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 June 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 [ ] No [X]
Number of shares of common stock outstanding as of June 30, 1998 was 24,728,146
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)
<TABLE>
<S> <C>
JUNE 30,
1998
ASSETS
CURRENT ASSETS
Cash $ 1,225
Accounts receivable - trade, net of allowance for doubtful
accounts of $34 30
Other receivables 11
Prepaid expenses and other 26
---------
Total current assets 1,292
Property and equipment, net 389
Deposits 41
TOTAL ASSETS $ 1,722
=========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Note payable - related parties $ 309
Convertible debentures 6,950
Accounts payable 2,291
Accrued liabilities 1,667
Liabilities in excess of assets of discontinued operations 78
---------
Total current liabilities 11,295
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 par value, 50,000 shares authorized,
24,728 shares issued and outstanding 25
Warrants 1,189
Additional paid-in capital 22,051
Deficit accumulated during development stage (32,838)
---------
Total stockholders' equity (deficit) (9,573)
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,722
=========
</TABLE>
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)
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<S> <C> <C> <C> <C> <C> <C>
MARCH 3, 1993
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997 1998
---- ---- ---- ---- ----
REVENUES $ - $ 26 $ 40 $ 101 $ 189
------------ ----------- ----------- ----------- ----------
COSTS AND EXPENSES
Cost of goods sold 5 8 22 29 75
Research and development 1,342 860 2,765 2,069 9,865
Selling, general and administrative 2,611 1,376 4,626 2,217 15,111
Impairment Loss on disposal of property
and equipment 937 - 937 - 937
----------- ---------- ----------- ---------- ----------
Total costs and expenses 4,895 2,244 8,350 4,315 25,988
----------- ---------- ----------- ----------- ----------
OPERATING LOSS (4,895) (2,218) (8,310) (4,214) (25,799)
------------ ----------- ----------- ----------- -----------
OTHER INCOME AND EXPENSE
Interest expense, net of interest (income) 2,473 (5) 3,449 - 4,666
Debt conversion expense 261 - 261 - 261
Other (income) expense - - - - 34
------------ ----------- ----------- ----------- -----------
Total other (income) expense 2,734 (5) 3,710 4,961
------------ ----------- ----------- ----------- -----------
Loss from continuing operations before income tax
expense and discontinued operations (7,629) (2,213) (12,020) (4,214) (30,760)
Income tax expense - - 2 1 6
------------ ----------- ----------- ----------- -----------
Loss from continuing operations (7,629) (2,213) (12,022) (4,215) (30,766)
Loss on disposal of discontinued operation - - 1,155 - 1,155
Loss from operations of discontinued operation, net
of income tax expense 176 302 400 302 917
------------ ----------- ----------- ----------- -----------
Loss from discontinued operations 176 302 1,555 302 2,072
------------ ----------- ----------- ----------- -----------
Net Loss $ (7,805) $ (2,515) $ (13,577) $ (4,517) $ (32,838)
============ ============ ============ =========== ===========
Basic and diluted net loss per common share
Continuing operations $ (0.35) $ (0.14) $ (0.57) $ (0.30)
Discontinued operations (0.01) (0.02) (0.08) (0.02)
------------ ----------- ----------- -----------
Basic and diluted net loss per common share $ (0.36) $ (0.16) $ (0.65) $ (0.32)
============ =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 21,501 15,815 21,034 14,114
============ =========== =========== ===========
</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)
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<S> <C> <C> <C>
MARCH 3, 1993
SIX MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30,
1998 1997 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (12,022) $ (4,215) $ (30,766)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 202 118 640
Amortization of discount on long-term debt 2,574 - 2,574
Loss on disposal of asset 937 - 939
Interest related to beneficial conversion features
of notes payable and long-term liabilities 247 - 1,348
Compensation recognized upon issuance of stock
and stock options 560 679 5,719
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 - - 140
Changes in operating assets and liabilities:
Cash - restricted 8 (31) -
Accounts receivable (30) - (30)
Other receivables (11) (7) (11)
Prepaid and other expenses 151 (26) (26)
Deposits 49 (24) (41)
Accounts payable 1,792 226 2,483
Accrued liabilities 820 259 1,993
----------- ----------- -----------
Net cash used in operating activities from continuing
operations (4,394) (2,521) (12,934)
----------- ----------- -----------
Net loss from discontinued operations (1,555) (302) (2,072)
Loss from disposal of assets 49 - 49
Write down of film rights and film cost inventory 277 - 249
Write down of goodwill 848 - 848
Change in liabilities in excess of assets of discontinued
operations 78 - 78
----------- ----------- -----------
Net cash used in operating activities from discontinued
operations (303) (302) (848)
----------- ----------- -----------
</TABLE>
(continued)
<PAGE>5
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(continued)
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<S> <C> <C> <C>
MARCH 3, 1993
SIX MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30,
1998 1997 1998
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition of Sierra Vista - 2,917 2,917
Advance to related party - - (140)
Cost incurred for organization of joint venture - - (68)
Purchases of property and equipment (997) (282) (1,971)
Proceeds from sale of asset - - 4
----------- ----------- -----------
Net cash provided by (used in) investing activities (997) 2,635 742
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft - (38) -
Proceeds from sale of common stock - 665 2,898
Proceeds from notes payable 778 - 4,866
Net proceeds from sale of debenture with detachable
warrants 1,992 - 6,601
Principal payments on notes payable (100)
----------- ----------- -----------
Net cash provided by financing activities 2,770 627 14,265
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,924) 439 1,225
CASH AND CASH EQUIVALENTS, beginning of period 4,149 - -
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,225 $ 439 $ 1,225
============ =========== ===========
</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
June 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 June 30, 1998, results of operations for the
three and six months ended June 30, 1998 and 1997, and the period from inception
(March 3, 1993) to June 30, 1998, and the cash flows for the six months ended
June 30, 1998 and 1997, and the period from inception (March 3, 1993) to June
30, 1998. The results for the period ended June 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 June 30, 1998. All assets have been
written down to their net realizable value as of June 30, 1998.
The net assets of Sierra Vista included in the accompanying consolidated balance
sheet as of June 30, 1998, consisted of the following:
Cash $ 2
Property and equipment 2
Accounts payable 82
--
Net liabilities in excess of assets $ 78
==
Sierra Vista has never generated any revenues.
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
<PAGE>7
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.
Subsequent to June 30, 1998, the Company settled two items of litigation which
resulted in reductions of previous liability estimates totaling approximately
$202,000. Selling, general and administrative expense for the three and six
month periods ending June 30, 1998 reflects expense reductions for the effects
of these settlements.
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.
In connection with the sales of the Debentures in December 1997, June 1998,
August 1998, November 1998 and January 1999, the Company issued five year
warrants to purchase up to an aggregate total of 1,450,000 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 1998 Debenture and Warrant transaction documents.
Consequently these Debentures are classified as current debt in the Company's
financial statements. Interest expense for the three and six month periods ended
June 30, 1998 contains expense of approximately $1,445,000 which represents
accelerated amortization of the deferred interest and original issue discount on
<PAGE>8
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 additional expense in the current period.
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 chip design project, cancel a number of other projects and
reduce personnel. See: "Liquidity and Capital Resources". Therefore, the results
for the three and six month periods ended June 30, 1998, will not be indicative
of future operations.
Three Months Ended June 30, 1998, Compared to June 30, 1997.
Revenues
Revenues were approximately $26,000 in the three months ended June 30, 1997
compared to zero in the same period in 1998. The revenue in the 1997 period was
from a developer kit sold to a prospective purchaser of the Company's single
chip encoder. There were no sales in the three months ended June 30, 1998.
Cost of goods sold
Cost of goods sold was approximately $8,000 or 31% of revenue for the three
months ended June 30, 1997. The cost of goods percentage seen in the second
quarter of 1997 is not necessarily indicative of that which the Company might
experience at such time, if any, that finished products begin to be shipped.
Research and development
Research and development was approximately $1,342,000 in the three months ended
June 30, 1998, an increase of approximately $482,000 over the expense in the
same period in 1997. Consulting expense increased by approximately $807,000 in
the second quarter of 1998 from the second quarter of 1997 as the Company
attempted to complete development of its single chip encoder. Payroll also
increased by approximately $219,000 in the second quarter of 1998 relative to
1997 as part of the same attempt to complete the encoder chip, but this increase
was offset by reduction of compensation imputed under APB 25 of approximately
$495,000. The development of the single chip encoder was terminated at the end
of the second quarter of 1998.
<PAGE>9
Selling, general and administrative
Selling, general and administrative expenses increased from approximately
$1,376,000 in the second quarter of 1997 to approximately $2,611,000 in the same
period in 1998. Payroll costs increased from 1997 to 1998 by approximately
$704,000 as the Company increased the numbers of sales and administrative
employees in anticipation of the introduction and shipment of products in 1998.
Included in this payroll cost increase were payments of approximately $266,000
to the Company's new President, Thomas E. Burke in the second quarter of 1998.
The second quarter of 1998 also included a charge of approximately $265,000 for
the issuance of below-market options for Mr. Burke, and moving and legal
expenses related to his arrival and departure of another approximately $125,000.
Loss on disposal of property and equipment
In June 1998, the management of the Company decided to terminate the single chip
encoder product and to focus the Company's research and development efforts into
projects with more immediate prospects for revenues. Certain portions of the
Company's property and equipment were specific to the chip development project
and with the termination of the project, this property and equipment was written
down to its realizable value. The amount of this write-down was approximately
$937,000. There was no similar loss experienced in the three month period ended
June 30, 1997.
Interest expense, net of interest income
Interest expense, net of interest income in the three months ended June 30, 1998
was approximately $2,473,000. There was essentially no interest expense or
income in the corresponding period of 1997. The Company had notes payable and
convertible debentures outstanding in excess of $8,000,000 at the beginning of
the second quarter of 1998, borrowed in excess of $2,000,000 more in the
quarter, and converted approximately $4,000,000 into equity. There was no
similar debt outstanding in the corresponding period of 1997. The stated
interest expense on the Company's obligations for the second quarter of 1998 was
approximately $160,000. Interest expense includes approximately $299,000 of
incentives allowed on other borrowings, and late charges and other items booked
as interest expense of approximately $101,000.
The Company was not in compliance with certain covenants under the terms of the
December 1997 and June 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 June 30, 1998. Interest expense in the three month period ended
June 30, 1998 contains approximately $1,913,000 of amortization of the original
discount on the Debentures sold in December 1997 and June 1998 of which
approximately $1,445,000 represents accelerated amortization of the deferred
interest and original issue discount on this debt.
Loss from Continuing Operations before Income Tax Expense and Discontinued
Operations
Loss from continuing operations before income tax expense and discontinued
operations increased from approximately $2,213,000 in the three months ended
June 30, 1997, to approximately $7,629,000 for the same period in 1998. This
<PAGE>10
increase reflects the substantial increases in expenses from 1997 to 1998
including the write-off of the Company's chip development project.
Six Months Ended June 30, 1998, Compared to June 30, 1997.
Revenues
Revenues for the six months ended June 30, 1998 were approximately $40,000 as
compared to approximately $101,000 for the same period in 1997. The revenue in
1997 was from the sale of four developer kits to prospective purchasers of the
Company's single chip encoder. There were no such sales in 1998, but sales of
pre-production board level products partially offset this decline.
Cost of goods sold
Cost of goods sold declined from approximately $29,000 or 29% of revenue in the
first half of 1997 to approximately $22,000 or 55% of revenue in the same period
of 1998. This reflects the different cost structures of the developer kits and
the pre-production boards. Neither percentage necessarily predicts accurately
the cost of sales that the Company might experience at such time, if any, that
production level products begin to ship.
Research and development
Research and development was approximately $2,765,000 in the first half of 1998
up by approximately $696,000 from the level in the first half of 1997.
Consulting expenses increased by approximately $941,000 between the two periods
as the Company attempted to complete development of its single chip encoder. As
part of the effort to complete the chip, payroll costs were also higher by
approximately $453,000. This was offset by a decrease in the compensation
expense recognized under APB 25 in 1998 of approximately $578,000. In the first
half of 1997 the Company recognized a $500,000 expense for the cost of
incomplete technology acquired in exchange for stock.
This expense was not repeated in 1998.
At the end of June 1998, the management of the Company took significant steps to
reduce research and development costs. The project to develop the single chip
encoder, and several other development projects were terminated. The Company
substantially reduced the size of its research and development staff, terminated
several consulting contracts, and continued development on only those projects
that were deemed to be closest to market. Accordingly, the Company's expenses
for research and development are expected to be lower in the quarters
immediately after June 30, 1998 than they were in the first two quarters of
1998.
Selling, general and administrative
Selling, general and administrative expenses were approximately $4,626,000 in
the first half of 1998 as compared to approximately $2,217,000 in the same
period of 1997, an increase of approximately $2,409,000. Selling, general and
administrative activity in the first half of 1998 was higher than it was in 1997
at the Company prepared for expected product releases, and staffed up to support
expected sales. Actual cash payroll increased by approximately $885,000 in the
first half of 1998 as compared to 1997, and compensation imputed for the
issuance of stock options at prices below market increased by approximately
$614,000. Legal and accounting expenses in the first half of 1998 increased by
approximately $484,000 from the first half of 1997 due in large part to the
costs of SEC filings and substantial increase in the cost of litigation. Travel,
<PAGE>11
entertainment, and trade show costs in the first half of 1998 increased by
approximately $255,000 relative to the first half of 1997 in large measure due
to the costs of attending the National Association of Broadcasters trade show in
1998.
In June of 1998, the management of the Company took steps to reduce the rate of
selling, general and administrative spending. Payroll was reduced significantly,
plans for future trade shows were reduced, litigation was settled or put into
contingent fee arrangements as much as possible, and non-core business
activities were eliminated. As a result, management anticipates that selling,
general and administrative expenses will be substantially lower for at least the
balance of 1998 than they were in the first half.
Interest expense, net of interest income
Interest expense, net of interest income was approximately $3,449,000 in the six
months ended June 30, 1998. During the entire first half of 1998 the Company
carried debt in excess of $6 million, on which the stated interest was
approximately $333,000. No such debt was outstanding in the same period of 1997.
Interest income was not significant in the either the first half of 1997 or the
first half of 1998.
The Company was not in compliance with certain covenants under the terms of the
December 1997 and June 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 June 30, 1998. Interest expense in the six month period ended
June 30, 1998 contains approximately $2,690,000 of amortization of the original
discount on the Debentures sold in December 1997 and June 1998 of which
approximately $1,445,000 represents accelerated amortization of the deferred
interest and original issue discount on this debt.
Management anticipates that the Company will continue to experience high levels
of interest expense in future quarters due to the debt incurred to fund
operations. Issuance of new Debentures after June 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
debt 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.
Liquidity and Capital Resources
Through June 30, 1998, the Company funded its operations primarily through the
sale of stock and placement of debt. On June 30, 1998, the Company had a cash
balance of approximately $1,225,000 and a working capital deficit of
approximately $10,003,000. 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
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.
<PAGE>12
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 three and six month periods 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.
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. 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.
<PAGE>13
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.
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.
<PAGE>14
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 ASIC 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 January 15, 1999 the average price at
which these convertible debentures could be converted into the Company's Common
Stock was approximately $.10 per share. If these two investors had exercised
their conversion rights at that time they would have owned approximately 81% 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 in concert with 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 January 15, 1999.
The Company was not in compliance with certain covenants under the terms of the
December 1997 and June 1998 Debenture and Warrant transaction documents.
Consequently these debentures are classified as current debt in the Company's
financial statements.
<PAGE>15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.26 Convertible Debenture Purchase Agreement, dated as of
December 15, 1998 between InnovaCom, Inc. and JNC Strategic Fund;
10.27 Debenture, dated as of December 15, 1998 between InnovaCom,
Inc. and JNC Strategic Fund;
10.28 Warrant, dated as of December 15, 1998 between InnovaCom,
Inc. and JNC Strategic Fund;
10.29 Registration Rights Agreement, dated as of December 15,
1998 between InnovaCom, Inc. and JNC Strategic Fund;
10.30 Security Agreement, dated as of December 15, 1998 between
InnovaCom, Inc. and JNC Strategic Fund;
10.31 Convertible Debenture Purchase Agreement, dated as of
January 14, 1999 between InnovaCom, Inc. and JNC Strategic Fund;
10.32 Debenture, dated as of January 14, 1999 between InnovaCom,
Inc. and JNC Strategic Fund;
10.33 Warrant, dated as of January 14, 1999 between InnovaCom,
Inc. and JNC Strategic Fund;
10.34 Registration Rights Agreement, dated as of January 14, 1999
between InnovaCom, Inc. and JNC Strategic Fund;
10.35 Security Agreement, dated as of January 14, 1999 between
InnovaCom, Inc. and JNC Strategic Fund;
<PAGE>16
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: February 17, 1999 /S/ FRANK J. ALIOTO
------------------------------
Frank J. Alioto, President and
Chief Executive Officer
Date: February 17, 1999 /S/ STANTON CREASEY
------------------------------
Stanton Creasey, Chief
Financial Officer
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.
