U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended September 30,
1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to
_______
Commission file number 0-23505
INNOVACOM, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0308568
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3400 Garrett Drive
Santa Clara, CA 94054
(Address of principal executive offices) (Zip Code)
(408) 727-2447
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding as of February 25, 1999 was
24,829,815
Transitional Small Business disclosure format Yes [ ] No [X]
<PAGE>2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
(Unaudited)
SEPTEMBER 30,
1998
ASSETS
CURRENT ASSETS
Cash $ 25
Accounts receivable - trade, net of allowance for
doubtful accounts of $91 31
Prepaid expenses and other 88
--------
Total current assets 144
Property and equipment, net 351
Deposits 37
--------
TOTAL ASSETS $ 532
========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Note payable - related parties $ 164
Convertible debentures 7,400
Accounts payable 1,995
Accrued liabilities 1,696
Liabilities in excess of assets of discontinued
operations 54
--------
Total current liabilities 11,309
--------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 par value, 50,000 shares authorized,
24,966 shares issued and outstanding 25
Warrants 1,378
Additional paid-in capital 22,268
Deficit accumulated during development stage (34,448)
--------
Total stockholders' equity (deficit) (10,777)
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 532
========
See accompanying notes to these condensed consolidated financial statements.
<PAGE>3
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 3, 1993
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES $ 48 $ 37 $ 149 $ 77 $ 226
-------- -------- -------- --------- ---------
COSTS AND EXPENSES
Cost of goods sold 24 138 53 160 213
Research and development 919 189 2,988 2,954 10,054
Selling, general and administrative 1,533 708 3,750 5,334 15,819
Impairment loss on property and equipment - - - 937 937
-------- -------- -------- --------- ---------
Total costs and expenses 2,476 1,035 6,791 9,385 27,023
-------- -------- -------- --------- ---------
OPERATING LOSS (2,428) (998) (6,642) (9,308) (26,797)
-------- -------- -------- --------- ---------
OTHER INCOME AND EXPENSE
Interest expense, net of interest income 575 612 575 4,061 5,278
Debt conversion expense - - - 261 261
Other expense - - - - 34
-------- -------- -------- --------- ---------
Total other expense 575 612 575 4,322 5,573
-------- -------- -------- --------- ---------
Loss from continuing operations before
income tax expense and discontinued
operations (3,003) (1,610) (7,217) (13,630) (32,370)
Income tax expense 1 - 2 2 6
-------- -------- -------- --------- ---------
Loss from continuing operations (3,004) (1,610) (7,219) (13,632) (32,376)
-------- -------- -------- --------- ---------
Loss on disposal of discontinued operation - - - 1,155 1,155
Loss from operations of discontinued operation,
net of income tax expense 239 - 541 400 917
-------- -------- -------- --------- ---------
Loss from discontinued operations 239 - 541 1,555 2,072
-------- -------- -------- --------- ---------
Net Loss $ (3,243) $ (1,610) $ (7,760) $ (15,187) $ (34,448)
======== ======== ======== ========= =========
Basic and diluted net loss per common share
Continuing operations $ (0.14) $ (0.06) $ (0.44) $ (0.61)
Discontinued operations (0.01) - (0.03) (0.07)
-------- -------- -------- ---------
Basic and diluted net loss per common
share $ (0.15) $ (0.06) $ (0.47) $ (0.68)
======== ======== ======== =========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 21,062 24,894 16,456 22,335
======== ======== ======== =========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
<PAGE>4
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 3, 1993
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (7,219) $ (13,632) $ (32,376)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 256 244 681
Amortization of discount on long-term debt - 2,346 2,346
Impairment loss on property and equipment - 937 937
Interest related to beneficial conversion features
of notes payable and long-term liabilities 541 832 1,933
Compensation recognized upon issuance of stock
and stock options 1,122 550 5,708
Expense recognized upon issuance of stock for
Conversion incentive - 261 261
Contribution of product license - - 1,275
Contribution of technology 500 - 500
Write-off acquisition costs - 68 68
Write-off related party receivable 25 - 140
Changes in operating assets and liabilities:
Cash - restricted 1 8 -
Accounts receivable - (31) (31)
Other receivables (9) - -
Prepaid and other expenses (133) 88 (88)
Deposits (44) 53 (37)
Accounts payable 199 1,520 2,211
Accrued liabilities 276 841 2,017
---------- ----------- -----------
