
Employee's heirs, executors, administrators, attorneys, agents, and assigns. Any
reimbursement obligation arising hereunder shall be satisfied on an as-incurred
basis. The Employer agrees to immediately secure and maintain in effect
<PAGE>
customary and appropriate directors' and officers' liability insurance
throughout Employee's employment and for a period of not less than six years
commencing immediately after termination of Employee's employment, it being
understood and agreed that the Employee shall be immediately added as a named
insured to any and all such insurance policies. Employee shall additionally be
entitled to the protection of any and all such insurance policies on no less
favorable a basis than is now or hereafter provided to any other officer or
director of the Company or any of its affiliated companies.
TERMINATION:
Employer and Employee agree that Employee's employment is on an "at-will"
basis. Either Employer or Employee may terminate this Agreement at any time for
any reason. The following additional issues, not otherwise covered by this
Agreement, pertain to such termination actions:
a) Employee is requested bo provide a minimum two week notice period
to Employer in the event of his resignation;
b) if the Employer elects to terminate Employee's employment without
cause, Employer agrees to pay Employee a minimum severance salary of three
months pay of Employee's then-existing salary. Employer also agrees to pay for
twelve (12) additional months of medical and dental insurance coverage for
Employee and his dependents. Additional compensation will be negotiated at the
time as the circumstances may then warrant such additional compensation.
c) A termination for "cause" as used in this Agreement will mean a
willful breach of the duties Employee is required to perform under the terms of
this Agreement, or the commission of such acts of dishonesty, fraud, or other
acts of moral turpitude as would prevent the effective performance of his
duties.
GENERAL PROVISIONS:
This Agreement shall not be terminated by Employer's voluntary or
involuntary dissolution or by any merger in which Employer is not the surviving
or resulting corporation, or In any transfer of all or substantially all of
Ernployer's assets. In the event of any such merger or transfer of assets, the
provisions of the Agreement shall be binding on and/or inure to the benefit of
the surviving business entity of the business entity to which such assets shall
be transferred.
If any provision of this Agreement is held by a court of competent
jurisdiction to be invalid, void, or unenforceable, the remaining provisions
shall nevertheless continue in full force without being impaired or invalidated
in any way.
If there is any dispute over the terms and conditions of this Agreement or
any breach thereof, the parties mutually agree that prior to instituting any
legal action they will engage in good faith to resolve such dispute in
mediation. The mediator will be jointly agreed upon by the parties.
<PAGE>
This Agreement shall be governed by and construed in accordance with the
laws of the State of California.
Dated this 15th day of March, 1999, at Santa Clara, CA.
FRANK ALIOTO
Frank Alioto
Dated this 15th day of March, 1999, at Santa Clara, California.
InnovaCom, Inc.
By: STANTON CREASEY
Title: CFO
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT, dated as of December ___, 1998 (the
"Agreement"), is made and entered into by and among Innovacom, Inc., a Nevada
corporation ("Innovacom") and Champlin Turner Enterprises, Inc., a California
corporation ("CTEI").
RECITALS
WHEREAS, Innovacom has been developing applications for its video
encoder in the telemedicine field, (hereinafter referred to as "Telemedicine
Opportunity");
WHEREAS, Innovacom has decided that it is in the best interest of
Innovacom and its shareholders to discontinue the development of the
Telemedicine Opportunity and not directly pursue the telemedicine market as a
business opportunity;
WHEREAS, CTEI, a corporation partially owned by John Champlin, a
director of Innovacom, is desirous of pursuing the telemedicine market as a
business opportunity and is willing to assume the liabilities incurred in the
development of telemedicine market in exchange for certain assets provided
herein; and
WHEREAS, the Board of Directors of Innovacom deems it advisable and in
the best interests of the stockholders of Innovacom to sell all assets
associated with Telemedicine Opportunity to CTEI in exchange for CTEI's
assumption of the liabilities associated with the development of Telemedicine
Opportunity.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
and agreements set forth herein, and for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
I. SALE AND PURCHASE OF ASSETS.
1.1 Purchase of Assets. On the terms and conditions of this Agreement,
Innovacom agrees to sell, transfer, assign, and convey to CTEI, all of the
assets, properties, and rights associated with the Telemedicine Opportunity as
of the Closing Date (as defined in Section 4.2), which assets are more
particularly set forth in "Exhibit A" hereto (the "Assets").