<PAGE>
(b) The Purchaser agrees to the imprinting, so long as is
required by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION
OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above (or any
other legend) if the conversion of Debentures, exercise of the 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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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:
<PAGE>
- --------------------------------------------------------------------------
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
Between
INNOVACOM, INC.
and
JNC STRATEGIC FUND LTD.
-----------------------------
December 15, 1998
------------------------------
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
No. D-1 U.S. $500,000
INNOVACOM, INC.
7% SECURED CONVERTIBLE DEBENTURE DUE DECEMBER 15, 2003
FOR VALUE RECEIVED, InnovaCom, Inc., a corporation organized
under the laws of the Nevada and having a principal place of business at 3400
Garrett Drive, Santa Clara, California 95054 (the "Company") promises to pay to
JNC Strategic Fund Ltd., or registered assigns (the "Holder"), the principal sum
of Five Hundred Thousand Dollars ($500,000), on or prior to December 15, 2003 or
such earlier date as this Debenture (the Debenture") is required to be repaid as
provided hereunder (the "Maturity Date") and to pay interest to the Holder on
the principal sum at the rate of 7% per annum, payable quarterly in arrears on
March 31, June 30, September 30 and December 31 of each year while this
Debenture is outstanding and on each Conversion Date (as defined in Section
4(a)(i)), commencing on the earlier to occur of a Conversion Date (as defined
herein) for such principal amount and December 31, 1998. Interest shall accrue
daily commencing on the Original Issue Date (as defined in Section 6) until
payment in full of the principal sum, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been made.
Interest shall be calculated on the basis of a 360-day year and for the actual
number of days elapsed. Interest hereunder will be paid to the Person (as
defined in Section 6) in whose name this Debenture (or one or more predecessor
Debentures) is registered on the records of the Company regarding registration
and transfers of this Debenture (the "Debenture Register"). All overdue, accrued
and unpaid interest and other amounts due hereunder shall bear interest at the
rate of 15% per annum (to accrue daily) from the date such interest is due
hereunder through and including the date of payment. The principal of, and
interest on, this Debenture are payable in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts, at the address of the Holder last appearing on the
Debenture Register, except that interest due on the principal amount (but not
overdue interest) may, at the Company's option, be paid in shares of Common
Stock (as defined in Section 6) calculated based upon the Conversion Price (as
defined below) on the date such interest was due. All amounts due hereunder
other than such interest shall be paid in cash. Notwithstanding anything to the
contrary contained herein, the Company may not issue shares of Common Stock in
payment of interest on the principal
<PAGE>
amount if: (i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held as treasury stock, is
insufficient to pay interest hereunder in shares of Common Stock; (ii) such
shares are not either registered for resale pursuant to an Underlying Securities
Registration Statement (as defined in Section 6) or freely transferable without
volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act
of 1933, as amended (the "Securities Act"), as determined by counsel to the
Company pursuant to a written opinion letter addressed and in form and substance
acceptable to the Holder and the transfer agent for such shares; or (iii) such
shares are not Actively Traded (as defined herein) (or listed or quoted for
trading on the American Stock Exchange, Nasdaq National Market, Nasdaq SmallCap
Market or The New York Stock Exchange, and any other exchange on which the
Common Stock is then listed for trading (each, a "Subsequent Market")). 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.
This Debenture is subject to the following additional provisions:
Section 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same but shall not be issuable in
denominations of less than integral multiplies of Fifty Thousand Dollars
($50,000) unless such amount represents the full principal balance of Debentures
outstanding to such Holder. No service charge will be made for such registration
of transfer or exchange.
Section 2. This Debenture has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Purchase Agreement. Prior to due presentment to the Company for transfer of this
Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Debenture Register as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.
Section 3. Events of Default.
(a) "Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) any default in the payment of the principal of, interest on
or liquidated damages in respect of, this Debenture, free of any claim
of subordination, as and when the
<PAGE>
same shall become due and payable (whether on the applicable quarterly
interest payment date, a Conversion Date or the Maturity Date or by
acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of, this Debenture, the Purchase Agreement, the Security
Agreement or the Registration Rights Agreement, and such failure or
breach shall not have been remedied within 10 days after the date on
which notice of such failure or breach shall have been given;
(iii) the Company or any of its subsidiaries shall commence, or
there shall be commenced against the Company or any such subsidiary a
case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences
any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is commenced
against the Company or any subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period of
60 days; or the Company or any subsidiary thereof is adjudicated
insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or the Company or any subsidiary
thereof suffers any appointment of any custodian or the like for it or
any substantial part of its property which continues undischarged or
unstayed for a period of 60 days; or the Company or any subsidiary
thereof makes a general assignment for the benefit of creditors; or the
Company shall fail to pay, or shall state that it is unable to pay, or
shall be unable to pay, its debts generally as they become due; or the
Company or any subsidiary thereof shall call a meeting of its creditors
with a view to arranging a composition or adjustment of its debts; or
the Company or any subsidiary thereof shall by any act or failure to act
indicate its consent to, approval of or acquiescence in any of the
foregoing; or any corporate or other action is taken by the Company or
any subsidiary thereof for the purpose of effecting any of the
foregoing;
(iv) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement or
other instrument under which there may be issued, or by which there may
be secured or evidenced any indebtedness of the Company in an amount
exceeding one hundred thousand dollars ($100,000), whether such
indebtedness now exists or shall hereafter be created and such default
shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable;
(v) the Common Stock shall fail to be Actively Traded or fail to
be listed or quoted for trading on any Subsequent Market if after the
Original Issue Date the Common Stock shall be listed or quoted for
trading on any such Subsequent Market, or if the Common Stock shall be
suspended from trading thereon without being actively traded, relisted
or having such suspension lifted, as the case may be, within fifteen
(15) days;
<PAGE>
(vi) the Company shall be a party to any merger or consolidation
pursuant to which the Company shall not be the surviving entity (or, if
the Company is the surviving entity, the Company shall issue or sell to
another Person, or group thereof, in excess of 50% of the Common Stock)
or shall dispose of all or substantially all of its assets in one or
more transactions, or shall redeem more than a de minimis number of
shares of Common Stock (other than redemptions of Underlying Shares);
(vii) an Underlying Securities Registration Statement shall not
have been declared effective by the Securities and Exchange Commission
(the "Commission") on or prior to the 180th day after the Original Issue
Date;
(viii) an Event (as hereinafter defined) shall not have been
cured to the satisfaction of the Holder prior to the expiration of
thirty (30) days from the Event Date (as hereinafter defined) relating
thereto (other than an Event resulting from a failure of an Underlying
Securities Registration Statement to be declared effective by the
Commission on or prior to the 90th day after the Original Issue Date);
or
(ix) the Company shall fail to deliver certificates to the Holder
prior to the 15th day after the Conversion Date pursuant to Section
4(b).
(b) If any Event of Default occurs and is continuing the full
principal amount of this Debenture (and, at the Holder's option, all other
Debentures then held by such Holder), together with interest and other amounts
owing in respect thereof, to the date of acceleration, to be, shall become,
immediately due and payable in cash. The aggregate amount payable upon an Event
of Default in respect of the Debentures shall be equal to the sum of (i) the
Mandatory Prepayment Amount (as defined in Section 6) plus (ii) the product of
(A) the number of Underlying Shares issued in respect of conversions or as
payment of interest hereunder and then held by the Holder and (B) the Per Share
Market Value on the date prepayment is demanded or the date the full prepayment
price is paid, whichever is greater. The Holder need not provide and the Company
hereby waives any presentment, demand, protest or other notice of any kind, and
the Holder may immediately and without expiration of any grace period enforce
any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such declaration may be rescinded and
annulled by Holder at any time prior to payment hereunder. No such rescission or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.
Section 4. Conversion.
(a) (i) This Debenture shall be convertible into shares of Common
Stock at the option of the Holder, in whole or in part at any time and from time
to time, from and after the 100th day following the Original Issue Date and
prior to the close of business on the Maturity Date. The number of shares of
Common Stock as shall be issuable upon a conversion hereunder shall be
determined by dividing the outstanding principal amount of this Debenture to be
converted, plus all accrued but unpaid interest thereon, by the Conversion Price
(as defined below), each as
<PAGE>
subject to adjustment as provided hereunder. The Holder shall effect conversions
by surrendering this Debenture (or such portions thereof) to be converted,
together with the form of conversion notice attached hereto as Exhibit A (a
"Conversion Notice") to the Company. Each Conversion Notice shall specify the
principal amount of Debentures to be converted and the date on which such
conversion is to be effected, which date may not be prior to the date such
Conversion Notice is deemed to have been delivered hereunder (a "Conversion
Date"). If no Conversion Date is specified in a Conversion Notice, the
Conversion Date shall be the date that such Conversion Notice is deemed
delivered hereunder. Subject to Section 4(b) hereof, each Conversion Notice,
once given, shall be irrevocable. If the Holder is converting less than all of
the principal amount represented by the Debenture(s) tendered by the Holder with
the Conversion Notice, or if a conversion hereunder cannot be effected in full
for any reason, the Company shall honor such conversion to the extent
permissible hereunder and shall promptly deliver to such Holder (in the manner
and within the time set forth in Section 4(b)) a new Debenture for such
principal amount as has not been converted.
(ii) Certain Conversion Restrictions.
(A) The Holder agrees not to convert Debentures to
the extent such
conversion would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in
excess of 4.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of the Debentures held by such Holder
after application of this Section. The Holder shall have the sole authority and
obligation to determine whether the restriction contained in this Section
applies and, to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which Debentures are
convertible shall be in the sole discretion of the Holder. The provisions of
this Section may be waived by a Holder (but only as to itself and not to any
other Holder) upon not less than 75 days prior notice to the Company (in which
case, the Holder shall make such filings with the Commission, including under
Rule 13D or 13G, as are required by applicable law). Other Holders shall be
unaffected by any such waiver.
(B) The Holder agrees not to convert Debentures to
the extent such conversion would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the rules
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of the Debentures held
by such Holder after application of this Section. The Holder shall have the sole
authority and obligation to determine whether the restriction contained in this
Section applies and, to the extent that the Holder determines that the
limitation contained in this Section applies, the determination of which
Debentures are convertible shall be in the sole discretion of the Holder. The
provisions of this Section may be waived by a Holder (but only as to itself and
not to any other Holder) upon not less than 75 days prior notice to the Company.
Other Holders shall be unaffected by any such waiver.
<PAGE>
(b) Not later than three Trading Days after the Conversion Date,
the Company will deliver to the Holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number of
shares of the Common Stock being acquired upon the conversion of Debentures,
(ii) Debentures in a principal amount equal to the principal amount of
Debentures not converted; (iii) a bank check in the amount of all accrued and
unpaid interest (if the Company has elected and is permitted hereunder to pay
accrued interest in cash), together with all other amounts then due and payable
in accordance with the terms hereof, in respect of Debentures tendered for
conversion and (iv) if the Company has elected to pay accrued interest in shares
of the Common Stock, certificates, which shall be free of restrictive legends
and trading restrictions (other than those required by Section 3.1(b) of the
Purchase Agreement), representing such number of shares of the Common Stock as
equals such interest divided by the Conversion Price calculated on the
Conversion Date; provided, however, that the Company shall not be obligated to
issue certificates evidencing the shares of the Common Stock issuable upon
conversion of the principal amount of Debentures until Debentures are delivered
for conversion to the Company or the Holder notifies the Company that such
Debenture has been mutilated, lost, stolen or destroyed and complies with
Section 9 hereof. If in the case of any Conversion Notice such certificate or
certificates, including for purposes hereof, any shares of the Common Stock to
be issued on the Conversion Date on account of accrued but unpaid interest
hereunder, are not delivered to or as directed by the Holder by the third
Trading Day after a Conversion Date, the Holder shall be entitled by written
notice to the Company at any time on or before its receipt of such certificate
or certificates thereafter, to rescind such conversion (whether subject to a
Holder or a Company Conversion Notice), in which event the Company shall
immediately return the Debentures tendered for conversion. If the Company fails
to deliver to the Holder such certificate or certificates pursuant to this
Section, including for purposes hereof, any shares of the Common Stock to be
issued on the Conversion Date on account of accrued but unpaid interest
hereunder, prior to the fifth Trading Day after the Conversion Date, the Company
shall pay to such Holder, in cash, as liquidated damages and not as a penalty,
$1,500 for each day thereafter until the Company delivers such certificates
(such amount shall be also be due for each Trading Day after the date that the
Holder may rescind such conversion until such date as the Holder shall have
received the return of the principal amount of Debentures relating to such
rescission). If the Company fails to deliver to the Holder such certificate or
certificates pursuant to this Section prior to the 15th day after the Conversion
Date, the Company shall, upon notice from the Holder, prepay such portion of the
aggregate of the principal amount of Debentures then held by such Holder, as
requested by such Holder, for the Mandatory Prepayment Amount, in cash. If any
portion of the Mandatory Prepayment Amount pursuant to this Section is not paid
within seven days after notice therefor is deemed delivered hereunder, the
Company will pay interest on the Mandatory Prepayment Amount at a rate of 15%
per annum (to accrue daily), in cash to such Holder, accruing from such seventh
day until the Mandatory Prepayment Amount, plus all accrued interest thereon, is
paid in full.
(c) (i) The conversion price (the "Conversion Price") in effect
on any Conversion Date shall be the lesser of (A) $.1775 (the "Initial
Conversion Price") and (B) the Applicable Percentage (as defined in Section 6)
<PAGE>
multiplied by the Average Price (as defined herein) calculated on the Conversion
Date; provided, that the five (5) Trading Day period contemplated in the Average
Price shall be extended for the number of Trading Days, if any, during such
period in which (A) the shares of Common Stock are not Actively Traded or
suspended or delisted from trading on any Subsequent Market, (B) after the date
declared effective by the Commission, the Underlying Securities Registration
Statement is not effective, or (C) after the date declared effective by the
Commission, the Prospectus included in the Underlying Securities Registration
Statement may not be used by the Holder for the resale of Underlying Shares,
provided, further, that if (a) an Underlying Securities Registration Statement
is not filed on or prior to the Filing Date (as defined in the Registration
Rights Agreement), or (b) the Company fails to file with the Commission a
request for acceleration in accordance with Rule 12d1-2 promulgated under the
Securities Exchange Act of 1934, as amended, within five (5) days of the date
that the Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Securities Registration Statement will not be
"reviewed" or is not subject to further review or comment by the Commission, or
(c) the Underlying Securities Registration Statement is not declared effective
by the Commission on or prior to the Effectiveness Date (as defined in the
Registration Rights Agreement), or (d) such Underlying Securities Registration
Statement is filed with and declared effective by the Commission but thereafter
ceases to be effective as to all Registrable Securities (as such term is defined
in the Registration Rights Agreement) for more than twenty (20) days at any time
prior to the expiration of the "Effectiveness Period" (as such term as defined
in the Registration Rights Agreement), without being succeeded by a subsequent
Underlying Securities Registration Statement filed with and declared effective
by the Commission within twenty (20) days, or (e) trading in the Common Stock
shall fail to be Actively Traded or if the Common Stock shall be suspended or
delisted from trading on any Subsequent Market for any reason for more than five
(5) days, or (f) the conversion rights of the Holders of Debentures are
suspended for any reason or if the Holder is not permitted to resell Registrable
Securities under the Underlying Securities Registration Statement, or (g) an
amendment to the Underlying Securities Registration Statement is not filed by
the Company with the Commission within fifteen (15) days of the Commission's
notifying the Company that such amendment is required in order for the
Underlying Securities Registration Statement to be declared effective (any such
failure being referred to as an "Event," and for purposes of clauses (a), (c)
and (f) the date on which such Event occurs, or for purposes of clauses (b) and
(e) the date on which such five (5) day period is exceeded, or for purposes of
clause (d) the date which such twenty (20) day period is exceeded, or for
purposes of clause (g) the date on which such fifteen (15) day period is
exceeded, being referred to as "Event Date"), the Company shall pay, in cash, as
liquidated damages and not as a penalty, on the Event Date and on the first day
of each month thereafter until the Event is cured, 1.5% of the aggregate
principal amount of Debentures then outstanding pro rata to the holders thereof
in accordance with their holdings thereof. The provisions of this Section are
not exclusive and shall in no way limit the Company's obligations under the
Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures
are outstanding, (a) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of the Common Stock, (b) subdivide
outstanding
<PAGE>
shares of the Common Stock into a larger number of shares, (c) combine
outstanding shares of the Common Stock into a smaller number of shares, or (d)
issue by reclassification of shares of the Common Stock any shares of capital
stock of the Company, the Initial Conversion Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding before such event and of
which the denominator shall be the number of shares of the Common Stock
outstanding after such event. Any adjustment made pursuant to this Section shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all holders of the Common Stock
(and not to Holders of Debentures) entitling them to subscribe for or purchase
shares of the Common Stock at a price per share less than the Per Share Market
Value of the Common Stock at the record date mentioned below, the Initial
Conversion Price shall be multiplied by a fraction, of which the denominator
shall be the number of shares of the Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of the Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such Per Share
Market Value. Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the Initial
Conversion Price pursuant to this Section, if any such right or warrant shall
expire and shall not have been exercised, the Initial Conversion Price shall
immediately upon such expiration be recomputed and effective immediately upon
such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Initial Conversion Price made pursuant
to the provisions of this Section 4 after the issuance of such rights or
warrants) had the adjustment of the Initial Conversion Price made upon the
issuance of such rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of the Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of the Common Stock (and not to
Holders of Debentures) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security, then in each such case the
Initial Conversion Price at which Debentures shall thereafter be convertible
shall be determined by multiplying the Initial Conversion Price in effect
<PAGE>
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the Per Share Market Value of the Common Stock determined as of the
record date mentioned above, and of which the numerator shall be such Per Share
Market Value of the Common Stock on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith; provided, however,
that in the event of a distribution exceeding ten percent (10%) of the net
assets of the Company, such fair market value shall be determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority in interest of
Debentures then outstanding; and provided, further, that the Company, after
receipt of the determination by such Appraiser shall have the right to select an
additional Appraiser, in good faith, in which case the fair market value shall
be equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to the holders
of Debentures of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of the Common
Stock. Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock
or any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the Holder of this Debenture shall have
the right thereafter to, at its option, (A) convert the then outstanding
principal amount, together with all accrued but unpaid interest and any other
amounts then owing hereunder in respect of this Debenture only into the shares
of stock and other securities, cash and property receivable upon or deemed to be
held by holders of the Common Stock following such reclassification or share
exchange, and the Holders of the Debentures shall be entitled upon such event to
receive such amount of securities, cash or property as the shares of the Common
Stock of the Company into which the then outstanding principal amount, together
with all accrued but unpaid interest and any other amounts then owing hereunder
in respect of this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled or (B) require the
Company to prepay, from funds legally available therefor at the time of such
prepayment, the aggregate of its outstanding principal amount of Debentures,
plus all interest and other amounts due and payable thereon, at a price
determined in accordance with Section 3(b). The entire prepayment price shall be
paid in cash. This provision shall similarly apply to successive
reclassifications or share exchanges.