Net cash used in operating activities from
continuing operations (4,485) (5,915) (14,455)
---------- ----------- -----------
Net loss from discontinued operations (541) (1,555) (2,072)
Loss from disposal of assets - 49 49
Write down of film rights and film cost inventory - 277 250
Write down of goodwill - 848 848
Change in liabilities in excess of assets of discontinued
operations - 54 54
---------- ----------- -----------
Net cash used in operating activities from discontinued
operations (541) (327) (871)
---------- ----------- -----------
(continued)
<PAGE>5
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(continued)
MARCH 3, 1993
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition of Sierra Vista 2,917 - 2,917
Advance to related party (25) - (140)
Cost incurred for organization of joint venture - - (68)
Purchases of property and equipment (570) (1,015) (1,989)
Proceeds from sale of asset - - 4
---------- ----------- -----------
Net cash provided by (used in) investing activities 2,322 (1,015) 724
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft (39) - -
Proceeds from sale of common stock 665 - 2,898
Proceeds from notes payable 2,166 778 4,865
Net proceeds from sale of debenture with detachable
warrants - 2,500 7,109
Principal payments on notes payable - (145) (245)
---------- ----------- -----------
Net cash provided by financing activities 2,792 3,133 14,627
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 88 (4,124) 25
CASH AND CASH EQUIVALENTS, beginning of period - 4,149 -
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 88 $ 25 $ 25
========== =========== ===========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
<PAGE>6
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended December 31, 1997.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments considered necessary to present fairly the
Company's financial position at September 30, 1998, results of operations for
the three and nine months ended September 30, 1998 and 1997, and the period from
inception (March 3, 1993) to September 30, 1998, and the cash flows for the nine
months ended September 30, 1998 and 1997, and the period from inception (March
3, 1993) to September 30, 1998. The results for the period ended September 30,
1998, are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 1998.
Note 2 - Discontinued Operation
On June 15, 1998 (measurement date), the Company's Board of Directors decided to
discontinue the operations of Sierra Vista Entertainment, Inc. ("Sierra Vista"),
its wholly-owned subsidiary and entertainment segment of the business.
Accordingly, Sierra Vista is accounted for as a discontinued operation in the
accompanying condensed consolidated financial statements. All operations from
the measurement date to the date of disposal have been estimated and included in
the loss from discontinued operation at September 30, 1998. All assets have been
written down to their net realizable value as of September 30, 1998.
The net assets of Sierra Vista included in the accompanying consolidated balance
sheet as of September 30, 1998, consisted of the following:
Cash $ 1
Accounts payable 55
------
Net liabilities in excess of assets $ 54
======
Sierra Vista has never generated any revenues.
<PAGE>7
Note 3 - Subsequent Events
On June 5, 1998, Thomas E. Burke, the Company's President who had started on May
1, 1998, resigned. On July 21, 1998, he filed a statement of claim with the
American Arbitration Association, San Francisco, CA. Mr. Burke claimed that 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
and benefits under his employment contract. In September 1998, Mr. Burke also
filed claims for unpaid wages with the California State Labor Commissioner. The
Company maintained that Mr. Burke had made certain misrepresentations and 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.
In December 1997, the Company issued $5,000,000 face value of Convertible
Debentures (the "Debentures"). As discussed below, other Debentures with similar
terms have been issued periodically through January 1999.
To provide for additional working capital, 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 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.
On March 8, 1999, the Company borrowed an additional $600,000 from the investor
who had purchased the majority of the Debentures and is evidenced in the form of
a note. The note bears interest at 13% and is due on demand.
In connection with the sales of the Debentures in December 1997, June 1998,
August 1998, November 1998 and January 1999, and the demand note in March 1999,
<PAGE>8
the Company issued five year warrants to purchase up to an aggregate total of
1,570,000 shares of common stock at prices ranging from $2.42 per share to $.11
per share to two investment brokers.