1.2 Assumption of Liabilities. In connection with the transfer of
Innovacom's right, title, and interest in and to the Assets, CTEI will accept
the assignment of, and also agrees to assume the duties and obligations of
performance under those specific contracts and liabilities to which Innovacom is
a party as identified in "Exhibit B" hereto (the "Liabilities").
<PAGE>
II. ADDITIONAL AGREEMENT
2.1 Software License. As an integral part of the transaction
contemplated hereunder, Innovacom shall have entered into those additional
covenants and agreements set forth in the Software License Agreement attached
hereto as "Exhibit C" and incorporated by this reference (the "Software License
Agreement").
III. CONDITIONS.
3.1 Conditions of the Obligations of Each Party. The obligations of
Innovacom, on the one hand, and CTEI on the other hand, to consummate the
transactions contemplated by this Agreement are subject to the satisfaction (or,
if permissible, waiver by the party for whose benefit such conditions exist) of
the following conditions:
(a) The parties shall have executed the Software License
Agreement;
(b) CTEI shall have cause Dr. John Champlin and Dr. James Turner,
each individually, to execute a "General Release" releasing Innovacom of its
obligations and liabilities related to the Telemedicine Opportunity, a copy of
the General Release is hereto attached as "Exhibit D" and "Exhibit E,"
respectively.
(c) The parties shall have agreed upon the allocation of the
sales price and prepared an Asset Acquisition Statement on Form 8594 as required
by Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code");
(d) All actions by or in respect of or filings with any court,
arbitral tribunal, administrative agency, commission, or other governmental or
regulatory authority or agency (a "Governmental Entity") required to permit the
consummation of the asset purchase shall have been obtained;
(e) All material consents of third parties (other than
Governmental Entities), if applicable, shall have been obtained; and
(e) No claim or threat of legal action by any third party as a
result of this transaction has been communicated to Innovacom, which claim or
threat remains unresolved as of the Closing Date.
IV. SIGNING AND CLOSING
4.1 Deliveries at Signing of Agreement. Prior to or substantially
contemporaneous with the execution this Agreement, Innovacom shall deliver or
cause to be delivered to the CTEI evidence of the corporate authorizations
approving the terms of this Agreement and the transactions contemplated herein
and therein; and
<PAGE>
4.2 Closing of Transaction. The closing of the transactions contemplated
hereby (the "Closing") shall take place when all deliveries provided for in this
Article IV shall have been made, which shall occur on, December ____, 1998, at
or before 11:00 p.m., Pacific Daylight Time, (the "Closing Date").
4.3 Deliveries on the Closing Date by Innovacom. Provided that all of
the terms and conditions of this Agreement have been satisfied, Innovacom shall
deliver or cause to be delivered to CTEI the following on or before the Closing
Date:
(a) The executed Software License Agreement;
(b) (i) Bills of sale or documents of assignment as shall be
required to vest in CTEI good and marketable title to all the Assets, and (ii)
operating control of the Assets; and
(c) A certificate signed by the President of Innovacom that all
of the representations and warranties of the Innovacom set forth in this
Agreement are true and correct in all material respects and that all of the
conditions of this Agreement applicable to the Closing Date have been satisfied
or waived.