(vi) All calculations under this Section 4 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Initial Conversion Price is adjusted
pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly mail to
each Holder of Debentures a notice setting forth the Initial Conversion Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment.
<PAGE>
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special
nonrecurring cash dividend on or a redemption
of its Common Stock; or
C. the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of
any rights; or
D. the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, of any compulsory
share of exchange whereby the Common Stock is
converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or
winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of the Debentures, and shall cause to be mailed to the
Holders of Debentures at their last addresses as they shall appear upon the
stock books of the Company, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided, however, that the failure to mail
such notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be specified in such notice.
Holders are entitled to convert Debentures during the 30-day period commencing
the date of such notice to the effective date of the event triggering such
notice.
<PAGE>
(d) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued shares of the Common Stock
solely for the purpose of issuance upon conversion of the Debentures and payment
of interest on the Debentures, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(c)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of the Common Stock that shall
be so issuable shall, upon issue, be duly and validly authorized, issued and
fully paid, nonassessable and, if the Underlying Securities Registration
Statement has been declared effective under the Securities Act, freely
tradeable.
(e) Upon a conversion hereunder the Company shall not be required
to issue stock certificates representing fractions of shares of the Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(f) The issuance of certificates for shares of the Common Stock
on conversion of the Debentures shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Any and all notices or other communications or deliveries to
be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at
3400 Garrett Drive, Santa Clara, California 95054 (facsimile number (408) 727-
8778), attention Chief Financial Officer, or such other address or facsimile
number as the Company may specify for such purposes by notice to the Holders
delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to each Holder of the Debentures at the facsimile telephone
number or address of such Holder appearing on the books of the Company, or if no
such facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
<PAGE>
facsimile telephone number specified in this Section prior to 7:00 p.m. (New
York City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 7:00 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) four days
after deposit in the United States mail, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.
Section 5. Optional Prepayment.
(a) The Company shall have the right, exercisable at any time
upon thirty (30) Trading Days prior written notice to the Holders of the
Debentures to be prepaid (the "Optional Prepayment Notice") given at any time
after the 90th day following the date the Underlying Securities Registration
Statement has been declared effective by the Commission (provided that any
Trading Days that the holders are prohibited from utilizing such Underlying
Securities Registration Statement to resell Underlying Shares, despite their
desire to do so, shall be added to such 90 day period), to prepay, from funds
legally available therefor at the time of such prepayment, all or any portion of
the outstanding principal amount of the Debentures which have not previously
been repaid or for which Conversion Notices have not previously been delivered
hereunder, at a price equal to the Optional Prepayment Price (as defined below).
Any such prepayment by the Company shall be in cash and shall be free of any
claim of subordination. The Holders shall have the right to tender, and the
Company shall honor, Conversion Notices delivered prior to the expiration of the
thirtieth (30th) Trading Day after receipt by the Holders of an Optional
Prepayment Notice for such Debentures (such date, the "Optional Prepayment
Date").
(b) If any portion of the Optional Prepayment Price shall not be
paid by the Company by the Optional Prepayment Date, the Optional Prepayment
Price shall be increased by 15% per annum (to accrue daily) until paid (which
amount shall be paid as liquidated damages and not as a penalty). In addition,
if any portion of the optional Prepayment Price remains unpaid through the
expiration of the Optional Prepayment Date, the Holder subject to such
prepayment may elect by written notice to the Company to either (i) demand
conversion in accordance with the formula and the time period therefor set forth
in Section 4 of any portion of the principal amount of Debentures for which the
Optional Prepayment Price, plus accrued liquidated damages thereof, has not been
paid in full (the "Unpaid Prepayment Principal Amount"), in which event the
applicable Per Share Market Value shall be the lower of the Per Share Market
Value calculated on the Optional Prepayment Date and the Per Share Market Value
as of the Holder's written demand for conversion, or (ii) invalidate ab initio
<PAGE>
such optional redemption, notwithstanding anything herein contained to the
contrary. If the Holder elects option (i) above, the Company shall within three
(3) Trading Days such election is deemed delivered hereunder to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Prepayment Amount
subject to such conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option (ii) above, the
Company shall promptly, and in any event not later than three Trading Days from
receipt of notice of such election, return to the Holder new Debentures for the
full Unpaid Prepayment Principal Amount. If, upon an election under option (i)
above, the Company fails to deliver the shares of Common Stock issuable upon
conversion of the Unpaid Prepayment Principal Amount prior to the fifth Trading
Day after such election is deemed delivered hereunder, the Company shall pay to
the Holder in cash, as liquidated damages and not as a penalty, $1,500 per day
until the Company delivers such Common Stock to the Holder.
(c) The "Optional Prepayment Price" for any Debentures shall
equal the sum of (i) the principal amount of Debentures to be prepaid, plus all
accrued and unpaid interest thereon, divided by the Conversion Price on (x) the
Optional Prepayment Date or (y) the date the Optional Prepayment Price is paid
in full, whichever is less, multiplied by the Average Price on (x) the Optional
Prepayment Date or (y) the date the Optional Prepayment Price is paid in full,
whichever is greater, and (ii) all other amounts, expenses, costs and liquidated
damages due in respect of such principal amount.
Section 6. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Applicable Percentage" means (i) 80% for any conversion honored
prior to the 120th day after the Original Issue Date, (ii) 77.5% for any
conversion honored on or after the 120th day and prior to the 150th day after
the Original Issue Date, and (iii) 75% for any conversion honored on or after
the 150th day after the Original Issue Date. For purposes hereof, a conversion
is deemed to have been honored when the shares of Common Stock issuable in
respect of such conversion are received by the Holder in accordance with the
terms hereof.
"Average Price" on any date means the average Per Share Market
Value for the five (5) Trading Days immediately preceding such date.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Common Stock" means the Company's common stock, $.001 par value
per share, and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"Mandatory Prepayment Amount" for any Debentures shall equal the
sum of (i) the principal amount of Debentures to be prepaid, plus all accrued
and unpaid interest thereon, divided by the Conversion Price on (x) the date the
Mandatory Prepayment Amount is demanded or (y) the date the Mandatory Prepayment
Amount is paid in full, whichever is less, multiplied by the Average Price on
(x) the date the Mandatory Prepayment Amount is demanded or (y) the date the
Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all
other amounts, costs, expenses and liquidated damages due in respect of such
Debentures.
"Original Issue Date" shall mean the date of the first issuance
of any Debentures regardless of the number of transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence such
Debenture.
"Per Share Market Value" on any particular date means (a) the
closing bid price per share of the Common Stock on such date as quoted by
Bloomberg Information Services, Inc. ("Bloomberg"), or similar organizations or
agencies succeeding to its functions of reporting prices, or (b) if the Common
Stock is no longer reported by Bloomberg, or such similar organizations or
agencies, such closing bid price per share shall be determined by reference to
"Pink Sheet" quotes for the relevant conversion period as determined in good
faith by the Holder or (c) if the Common Stock is not then publicly traded, the
fair market value of a share of Common Stock as determined by an appraiser
selected in good faith by the Holders of a majority in interest of the
Debentures.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Debenture Purchase
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"Security Agreement" means the Security Agreement, dated as of
June 29, 1998, between the Company and the original Holder of Debentures, as
amended on August 28, 1998 and on the Original Issue Date, and as may be further
amended modified or supplemented from time to time in accordance with its terms.
"Trading Day" means (a) a day on which the Common Stock is traded
on the Nasdaq Stock Market or other stock exchange or market on which the Common
Stock has been listed, or (b) if the Common Stock is not listed on the Nasdaq
Stock Market or any stock exchange or market, a day on which the Common Stock is
traded on the over-the-counter market, as reported by the OTC Bulletin Board, or
(c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which
the Common Stock is quoted on the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices).
<PAGE>
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance with the
terms hereof.
"Underlying Securities Registration Statement" means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement, covering among other things the resale of the Underlying
Shares and naming the Holder as a "selling stockholder" thereunder.
Section 7. Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct obligation of
the Company. This Debenture ranks pari passu with all other Debentures now or
hereafter issued under the terms set forth herein. The Company may only
voluntarily prepay the outstanding principal amount on the Debentures in
accordance with Section 5 hereof.
Section 8. This Debenture shall not entitle the Holder to any of
the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
Section 9. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
Section 10. This Debenture shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The Company hereby irrevocably submits to the
non-exclusive jurisdiction of the state and federal courts sitting in the City
of New York, borough of Manhattan, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, or that such suit, action or proceeding is
improper. The Company hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
receiving a copy thereof sent to the Company at the address in effect for
notices to it under this instrument and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.
Section 11. Any waiver by the Company or the Holder of a breach
of any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to insist
upon strict adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver must be in writing.
Section 12. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
Section 13. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day (or, if such next succeeding Business Day falls
in the next calendar month, the preceding Business Day in the appropriate
calendar month).
Section 14. The payment obligations under this Debenture and the
obligations of the Company to the Holder arising upon the conversion of all or
any of the Debentures in accordance with the provisions hereof are secured
pursuant to the Security Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Secured
Convertible Debenture to be duly executed by a duly authorized officer as of the
date first above indicated.
INNOVACOM, INC.
By:________________________________
Name:
Title:
Attest:
By:___________________________
Name:
Title:
<PAGE>
EXHIBIT A
INNOVACOM, INC
NOTICE OF CONVERSION
AT THE ELECTION OF THE HOLDER
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert Debenture No. D-1 into shares of Common
Stock, $.001 par value per share (the "Common Stock"), of INNOVACOM, INC. (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
Conversion calculations:
Date to Effect Conversion
Principal Amount of Debentures to be
Converted
Number of shares of Common Stock to be Issued
Applicable Conversion Price
Signature
Name
Address
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
INNOVACOM, INC.
WARRANT
Dated: December 15, 1998
InnovaCom, Inc., a Nevada corporation (the "Company"), hereby certifies
that, for value received, JNC Strategic Fund Ltd., or its registered assigns
("Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company up to a total of 125,000 shares of Common Stock, $.001 par value per
share (the "Common Stock"), of the Company (each such share, a "Warrant Share"
and all such shares, the "Warrant Shares") at an exercise price equal to $.50
per share (as adjusted from time to time as provided in Section 8, the "Exercise
Price"), at any time and from time to time from and after the date hereof and
through and including December 15, 2003 (the "Expiration Date"), and subject to
the following terms and conditions:
1. Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any portion of
this Warrant in the Warrant Register, upon surrender of this Warrant, with the
Form of Assignment attached hereto duly completed and signed, to the Company at
the office specified in or pursuant to Section
<PAGE>
3(b). Upon any such registration or transfer, a new warrant to purchase Common
Stock, in substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be issued
to the transferee and a New Warrant evidencing the remaining portion of this
Warrant not so transferred, if any, shall be issued to the transferring Holder.
The acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender
hereof by the Holder to the office of the Company specified in or pursuant to
Section 3(b) for one or more New Warrants, evidencing in the aggregate the right
to purchase the number of Warrant Shares which may then be purchased hereunder.
Any such New Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered
Holder on any business day before 5:30 P.M., New York City time, at any time and
from time to time on or after the date hereof to and including the Expiration
Date. At 5:30 P.M., New York City time on the Expiration Date, the portion of
this Warrant not exercised prior thereto shall be and become void and of no
value. Prior to the Expiration Date, the Company may not call or otherwise
redeem this Warrant without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 9, upon surrender of
this Warrant, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Company at its address for notice set forth in
Section 11 and upon payment of the Exercise Price multiplied by the number of
Warrant Shares that the Holder intends to purchase hereunder, in the manner
provided hereunder, all as specified by the Holder in the Form of Election to
Purchase, the Company shall promptly (but in no event later than 3 business days
after the Date of Exercise (as defined herein)) issue or cause to be issued and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise, free of restrictive legends, except in the event
that a Registration Statement (as defined herein) is not then effective or, if
this Warrant shall have been issued pursuant to a written agreement between the
original Holder and the Company, other than as required by such agreement. Any
person so designated by the Holder to receive Warrant Shares shall be deemed to
have become holder of record of such Warrant Shares as of the Date of Exercise
of this Warrant.
A "Date of Exercise" means the date on which the Company
shall have received (i) this Warrant (or any New Warrant, as applicable), with
the Form of Election to Purchase attached hereto (or attached to such New
Warrant) appropriately completed and duly
<PAGE>
signed, and (ii) payment of the Exercise Price for the number of Warrant Shares
so indicated by the holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant Shares.
If less than all of the Warrant Shares which may be purchased under this Warrant
are exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. Piggyback Registration Rights. During the term of this
Warrant, the Company may not file any registration statement with the Securities
and Exchange Commission (other than registration statements of the Company filed
on Form S-8 or Form S-4, each as promulgated under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to which the Company is registering
securities pursuant to a Company employee benefit plan or pursuant to a merger,
acquisition or similar transaction including supplements thereto, but not
additionally filed registration statements in respect of such securities) at any
time when there is not an effective registration statement covering the resale
of the Warrant Shares and naming the Holder as a selling stockholder thereunder
(a "Registration Statement"), unless the Company provides the Holder with not
less than 20 days notice to each of the Holder and Robinson Silverman Pearce
Aronsohn & Berman LLP, attention Eric L. Cohen, notice of its intention to file
such registration statement and provides the Holder the option to include any or
all of the applicable Warrant Shares therein. The piggyback registration rights
granted to the Holder pursuant to this Section shall continue until all of the
Holder's Warrant Shares have been sold in accordance with an effective
registration statement or upon the Expiration Date. The Company will pay all
registration expenses in connection therewith.
5. Payment of Taxes. The Company will pay all documentary stamp
taxes attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder, and the Company shall not be required to issue or cause to be issued
or deliver or cause to be delivered the certificates for Warrant Shares unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Holder shall be
responsible for all other tax liability that may arise as a result of holding or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange
and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such
<PAGE>
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that it
will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (taking into account
the adjustments and restrictions of Section 8). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized, issued and fully paid and nonassessable.
8. Certain Adjustments. The Exercise Price and number of Warrant
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 8. Upon each such adjustment of the
Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to
the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on
outstanding preferred stock as of the date hereof which contain a stated
dividend rate) or otherwise make a distribution or distributions on shares of
its Common Stock (as defined below) or on any other class of capital stock and
not the Common Stock) payable in shares of Common Stock, (ii) subdivide
outstanding shares of Common Stock into a larger number of shares, or (iii)
combine outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price shall be multiplied by a fraction of which the numerator shall be
the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock (excluding treasury shares, if any) outstanding after
such event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision or combination, and shall
apply to successive subdivisions and combinations.
(b) In case of any reclassification of the Common
Stock, any consolidation or merger of the Company with or into another person,
the sale or transfer of all or substantially all of the assets of the Company or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and
<PAGE>
property receivable upon or deemed to be held by holders of Common Stock
following such reclassification, consolidation, merger, sale, transfer or share
exchange, and the Holder shall be entitled upon such event to receive such
amount of securities or property equal to the amount of Warrant Shares such
Holder would have been entitled to had such Holder exercised this Warrant
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give to
the Holder the right to receive the securities or property set forth in this
Section 8(b) upon any exercise following any such reclassification,
consolidation, merger, sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to holders
of this Warrant) evidences of its indebtedness or assets or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
a nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") mutually selected in good faith by the holders of a majority in
interest of the Warrants then outstanding and the Company. Any determination
made by the Appraiser shall be final.