The Company was not in compliance with certain covenants under the terms of the
December 1997 and June and August 1998 Debenture and Warrant transaction
documents. Consequently these Debentures are classified as current debt in the
Company's financial statements. Interest expense for the nine month period ended
September 30, 1998 contains expense of approximately $1,817,000 which represents
accelerated amortization of the deferred interest and original issue discount on
this debt. Reclassification of the debt from long term to current required
presentation of the debt at its full face value, causing the Company to
recognize this expense on an accelerated basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
With the exception of historical facts stated herein, the matters discussed in
this report are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to, statements regarding anticipated levels of future
revenues and earnings from operations of the Company. Factors that could cause
actual results to differ materially include, in addition to other factors
identified in this report, lack of revenues, substantial losses, need for
additional capital and limited operating history, and other risks factors
detailed in the Company's Securities and Exchange Commission ("SEC") filings
including the risk factors set forth in the Company's Registration Statement on
Form SB-2, SEC File No. 333-45875 and "Certain Consideration" section in the
Company's Form 10-KSB for the year ended December 31, 1997. Readers of this
report are cautioned not to put undue reliance on "forward looking" statements
which are, by their nature, uncertain as reliable indicators of future
performance. The Company disclaims any intent or obligation to publicly update
these "forward looking" statements, whether as a result of new information,
future events, or otherwise.
As discussed in "Item 5. Other Information," in June 1998, the Company
reevaluated its business and decided to focus the Company in the development of
video compression technology in the areas of digital television, communications,
and digital video disks. As a result of this emphasis, the Company decided to
discontinue its single chip encoder design project, cancel a number of projects
and reduce personnel. See: "Liquidity and Capital Resources". Therefore, the
results for the nine month period ended September 30, 1998, will not be
indicative of future operations.
Revenues
Revenues for the three months ended September 30, 1998 were approximately
$37,000 as compared to approximately $48,000 for the same period in 1997.
Revenue for the nine months ended September 30, 1998 was approximately $77,000
as compared to approximately $149,000 for the same period in 1997. The revenue
in 1997 was from the sale of developer kits to prospective purchasers of the
Company's single chip encoder. There were no such sales in 1998, but sales of
pre-production and sample products partially offset this decline.
Cost of goods sold
Cost of goods sold was approximately $160,000 in the first nine months of 1998
as compared to approximately $53,000 in the same period of 1997. Cost of sales
increased from approximately $24,000 in the third quarter of 1997 to
approximately $138,000 in the same period of 1998. The costs of sales in 1997
<PAGE>9
and in the first half of 1998 consist principally of the material cost of the
product shipped. Cost of sales in the third quarter of 1998 contains not only
the material cost of the product shipped, but also expenses related to building
and staffing a production department in anticipation of product releases. The
cost of sales as a proportion of sales experienced in the periods shown in 1997
and 1998 do not necessarily predict the cost of sales that the Company might
experience at such time, if any, that production level products begin to ship in
normal production volumes. Cost of sales in future periods will depend
principally on the volume of production required to support sales.
Research and development
Research and development expense was approximately $2,954,000 and $189,000 in
nine and three month periods ended September 30, 1998, respectively. This
compared to approximately $2,988,000 and $919,000 for the same periods in 1997.
The decline in the third quarter of 1998 relative to the same period in 1997
reflects the actions taken by management in June 1998 to terminate development
work on the single chip encoder, and to focus development work on a relatively
few products that management believed were close to market. Management's actions
decreased essentially all aspects of research and development expense including
payroll, outside consultants, and purchases of materials and supplies. Research
and development expense in the third quarter of 1998 also reflects a reduction
of approximately $232,000 for the effect of a number of accounts payable and
other liabilities settled at discounted amounts. Without this reduction,
reported research and development expense in the third quarter of 1998 would
have been approximately $421,000.
Management intends to continue research and development expense at approximately
current levels for at least the next two quarters, but without reductions
similar to the discounted liability settlements described above, reported
research and development expense in future quarters will be higher than that
reported in the current quarter. There can be no assurance that future quarters
will contain such similar reductions.