4.4 Deliveries on the Closing Date by CTEI. Provided that all of the
terms and conditions of this Agreement have been satisfied, CTEI shall deliver
or cause to be delivered to Innovacomthe following on or before the Closing
Date:
(a) The General Release signed by Dr. John Champlin;
(b) The General Release signed by Dr. James Turner; and
(c) A certificate signed by the President of CTEI that all of the
representations and warranties of the Innovacom set forth in this Agreement are
true and correct in all material respects and that all of the conditions of this
Agreement applicable to the Closing Date have been satisfied or waived; and
4.5 Filings; Cooperation. Innovacom and CTEI shall, on request and
without further consideration, cooperate with one another by furnishing or using
their best efforts to cause others to furnish any additional information and/or
executing and delivering or using their best efforts to cause others to execute
and deliver any additional documents and/or instruments, and doing or using
their best efforts to cause others to do any and all such other things as may be
reasonably required by the parties or their counsel to consummate or otherwise
implement the transactions contemplated by this Agreement. Unless otherwise
provided herein, all such instruments so delivered shall be dated the Closing
Date.
<PAGE>
V. REPRESENTATIONS AND WARRANTIES OF INNOVACOM.
5.1 Title to Property. Exhibit A accurately identifies all of the Assets
of Innovacom in connection with Telemedicine Opportunity. Innovacom has good and
marketable title to the Assets free and clear of all liens, encumbrances,
security interests, charges, restrictions, options, mortgages, easements,
rights-of-way, or other encumbrances and restrictions of any nature whatsoever,
except as described in "Exhibit F" and upon consummation of the transactions
contemplated hereby, Innovacom shall transfer, assign, and convey to CTEI, and
CTEI shall receive from Innovacom, good and marketable title to all of the
Assets free and clear of any and all liens, encumbrances, security interests,
charges, or restrictions against transfer except as disclosed in "Exhibit F"
5.2 Organization. Innovacom is a corporation duly organized, validly
existing, duly qualified or licensed to do business, and in good standing under
the laws of the jurisdiction of its incorporation or organization and in each
jurisdiction in which the nature of the business conducted by it makes such
qualification or licensing necessary, and has all requisite corporate or other
power and authority and all necessary governmental approvals to own, lease, and
operate its properties and to carry on its business as now being conducted,
except where the failure to be so organized, existing, and in good standing or
to have such power, authority, and governmental approvals would not have a
material adverse effect on Innovacom.
5.3 Corporate Authorization; Validity of Agreement. Innovacom has full
corporate power and authority to execute and deliver this Agreement and the
Software License Agreement to which it is a party and to consummate the
transactions contemplated hereby and thereby. The execution and delivery by
Innovacom of this Agreement and the Software License Agreements and the
consummation by them of the transactions contemplated hereby and thereby have
been duly and validly authorized. This Agreement and the Software License
Agreement has been duly executed and delivered by Innovacom and constitutes a
valid and binding obligation of Innovacom, enforceable against each of them as
applicable in accordance with its terms, except that (i) such enforcement may be
subject to applicable bankruptcy, insolvency, or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
VI. REPRESENTATIONS AND WARRANTIES OF CTEI.
6.1 Organization. CTEI is a corporation duly organized, validly
existing, duly qualified or licensed to do business, and in good standing under
the laws of the jurisdiction of its incorporation or organization and in each
jurisdiction in which the nature of the business conducted by it makes such
qualification or licensing necessary, and has all requisite corporate or other
power and authority and all necessary governmental approvals to own, lease, and
operate its properties and to carry on its business as now being conducted,
except where the failure to be so organized, existing, and in good standing or
to have such power, authority, and governmental approvals would not have a
material adverse effect on CTEI.
<PAGE>
6.2 Corporate Authorization; Validity of Agreement. CTEI has full
corporate power and authority to execute and deliver this Agreement to which it
is a party and to consummate the transactions contemplated hereby and thereby.
The execution and delivery by CTEI of this Agreement and the consummation by
them of the transactions contemplated hereby and thereby have been duly and
validly authorized. This Agreement has been duly executed and delivered by CTEI
and constitutes a valid and binding obligation of CTEI, enforceable against each
of them as applicable in accordance with its terms, except that (i) such
enforcement may be subject to applicable bankruptcy, insolvency, or other
similar laws, now or hereafter in effect, affecting creditors' rights generally,
and (ii) the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
VII. INDEMNIFICATION.
7.1 Indemnification Obligations of CTEI. CTEI shall indemnify and hold
Innovacom harmless from any and all liabilities and obligations arising from
CTEI's operation and/or development of the Telemedicine Opportunity after the
Closing Date.