(d) If, at any time while this Warrant is outstanding, the
Company shall issue or cause to be issued rights or warrants to acquire or
otherwise sell or distribute shares of Common Stock for a consideration per
share less than the Exercise Price then in effect, then, forthwith upon such
issue or sale, the Exercise Price shall be reduced to the price (calculated to
the nearest cent) determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of (i) the number of shares of Common Stock outstanding immediately prior to
such issuance, and (ii) the number of shares of Common Stock which the aggregate
consideration received (or to be received, assuming exercise or conversion in
full of such rights, warrants and convertible securities) for the issuance of
such additional shares of Common Stock would purchase at the Exercise Price, and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an issuance is made.
(e) For the purposes of this Section 8, the following
clauses shall also be applicable:
<PAGE>
(i) Record Date. In case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them (A)
to receive a dividend or other distribution payable in Common Stock or in
securities convertible or exchangeable into shares of Common Stock, or (B) to
subscribe for or purchase Common Stock or securities convertible or exchangeable
into shares of Common Stock, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of
Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(g) If:
(i) the Company shall declare a dividend
(or any other distribution) on its
Common Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
(iii) the Company shall authorize the
granting to all holders of the
Common Stock rights or warrants to
subscribe for or purchase any shares
of capital stock of any class or of
any rights; or
(iv) the approval of any stockholders of
the Company shall be required in
connection with any reclassification
of the Common Stock of the Company,
any consolidation or merger to which
the Company is a party, any sale or
transfer of all or substantially all
of the assets of the Company, or any
compulsory share exchange whereby
the Common Stock is converted into
other securities, cash or property;
or
<PAGE>
(v) the Company shall authorize the
voluntary dissolution, liquidation
or winding up of the affairs of the
Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Payment of Exercise Price. The Holder may pay the Exercise
Price in one of the following manners:
(a) Cash Exercise. The Holder shall deliver immediately
available funds; or
(b) Cashless Exercise. The Holder shall surrender this Warrant
to the Company together with a notice of cashless exercise,
in which event the Company shall issue to the Holder the
number of Warrant Shares determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to
the Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the average of the closing sale prices of the
Common Stock for the five (5) trading days
immediately prior to (but not including) the Date
of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
<PAGE>
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
10. Fractional Shares. The Company shall not be required to issue
or cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 10, be issuable
on the exercise of this Warrant, the Company shall pay an amount in cash equal
to the Exercise Price multiplied by such fraction.
11. Notices. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 4:30 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 4:30 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 addresses for such communications shall be: (i) if to the Company, to
3400 Garrett Drive, Santa Clara, California 95054, or to Facsimile No. (408)
727-8778, Attention: Chief Financial Officer, or (ii) if to the Holder, to the
Holder at the address or facsimile number appearing on the Warrant Register or
such other address or facsimile number as the Holder may provide to the Company
in accordance with this Section 11.
12. Warrant Agent.
(a) The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a
new warrant agent.
(b) Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any consolidation
to which the Company or any new warrant agent shall be a party or any
corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business shall
be a successor warrant agent under this Warrant without any further act. Any
such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the Holder
at the Holder's last address as shown on the Warrant Register.
<PAGE>
13. Miscellaneous.
(a) This Warrant shall be binding on and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. This Warrant may be amended only in writing signed by the Company and
the Holder.
(b) Subject to Section 13(a), above, nothing in this
Warrant shall be construed to give to any person or corporation other than the
Company and the Holder any legal or equitable right, remedy or cause under this
Warrant. This Warrant shall inure to the sole and exclusive benefit of the
Company and the Holder and their successors and assigns.
(c) This Warrant shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or affect any
of the provisions hereof.
(e) In case any one or more of the provisions of this
Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated above.
INNOVACOM, INC.
By:
Name:
Title:
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To InnovaCom, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), $.001 par value per share, of
InnovaCom, Inc. and , if such Holder is not utilizing the cashless exercise
provisions set forth in this Warrant, encloses herewith $________ in cash,
certified or official bank check or checks, which sum represents the aggregate
Exercise Price (as defined in the Warrant) for the number of shares of Common
Stock to which this Form of Election to Purchase relates, together with any
applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
(Please print name and address)
Dated:
Name of Holder:
(Print)
(By:)
(Name:)
(Title:)
<PAGE>
(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant)
<PAGE>
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of InnovaCom, Inc. to
which the within Warrant relates and appoints ________________ attorney to
transfer said right on the books of InnovaCom, Inc. with full power of
substitution in the premises.
Dated:
- ---------------, ----
---------------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
---------------------------------------
Address of Transferee
---------------------------------------
---------------------------------------
In the presence of:
- --------------------------
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of December 15, 1998, between InnovaCom, Inc. a Nevada
corporation (the "Company"), and JNC Strategic Fund Ltd., a Cayman Islands
company (the "Purchaser").
This Agreement is made pursuant to the Convertible Debenture
Purchase Agreement, dated as of the date hereof between the Company and the
Purchaser (the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common control
with such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.001
per share.
"Debentures" means Company's 7% Secured Convertible Debentures
due December 15, 2003 issued to the Purchaser pursuant to the Purchase
Agreement.
<PAGE>
"Effectiveness Date" means May 15, 1999.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means March 15, 1999.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Initial Closing Date" shall have the meaning set forth in the
Purchase Agreement.
"Losses" shall have the meaning set forth in Section 5(a).
"New York Courts" shall have the meaning set forth in Section
7(j).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable upon (a) conversion in full of the Debentures, (b) exercise of the
Warrants and (c) payment of interest in respect of the Debentures; provided,
however that in order to account for the fact that the number of shares of
Common Stock that are issuable upon conversion of Debentures is determined in
part upon the market price of the Common Stock at the time of conversion,
<PAGE>
Registrable Securities contemplated by clause (a) of this definition shall be
deemed to include not less than 200% of the number of shares of Common Stock
into which the Debentures are convertible, assuming such conversion occurred on
the Closing Date or the Filing Date (whichever date yields a lower Conversion
Price, as such term is defined in the Debentures). The initial Registration
Statement shall cover at least such number of shares of Common Stock as equals
the sum of (x) 200% of the number of shares of Common Stock into which the
Debentures are convertible, assuming such conversion occurred on the Closing
Date or the Filing Date (whichever date yields a lower Conversion Price), (y)
interest thereon and (z) the shares of Common Stock issuable upon exercise in
full of the Warrants. The Company shall be required to file additional
Registration Statements to the extent the actual number of shares of Common
Stock into which Debentures are convertible (together with interest thereon) and
Warrants are exercisable exceeds the number of shares of Common Stock initially
registered in accordance with the immediately prior sentence. The Company shall
have 10 Business Days to file such additional Registration Statement after
notice of the requirement thereof, which the Holders may give at such time when
the number of shares of Common Stock as are issuable upon conversion of
Debentures exceeds 175% of the number of shares of Common Stock into which
Debentures are convertible, assuming such conversion occurred on the Closing
Date or the Filing Date (whichever yields a lower Conversion Price.)
"Registration Statement" means the registration statement
contemplated by Section 2(a) (covering such number of Registrable Securities and
any additional Registration Statements contemplated in the definition of
Registrable Securities), including (in each case) the Prospectus, amendments and
supplements to such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference or deemed to be incorporated by reference in such registration
statement.
"Rule 158" means Rule 158 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means one law firm acting as counsel to the
Holders, for which the Holders will be reimbursed by the Company pursuant to
Section 4.
<PAGE>
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"Warrants" means the Common Stock purchase warrant issued to the
Purchaser on the Closing Date and to Cardinal Capital Management, Inc. and
Elizabeth Hagopian pursuant to the Purchase Agreement.
2. Shelf Registration
(a) On or prior to the Filing Date the Company shall prepare and
file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement shall be on Form SB-2 (or, if the
Company is not permitted to register the resale of the Registrable Securities on
Form SB-2, the Registration Statement shall be on such other appropriate form in
accordance herewith as the Holders of a majority in interest of the Registrable
Securities may consent). The Company shall use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
Effectiveness Date, and shall use its best efforts to keep such Registration
Statement continuously effective under the Securities Act until the date which
is three years after the date that such Registration Statement is declared
effective by the Commission or such earlier date when all Registrable Securities
covered by such Registration Statement have been sold or may be sold without
volume restrictions pursuant to Rule 144(k) promulgated under the Securities
Act, as determined by the counsel to the Company pursuant to a written opinion
letter to such effect, addressed and acceptable to the Company's transfer agent
(the "Effectiveness Period"); provided, however, that the Company shall not be
deemed to have used its best efforts to keep the Registration Statement
effective during the Effectiveness Period if it voluntarily takes any action
that would result in the Holders not being able to sell the Registrable
Securities covered by such Registration Statement during the Effectiveness
Period, unless such action is required under applicable law or the Company has
filed a post-effective amendment to the Registration Statement and the
Commission has not declared it effective.
(b) If the Holders of a majority of the Registrable Securities so
elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing underwriters can be sold, and such amount
shall be allocated pro rata among the Holders proposing to sell Registrable
Securities in such Underwritten Offering.
<PAGE>
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company. No
Holder may participate in any Underwritten Offering hereunder unless such Person
(i) agrees to sell its Registrable Securities on the basis provided in any
underwriting agreements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement (and any additional Registration
Statements as may be required) in accordance with Section 2(a) which shall
contain the "Plan of Distribution" attached hereto as Annex A (except if
otherwise directed by the Holders), and cause the Registration Statement to
become effective and remain effective as provided herein; provided, however,
that not less than five (5) Business Days prior to the filing of the
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall (i) furnish to the
Holders, their Special Counsel and any managing underwriters, copies of all such
documents proposed to be filed, which documents (other than those incorporated
or deemed to be incorporated by reference) will be subject to the review of such
Holders, their Special Counsel and such managing underwriters, and (ii) cause
its officers and directors, counsel and independent certified public accountants
to respond to such inquiries as shall be necessary, in the opinion of respective
counsel to such Holders and such underwriters, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company shall not
file the Registration Statement or any such Prospectus or any amendments or
supplements thereto to which the Holders of a majority of the Registrable
Securities, their Special Counsel, or any managing underwriters, shall
reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as practicable to any comments
received from the Commission with respect to the Registration Statement or any
amendment thereto and promptly provide the Holders true and complete copies of
all correspondence from and to the Commission relating to the Registration
<PAGE>
Statement; and (iv) comply with the provisions of the Securities Act and the
Exchange Act with respect to the disposition of all Registrable Securities
covered by the Registration Statement during the applicable period in accordance
with the intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters immediately (and, in the
case of (i)(A) below, not less than five (5) days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
(1) Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the
Holders) and (C) with respect to the Registration Statement or any
post-effective amendment, when the same is no longer subject to review by the
Commission or has become effective; (ii) of any request by the Commission or any
other Federal or state governmental authority for amendments or supplements to
the Registration Statement or Prospectus or for additional information; (iii) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement covering any or all of the Registrable Securities or
the initiation of any Proceedings for that purpose; (iv) if at any time any of
the representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection with
<PAGE>
an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as such
managing underwriters and such Holders reasonably agree should be included
therein and (ii) make all required filings of such Prospectus supplement or such
post-effective amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; provided, however, that the Company shall not be
required to take any action pursuant to this Section 3(e) that would, in the
opinion of counsel for the Company, violate applicable law or be materially
detrimental to the business prospects of the Company.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent reasonably
requested by such Person (including those previously furnished or incorporated
by reference) promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and
any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use
its best efforts to register or qualify or cooperate with the selling Holders,
any underwriters and their Special Counsel in connection with the registration
or qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions as any Holder or underwriter requests in writing, to keep
each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, however,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction where it
is not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement, which
certificates shall be free of all restrictive legends, and to enable such
<PAGE>
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request at least three Business
Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on any securities exchange,
quotation system, market or over-the-counter bulletin board, if any, on which
similar securities issued by the Company are then listed as and when required
pursuant to the Purchase Agreement.
(l) In the case of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and substance as
is customary in Underwritten Offerings) and take all such other actions in
connection therewith (including those reasonably requested by any managing
underwriters and the Holders of a majority of the Registrable Securities being
sold) in order to expedite or facilitate the disposition of such Registrable
Securities, and whether or not an underwriting agreement is entered into, (i)
make such representations and warranties to such Holders and such underwriters
as are customarily made by issuers to underwriters in underwritten public
offerings, and confirm the same if and when requested; (ii) obtain and deliver
copies thereof to each Holder and the managing underwriters, if any, of opinions
of counsel to the Company and updates thereof addressed to each selling Holder
and each such underwriter, in form, scope and substance reasonably satisfactory
to any such managing underwriters and Special Counsel to the selling Holders
covering the matters customarily covered in opinions requested in Underwritten
Offerings and such other matters as may be reasonably requested by such Special
Counsel and underwriters; (iii) immediately prior to the effectiveness of the
Registration Statement or at the time of delivery of any Registrable Securities
sold pursuant thereto (at the option of the underwriters), obtain and deliver
copies to the Holders and the managing underwriters, if any, of "cold comfort"
letters and updates thereof from the independent certified public accountants of
the Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by the
Company for which financial statements and financial data is, or is required to
be, included in the Registration Statement), addressed to each Person and in
such form and substance as are customary in connection with Underwritten
Offerings; (iv) if an underwriting agreement is entered into, the same shall
contain indemnification provisions and procedures no less favorable to the
selling Holders and the underwriters, if any, than those set forth in Section 7
<PAGE>
(or such other provisions and procedures acceptable to the managing
underwriters, if any, and holders of a majority of Registrable Securities
participating in such Underwritten Offering; and (v) deliver such documents and
certificates as may be reasonably requested by the Holders of a majority of the
Registrable Securities being sold, their Special Counsel and any managing
underwriters to evidence the continued validity of the representations and
warranties made pursuant to clause 3(l)(i) above and to evidence compliance with
any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, a
representative of such Holders, an underwriter participating in any disposition
of Registrable Securities, and an attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than 45 days after the end of any 12-month period (or 90 days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or best efforts Underwritten Offering
and (ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company after the effective date of
the Registration Statement, which statement shall cover said 12-month period, or
end shorter periods as is consistent with the requirements of Rule 158.
(o) The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such selling
Holder as is required by law to be disclosed in the Registration Statement and
the Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
<PAGE>
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder agrees by its acquisition of such Registrable
Securities that (i) it will not offer or sell any Registrable Securities under
the Registration Statement until it has received copies of the Prospectus as
then amended or supplemented as contemplated in Section 3(g) and notice from the
Company that such Registration Statement and any post-effective amendments
thereto have become effective as contemplated by Section 3(c) and (ii) it will
comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated by
Section 3(j), or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall, except as and to the extent
specified in Section 4(c), be borne by the Company whether or not pursuant to an
Underwritten Offering and whether or not the Registration Statement is filed or
becomes effective and whether or not any Registrable Securities are sold
pursuant to the Registration Statement. The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect
to filings required to be made with The Nasdaq Stock Market, Inc. and each other
securities exchange or market on which Registrable Securities are required
hereunder to be listed and (B) in compliance with state securities or Blue Sky
laws (including, without limitation, fees and disbursements of counsel for the
underwriters or Holders in connection with Blue Sky qualifications of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the managing
underwriters, if any, or the Holders of a majority of Registrable Securities may
designate)), (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if
the printing ofprospectuses is requested by the managing underwriters, if any,
or by the holders of a majority of the Registrable Securities included in the
<PAGE>
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and Special Counsel for the
Holders, in the case of the Special Counsel, to a maximum amount of $5,000, (v)
Securities Act liability insurance, if the Company so desires such insurance,
and (vi) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by this
Agreement. In addition, the Company shall be responsible for all of its internal
expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement (including, without limi tation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit, the fees and expenses incurred in connection
with the listing of the Registrable Securities on any securities
exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to
the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants. By way of illustration which is not intended to
diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, settlements, judgments, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by or on behalf of such Holder expressly for use therein, or to the
extent that such information relates to such
<PAGE>
Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto. The Company shall notify
the Holders promptly of the institution, threat or assertion of any Proceeding
of which the Company is aware in connection with the transactions contemplated
by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or arising solely out of or based solely
upon any omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company specifically for inclusion
in the Registration Statement or such Prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
<PAGE>
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not
have the right to assume the defense thereof and such counsel shall be at the
expense of the Indemnifying Party). The Indemnifying Party shall not be liable
for any settlement of any such Proceeding effected without its written
onsent, which consent shall not be unreasonably withheld. No Indemnifying
Party shall, without the prior written consent of the Indemnified Party, effect
any settlement of any pending Proceeding in respect of which any Indemnified
Party is a party, unless such settlement includes an unconditional release
of such Indemnified Party from all liability on claims that are the subject
matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within 10 Business Days of written notice thereof to the Indemnifying
Party (regardless of whether it is ultimately determined that an Indemnified
Party is not entitled to indemnification hereunder; provided, that the
Indemnifying Party may require such Indemnified Party to undertake to reimburse
all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative intent,
<PAGE>
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limita tions set forth
in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allo cation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), a Purchaser shall not be
required to contribute, in the aggregate, any amount in excess of the amount by
which the proceeds actually received by such Purchaser from the sale of the
Registrable Securities subject to the Pro ceeding exceeds the amount of any
damages that such Purchaser has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Except as and to the extent
specifically set forth in Schedule 6(b) attached hereto, neither the Company nor
any of its subsidiaries has, as of the date hereof, nor shall the Company or any
of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specifically set forth in
Schedule 6(b) attached hereto, neither the Company nor any of its subsidiaries
has previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person. Without limiting the generality
of the foregoing, without the written consent of the Holders of a majority of
the then outstanding Registrable Securities, the Company shall not grant to any
Person the right to request the Company to register any securities of the
Company under the Securities Act unless the rights so granted are subject in all
respects to the prior rights in full of the Holders set forth herein, and are
not otherwise in conflict or inconsistent with the provisions of this Agreement.