Selling, general and administrative
Selling, general and administrative expenses increased from approximately
$3,750,000 in the first three quarters of 1997 to approximately $5,334,000 in
the same period of 1998, while dropping from approximately $1,533,000 in the
third quarter of 1997 to approximately $708,000 in the same quarter of 1998. The
increase in the nine month expenses from 1997 to 1998 is entirely due to
increased expense in the first half of 1998 as the Company prepared to release
several products. Selling, general and administrative expenses in the third
quarter of 1997 contained two large items that were not repeated in the same
period of 1998; an expense of approximately $320,000 imputed for the issuance of
options to purchase common stock, and an expense of approximately $192,000
related to the purchase of Technical Systems Associates. The purchase of
Technical Systems Associates was abandoned in the last quarter of 1997. In
addition, while personnel costs were largely unchanged between the third
quarters of 1997 and 1998, consulting, marketing, and most other expenses
declined in accordance with the Company's cutbacks in June of 1998. The third
quarter of 1998 also contained approximately $141,000 of expense reductions
recognized from the discounted settlement of accounts payable and other
liabilities of the Company, analogous to the expense reductions described in the
research and development discussion, above. Without these reductions, selling,
general and administrative expense would have been approximately $849,000 in the
third quarter of 1998.
Management intends to maintain selling, general and administrative expenses at
no greater than the current rate for at least the next two quarters, but if
<PAGE>10
reductions from liability settlements at discount as seen in the current quarter
are not repeated in later periods, the amount of expense reported will be
higher. There is no assurance that future quarters will contain similar
reductions.
Interest expense, net of interest income
Interest expense, net of interest income was approximately $4,061,000 and
$612,000 in the nine and three month periods ended September 30, 1998 as
compared to approximately $575,000 in both the same periods in 1997. The Company
did not begin to carry significant debt, and had no significant interest
expense, until July of 1997. Interest expense reported in the third quarter of
1997 was due in largest part to expense recognized due to conversion incentives
allowed to the borrower. Stated interest was approximately $39,000. The last of
this debt converted to equity in the second quarter of 1998, and accordingly
none of the interest in the third quarter of 1998 related to this debt. Interest
expense in the third quarter of 1998 related principally to borrowings under
convertible Debentures that began in December of 1997. Stated interest on these
Debentures was approximately $123,000. In addition, the Company accrued
approximately $120,000 of interest expense in penalties for failure to file
registration statements to register the common stock that underlies the
conversion feature of these Debentures. Interest income was not significant in
any of the periods shown in these financial statements.
The Company was not in compliance with certain covenants under the terms of the
December 1997 and June and August 1998 Debenture and Warrant transaction
documents. Consequently these Debentures are classified as current debt in the
Company's financial statements and the Company's statements of operations
reflect amortization of deferred charges on these loans so that the full amount
of the debt is shown at September 30, 1998. Interest expense in the nine month
period ended September 30, 1998 contains approximately $2,285,000 from the
original discount on the Debentures of which approximately $1,817,000 represents
accelerated amortization of the deferred interest and original issue discount on
this debt. The three month period ended September 30, 1998 contains
approximately $372,000 of original issue discount amortization.
Management anticipates that the Company will continue to experience significant
levels of interest expense in future quarters due to the debt incurred to fund
operations. Issuance of new Debentures after September 30, 1998 increases the
level of stated interest, and also creates imputed interest through amortization
of original discount. See: "Note 3 - Subsequent Events", and "Liquidity and
Capital Resources". Until such time, as any, that the Company is able to
generate enough cash internally to fund its operations, it will need to rely on
external funding. If that external funding is in the form of debt, interest
expense will be incurred. Interest expense reported in future quarters will also
reflect the immediate amortization of deferred interest charges, if any, on
newly placed Debentures as long as the Company remains out of compliance with
the covenants of its Debenture agreements, and is obligated to report such debt
as a current liability, and penalties for failure to file registration
statements as required by the Debenture agreements.
Liquidity and Capital Resources
Through September 30, 1998, the Company funded its operations primarily through
the sale of stock and placement of debt. On September 30, 1998, the Company had
a cash balance of approximately $25,000 and a working capital deficit of
approximately $11,165,000. This compares with cash of approximately $4,149,000
and a working capital deficit of approximately $1,454,000 at December 31, 1997.
The decrease in cash is primarily due to the operating losses of the Company,
partially offset by non-cash expenses and increases in debt. The decrease in
working capital is further effected by the reclassification of convertible
<PAGE>11
Debentures from long term to current debt because the Company was not in
compliance with certain of the terms of the Debentures.
