U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(MarkOne)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _____ to _____
Commission file number 0-23503
InnovaCom, Inc.
(Exact name of registrant as specified in its charter)
Nevada 367 88-0308568
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
3400 Garrett Drive, Santa Clara, California 95054; 408-727-2447
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenues for the year ended December 31, 1999, were approximately $507,000.
As of March 15, 2000, the aggregate market value of the voting common stock held
by non-affiliates was $70,343,486 based on the average closing bid and ask price
of $2.02 per share.
As of March 15, 2000, the number of shares of common stock outstanding was
36,359,408.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one): Yes ___ No X
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With the exception of historical facts stated herein, the following
discussion may contain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ materially
from those anticipated in such forward-looking statements. Factors that could
cause actual results to differ materially include, in addition to other factors
identified in this report, are the Company's operating losses, need for
additional capital, its ability to develop new products, the security interest
in all of the Company's assets, and dependence on key personnel, all of which
factors are set forth in more detail in the sections entitled "Certain
Considerations" and "Management's Discussion and Analysis or Plan of Operation"
herein. Readers of this report are cautioned not to put undue reliance on
"forward looking" statements which are, by their nature, uncertain as reliable
indicators of future performance. The Company disclaims any intent or obligation
to publicly update these "forward looking" statements, whether as a result of
new information, future events, or otherwise.
Part I.
Item 1. Description of Business
BUSINESS
Corporate Information
The Company is in transition from a development stage company to a
manufacturing stage company, focusing on digital video compression,
transmission, and processing technology compliant with MPEG-2 standards. It was
originally incorporated in Florida in March of 1993 as a research and
development company and was essentially dormant until 1996. In March of 1996,
the Company began to emphasize the development of broadcast quality encoded
video utilizing the Motion Picture Experts Group ("MPEG") second generation
standard for video and audio compression ("MPEG-2"), including development of a
single-chip encoder termed the "Gecko" chip. Development of the single-chip
encoder was terminated in June 1998, but development of other MPEG-2 related
products continued.
In July 1996, the Company merged with Jettson Realty Development
Corporation, a Nevada corporation ("Jettson"). The merger took the form of a
share for share exchange, in which all of the shares of the Company were
exchanged for approximately 52% of Jettson. The merger was accounted for under
the reverse take-over method of accounting. Thereafter, the name of Jettson was
changed to "InnovaCom, Inc." The Company's Common Stock currently trades on the
OTC Bulletin Board under the symbol "MPEG." The merger between the Company and
Jettson is currently the subject of litigation. See "Legal Proceedings."
In May 1997, the Company acquired Sierra Vista Entertainment, Inc., a
Nevada corporation ("Sierra Vista") in a share for share exchange by issuing
8,514,500 shares of its Common Stock to Sierra Vista shareholders. Sierra Vista
was a motion picture production company and as a result of the acquisition, the
Company gained access to approximately $3 million of working capital and a
credit facility of up to $5 million. As discussed below, Sierra Vista's
operations were discontinued as part of the Company's re-ordering of priorities
in June 1998.
On May 1, 1998, Thomas E. Burke became the Company's new president,
replacing Mark Koz. On June 5, 1998, Mr. Burke resigned. Both Mr. Burke and the
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Company alleged breach of Mr. Burke's employment contract and additional claims
against the other. On December 14, 1998, the Company and Mr. Burke settled their
respective claims against each other, such settlement including a payment by
each party to the other. The amount of these payments was not material to the
Company.
On June 23, 1998, Frank J. Alioto was elected President and appointed to
the Company's board of directors. In December 1998 Mr. Alioto replaced Mark Koz
as the Chairman of the Board of Directors.
Concurrent with the election of Mr. Alioto as President in June 1998,
the Board of Directors decided to focus the Company on those projects that had
the greatest short-term promise, and that were closest to market. Accordingly,
essentially all development effort was focused on the development of video
compression technology products in the areas of video transmission and digital
video disks (DVD) mastering. See "Company's Products and Technology" below. At
the same time the Company terminated or suspended all non-core activities
including the Gecko chip development and Sierra Vista's activities. At the same
time the Company took other steps to reduce expenses and conserve cash,
including termination of approximately half of its workforce. One result was a
reduction in the loss reported by the Company in its statements of operations.
The reported loss in the second half of 1998 was approximately 21% of the loss
reported in the first half. In addition, development of shippable products was
enhanced. In the fourth quarter of 1998, the Company shipped the first of its
MPEG-2 transmission systems to a customer.
In 1999, the Company continued to develop the products identified in
1998 and to expand the functionality of those products to address newly
identified market opportunities. Operational expense levels continued at levels
comparable to those experienced in the second half of 1998. Volume shipments of
products began to ship in the last quarter of 1999 to fill large-scale
installation orders. The Company received $4,950,00 to fund its operations in
1999 from the investors who had previously funded a total of $9,000,000 in 1997
and 1998.