7.2 Indemnification Obligations of Innovacom. Innovacom shall indemnify
and hold CTEI harmless from any and all liabilities and obligations arising from
Innovacom's operation and/or development of the Telemedicine Opportunity prior
to the Closing Date except for those obligations and liabilities appearing in
"Exhibit B" and expressly assumed by CTEI in Section 1.2 of this Agreement.
VIII. MISCELLANEOUS.
8.1 Fees and Expenses. Except as contemplated by this Agreement, all
costs and expenses incurred in connection with this Agreement and the
consummation of the transactions contemplated hereby shall be paid by the party
incurring such expenses.
8.2 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified, and supplemented in any and all respects by
written agreement of the parties hereto at any time prior to the Closing Date
with respect to any of the terms contained herein.
8.3 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) or sent by a nationally recognized overnight courier service to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
<PAGE>
(a) if to Innovacom:
Innovacom, Inc.
3400 Garrett Drive
Santa Clara, California 95054
Attn: Frank Alioto
Facsimile: (408) 727-8778
with a copy to:
Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, CA 95814
Attn: Scott E. Bartel, Esq.
Facsimile No.: (916) 442-3442
(b) if to CTEI, to:
Champlin Turner Enterprises, Inc.
6651 Madison Avenue
Carmichael, CA 95608
Attn: Dr. John Champlin
Facsimile No.: (916) 965-5143
8.4 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words "include", "includes" or "including" are
used in this Agreement they shall be deemed to be followed by the words "without
limitation".
8.5 Assignment. Neither this Agreement nor any of the rights, interests,
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of, and be enforceable by the parties and their respective
successors and assigns.
8.6 Jurisdiction and Venue. Any and all suits for any breach of this
Agreement or for rescission or specific performance of this Agreement shall be
filed and maintained in any court of competent jurisdiction in Santa Clara
County, California. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
8.7 Entire Agreement; No Third Party Beneficiaries. This Agreement
(including the documents and the instruments referred to herein): (a) constitute
the entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the
<PAGE>
subject matter hereof, and (b) are not intended to confer upon any Person other
than the parties hereto any rights or remedies hereunder.
8.8 Severability. If any term, provision, covenant, or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void, unenforceable or against its regulatory policy, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
8.9 Counterparts. This Agreement may be executed in two or more
counterparts, by facsimile signature or otherwise, all of which shall be
considered one and the same agreement and shall become effective when two or
more counterparts have been signed by parties and delivered to the other
parties, it being understood that all parties need not sign the same
counterpart.
IN WITNESS WHEREOF, Innovacom and CTEI have executed this Agreement as
of the date specified above.
INNOVACOM, INC.
By:
Frank Alioto
President and Chief Executive
Officer
Champlin Turner Enterprises, Inc.
By: Dr. John Champlin
President
AMENDED EMPLOYMENT AGREEMENT
BETWEEN
INNOVACOM, INC.
AND
MARK C. KOZ
THIS AGREEMENT is entered into as of the _____ day of April, 1998, by
and between InnovaCom, Inc., a Nevada corporation (hereafter referred to as
"Employer") and Mark C. Koz, an individual (hereafter referred to as
"Employee")(the "Agreement").
WHEREAS, Employer and Employee wish to amend that certain Employment
Agreement entered into between them as of May 15, 1997.
NOW, THEREFORE, in consideration of this premise and for valuable
consideration including the mutual promises contained in this Agreement, the
parties agree to the following terms and conditions.
TERM OF EMPLOYMENT
Section 1.01. Employment and Term. Employer hereby employs Employee and Employee
hereby accepts employment with Employer, upon the terms and conditions
hereinafter set forth, from May 1, 1998 until May 15, 2002 or until the
employment relationship is sooner terminated by either party in accordance with
the terms of this Agreement.
<PAGE>
Section 1.02. "Employment Term" Defined. As used in this
Agreement, the phrase "Employment Term" refers to the entire
period of employment of Employee by Employer hereunder.