In May 1998, Micro Technologies converted $4,181,422 of its line of credit to
the Company in exchange for 1,742,362 shares of Common Stock.
To provide for working capital, in June 1998, the Company issued 7% Convertible
Debentures in the aggregate principal amount of $2 million (the "Debentures").
The Debentures accrue interest at the rate of 7% per annum and are convertible
into shares of the Company's Common Stock at a conversion price equal to $0.35
per share. The Debentures have a term of five years, expiring June 29, 2003 (the
"Due Date"), and are secured by all of the assets of the Company. As part of the
issuance of the Debentures, the Company issued to the Debenture holders five
year warrants to purchase up to 500,000 shares of Common Stock at $.50 per
share. In conjunction with the issuance of the Debentures, Micro Technologies
subordinated its lien on the Company's assets to the Debenture holders.
On June 26, 1998, Micro Technologies converted its remaining balance on the
credit facility of $317,358 into 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. The Company recognized an additional expense of approximately $261,000 in
the quarter ended June 30, 1998 for the value of the additional stock issued to
Micro Technology to induce the conversion.
To provide for additional working capital, on August 28, 1998, the Company
issued additional Debentures in the aggregate principal amount of $500,000, with
the right to issue up to $1 million more Debentures in September and/or October
1998 under the same terms. The Debentures accrue interest at the rate of 7% per
annum and are convertible into shares of the Company's Common Stock at a
conversion price equal to the lesser of (i) 125% of the five-day average share
price at the time of issuance and (ii) 80% for conversions prior to 120 days
after issuance, 77.5% for conversions 120-150 days after issuance, and 75%
thereafter. The Debentures have a term of five years, expiring August 28, 2003,
and are secured by all of the assets of the Company. As part of the issuance of
the Debentures, the Company issued to the Debenture holders five year warrants
to purchase up to 75,000 shares of Common Stock at $.50 per share.
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.
On March 8, 1999, the Company borrowed an additional $600,000 from the same
investor who had purchased the majority of the Debentures. The note bears
interest at 13% and is due on demand.
There can be no assurance that the Company will be successful in its efforts to
internally generate the cash that will be required to fund the Company's
operations and to pay off the liabilities incurred in prior periods.
<PAGE>12
In this event, the Company will require additional funding to finance its
operations. Traditionally, the Company has financed its operations through the
issuance of convertible Debentures, but no assurance can be given that the
Company will be able to secure additional financing or, if it can, that it will
be available on terms favorable to the Company.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's, or
its suppliers' and customers' computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The majority of the Company's operations are based on PC application and the
Company believes that its software is year 2000 compliant. The Company has not
yet identified any year 2000 problem but will continue to monitor the issues. No
assurances can be given that the year 2000 problem will not occur with respect
to the Company's computer systems.
As of February 1, 1999, the Company has initiated communications with
significant suppliers and large customers to determine the extent to which those
third parties' failure to remedy their own Year 2000 Issues may materially
effect the Company and its subsidiaries. The Company has not received any
indication from its suppliers and large customers that the Year 2000 Issue may
materially effect their ability to conduct business. Upon receipt of the
responses, the Company will assess what steps, if any, will be necessary.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On July 21, 1998, Mr. Thomas E. Burke, the Company's former president, filed a
statement of claim with the American Arbitration Association, San Francisco,
California. Mr. Burke is claiming the Company has breached his employment
contract by failing to pay him a lump-sum cash payment of $1 million, salary,
bonuses, expenses and other payments under his employment contract. In September
1998, Mr. Burke also filed claims for unpaid wages with the California State
Labor Commissioner. The Company believed that Mr. Burke made certain
misrepresentations and vigorously defended itself in this action. 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.
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.
<PAGE>13
The Company has been threatened or served with a number of lawsuits from vendors
for collection of amounts due by the Company for unpaid trade payables. To date
the Company has been able to amicably settle several such suits on terms that
were not materially adverse to the Company, and anticipates that it will do so
for the suits still outstanding. There can be no assurance, however, that the
number of these suits that are filed, or the terms that might be allowed for
settlement will not create material hardship to the Company in the future.