(c) No Piggyback on Registrations. Except as and to the extent
specifically set forth in Schedule 6(b) attached hereto, neither the Company nor
any of its security holders (other than the Holders in such capacity pursuant
hereto) may include securities of the Company in the Registration Statement
other than the Registrable Securities, and the Company shall not enter into any
agreement providing any such right to any of its securityholders.
(d) Piggy-Back Registrations. If at any time during the
Effectiveness Period there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act) or their then equivalents relating to equity securities to
be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, then the Company
shall send to each holder of Registrable Securities written notice of such
determination and, if within twenty (20) days after receipt of such notice, any
such holder shall so request in writing, the Company shall include in such
registration statement all or any part of the Registrable Securities such holder
requests to be registered. No right to registration of Registrable Securities
under this Section shall be construed to limit any registration otherwise
required hereunder.
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least a majority of the then outstanding Registrable
Securities; provided, however, that, for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company are not deemed outstanding. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of at least a majority of the Registrable Securities to which such
waiver or consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(f) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
<PAGE>
facsimile telephone number specified in this Section prior to 7:00 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 7:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to the Company: InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, California 95054
Facsimile No.: (408) 727-8778
Attn: Chief Financial Officer
With copies to: Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Facsimile No.: (916) 442-3442
Attn: Scott Bartel
If to the 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
<PAGE>
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the stock transfer
books of the Company or such other address as may be designated in
writing hereafter, in the same manner, by such Person.
(g) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. A Purchaser may assign its respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement (for such
purposes, Opportunity shall be treated as a Purchaser under the Purchase
Agreement).
(h) Assignment of Registration Rights. The rights of a Purchaser
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by such Purchaser to any assignee or transferee of all
or a portion of the Debentures, the Warrants and other Common Stock warrants
referenced in the definition of Registrable Securities or Registrable Securities
without the consent of the Company if: (i) such Purchaser agrees in writing with
the transferee or assignee to assign such rights, and a copy of such agreement
is furnished to the Company within a reasonable time after such
assignment, (ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to such registration
rights are being transferred or assigned, (iii) at or before the time the
Company receives the written notice contemplated by clause (ii) of this Section,
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions of this Agreement, and (iv) such transfer shall have been made
in accordance with the applicable requirements of the Purchase Agreement. The
rights to assignment shall apply to the Purchaser's (and to subsequent)
successors and assigns.
(i) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(j) Governing Law; Submission to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the laws of the State of
<PAGE>
New York, without regard to principles of conflicts of law. Each party hereby
irrevocably submits to the exclusive jurisdiction of any New York state court
sitting in the Borough of Manhattan, the state and federal courts sitting in the
City of New York or any federal court sitting in the Borough of Manhattan in the
City of New York (collectively, the "New York Courts") in respect of any
Proceeding arising out of or relating to this Agreement, and irrevocably accepts
for itself and in respect of its property, generally and unconditionally,
jurisdiction of the New York Courts. The Company irrevocably waives to the
fullest extent it may effectively do so under applicable law any objection that
it may now or hereafter have to the laying of the venue of any such proceeding
brought in any New York Court and any claim that any such Proceeding brought in
any New York Court has been brought in an inconvenient forum. Nothing herein
shall affect the right of any Holder. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by receiving a copy thereof sent to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
(k) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(l) Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed
the remaining terms, provisions, covenants and restrictions without including
any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(m) Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(n) Shares Held by The Company and its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than the Purchasers or transferees or successors or
assigns thereof if such Persons are deemed to be Affiliates solely by reason of
their holdings of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
INNOVACOM, INC.
By: ___________________________
Name:
Title:
JNC STRATEGIC FUND LTD.
By: ___________________________
Name:
Title:
<PAGE>
Annex A
Plan of Distribution
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o Broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser)
<PAGE>
in amounts to be negotiated. The Selling Stockholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
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 the Transaction
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
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 part 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.
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<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
JNC STRATEGIC FUND LTD.
By:_______________________________
Its:______________________________
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of January 14, 1999
(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 $750,000 of the
Company's 7% Secured Convertible Debentures, due January 14, 2004 (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
$750,000. 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 187,500 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) $750,000 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>2
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>3
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>4
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>5
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>6
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>7
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>8
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>9
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>10
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>11
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>12
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 Closing Date, except
(i) the granting of options or warrants to employees, officers and directors,
and the issuance of shares upon exercise of options granted, under any stock
option plan heretofore or hereinafter duly adopted by the Company, (ii) shares
issued upon exercise of any currently outstanding warrants and upon conversion
of any currently outstanding convertible preferred stock in each case disclosed
in Schedule 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 substantially the terms set forth in the Subsequent Financing
Notice. If Encore shall fail to notify the Company of its intention to enter
into
<PAGE>13
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.
(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
<PAGE>14
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
Second Amended and Restated Security Agreement, dated as of June 29, 1998 (as
amended and restated on August 28, 1998 and December 15, 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, $3,500 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 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
<PAGE>15
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.
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
<PAGE>
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 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
<PAGE>
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature page were an original
thereof.
4.11 Severability. In case any one or more of the provisions of
this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement shall
not in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
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:
<PAGE>19
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
Between
INNOVACOM, INC.
and
JNC STRATEGIC FUND LTD.
-----------------------------
January 14, 1999
------------------------------
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
No. E-1 U.S. $750,000
INNOVACOM, INC.
7% SECURED CONVERTIBLE DEBENTURE DUE JANUARY 14, 2004
FOR VALUE RECEIVED, InnovaCom, Inc., a corporation organized
under the laws of the Nevada and having a principal place of business at 3400
Garrett Drive, Santa Clara, California 95054 (the "Company") promises to pay to
JNC Strategic Fund Ltd., or registered assigns (the "Holder"), the principal sum
of Seven Hundred Fifty Thousand Dollars ($750,000), on or prior to January 14,
2004 or such earlier date as this Debenture (the Debenture") is required to be
repaid as provided hereunder (the "Maturity Date") and to pay interest to the
Holder on the principal sum at the rate of 7% per annum, payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year while
this Debenture is outstanding and on each Conversion Date (as defined in Section
4(a)(i)), commencing on the earlier to occur of a Conversion Date (as defined
herein) for such principal amount and March 31, 1999. Interest shall accrue
daily commencing on the Original Issue Date (as defined in Section 6) until
payment in full of the principal sum, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been made.
Interest shall be calculated on the basis of a 360-day year and for the actual
number of days elapsed. Interest hereunder will be paid to the Person (as
defined in Section 6) in whose name this Debenture (or one or more predecessor
Debentures) is registered on the records of the Company regarding registration
and transfers of this Debenture (the "Debenture Register"). All overdue, accrued
and unpaid interest and other amounts due hereunder shall bear interest at the
rate of 15% per annum (to accrue daily) from the date such interest is due
hereunder through and including the date of payment. The principal of, and
interest on, this Debenture are payable in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts, at the address of the Holder last appearing on the
Debenture Register, except that interest due on the principal amount (but not
overdue interest) may, at the Company's option, be paid in shares of Common
Stock (as defined in Section 6) calculated based upon the Conversion Price (as
defined below) on the date such interest was due. All amounts due hereunder
other than such interest shall be paid in cash. Notwithstanding anything to the
contrary contained herein, the Company may not issue shares of Common Stock in
payment of interest on the principal amount if: (i) the number of shares of
Common Stock at the time authorized, unissued and unreserved for all purposes,
or held as treasury stock, is insufficient to pay interest hereunder in
<PAGE>2
shares of Common Stock; (ii) such shares are not either registered for resale
pursuant to an Underlying Securities Registration Statement (as defined in
Section 6) or freely transferable without volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), as determined by counsel to the Company pursuant to a written opinion
letter addressed and in form and substance acceptable to the Holder and the
transfer agent for such shares; or (iii) such shares are not Actively Traded (as
defined herein) (or listed or quoted for trading on the American Stock Exchange,
Nasdaq National Market, Nasdaq SmallCap Market or The New York Stock Exchange,
and any other exchange on which the Common Stock is then listed for trading
(each, a "Subsequent Market")). 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.
This Debenture is subject to the following additional provisions:
Section 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same but shall not be issuable in
denominations of less than integral multiplies of Fifty Thousand Dollars
($50,000) unless such amount represents the full principal balance of Debentures
outstanding to such Holder. No service charge will be made for such registration
of transfer or exchange.
Section 2. This Debenture has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Purchase Agreement. Prior to due presentment to the Company for transfer of this
Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Debenture Register as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.
Section 3. Events of Default.
(a) "Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) any default in the payment of the principal of, interest on
or liquidated damages in respect of, this Debenture, free of any claim
of subordination, as and when the same shall become due and payable
(whether on the applicable quarterly interest payment date, a Conversion
Date or the Maturity Date or by acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of, this Debenture, the Purchase Agreement, the Security
Agreement or the Registration Rights Agreement, and such failure
<PAGE>3
or breach shall not have been remedied within 10 days after the date on
which notice of such failure or breach shall have been given;
(iii) the Company or any of its subsidiaries shall commence, or
there shall be commenced against the Company or any such subsidiary a
case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences
any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is commenced
against the Company or any subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period of
60 days; or the Company or any subsidiary thereof is adjudicated
insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or the Company or any subsidiary
thereof suffers any appointment of any custodian or the like for it or
any substantial part of its property which continues undischarged or
unstayed for a period of 60 days; or the Company or any subsidiary
thereof makes a general assignment for the benefit of creditors; or the
Company shall fail to pay, or shall state that it is unable to pay, or
shall be unable to pay, its debts generally as they become due; or the
Company or any subsidiary thereof shall call a meeting of its creditors
with a view to arranging a composition or adjustment of its debts; or
the Company or any subsidiary thereof shall by any act or failure to act
indicate its consent to, approval of or acquiescence in any of the
foregoing; or any corporate or other action is taken by the Company or
any subsidiary thereof for the purpose of effecting any of the
foregoing;
(iv) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement or
other instrument under which there may be issued, or by which there may
be secured or evidenced any indebtedness of the Company in an amount
exceeding one hundred thousand dollars ($100,000), whether such
indebtedness now exists or shall hereafter be created and such default
shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable;
(v) the Common Stock shall fail to be Actively Traded or fail to
be listed or quoted for trading on any Subsequent Market if after the
Original Issue Date the Common Stock shall be listed or quoted for
trading on any such Subsequent Market, or if the Common Stock shall be
suspended from trading thereon without being actively traded, relisted
or having such suspension lifted, as the case may be, within fifteen
(15) days;
(vi) the Company shall be a party to any merger or consolidation
pursuant to which the Company shall not be the surviving entity (or, if
the Company is the surviving entity, the Company shall issue or sell to
another Person, or group thereof, in excess of 50% of the Common Stock)
or shall dispose of all or substantially all of its assets in one or
more transactions, or shall redeem more than a de minimis number of
shares of Common Stock (other than redemptions of Underlying Shares);
<PAGE>4
(vii) an Underlying Securities Registration Statement shall not
have been declared effective by the Securities and Exchange Commission
(the "Commission") on or prior to the 180th day after the Original Issue
Date;
(viii) an Event (as hereinafter defined) shall not have been
cured to the satisfaction of the Holder prior to the expiration of
thirty (30) days from the Event Date (as hereinafter defined) relating
thereto (other than an Event resulting from a failure of an Underlying
Securities Registration Statement to be declared effective by the
Commission on or prior to the 90th day after the Original Issue Date);
or
(ix) the Company shall fail to deliver certificates to the Holder
prior to the 15th day after the Conversion Date pursuant to Section
4(b).
(b) If any Event of Default occurs and is continuing the full
principal amount of this Debenture (and, at the Holder's option, all other
Debentures then held by such Holder), together with interest and other amounts
owing in respect thereof, to the date of acceleration, to be, shall become,
immediately due and payable in cash. The aggregate amount payable upon an Event
of Default in respect of the Debentures shall be equal to the sum of (i) the
Mandatory Prepayment Amount (as defined in Section 6) plus (ii) the product of
(A) the number of Underlying Shares issued in respect of conversions or as
payment of interest hereunder and then held by the Holder and (B) the Per Share
Market Value on the date prepayment is demanded or the date the full prepayment
price is paid, whichever is greater. The Holder need not provide and the Company
hereby waives any presentment, demand, protest or other notice of any kind, and
the Holder may immediately and without expiration of any grace period enforce
any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such declaration may be rescinded and
annulled by Holder at any time prior to payment hereunder. No such rescission or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.
Section 4. Conversion.
(a) (i) This Debenture shall be convertible into shares of Common
Stock at the option of the Holder, in whole or in part at any time and from time
to time, from and after the 100th day following the Original Issue Date and
prior to the close of business on the Maturity Date. The number of shares of
Common Stock as shall be issuable upon a conversion hereunder shall be
determined by dividing the outstanding principal amount of this Debenture to be
converted, plus all accrued but unpaid interest thereon, by the Conversion Price
(as defined below), each as subject to adjustment as provided hereunder. The
Holder shall effect conversions by surrendering this Debenture (or such portions
thereof) to be converted, together with the form of conversion notice attached
hereto as Exhibit A (a "Conversion Notice") to the Company. Each Conversion
Notice shall specify the principal amount of Debentures to be converted and the
date on which such conversion is to be effected, which date may not be prior to
the date such Conversion Notice is deemed to have been delivered hereunder (a
"Conversion Date"). If no Conversion Date is specified in a Conversion Notice,
the Conversion Date shall be the date that such Conversion Notice is deemed
delivered hereunder. Subject to Section 4(b) hereof, each Conversion Notice,
once given, shall be irrevocable. If the Holder is converting less than all of
the principal amount represented by the Debenture(s) tendered by the Holder with
the Conversion Notice, or if a conversion hereunder
<PAGE>5
cannot be effected in full for any reason, the Company shall honor such
conversion to the extent permissible hereunder and shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 4(b)) a new
Debenture for such principal amount as has not been converted.
(ii) Certain Conversion Restrictions.
(A) The Holder agrees not to convert Debentures to
the extent such
conversion would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in
excess of 4.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of the Debentures held by such Holder
after application of this Section. The Holder shall have the sole authority and
obligation to determine whether the restriction contained in this Section
applies and, to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which Debentures are
convertible shall be in the sole discretion of the Holder. The provisions of
this Section may be waived by a Holder (but only as to itself and not to any
other Holder) upon not less than 75 days prior notice to the Company (in which
case, the Holder shall make such filings with the Commission, including under
Rule 13D or 13G, as are required by applicable law). Other Holders shall be
unaffected by any such waiver.
(B) The Holder agrees not to convert Debentures to
the extent such
conversion would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in
excess of 9.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of the Debentures held by such Holder
after application of this Section. The Holder shall have the sole authority and
obligation to determine whether the restriction contained in this Section
applies and, to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which Debentures are
convertible shall be in the sole discretion of the Holder. The provisions of
this Section may be waived by a Holder (but only as to itself and not to any
other Holder) upon not less than 75 days prior notice to the Company. Other
Holders shall be unaffected by any such waiver.
(b) Not later than three Trading Days after the Conversion Date,
the Company will deliver to the Holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number of
shares of the Common Stock being acquired upon the conversion of Debentures,
(ii) Debentures in a principal amount equal to the principal amount of
Debentures not converted; (iii) a bank check in the amount of all accrued and
unpaid interest (if the Company has elected and is permitted hereunder to pay
accrued interest in cash), together with all other amounts then due and payable
in accordance with the terms hereof, in respect of Debentures tendered for
conversion and (iv) if the Company has elected to pay accrued interest in shares
of the Common Stock, certificates, which shall be free of restrictive legends
and trading restrictions (other than those required by Section 3.1(b) of the
Purchase Agreement), representing such number of shares of the Common Stock as
equals such interest divided by the Conversion Price calculated on the
Conversion Date; provided, however, that the Company shall not be obligated to
issue certificates evidencing the shares of the Common Stock issuable upon
conversion of the principal amount of Debentures until Debentures are delivered
for conversion to the Company or the Holder notifies the Company
<PAGE>6
that such Debenture has been mutilated, lost, stolen or destroyed and complies
with Section 9 hereof. If in the case of any Conversion Notice such certificate
or certificates, including for purposes hereof, any shares of the Common Stock
to be issued on the Conversion Date on account of accrued but unpaid interest
hereunder, are not delivered to or as directed by the Holder by the third
Trading Day after a Conversion Date, the Holder shall be entitled by written
notice to the Company at any time on or before its receipt of such certificate
or certificates thereafter, to rescind such conversion (whether subject to a
Holder or a Company Conversion Notice), in which event the Company shall
immediately return the Debentures tendered for conversion. If the Company fails
to deliver to the Holder such certificate or certificates pursuant to this
Section, including for purposes hereof, any shares of the Common Stock to be
issued on the Conversion Date on account of accrued but unpaid interest
hereunder, prior to the fifth Trading Day after the Conversion Date, the Company
shall pay to such Holder, in cash, as liquidated damages and not as a penalty,
$1,500 for each day thereafter until the Company delivers such certificates
(such amount shall be also be due for each Trading Day after the date that the
Holder may rescind such conversion until such date as the Holder shall have
received the return of the principal amount of Debentures relating to such
rescission). If the Company fails to deliver to the Holder such certificate or
certificates pursuant to this Section prior to the 15th day after the Conversion
Date, the Company shall, upon notice from the Holder, prepay such portion of the
aggregate of the principal amount of Debentures then held by such Holder, as
requested by such Holder, for the Mandatory Prepayment Amount, in cash. If any
portion of the Mandatory Prepayment Amount pursuant to this Section is not paid
within seven days after notice therefor is deemed delivered hereunder, the
Company will pay interest on the Mandatory Prepayment Amount at a rate of 15%
per annum (to accrue daily), in cash to such Holder, accruing from such seventh
day until the Mandatory Prepayment Amount, plus all accrued interest thereon, is
paid in full.