DUTIES OF EMPLOYEE AS SENIOR VICE PRESIDENT,
CHIEF TECHNICAL OFFICER AND CHAIRMAN OF THE BOARD
Section 2.01. General Duties. Employee shall serve as the Senior Vice President,
Chief Technical Officer and Chairman of the Board of InnovaCom, Inc., a Nevada
Corporation. In his capacity as Senior Vice President and Chief Technical
Officer of Employer, Employee shall do and perform all services, acts, or things
necessary or advisable to manage and conduct the new products research and
development activities of Employer, subject at all times to the overall
direction of the Employer's Chief Executive Officer and the policies and
directions set by Employer's Board of Directors (the "Board"). The Employee
shall develop an annual plan and budget for new product research and development
which shall be submitted to the Board for approval. To the extent not
inconsistent with Employer's articles and bylaws, Employee shall preside at all
meetings of Employer's stockholders and at all meetings of the Board. Employee
shall also have such other powers, duties and responsibilities as may be
prescribed by the Board and the Employer's corporate articles and bylaws.
Finally, Employee shall serve as a director of the Employer and on the Executive
Committee of the Board, if one
<PAGE>
exists now or in the future, and shall be nominated as a director as one of the
Boards' slate of directors from year to year and subject only to the continued
approval of the stockholders of Employer as required by law.
Section 2.03. Passive Investments and Endeavors. This Agreement shall not be
interpreted to prohibit Employee from making passive personal investments or
conducting private business affairs if those activities do not materially
interfere with the services required of Employee under this Agreement. However,
Employee shall not directly or indirectly acquire, during the Employment Term, a
controlling interest in any business competing with the business of Employer
without the prior consent of the Board.
OBLIGATIONS OF EMPLOYER
Section 3.01. General Obligations. Employer shall provide Employee with the
compensation, incentives, benefits, and business expense reimbursements
specified elsewhere in this Agreement. Employer shall also provide Employee with
an office located in Santa Clara, California, stenographic help, office
equipment, a cellular phone, supplies, and other facilities and services,
suitable to Employee's position and adequate for the performance of his duties.
Employer may not change the domicile of Employee's office without Employee's
prior consent.
<PAGE>
Section 3.02. Indemnification. Employer shall indemnify and hold Employee
harmless for any actions taken or decisions made by him in good faith while
performing services in his capacity as an employee, officer and director of
Employer during the Employment Term. To the extent permitted by law, Employer
shall pay, indemnify and hold Employee harmless from any liability, cost or
expense (including, without limitation, reasonable attorneys' fees) incurred by
him in the defense of any claim, proceeding or action arising out of his
performance of services for Employer or out of his status as an officer and
director of Employer. Employer will use its best efforts to obtain coverage for
Employee under any insurance now in force or hereafter obtained during the term
of this Agreement covering any employee, officer or director of Employer.
Notwithstanding the foregoing, Employer does not intend to and shall not
indemnify Employee against any act or omission by him constituting fraud,
willful misconduct or gross negligence.
COMPENSATION OF EMPLOYEE
Section 4.01. Annual Salary. As compensation for the services to be performed
hereunder, Employee shall receive a salary at the rate of two hundred forty
thousand dollars ($240,000) per annum, payable not less frequently than the
regular payroll schedule of Employer during the Employment Term.
<PAGE>
Section 4.02. Annual Increases. Employee shall receive such annual increases in
salary as may be determined by the Board in its sole discretion. Notwithstanding
the foregoing, Employee shall be entitled to a seven percent (7%) cost of living
increase annually for the period through May 15, 2000, at which time the Board,
in its sole discretion, may change the amount of the annual cost of living
increase.
Section 4.03. Tax Withholding. Employer shall have the right to deduct or
withhold from the compensation due to Employee hereunder any and all sums
required for federal income and Social Security taxes and all state or local
taxes now applicable or that may be enacted and become applicable in the future.
Section 4.04. Vehicle Allowance. As additional compensation to the Employee,
Employer shall pay to Employee a vehicle allowance of one thousand five hundred
dollars ($1,500) per month during the Employment Term.