Management anticipates that the number of such suits might increase over time as
the Company's unpaid obligations age further if more vendors conclude that legal
action is the prudent course to pursue for collection.
Item 2. Changes in Securities and Use of Proceeds. - Not Applicable
Item 3. Defaults Upon Senior Securities. - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. - Not Applicable
Item 5. Other Information.
On June 23, 1998, Frank J. Alioto was elected President and appointed to the
Company's board of directors. Mr. Alioto replaced Thomas E. Burke who resigned
as President and a director of the Company on June 5, 1998. Mr. Burke resigned
from the Company stating that the Company had breached his employment contract.
See "Item 1. Legal Proceedings". Further, in June 1998, Peter Sprague resigned
as a director. In December 1998 Frank Alioto replaced Mark Koz as the Chairman
of the board of directors. In January 1999 Stanton R. Creasey, the Company's
Chief Financial Officer, was appointed to the board of directors. The board
currently consists of seven members. Further, as part of the management
restructuring, in June 1998 the Company and Mr. Koz mutually agreed to amend his
employment contracts to provide for, among other things, no severance upon
termination and in December 1998 Mr. Koz's employment with the Company was
terminated. Mr. Koz remains as a director of the Company. Mr. Anderson has
resigned from his position as Director of Strategic Planning and President of
the Company's Entertainment Division, but still remains as a director of the
Company.
In light of the corporate restructuring and new president, the board of
directors decided to focus the Company on the development of video compression
technology products in the areas of digital television (DTV), communications and
digital video disks (DVD). As a result of this emphasis, the Company decided to
discontinue and seek a buyer for the single chip encoder design project and to
discontinue Sierra Vista Entertainment. During the six month period ending June
30, 1998, the Company recognized a loss of approximately $1,555,000 as a result
of the discontinuance of Sierra Vista Entertainment. See: "Note 2 Discontinued
Operation", and "Management's Discussion and Analysis or Plan of Operation".
To provide for working capital since December 1997, the Company has issued an
aggregate face value of $9,750,000 of convertible debentures to two investor
funds that are affiliated with each other. See: "Note 3 - Subsequent Events" to
the Company's financial statements. At March 8, 1999 the average price at which
these convertible debentures could be converted into the Company's Common Stock
was approximately $.24 per share. If these two investors had exercised their
conversion rights at that time they would have owned approximately 64% of the
outstanding Common Stock of the Company, giving them effective control of the
Company. Because the price at which most of these convertible debentures can be
converted into common stock changes is dependent on movements in the market
price of the Company's common stock, the actual percentage of control that these
two funds might acquire at any given time could be greater or less than the
figure determined as of March 8, 1999.
<PAGE>14
The Company was not in compliance with certain covenants under the terms of the
December 1997 and June and August 1998 Debenture and Warrant transaction
documents. Consequently these debentures are classified as current debt in the
Company's financial statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<PAGE>15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INNOVACOM, INC.
(Registrant)
Date: March 19, 1999 FRANK J. ALIOTO
--------------------------------------
Frank J. Alioto, President and
Chief Executive Officer
Date: March 19, 1999 STANTON CREASEY
--------------------------------------
Stanton Creasey, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-QSB
FOR THE PERIOD ENDED SEPTEMBER 30, 1998, FOR INNOVACOM, INC., AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1998
<CASH> 25,000
<SECURITIES> 0
<RECEIVABLES> 122,000
<ALLOWANCES> (91,000)
<INVENTORY> 0
<CURRENT-ASSETS> 144,000
<PP&E> 490,000
<DEPRECIATION> (139,000)
<TOTAL-ASSETS> 532,000
<CURRENT-LIABILITIES> 11,309,000
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> (10,802,000)
<TOTAL-LIABILITY-AND-EQUITY> 532,000
<SALES> 77,000
<TOTAL-REVENUES> 77,000
<CGS> 160,000
<TOTAL-COSTS> 9,385,000
<OTHER-EXPENSES> 261,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,061,000
<INCOME-PRETAX> (13,630,000)
<INCOME-TAX> 2,000
<INCOME-CONTINUING> (13,632,000)
<DISCONTINUED> (1,555,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,187,000)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