(c) (i) The conversion price (the "Conversion Price") in effect
on any Conversion Date shall be the lesser of (A) $.1275 (the "Initial
Conversion Price") and (B) the Applicable Percentage (as defined in Section 6)
multiplied by the Average Price (as defined herein) calculated on the Conversion
Date; provided, that the five (5) Trading Day period contemplated in the Average
Price shall be extended for the number of Trading Days, if any, during such
period in which (A) the shares of Common Stock are not Actively Traded or
suspended or delisted from trading on any Subsequent Market, (B) after the date
declared effective by the Commission, the Underlying Securities Registration
Statement is not effective, or (C) after the date declared effective by the
Commission, the Prospectus included in the Underlying Securities Registration
Statement may not be used by the Holder for the resale of Underlying Shares,
provided, further, that if (a) an Underlying Securities Registration Statement
is not filed on or prior to the Filing Date (as defined in the Registration
Rights Agreement), or (b) the Company fails to file with the Commission a
request for acceleration in accordance with Rule 12d1-2 promulgated under the
Securities Exchange Act of 1934, as amended, within five (5) days of the date
that the Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Securities Registration Statement will not be
"reviewed" or is not subject to further review or comment by the Commission, or
(c) the Underlying Securities Registration Statement is not declared effective
by the Commission on or prior to the Effectiveness Date (as defined in the
Registration Rights Agreement), or (d) such Underlying Securities Registration
Statement is filed with and declared effective by the Commission but thereafter
ceases to be effective as to all Registrable Securities (as such term is defined
in the Registration Rights Agreement) for more than twenty (20) days at any time
prior to the expiration
<PAGE>7
of the "Effectiveness Period" (as such term as defined in the Registration
Rights Agreement), without being succeeded by a subsequent Underlying Securities
Registration Statement filed with and declared effective by the Commission
within twenty (20) days, or (e) trading in the Common Stock shall fail to be
Actively Traded or if the Common Stock shall be suspended or delisted from
trading on any Subsequent Market for any reason for more than five (5) days, or
(f) the conversion rights of the Holders of Debentures are suspended for any
reason or if the Holder is not permitted to resell Registrable Securities under
the Underlying Securities Registration Statement, or (g) an amendment to the
Underlying Securities Registration Statement is not filed by the Company with
the Commission within fifteen (15) days of the Commission's notifying the
Company that such amendment is required in order for the Underlying Securities
Registration Statement to be declared effective (any such failure being referred
to as an "Event," and for purposes of clauses (a), (c) and (f) the date on which
such Event occurs, or for purposes of clauses (b) and (e) the date on which such
five (5) day period is exceeded, or for purposes of clause (d) the date which
such twenty (20) day period is exceeded, or for purposes of clause (g) the date
on which such fifteen (15) day period is exceeded, being referred to as "Event
Date"), the Company shall pay, in cash, as liquidated damages and not as a
penalty, on the Event Date and on the first day of each month thereafter until
the Event is cured, 1.5% of the aggregate principal amount of Debentures then
outstanding pro rata to the holders thereof in accordance with their holdings
thereof. The provisions of this Section are not exclusive and shall in no way
limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures are outstanding,
(a) shall pay a stock dividend or otherwise make a distribution or distributions
on shares of its Common Stock or any other equity or equity equivalent
securities payable in shares of the Common Stock, (b) subdivide outstanding
shares of the Common Stock into a larger number of shares, (c) combine
outstanding shares of the Common Stock into a smaller number of shares, or (d)
issue by reclassification of shares of the Common Stock any shares of capital
stock of the Company, the Initial Conversion Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding before such event and of
which the denominator shall be the number of shares of the Common Stock
outstanding after such event. Any adjustment made pursuant to this Section shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
(iii) If the Company, at any time while any Debentures are outstanding, shall
issue rights or warrants to all holders of the Common Stock (and not to Holders
of Debentures) entitling them to subscribe for or purchase shares of the Common
Stock at a price per share less than the Per Share Market Value of the Common
Stock at the record date mentioned below, the Initial Conversion Price shall be
multiplied by a fraction, of which the denominator shall be the number of shares
of the Common Stock (excluding treasury shares, if any) outstanding on the date
of issuance of such rights or warrants plus the number of additional shares of
the Common Stock offered for subscription or purchase, and of which the
numerator shall be the number of shares of the Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such rights or warrants
plus the number of shares which the aggregate offering price of the total number
of shares so offered would purchase at such Per Share Market Value. Such
adjustment shall be made
<PAGE>8
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights or warrants. However, upon the expiration of any right or
warrant to purchase shares of the Common Stock the issuance of which resulted in
an adjustment in the Initial Conversion Price pursuant to this Section, if any
such right or warrant shall expire and shall not have been exercised, the
Initial Conversion Price shall immediately upon such expiration be recomputed
and effective immediately upon such expiration be increased to the price which
it would have been (but reflecting any other adjustments in the Initial
Conversion Price made pursuant to the provisions of this Section 4 after the
issuance of such rights or warrants) had the adjustment of the Initial
Conversion Price made upon the issuance of such rights or warrants been made on
the basis of offering for subscription or purchase only that number of shares of
the Common Stock actually purchased upon the exercise of such rights or warrants
actually exercised.
(iv) If the Company, at any time while Debentures are
outstanding, shall
distribute to all holders of the Common Stock (and not to Holders of Debentures)
evidences of its indebtedness or assets or rights or warrants to subscribe for
or purchase any security, then in each such case the Initial Conversion Price at
which Debentures shall thereafter be convertible shall be determined by
multiplying the Initial Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of the Common Stock determined as of the record date mentioned
above, and of which the numerator shall be such Per Share Market Value of the
Common Stock on such record date less the then fair market value at such record
date of the portion of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of the Common Stock as determined by the
Board of Directors in good faith; provided, however, that in the event of a
distribution exceeding ten percent (10%) of the net assets of the Company, such
fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the holders of a majority in interest of Debentures then
outstanding; and provided, further, that the Company, after receipt of the
determination by such Appraiser shall have the right to select an additional
Appraiser, in good faith, in which case the fair market value shall be equal to
the average of the determinations by each such Appraiser. In either case the
adjustments shall be described in a statement provided to the holders of
Debentures of the portion of assets or evidences of indebtedness so distributed
or such subscription rights applicable to one share of the Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, the Holder of this Debenture shall have the
right thereafter to, at its option, (A) convert the then outstanding principal
amount, together with all accrued but unpaid interest and any other amounts then
owing hereunder in respect of this Debenture only into the shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of the Common Stock following such reclassification or share exchange,
and the Holders of the Debentures shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common Stock of
the Company into which the then outstanding principal amount, together with all
<PAGE>9
accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled or (B) require the
Company to prepay, from funds legally available therefor at the time of such
prepayment, the aggregate of its outstanding principal amount of Debentures,
plus all interest and other amounts due and payable thereon, at a price
determined in accordance with Section 3(b). The entire prepayment price shall be
paid in cash. This provision shall similarly apply to successive
reclassifications or share exchanges.
(vi) All calculations under this Section 4 shall be made
to the nearest cent
or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Initial Conversion Price is adjusted
pursuant to any of
Section 4(c)(ii) - (v), the Company shall promptly mail to each Holder of
Debentures a notice setting forth the Initial Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(viii) If:
A. the Company shall declare a dividend (or any other distribution) on
its Common Stock; or
B. the Company shall declare a special nonrecurring cash dividend
on or a redemption of its Common Stock; or
C. the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
D. the approval of any stockholders of the Company shall be required
in connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share of exchange whereby the Common Stock is converted into
other securities, cash or property; o
E. the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of the Debentures, and shall cause to be mailed to the
Holders of Debentures at their last addresses as they shall appear upon the
stock books of the Company, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to
<PAGE>10
be entitled to such dividend, distributions, redemption, rights or warrants are
to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Debentures during the 30-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(d) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued shares of the Common Stock
solely for the purpose of issuance upon conversion of the Debentures and payment
of interest on the Debentures, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(c)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of the Common Stock that shall
be so issuable shall, upon issue, be duly and validly authorized, issued and
fully paid, nonassessable and, if the Underlying Securities Registration
Statement has been declared effective under the Securities Act, freely
tradeable.
(e) Upon a conversion hereunder the Company shall not be required
to issue stock certificates representing fractions of shares of the Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(f) The issuance of certificates for shares of the Common Stock
on conversion of the Debentures shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Any and all notices or other communications or deliveries to
be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at
3400 Garrett Drive, Santa Clara, California 95054 (facsimile number (408)
727-8778), attention Chief Financial Officer, or such other address or facsimile
number as the Company may specify for such purposes by notice to the Holders
delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
<PAGE>11
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to each Holder of the Debentures at the facsimile telephone
number or address of such Holder appearing on the books of the Company, or if no
such facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 7:00 p.m. (New
York City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 7:00 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) four days
after deposit in the United States mail, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.
Section 5. Optional Prepayment.
(a) The Company shall have the right, exercisable at any time
upon thirty (30) Trading Days prior written notice to the Holders of the
Debentures to be prepaid (the "Optional Prepayment Notice") given at any time
after the 90th day following the date the Underlying Securities Registration
Statement has been declared effective by the Commission (provided that any
Trading Days that the holders are prohibited from utilizing such Underlying
Securities Registration Statement to resell Underlying Shares, despite their
desire to do so, shall be added to such 90 day period), to prepay, from funds
legally available therefor at the time of such prepayment, all or any portion of
the outstanding principal amount of the Debentures which have not previously
been repaid or for which Conversion Notices have not previously been delivered
hereunder, at a price equal to the Optional Prepayment Price (as defined below).
Any such prepayment by the Company shall be in cash and shall be free of any
claim of subordination. The Holders shall have the right to tender, and the
Company shall honor, Conversion Notices delivered prior to the expiration of the
thirtieth (30th) Trading Day after receipt by the Holders of an Optional
Prepayment Notice for such Debentures (such date, the "Optional Prepayment
Date").
(b) If any portion of the Optional Prepayment Price shall not be
paid by the Company by the Optional Prepayment Date, the Optional Prepayment
Price shall be increased by 15% per annum (to accrue daily) until paid (which
amount shall be paid as liquidated damages and not as a penalty). In addition,
if any portion of the optional Prepayment Price remains unpaid through the
expiration of the Optional Prepayment Date, the Holder subject to such
prepayment may elect by written notice to the Company to either (i) demand
conversion in accordance with the formula and the time period therefor set forth
in Section 4 of any portion of the principal amount of Debentures for which the
Optional Prepayment Price, plus accrued liquidated damages thereof, has not been
paid in full (the "Unpaid Prepayment Principal Amount"), in which event the
applicable Per Share Market Value shall be the lower of the Per Share Market
Value calculated on the Optional Prepayment Date and the Per Share Market Value
as of the Holder's written demand for conversion, or (ii) invalidate ab initio
such optional redemption, notwithstanding anything herein contained to the
contrary. If the Holder elects option (i) above, the Company shall within three
(3) Trading Days such election is deemed delivered hereunder to the Holder the
shares of Common Stock issuable upon conversion
<PAGE>12
of the Unpaid Prepayment Amount subject to such conversion demand and otherwise
perform its obligations hereunder with respect thereto; or, if the Holder elects
option (ii) above, the Company shall promptly, and in any event not later than
three Trading Days from receipt of notice of such election, return to the Holder
new Debentures for the full Unpaid Prepayment Principal Amount. If, upon an
election under option (i) above, the Company fails to deliver the shares of
Common Stock issuable upon conversion of the Unpaid Prepayment Principal Amount
prior to the fifth Trading Day after such election is deemed delivered
hereunder, the Company shall pay to the Holder in cash, as liquidated damages
and not as a penalty, $1,500 per day until the Company delivers such Common
Stock to the Holder.
(c) The "Optional Prepayment Price" for any Debentures shall
equal the sum of (i) the principal amount of Debentures to be prepaid, plus all
accrued and unpaid interest thereon, divided by the Conversion Price on (x) the
Optional Prepayment Date or (y) the date the Optional Prepayment Price is paid
in full, whichever is less, multiplied by the Average Price on (x) the Optional
Prepayment Date or (y) the date the Optional Prepayment Price is paid in full,
whichever is greater, and (ii) all other amounts, expenses, costs and liquidated
damages due in respect of such principal amount.
Section 6. Definitions. For the purposes hereof, the
following terms shall have the following meanings:
"Applicable Percentage" means (i) 80% for any conversion honored
prior to the 120th day after the Original Issue Date, (ii) 77.5% for any
conversion honored on or after the 120th day and prior to the 150th day after
the Original Issue Date, and (iii) 75% for any conversion honored on or after
the 150th day after the Original Issue Date. For purposes hereof, a conversion
is deemed to have been honored when the shares of Common Stock issuable in
respect of such conversion are received by the Holder in accordance with the
terms hereof.
"Average Price" on any date means the average Per Share Market
Value for the five (5) Trading Days immediately preceding such date.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Common Stock" means the Company's common stock, $.001 par value
per share, and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"Mandatory Prepayment Amount" for any Debentures shall equal the
sum of (i) the principal amount of Debentures to be prepaid, plus all accrued
and unpaid interest thereon, divided by the Conversion Price on (x) the date the
Mandatory Prepayment Amount is demanded or (y) the date the Mandatory Prepayment
Amount is paid in full, whichever is less, multiplied by the Average Price on
(x) the date the Mandatory Prepayment Amount is demanded or (y) the date the
Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all
other amounts, costs, expenses and liquidated damages due in respect of such
Debentures.
<PAGE>13
"Original Issue Date" shall mean the date of the first issuance
of any Debentures regardless of the number of transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence such
Debenture.
"Per Share Market Value" on any particular date means (a) the
closing bid price per share of the Common Stock on such date as quoted by
Bloomberg Information Services, Inc. ("Bloomberg"), or similar organizations or
agencies succeeding to its functions of reporting prices, or (b) if the Common
Stock is no longer reported by Bloomberg, or such similar organizations or
agencies, such closing bid price per share shall be determined by reference to
"Pink Sheet" quotes for the relevant conversion period as determined in good
faith by the Holder or (c) if the Common Stock is not then publicly traded, the
fair market value of a share of Common Stock as determined by an appraiser
selected in good faith by the Holders of a majority in interest of the
Debentures.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Debenture Purchase
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"Security Agreement" means the Security Agreement, dated as of
June 29, 1998, between the Company and the original Holder of Debentures, as
amended and restated on August 28, 1998, December 15, 1998 and the Original
Issue Date, and as may be further amended modified or supplemented from time to
time in accordance with its terms.
"Trading Day" means (a) a day on which the Common Stock is traded
on the Nasdaq Stock Market or other stock exchange or market on which the Common
Stock has been listed, or (b) if the Common Stock is not listed on the Nasdaq
Stock Market or any stock exchange or market, a day on which the Common Stock is
traded on the over-the-counter market, as reported by the OTC Bulletin Board, or
(c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which
the Common Stock is quoted on the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices).
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance with the
terms hereof.
"Underlying Securities Registration Statement" means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement, covering among other things the resale of the Underlying
Shares and naming the Holder as a "selling stockholder" thereunder.
<PAGE>14
Section 7. Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct obligation of
the Company. This Debenture ranks pari passu with all other Debentures now or
hereafter issued under the terms set forth herein. The Company may only
voluntarily prepay the outstanding principal amount on the Debentures in
accordance with Section 5 hereof.
Section 8. This Debenture shall not entitle the Holder to any of
the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
Section 9. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
Section 10. This Debenture shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The Company hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, or that such suit, action or proceeding is
improper. The Company hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
receiving a copy thereof sent to the Company at the address in effect for
notices to it under this instrument and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.
Section 11. Any waiver by the Company or the Holder of a breach
of any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to insist
upon strict adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver must be in writing.
Section 12. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
<PAGE>15
Section 13. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day (or, if such next succeeding Business Day falls
in the next calendar month, the preceding Business Day in the appropriate
calendar month).