Section 4.05 Whole Life Policy. The Company shall purchase and provide Employee
with a $2,000,000.00 Whole Life Insurance policy on the life of Employee,
payable to Employee's designated beneficiaries. Upon expiration or termination
of this Agreement, said policy, together with any accumulated cash value shall
become the sole and exclusive property of Employee.
<PAGE>
Section 4.06. Intellectual Property. Compensation to be paid by
Employer to Employee for intellectual property created by
Employee shall be governed by a separate agreement between the
Employee and Employer.
EMPLOYEE BENEFITS
Section 5.01. Annual Vacation. Employee shall be entitled to thirty (30) days
vacation time each year without loss of compensation. Accrued unused vacation
shall accumulate from year to year up to a maximum of sixty (60) days.
Section 5.02. Illness. Employee shall be entitled to thirty (30) days per year
as sick leave with full pay. Sick leave may be accumulated from year to year up
to a maximum of one hundred eighty (180) days and may be used only during
periods of bona fide illness.
Section 5.03. Employee Benefits Generally. During the Employment Term, Employee
shall be entitled to participate in and to receive benefits from all present and
future accident, disability, medical, dental and similar plans, pension plans,
savings plans, profit sharing plans, stock option plans or other similar
employee benefit plans available generally to all other officers or employees of
Employer. The amount and extent of these benefits, including employee-paid
premiums, co-payments and
<PAGE>
deductibles, shall be governed by the specific benefit plan, as it may be
amended from time to time.
BUSINESS EXPENSES
Section 6. Reimbursement of Business Expenses. Employer shall promptly reimburse
Employee for all reasonable business expenses incurred by Employee in connection
with the business of Employer. Employee shall furnish to Employer adequate
records and other documentary evidence required by federal and state tax
statutes and regulations for the substantiation of each such expenditure prior
to reimbursement.
TERMINATION OF EMPLOYMENT
Section 7.01. Termination for Cause. Employer reserves the right to terminate
this Agreement upon: (a) Employee's willful and continued failure to
substantially perform his duties with Employer (other than such failure
resulting from his incapacity due to physical or mental illness) after there is
delivered to Employee by the Board of Directors, a written demand for
substantial performance which sets forth in detail the specific respects in
which the Board believes Employee has not substantially performed his duties,
and giving Employee not less than thirty (30) days to correct the deficiencies
specified in the written demand, (b) Employee's willful engagement in gross
<PAGE>
misconduct as determined by the Board which is materially and demonstrably
injurious to Employer, or (c) Employee's commission of a felony or an act of
fraud against Employer or its affiliates. No act, or failure to act, by Employee
shall be considered "willful" if done, or omitted to be done, by Employee in
good faith and with the reasonable belief that the act or omission was in the
best interest of Employer and/or required by applicable law. Anything contained
in this Section 7.01 to the contrary notwithstanding, Employee shall not be
deemed to have been terminated for cause for purposes of Sections (a) or (b) of
this Section 7.01 unless and until there shall have been delivered to Employee a
copy of a resolution duly adopted by the affirmative vote of not less than
seventy-five percent (75%) of the entire membership of the Board at a meeting of
the Board called and held for that purpose (after reasonable notice to and an
opportunity for Employee, together with his counsel, to be heard before the
Board), finding that in the good faith opinion of the Board, Employee was guilty
of conduct set forth in Sections (a) or (b) of this Section 7.01 and specifying
the particulars thereof in detail. Termination under this Section 7.01 shall be
considered "for cause" for the purposes of this Agreement.
Section 7.02. Termination Without Cause. This Agreement shall
terminate upon the death of Employee. Employer reserves the
right to terminate this Agreement after three (3) continuous
<PAGE>
months of physical or mental disability suffered by Employee that would prevent
the performance of Employee's duties under this Agreement. Such a termination
shall be effected by giving thirty (30) days written notice of termination to
Employee. Notwithstanding anything else to the contrary, physical or mental
disability shall not include periods of bona fide illness for which Employee is
entitled to sick leave pursuant to Section 5.02 of this Agreement. Other than on
death or upon the physical or mental disability of Employee, Employer reserves
the right at any time to terminate this Agreement upon sixty (60) days written
notice to Employee which notice shall include a copy of the resolution duly
adopted by the affirmative vote of not less than seventy-five percent (75%) of
the entire membership of the Board at a meeting of the Board called and held for
that purpose and, in such an event, Employee shall be paid his severance benefit
hereinafter provided.