Section 14. The payment obligations under this Debenture and the
obligations of the Company to the Holder arising upon the conversion of all or
any of the Debentures in accordance with the provisions hereof are secured
pursuant to the Security Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
<PAGE>16
IN WITNESS WHEREOF, the Company has caused this Secured
Convertible Debenture to be duly executed by a duly authorized officer as of the
date first above indicated.
INNOVACOM, INC.
By:________________________________
Name:
Title:
Attest:
By:___________________________
Name:
Title:
<PAGE>17
EXHIBIT A
INNOVACOM, INC
NOTICE OF CONVERSION
AT THE ELECTION OF THE HOLDER
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert Debenture No. E-1 into shares of Common
Stock, $.001 par value per share (the "Common Stock"), of INNOVACOM, INC. (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
Conversion calculations:
Date to Effect Conversion
Principal Amount of Debentures to be Converted
Number of shares of Common Stock to be Issued
Applicable Conversion Price
Signature
Name
Address
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
INNOVACOM, INC.
WARRANT
Dated: January 14, 1999
InnovaCom, Inc., a Nevada corporation (the "Company"), hereby certifies
that, for value received, JNC Strategic Fund Ltd., or its registered assigns
("Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company up to a total of 187,500 shares of Common Stock, $.001 par value per
share (the "Common Stock"), of the Company (each such share, a "Warrant Share"
and all such shares, the "Warrant Shares") at an exercise price equal to $.50
per share (as adjusted from time to time as provided in Section 8, the "Exercise
Price"), at any time and from time to time from and after the date hereof and
through and including January 14, 2004 (the "Expiration Date"), and subject to
the following terms and conditions:
1. Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any portion of this Warrant
in the Warrant Register, upon surrender of this Warrant, with the Form of
Assignment attached hereto duly completed and signed, to the Company at the
office specified in or pursuant to Section
<PAGE>2
3(b). Upon any such registration or transfer, a new warrant to purchase Common
Stock, in substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be issued
to the transferee and a New Warrant evidencing the remaining portion of this
Warrant not so transferred, if any, shall be issued to the transferring Holder.
The acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender
hereof by the Holder
to the office of the Company specified in or pursuant to Section 3(b) for one or
more New Warrants, evidencing in the aggregate the right to purchase the number
of Warrant Shares which may then be purchased hereunder. Any such New Warrant
will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered Holder on any
business day before 5:30 P.M., New York City time, at any time and from time to
time on or after the date hereof to and including the Expiration Date. At 5:30
P.M., New York City time on the Expiration Date, the portion of this Warrant not
exercised prior thereto shall be and become void and of no value. Prior to the
Expiration Date, the Company may not call or otherwise redeem this Warrant
without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 9, upon surrender of this Warrant, with
the Form of Election to Purchase attached hereto duly completed and signed, to
the Company at its address for notice set forth in Section 11 and upon payment
of the Exercise Price multiplied by the number of Warrant Shares that the Holder
intends to purchase hereunder, in the manner provided hereunder, all as
specified by the Holder in the Form of Election to Purchase, the Company shall
promptly (but in no event later than 3 business days after the Date of Exercise
(as defined herein)) issue or cause to be issued and cause to be delivered to or
upon the written order of the Holder and in such name or names as the Holder may
designate, a certificate for the Warrant Shares issuable upon such exercise,
free of restrictive legends, except in the event that a Registration Statement
(as defined herein) is not then effective or, if this Warrant shall have been
issued pursuant to a written agreement between the original Holder and the
Company, other than as required by such agreement. Any person so designated by
the Holder to receive Warrant Shares shall be deemed to have become holder of
record of such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the Form of
Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares so indicated by the holder hereof to be
purchased.
(c) This Warrant shall be exercisable, either in its entirety or, from
time to time, for a portion of the number of Warrant Shares. If less than all
of the Warrant Shares which
<PAGE>3
may be purchased under this Warrant are exercised at any time, the Company shall
issue or cause to be issued, at its expense, a New Warrant evidencing the right
to purchase the remaining number of Warrant Shares for which no exercise has
been evidenced by this Warrant.
4. Piggyback Registration Rights. During the term of this
Warrant, the Company may not file any registration statement with the Securities
and Exchange Commission (other than registration statements of the Company filed
on Form S-8 or Form S-4, each as promulgated under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to which the Company is registering
securities pursuant to a Company employee benefit plan or pursuant to a merger,
acquisition or similar transaction including supplements thereto, but not
additionally filed registration statements in respect of such securities) at any
time when there is not an effective registration statement covering the resale
of the Warrant Shares and naming the Holder as a selling stockholder thereunder
(a "Registration Statement"), unless the Company provides the Holder with not
less than 20 days notice to each of the Holder and Robinson Silverman Pearce
Aronsohn & Berman LLP, attention Eric L. Cohen, notice of its intention to file
such registration statement and provides the Holder the option to include any or
all of the applicable Warrant Shares therein. The piggyback registration rights
granted to the Holder pursuant to this Section shall continue until all of the
Holder's Warrant Shares have been sold in accordance with an effective
registration statement or upon the Expiration Date. The Company will pay all
registration expenses in connection therewith.
5. Payment of Taxes. The Company will pay all documentary stamp
taxes attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder, and the Company shall not be required to issue or cause to be issued
or deliver or cause to be delivered the certificates for Warrant Shares unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Holder shall be
responsible for all other tax liability that may arise as a result of holding or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange
and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that it
will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein
<PAGE>4
provided, the number of Warrant Shares which are then issuable and deliverable
upon the exercise of this entire Warrant, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holder (taking
into account the adjustments and restrictions of Section 8). The Company
covenants that all Warrant Shares that shall be so issuable and deliverable
shall, upon issuance and the payment of the applicable Exercise Price in
accordance with the terms hereof, be duly and validly authorized, issued and
fully paid and nonassessable.
8. Certain Adjustments. The Exercise Price and number of Warrant
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 8. Upon each such adjustment of the
Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to
the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is outstanding, (i) shall
pay a stock dividend (except scheduled dividends paid on outstanding preferred
stock as of the date hereof which contain a stated dividend rate) or otherwise
make a distribution or distributions on shares of its Common Stock (as defined
below) or on any other class of capital stock and not the Common Stock) payable
in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock
into a larger number of shares, or (iii) combine outstanding shares of Common
Stock into a smaller number of shares, the Exercise Price shall be multiplied by
a fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision or combination, and shall apply to successive
subdivisions and combinations.
(b) In case of any reclassification of the Common Stock, any consolidation
or merger of the Company with or into another person, the sale or transfer of
all or substantially all of the assets of the Company or any compulsory share
exchange pursuant to which the Common Stock is converted into other securities,
cash or property, then the Holder shall have the right thereafter to exercise
this Warrant only into the shares of stock and other securities and property
receivable upon or deemed to be held by holders of Common Stock following such
reclassification, consolidation, merger, sale, transfer or share exchange, and
the Holder shall be entitled upon such event to receive such amount of
securities or property equal to the amount of Warrant Shares such Holder would
have been entitled to had such Holder exercised this Warrant immediately prior
to such reclassification, consolidation, merger, sale, transfer or share
exchange. The terms of any such consolidation, merger, sale, transfer or share
exchange shall include such terms so as to continue to give to the Holder the
right to receive the securities or property set forth in this Section 8(b) upon
<PAGE>5
any exercise following any such reclassification, consolidation, merger, sale,
transfer or share exchange.
(c) If the Company, at any time while this Warrant is outstanding, shall
distribute to all holders of Common Stock (and not to holders of this Warrant)
evidences of its indebtedness or assets or rights or warrants to subscribe for
or purchase any security (excluding those referred to in Sections 8(a), (b) and
(d)), then in each such case the Exercise Price shall be determined by
multiplying the Exercise Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Exercise Price determined as of
the record date mentioned above, and of which the numerator shall be such
Exercise Price on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
a nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") mutually selected in good faith by the holders of a majority in
interest of the Warrants then outstanding and the Company. Any determination
made by the Appraiser shall be final.
(d) If, at any time while this Warrant is outstanding, the Company shall
issue or cause to be issued rights or warrants to acquire or otherwise sell or
distribute shares of Common Stock for a consideration per share less than the
Exercise Price then in effect, then, forthwith upon such issue or sale, the
Exercise Price shall be reduced to the price (calculated to the nearest cent)
determined by multiplying the Exercise Price in effect immediately prior thereto
by a fraction, the numerator of which shall be the sum of (i) the number of
shares of Common Stock outstanding immediately prior to such issuance, and (ii)
the number of shares of Common Stock which the aggregate consideration received
(or to be received, assuming exercise or conversion in full of such rights,
warrants and convertible securities) for the issuance of such additional shares
of Common Stock would purchase at the Exercise Price, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately after the issuance of such additional shares. Such adjustment shall
be made successively whenever such an issuance is made.
(e) For the purposes of this Section 8, the following
clauses shall also be applicable:
(i) Record Date. In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock or in securities
convertible or exchangeable into shares of Common Stock, or (B) to subscribe for
or purchase Common Stock or securities convertible or exchangeable into shares
of Common Stock, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the making of such other distribution
or the date of the granting of such right of subscription or purchase, as the
case may be.
<PAGE>6
(ii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(g) If:
(i) the Company shall declare a dividend (or any other distribution)
on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash dividend on
or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
(iv) the approval of any stockholders of the Company shall be required
in connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or
(v) the Company shall authorize the voluntary dissolution, liquidation
or winding up of the affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property
<PAGE>7
deliverable upon such reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding up; provided, however, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice.
9. Payment of Exercise Price. The Holder may pay the Exercise
Price in one of the following manners:
(a) Cash Exercise. The Holder shall deliver immediately available funds;
or
(b) Cashless Exercise. The Holder shall surrender this Warrant to the
Company together with a notice of cashless exercise, in which event the Company
shall issue to the Holder the number of Warrant Shares determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to
the Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the average of the closing sale prices of the
Common Stock for the five (5) trading days
immediately prior to (but not including) the Date
of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
10. Fractional Shares. The Company shall not be required to issue
or cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 10, be issuable
on the exercise of this Warrant, the Company shall pay an amount in cash equal
to the Exercise Price multiplied by such fraction.
11. Notices. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of
<PAGE>8
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (New
York City time) on a business day, (ii) the business day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 4:30 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 addresses for such
communications shall be: (i) if to the Company, to 3400 Garrett Drive, Santa
Clara, California 95054, or to Facsimile No. (408) 727-8778, Attention: Chief
Financial Officer, or (ii) if to the Holder, to the Holder at the address or
facsimile number appearing on the Warrant Register or such other address or
facsimile number as the Holder may provide to the Company in accordance with
this Section 11.
12. Warrant Agent.
(a) The Company shall serve as warrant agent under this Warrant. Upon
thirty (30) days' notice to the Holder, the Company may appoint a new warrant
agent.
(b) Any corporation into which the Company or any new warrant agent
may be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
13. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. This Warrant may
be amended only in writing signed by the Company and the Holder.
(b) Subject to Section 13(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant. This
Warrant shall inure to the sole and exclusive benefit of the Company and the
Holder and their successors and assigns.
(c) This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute a part
of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
<PAGE>9
(e) In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
<PAGE>10
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated above.
INNOVACOM, INC.
By:
Name:
Title:
<PAGE>11
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To InnovaCom, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), $.001 par value per share, of
InnovaCom, Inc. and , if such Holder is not utilizing the cashless exercise
provisions set forth in this Warrant, encloses herewith $________ in cash,
certified or official bank check or checks, which sum represents the aggregate
Exercise Price (as defined in the Warrant) for the number of shares of Common
Stock to which this Form of Election to Purchase relates, together with any
applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
(Please print name and address)
Dated: , Name of Holder:
(Print)
(By:)
(Name:)
(Title:)
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant)
<PAGE>
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of InnovaCom, Inc. to
which the within Warrant relates and appoints ________________ attorney to
transfer said right on the books of InnovaCom, Inc. with full power of
substitution in the premises.
Dated:
- ---------------, ----
---------------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
---------------------------------------
Address of Transferee
---------------------------------------
---------------------------------------
In the presence of:
- --------------------------
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of January 14, 1999, between InnovaCom, Inc. a Nevada
corporation (the "Company"), and JNC Strategic Fund Ltd., a Cayman Islands
company (the "Purchaser").
This Agreement is made pursuant to the Convertible Debenture
Purchase Agreement, dated as of the date hereof between the Company and the
Purchaser (the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common control
with such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.001
per share.
"Debentures" means Company's 7% Secured Convertible Debentures
due January 14, 2004 issued to the Purchaser pursuant to the Purchase Agreement.
"Effectiveness Date" means May 15, 1999.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
<PAGE>2
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Filing Date" means March 15, 1999.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Initial Closing Date" shall have the meaning set forth in the
Purchase Agreement.
"Losses" shall have the meaning set forth in Section 5(a).
"New York Courts" shall have the meaning set forth in Section 7(j).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable upon (a) conversion in full of the Debentures, (b) exercise of the
Warrants and (c) payment of interest in respect of the Debentures; provided,
however that in order to account for the fact that the number of shares of
Common Stock that are issuable upon conversion of Debentures is determined in
part upon the market price of the Common Stock at the time of conversion,
Registrable Securities contemplated by clause (a) of this definition shall be
deemed to include not less than 200% of the number of shares of Common Stock
into which the Debentures are convertible, assuming such conversion occurred on
the Closing Date or the Filing Date (whichever date yields a lower Conversion
Price, as such term is defined in the Debentures). The initial Registration
Statement shall cover at least such number of shares of Common Stock as equals
the sum of (x) 200% of the number of shares of Common Stock into which the
Debentures are convertible, assuming such conversion occurred on the Closing
Date or the Filing Date (whichever date yields a lower Conversion Price), (y)
interest thereon and (z) the shares of Common Stock issuable upon exercise
<PAGE>3
in full of the Warrants. The Company shall be required to file additional
Registration Statements to the extent the actual number of shares of Common
Stock into which Debentures are convertible (together with interest thereon) and
Warrants are exercisable exceeds the number of shares of Common Stock initially
registered in accordance with the immediately prior sentence. The Company shall
have 10 Business Days to file such additional Registration Statement after
notice of the requirement thereof, which the Holders may give at such time when
the number of shares of Common Stock as are issuable upon conversion of
Debentures exceeds 175% of the number of shares of Common Stock into which
Debentures are convertible, assuming such conversion occurred on the Closing
Date or the Filing Date (whichever yields a lower Conversion Price.
"Registration Statement" means the registration statement
contemplated by Section 2(a) (covering such number of Registrable Securities and
any additional Registration Statements contemplated in the definition of
Registrable Securities), including (in each case) the Prospectus, amendments and
supplements to such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference or deemed to be incorporated by reference in such registration
statement.
"Rule 158" means Rule 158 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means one law firm acting as counsel to the
Holders, for which the Holders will be reimbursed by the Company pursuant to
Section 4.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"Warrants" means the Common Stock purchase warrant issued to the
Purchaser on the Closing Date and to Cardinal Capital Management, Inc. and
Elizabeth Hagopian pursuant to the Purchase Agreement.
2. Shelf Registration
(a) On or prior to the Filing Date the Company shall prepare and
file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement shall be on Form SB-2 (or, if the
Company is not permitted to register the resale of the Registrable Securities on
Form SB-2, the Registration Statement shall be on such other appropriate form in
accordance herewith as
<PAGE>4
the Holders of a majority in interest of the Registrable Securities may
consent). The Company shall use its best efforts to cause the Registration
Statement to be declared effective under the Securities Act as promptly as
possible after the filing thereof, but in any event prior to the Effectiveness
Date, and shall use its best efforts to keep such Registration Statement
continuously effective under the Securities Act until the date which is three
years after the date that such Registration Statement is declared effective by
the Commission or such earlier date when all Registrable Securities covered by
such Registration Statement have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) promulgated under the Securities Act, as
determined by the counsel to the Company pursuant to a written opinion letter to
such effect, addressed and acceptable to the Company's transfer agent (the
"Effectiveness Period"); provided, however, that the Company shall not be deemed
to have used its best efforts to keep the Registration Statement effective
during the Effectiveness Period if it voluntarily takes any action that would
result in the Holders not being able to sell the Registrable Securities covered
by such Registration Statement during the Effectiveness Period, unless such
action is required under applicable law or the Company has filed a
post-effective amendment to the Registration Statement and the Commission has
not declared it effective.
(b) If the Holders of a majority of the Registrable Securities so
elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing underwriters can be sold, and such amount
shall be allocated pro rata among the Holders proposing to sell Registrable
Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company. No
Holder may participate in any Underwritten Offering hereunder unless such Person
(i) agrees to sell its Registrable Securities on the basis provided in any
underwriting agreements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement (and any additional Registration
Statements as may be required) in accordance with Section 2(a) which shall
contain the "Plan of Distribution" attached hereto as Annex A (except if
otherwise directed by the Holders), and cause the Registration Statement to
become effective and remain effective as provided herein; provided, however,
that not less than five (5)
<PAGE>5
Business Days prior to the filing of the Registration Statement or any related
Prospectus or any amendment or supplement thereto (including any document that
would be incorporated or deemed to be incorporated therein by reference), the
Company shall (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of such Holders, their Special Counsel and such
managing underwriters, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the opinion of respective counsel to such Holders and such
underwriters, to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities, their Special Counsel, or any managing
underwriters, shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as practicable to any comments
received from the Commission with respect to the Registration Statement or any
amendment thereto and promptly provide the Holders true and complete copies of
all correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply with the provisions of the Securities Act and the
Exchange Act with respect to the disposition of all Registrable Securities
covered by the Registration Statement during the applicable period in accordance
with the intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters immediately (and, in the
case of (i)(A) below, not less than five (5) days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
(1) Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the
Holders) and (C) with respect to the Registration Statement or any
post-effective amendment, when the same is no longer subject to review by the
Commission or has become effective; (ii) of any request by the Commission or any
other Federal or state governmental authority for amendments or supplements to
the Registration Statement or Prospectus or for additional information; (iii) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement covering any or all of the Registrable Securities or
the initiation of any Proceedings for that purpose; (iv) if at any time any of
the representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
<PAGE>6
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection with
an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as such
managing underwriters and such Holders reasonably agree should be included
therein and (ii) make all required filings of such Prospectus supplement or such
post-effective amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; provided, however, that the Company shall not be
required to take any action pursuant to this Section 3(e) that would, in the
opinion of counsel for the Company, violate applicable law or be materially
detrimental to the business prospects of the Company.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent reasonably
requested by such Person (including those previously furnished or incorporated
by reference) promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and
any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use
its best efforts to register or qualify or cooperate with the selling Holders,
any underwriters and their Special Counsel in connection with the registration
or qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
<PAGE>7
of such jurisdictions as any Holder or underwriter requests in writing, to keep
each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, however,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction where it
is not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement, which
certificates shall be free of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request at least three Business
Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on any securities exchange,
quotation system, market or over-the-counter bulletin board, if any, on which
similar securities issued by the Company are then listed as and when required
pursuant to the Purchase Agreement.
(l) In the case of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and substance as
is customary in Underwritten Offerings) and take all such other actions in
connection therewith (including those reasonably requested by any managing
underwriters and the Holders of a majority of the Registrable Securities being
sold) in order to expedite or facilitate the disposition of such Registrable
Securities, and whether or not an underwriting agreement is entered into, (i)
make such representations and warranties to such Holders and such underwriters
as are customarily made by issuers to underwriters in underwritten public
offerings, and confirm the same if and when requested; (ii) obtain and deliver
copies thereof to each Holder and the managing underwriters, if any, of opinions
of counsel to the Company and updates thereof addressed to each selling Holder
and each such underwriter, in form, scope and substance reasonably satisfactory
to any such managing underwriters and Special Counsel to the selling Holders
covering the matters customarily covered in opinions requested in Underwritten
Offerings and such other matters as may be reasonably requested by such Special
Counsel and underwriters; (iii) immediately prior to the effectiveness of the
Registration Statement or at the time of delivery of any Registrable Securities
sold pursuant thereto (at the option of the underwriters), obtain and
<PAGE>8
deliver copies to the Holders and the managing underwriters, if any, of "cold
comfort" letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent certified
public accountants of any subsidiary of the Company or of any business acquired
by the Company for which financial statements and financial data is, or is
required to be, included in the Registration Statement), addressed to each
Person and in such form and substance as are customary in connection with
Underwritten Offerings; (iv) if an underwriting agreement is entered into, the
same shall contain indemnification provisions and procedures no less favorable
to the selling Holders and the underwriters, if any, than those set forth in
Section 7 (or such other provisions and procedures acceptable to the managing
underwriters, if any, and holders of a majority of Registrable Securities
participating in such Underwritten Offering; and (v) deliver such documents and
certificates as may be reasonably requested by the Holders of a majority of the
Registrable Securities being sold, their Special Counsel and any managing
underwriters to evidence the continued validity of the representations and
warranties made pursuant to clause 3(l)(i) above and to evidence compliance with
any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, a
representative of such Holders, an underwriter participating in any disposition
of Registrable Securities, and an attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than 45 days after the end of any 12-month period (or 90 days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or best efforts Underwritten Offering
and (ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company after the effective date of
the Registration Statement, which statement shall cover said 12-month period, or
end shorter periods as is consistent with the requirements of Rule 158.
(o) The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities and the beneficial
<PAGE>9
ownership of Common Stock held by such selling Holder as is required by law to
be disclosed in the Registration Statement and the Company may exclude from such
registration the Registrable Securities of any such Holder who unreasonably
fails to furnish such information within a reasonable time after receiving such
request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder agrees by its acquisition of such Registrable
Securities that (i) it will not offer or sell any Registrable Securities under
the Registration Statement until it has received copies of the Prospectus as
then amended or supplemented as contemplated in Section 3(g) and notice from the
Company that such Registration Statement and any post-effective amendments
thereto have become effective as contemplated by Section 3(c) and (ii) it will
comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated by
Section 3(j), or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall, except as and to the extent
specified in Section 4(c), be borne by the Company whether or not pursuant to an
Underwritten Offering and whether or not the Registration Statement is filed or
becomes effective and whether or not any Registrable Securities are sold
pursuant to the Registration Statement. The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect
to filings required to be made with The Nasdaq Stock Market, Inc. and each other
securities exchange or market on which Registrable Securities are required
hereunder to be listed and (B) in compliance with state securities or Blue Sky
laws (including, without limitation, fees and disbursements of counsel for the
underwriters or Holders in connection with Blue Sky qualifications of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the managing
underwriters, if any, or the Holders of a majority of Registrable Securities may
designate)), (ii) printing expenses (including, without limitation, expenses of
printing certificates for
<PAGE>10
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the managing underwriters, if any, or by the
holders of a majority of the Registrable Securities included in the Registration
Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company and Special Counsel for the Holders, in
the case of the Special Counsel, to a maximum amount of $5,000, (v) Securities
Act liability insurance, if the Company so desires such insurance, and (vi) fees
and expenses of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement. In addition,
the Company shall be responsible for all of its internal expenses incurred in
connection with the consummation of the transactions contemplated by this
Agreement (including, without limi tation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, the fees and expenses incurred in connection with the listing
of the Registrable Securities on any securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to
the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants. By way of illustration which is not intended to
diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, settlements, judgments, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by or on behalf of such Holder expressly for use therein, or to the
extent that such information relates to such
<PAGE>11
Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto. The Company shall notify
the Holders promptly of the institution, threat or assertion of any Proceeding
of which the Company is aware in connection with the transactions contemplated
by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or arising solely out of or based solely
upon any omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company specifically for inclusion
in the Registration Statement or such Prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in
<PAGE>12
which case, if such Indemnified Party notifies the Indemnifying Party in writing
that it elects to employ separate counsel at the expense of the Indemnifying
Party, the Indemnifying Party shall not have the right to assume the defense
thereof and such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within 10 Business Days of written notice thereof to the Indemnifying
Party (regardless of whether it is ultimately determined that an Indemnified
Party is not entitled to indemnification hereunder; provided, that the
Indemnifying Party may require such Indemnified Party to undertake to reimburse
all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limita tions set forth
in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allo cation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), a Purchaser shall not be
required to contribute, in the aggregate, any amount in excess of the amount by
which the proceeds actually received by such Purchaser from the sale of the
Registrable Securities subject to the Pro ceeding exceeds the amount of any
damages that such Purchaser has otherwise been required to pay
<PAGE>13
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Except as and to the extent
specifically set forth in Schedule 6(b) attached hereto, neither the Company nor
any of its subsidiaries has, as of the date hereof, nor shall the Company or any
of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specifically set forth in
Schedule 6(b) attached hereto, neither the Company nor any of its subsidiaries
has previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person. Without limiting the generality
of the foregoing, without the written consent of the Holders of a majority of
the then outstanding Registrable Securities, the Company shall not grant to any
Person the right to request the Company to register any securities of the
Company under the Securities Act unless the rights so granted are subject in all
respects to the prior rights in full of the Holders set forth herein, and are
not otherwise in conflict or inconsistent with the provisions of this Agreement.
(c) No Piggyback on Registrations. Except as and to the extent
specifically set forth in Schedule 6(b) attached hereto, neither the Company nor
any of its security holders (other than the Holders in such capacity pursuant
hereto) may include securities of the Company in the Registration Statement
other than the Registrable Securities, and the Company shall not enter into any
agreement providing any such right to any of its securityholders.
(d) Piggy-Back Registrations. If at any time during the
Effectiveness Period there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act) or their then equivalents relating to equity securities to
be issued solely in connection with any
<PAGE>14
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, then the Company
shall send to each holder of Registrable Securities written notice of such
determination and, if within twenty (20) days after receipt of such notice, any
such holder shall so request in writing, the Company shall include in such
registration statement all or any part of the Registrable Securities such holder
requests to be registered. No right to registration of Registrable Securities
under this Section shall be construed to limit any registration otherwise
required hereunder.
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least a majority of the then outstanding Registrable
Securities; provided, however, that, for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company are not deemed outstanding. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of at least a majority of the Registrable Securities to which such
waiver or consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(f) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 7:00 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 7:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to the Company: InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, California 95054
Facsimile No.: (408) 727-8778
Attn: Chief Financial Officer
With copies to: Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Facsimile No.: (916) 442-3442
Attn: Scott Bartel
<PAGE>15
If to the 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
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the
stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(g) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. A Purchaser may assign its respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement (for such
purposes, Opportunity shall be treated as a Purchaser under the Purchase
Agreement).
(h) Assignment of Registration Rights. The rights of a Purchaser
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by such Purchaser to any assignee or transferee of all
or a portion of the Debentures, the Warrants and other Common Stock warrants
referenced in the definition of Registrable Securities or Registrable Securities
without the consent of the Company if: (i) such Purchaser agrees in writing with
the transferee or assignee to assign such rights, and a copy of such agreement
is furnished to the Company within a reasonable time after such
<PAGE>16
assignment, (ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to such registration
rights are being transferred or assigned, (iii) at or before the time the
Company receives the written notice contemplated by clause (ii) of this Section,
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions of this Agreement, and (iv) such transfer shall have been made
in accordance with the applicable requirements of the Purchase Agreement. The
rights to assignment shall apply to the Purchaser's (and to subsequent)
successors and assigns.
(i) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(j) Governing Law; Submission to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York, without regard to principles of conflicts of law. Each party hereby
irrevocably submits to the exclusive jurisdiction of any New York state court
sitting in the Borough of Manhattan, the state and federal courts sitting in the
City of New York or any federal court sitting in the Borough of Manhattan in the
City of New York (collectively, the "New York Courts") in respect of any
Proceeding arising out of or relating to this Agreement, and irrevocably accepts
for itself and in respect of its property, generally and unconditionally,
jurisdiction of the New York Courts. The Company irrevocably waives to the
fullest extent it may effectively do so under applicable law any objection that
it may now or hereafter have to the laying of the venue of any such proceeding
brought in any New York Court and any claim that any such Proceeding brought in
any New York Court has been brought in an inconvenient forum. Nothing herein
shall affect the right of any Holder. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by receiving a copy thereof sent to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
(k) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(l) Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed
<PAGE>17
the remaining terms, provisions, covenants and restrictions without including
any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(m) Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(n) Shares Held by The Company and its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than the Purchasers or transferees or successors or
assigns thereof if such Persons are deemed to be Affiliates solely by reason of
their holdings of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
<PAGE>18
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
INNOVACOM, INC.
By: ___________________________
Name:
Title:
JNC STRATEGIC FUND LTD.
By: ___________________________
Name:
Title:
<PAGE>19
Annex A
Plan of Distribution
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-
dealer for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o Broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser)
<PAGE>20
in amounts to be negotiated. The Selling Stockholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
THIRD AMENDED AND RESTATED SECURITY AGREEMENT
THIS THIRD AMENDED AND RESTATED SECURITY AGREEMENT (the "Security
Agreement") is made and entered into, as of January 14th, 1999, 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 "Security
Agreement") to secure the payment and discharge of all of the Company's
obligations under the June 29th Debentures 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
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 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 Secured Debentures Due
August 28, 2003 in an aggregate principal amount of $1,500,000 (the "August 28th
Debentures") and other Transaction Documents (as defined in Section 2.1(a) of
the August 28th Purchase Agreement) would also be deemed to be part of the
Obligations (as defined in Section 2 of the Security Agreement) of the Company
under the Security Agreement; and
WHEREAS, subsequently, JNC and the Company again agreed to amend and
restate in its entirety the Security Agreement (as amended and restated pursuant
to the transactions contemplated by the August 28th Purchase Agreement) in
connection with their entering into a Convertible Debenture Purchase Agreement
dated as of December 15th, 1998 (the "December 15th Purchase Agreement") in
order to provide that the obligations of the Company pursuant to the Company's
7% Secured Convertible Debentures Due December 15, 2003 in an aggregate
principal amount of $500,000 (the "December 15th Debentures") and other
Transaction Documents (as defined in Section 2.1(a) of the December 15th
Purchase Agreement) would also be deemed to be part of the Obligations of the
Company under the Security Agreement; and
<PAGE>2
WHEREAS, JNC and the Company have now agreed to amend and restate in its
entirety the Security Agreement (as amended and restated pursuant to the
transactions contemplated by the August 28th Purchase Agreement and the
transactions contemplated by the December 15th Purchase Agreement) in connection
with their entering into a Convertible Debenture Purchase Agreement dated as of
January 14th, 1999 (the "January 14th Purchase Agreement," and collectively with
the June 29th Purchase Agreement, the August 28th Purchase Agreement, and the
December 15th 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 January 14, 2004 in an aggregate principal amount of
$750,000 (the "January 14th Debentures," and collectively with the June 29th
Debentures, the August 28th Debentures, and the December 15th Debentures, the
"Debentures") and other Transaction Documents (as defined in Section 2.1(a) of
the January 14th Purchase Agreement) shall also be deemed to be part of the
Obligations of the Company under the Security Agreement;
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 Security Agreement shall have
the same meaning given such terms in the Transaction Documents (as
defined in Section 2.1(a) of the January 14th 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 Security 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 the Transaction 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 Purchase 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
<PAGE>3
"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.
4. Preservation and Perfection of Security Interests. In connection
with the Security -------------------------------------------------
Agreement, the Company previously 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 Security 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
Security 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 Security 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
which was filed on June 26, 1998 with the California Secretary of State and
on June 29, 1998 with the Santa Clara County Recorder, and also except for
that certain Writ of Attachment granted on or about December 31, 1998 in
favor of Lumen Intellectual Property Services, and that certain unsecured
personal property tax lien, copies of which have 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 Security 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
<PAGE>4
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 Security 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
Security 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 Security Agreement.
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 Security
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 Security
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.
<PAGE>5
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.
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
<PAGE>6
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 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.
<PAGE>7
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 9.
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
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 Security
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
<PAGE>8
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 Security 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, 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 Security Agreement, and
shall not be discharged or satisfied by any prior payment thereof and/or
cancellation of this Security 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,
<PAGE>9
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 Security Agreement and of the Purchase
Agreements all as fully and effectually as the Company might or
could do.
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 Security
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 Security 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
<PAGE>10
of this Security 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 Security 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 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 Security Agreement shall terminate when all
payments under 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 Security
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 Security Agreement or the
Obligations, or any act, event, or transaction related or attendant
thereto, including, without
<PAGE>11
limitation, any and all costs and expenses incurred in the
enforcement of this Security 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.
c. Remedies Cumulative. Except as otherwise expressly provided
herein, no ------------------- remedy conferred by any of the specific
provisions of this Security 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 Security 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
<PAGE>12
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
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 Security
Agreement are for convenience only and shall not control or
affect the meaning or construction of any of the provisions of
this Security Agreement.
e. Governing Law. This Security 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 Security 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 Security
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 Security Agreement may be amended
only by an agreement in writing executed by JNC and the Company.
<PAGE>13
g. Severability. In the event that any provision of this Security
Agreement is held ------------ to be invalid, prohibited or
unenforceable in any jurisdiction for any reason, unless such
provision is narrowed by judicial construction, this Security
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 Security
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 Security Agreement and
without affecting the validity or enforceability of such provision or
the other provisions of this Security 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 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
Security 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 Security 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 Security 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 Security 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 this Security Agreement relates back to the date
of the June 29th Purchase Agreement.
[remainder of this page intentionally left blank]
<PAGE>14
IN WITNESS WHEREOF, the Company has caused this Third Amended And
Restated Security Agreement to be duly executed and delivered by its officers
thereunto duly authorized effective as of January 14th, 1999.
INNOVACOM, INC.
By:_____________________________________
Frank Alioto
President
Accepted and agreed, effective
as of this 14th day of January, 1999
JNC STRATEGIC FUND LTD.
By:_______________________________
Its:______________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,225
<SECURITIES> 0
<RECEIVABLES> 64
<ALLOWANCES> 34
<INVENTORY> 0
<CURRENT-ASSETS> 1,292
<PP&E> 490
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<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> (9,588)
<TOTAL-LIABILITY-AND-EQUITY> 1,722
<SALES> 40
<TOTAL-REVENUES> 40
<CGS> 22
<TOTAL-COSTS> 8,350
<OTHER-EXPENSES> 261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,449
<INCOME-PRETAX> (12,020)
<INCOME-TAX> 2
<INCOME-CONTINUING> (12,022)
<DISCONTINUED> 1,555
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