Section 7.03. Termination by Employee. Employee may terminate this Agreement at
any time upon sixty (60) days written notice to Employer. Other than upon
Employee's termination of this Agreement pursuant to Section 7.05, Employer
shall not be obligated to pay any severance benefit if Employee terminates this
Agreement pursuant to this Section 7.03.
Section 7.04. Severance Benefit Upon Termination Without Cause.
Notwithstanding any other provision of this Agreement, if
<PAGE>
Employer terminates this Agreement other than for cause as defined in Section
7.01, Employer shall pay Employee a lump sum cash payment equal to one years
annual salary as provided for in this Agreement, or Employee's then current rate
of compensation, whichever is greater.
Section 7.05. Severance Benefit Upon Change in Control. Notwithstanding any
other provision of this Agreement, if Employer terminates this Agreement for any
reason, other than "for cause" pursuant to Section 7.01, within six months of a
"change of control" as hereinafter defined, Employer shall pay Employee a lump
sum cash payment equal to three years annual salary as provided for in this
Agreement, or Employee's then current rate of compensation, whichever is
greater. Notwithstanding any other provision of this Agreement, if Employee
terminates this Agreement within six months following a "change of control," as
hereinafter defined, as a result of Employee's determination, in his sole and
complete discretion, that the policies and procedures of the Board of Directors
of Employer are unacceptable to Employee, Employer shall pay Employee a lump sum
cash payment equal to one year of Employee's annual salary as provided for in
this Agreement, or Employee's then current rate of compensation, whichever is
greater. For the purposes of this Section 7.04, a "change of control" shall mean
an event involving one transaction or a related series of transactions, in which
(i) the Employer issues securities equal
<PAGE>
to 51% or more of the issued and outstanding capital stock of Employer to any
individual, firm, partnership or other entity, including a "group" within the
meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, (ii) the
Employer issues securities equal to 51% or more of the issued and outstanding
capital stock of Employer in connection with a merger, consolidation or other
business combination, (iii) the Employer is acquired in a merger or other
business combination transaction in which the Employer is not the surviving
corporation, or (iv) 51% or more of the Employers' consolidated assets or
earning power are sold or transferred.
Section 7.06. Noncompetition. If the Employee services with the
Company are terminated pursuant to paragraph 7.01(a), in further
consideration for this Agreement, the Employee agrees that for a
period of two years following termination, Employee will not
engage, directly or indirectly, either personally or as an
employee, associate, partner, manager, agent or otherwise, or by
means of any corporation or other entity which is in competition
with the Company at the date of such termination, in any
territory within a radius of 50 miles of any city in which the
Company does business or has customers.
<PAGE>
GENERAL PROVISIONS
Section 8.01. Notices. Any notice to be given hereunder by either party to the
other shall be in writing and may be transmitted by personal delivery, facsimile
transmission, overnight courier or by mail, registered or certified, postage
prepaid with return receipt requested. Mailed notices shall be addressed to the
parties at the following addresses:
EMPLOYER InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
EMPLOYEE Mark Koz
18324 Purdue
Saratoga, CA 95070
Any party may change the address at which notice is to be provided by providing
a written notice to the other party specifying a new address. Notices delivered
personally or by facsimile transmission shall be deemed communicated as of the
date of actual receipt; notices mailed shall be deemed communicated as of the
third day after mailing.
Section 8.02. Arbitration. Any controversy between Employer and
Employee involving the construction or application of any of the
terms, provisions, or conditions of this Agreement shall on the
written request of either party which is served on the other be
submitted to arbitration. Arbitration shall comply with and be
<PAGE>
governed by the provisions of the American Arbitration Association. Employer and
Employee shall each appoint one person who shall then choose a third person, all
three of which shall hear and determine the dispute. The decision of the
arbitrators shall be final and conclusive upon both parties.
Section 8.03. Attorneys' Fees and Costs. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which that party may be
entitled.
Section 8.04. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no representation, inducements, promises, or
agreements, orally or otherwise, have been made by any party, or anyone acting
on behalf of any party, which are not embodied herein, and that no other
agreement shall be valid or binding on either party.
Section 8.05. Modification. Any modification of this Agreement
will be effective only if it is in writing and signed by the
party to be charged.
<PAGE>
Section 8.06. Effect of Waiver. The failure of either party to insist on strict
compliance with any of the terms, covenants, or conditions, of this Agreement by
the other party shall not be deemed a waiver of that term, covenant, or
condition, nor shall any waiver or relinquishment of any right or power at any
one time or times be deemed a waiver or relinquishment of that right or power
for all or any other time.
Section 8.07. Partial Invalidity. If any provision in this Agreement is held by
a court of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall nevertheless continue in full force without being
impaired or invalidated in any way.
Section 8.08. Law Governing Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the
State of California.
Section 8.09. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be an original but
all of which together shall constitute one instrument.
//
/
<PAGE>
IN WITNESS WHEREOF, the Employer and Employee have duly executed this
Employment Agreement as of the day and year first above written.
EMPLOYER
InnovaCom, Inc.
By: F. James Anderson
Its: Director of Strategic Planning
EMPLOYEE
Mark C. Koz, an individual
INNOVACOM
Your MPEG Solutions Company
June 16, 1998
Mr. Mark Koz
18324 Purdue Drive
Saratoga, CA 95070
Dear Mark:
I am pleased to offer you employment for the position of Chief Technology
Officer reporting to the President. Your employment at InnovaCom, Inc. is "at
will." That means that you will continue until you provide at least two weeks of
notice. The company has the right to terminate employment at any time with or
without prior notice and with or without cause.
POSITION:
Your duties as Chief Technology Officer will include:
Identification and patenting of InnovaCom intellectual property Evaluation and
analysis of MPEG technology and video industry trends Identification of new
product opportunities Other duties as assigned by the President in line with
your expertise and position
COMPENSATION:
o You will receive a salary at the annual rate of $120,000 payable in
accordance with regular payroll practices of the Company.
o The Company will provide you and your family medical coverage and other
group benefits offered by the Company to its employees on the same terms
as offered to other employees. In the event that your employment is
terminated with the Company for any reason, the Company will continue
your health insurance coverage under the Company's group policy for an
additional year.
o You will be entitled to four (4) weeks paid vacation per year.
REQUIREMENTS:
This letter immediately supersedes in all aspects your employment agreement with
the Company dated May 15, 1997.
It is required that you sign a detail Confidentiality Agreement, a copy of which
is attached. During your employment by the Company you will not directly or
indirectly be involved in any other business that competes with the Company.
We look forward to having you continue with the Company in your new capacity,
and we are confident that you can continue to make a significant contribution.
Sincerely,
Agreed: MARK KOZ
FRANK ALIOTO STANTON CREASEY Date: June 16, 1998
- ------------ --------------- -------------
00Frank Alioto Stanton Creasey
President CFO
2855 Kifer Road, Suite 100o SantaClara, CA 95051o Telephone: (408) 727-2447
(CHIP)o Facsimile: (408) 727-8778
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, FOR INNOVACOM, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,934
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<ALLOWANCES> 19,250
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<CURRENT-ASSETS> 122,673
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0
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<COMMON> 25,036
<OTHER-SE> 24,191,255
<TOTAL-LIABILITY-AND-EQUITY> 463,387
<SALES> 107,632
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<CGS> 338,763
<TOTAL-COSTS> 10,004,147
<OTHER-EXPENSES> 260,645
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<INTEREST-EXPENSE> 4,761,319
<INCOME-PRETAX> (14,908,454)
<INCOME-TAX> 1,600
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</TABLE>