Certain Considerations
In addition to the other information presented in the Annual Report, the
Company and its business are subject to certain factors as discussed below:
Limited Operating History. Since inception, the Company's primary
activities have been the research and development of MPEG-2 products for digital
video compression and processing technology. Revenues in the fourth quarter of
1999 totaled approximately $335,000, but prior to that quarter, revenues had
been only minor. The Company's success is dependent upon sustained or increased
shipments of its current products, and development and marketing of its proposed
products, as to which there can be no assurance. Unanticipated problems,
expenses, and delays are frequently encountered in ramping up sales and in
developing new products. Other factors that may affect the development of
products and their sales include, but are not limited to, new or competing
products developed by competitors, the need to develop customer support
capabilities and market expertise, delays in product development, manufacturing
difficulties, market acceptance, product quality problems that require sales
returns or allowances, and the success or failure of sales and marketing
activities. The Company has limited experience in bringing products to market
and the failure of the Company to meet any of the conditions discussed above
could have a materially adverse effect upon the Company's operations. No
assurances can be given that the Company can be or ever will be profitable.
Losses. Since its inception, the Company has incurred losses. For the
years ended December 31, 1998 and 1999, the Company incurred net losses of
approximately $16,466,000 and $7,140,000, respectively, and has accumulated a
deficit of approximately $42,867,000 since inception. Operating losses for the
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years ended December 31, 1998 and 1999, were approximately $10,469,000 and
$4,569,000, respectively, and the accumulated operating loss since inception is
approximately $32,318,000. The Company expects to continue to incur losses and
to continue to increase its deficit until the Company develops and markets its
products and gains significant market acceptance. Management anticipates that
the Company's operating losses will decline in 2000 relative to 1999 as revenue
grows, but does not anticipate actual operating profits before the end of 2000.
No assurances can be given that the Company will ever achieve profitability.
Qualified Opinion. The report of the Company's independent accountants
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern. Among the factors cited by the accountants as raising
substantial doubt as to the Company's ability to continue as a going concern
include the fact that the Company has no established source of operating income
and that it has recurring losses from operations.
Need For Additional Capital and Dilution. The Company's future capital
requirements will depend on many factors, including cash flow from operations,
progress in developing new products, competing technological and market
developments, and the Company's ability to successfully market its products.
Because the Company currently does not have sufficient revenues to support its
activities, the Company will be required to raise additional capital through
equity or debt offerings to fund its operations. Traditionally, the Company has
relied on the sale of debt to meet its capital requirements. Debt financing will
result in interest expense, and if convertible into equity, could also dilute
then-existing shareholders. Any equity financing could result in dilution to the
Company's then-existing stockholders. If the Company is unable to raise
additional funds, the Company may be required to reduce or suspend its
operations. There can be no assurance that additional funding will be available
when required on terms acceptable to the Company.
Litigation Involving the Company. In 1997, the Company filed an action
against numerous parties including former directors and officers of the Company,
alleged financial consultants to the Company, the Company's prior transfer
agent, and other parties for, among other things, breach of fiduciary duty,
fraud, breach of contract, and RICO. There is currently no active litigation
with any of the original parties under this suit. In all instances the Company
settled with the original parties, dropped them from the complaint, or received
judgments against them. The Company has amended this action twice and named
additional defendants, four of which remain in the action. Discovery is
continuing in this action with respect to these additional defendants.
Subsequent to December 31, 1999, the Company filed another action
against six stockbrokers or clearinghouses who were involved in the trading of
the company's stock in 1996 and early 1997, alleging negotiation of improperly
endorsed stock certificates. The Company's claims in this action were assigned
to the Company by the Company's former transfer agent in a settlement of the
litigation discussed in the prior paragraph. This action is in an early stage
and discovery has not yet begun.
In 1998, the Company filed a separate action against its former auditor
and its prior attorneys alleging malpractice and conflict of interest. This suit
was dismissed in 1999. In 1999, the Company re-filed its suit against the
Company's former auditor. This action is in an early stage and discovery has not
yet begun.
In August 1998, the Staff of the Division of Enforcement of the
Securities and Exchange Commission advised the Company that the Commission had
issued a formal order for private investigation. The investigation addresses in
large part the same issues that the Company raised in its RICO suit discussed
above. The Company is cooperating with the SEC in this investigation. If the SEC
<PAGE>5
determines that the Company's actions in this matter in 1996 and 1997 were not
proper, the Company might be subject to SEC actions that could negatively affect
its business.
In 1998 and 1999, numerous alleged creditors of the Company filed
actions for the payment of monies. As of March 15, 2000, all of these suits had
been settled or otherwise dismissed, but the Company continues to carry a
significant balance of unpaid trade payables mostly from the first half of 1998.
As a result of litigation, the Company has had to spend a substantial
amount of time and fees in prosecuting and defending itself in these matters,
and will continue to do so in the future. The potential also exists that one or
more of the items of litigation initiated by the Company could generate
counterclaims against the Company that might be successful, or that the Company
might be forced to settle, which in either case could cause financial loss to
the Company. As of March 15 2000, there were no active claims or counterclaims
against the Company under the litigation discussed above, but there can be no
assurance that claims or counterclaims will not arise in the future.
Security Interest in the Company's Assets and Current Default Status. In
December 1997, the Company issued $5,000,000 face value of Convertible
Debentures (the "Debentures," or "Convertible Debentures"). An additional
$4,750,000 of Debentures with similar terms were issued periodically through
January 1999. Twelve Demand Notes (the "Demand Notes") with a total principal
balance of $4,825,000 were issued between March 1999 and March of 2000. The
outstanding principal and interest of the Debentures and Demand Notes is secured
by all of the assets of the Company. Therefore, in the event the Company is
unable to repay the Debentures or Demand Notes, the holders will hold a
first-priority security interest in the Company's assets upon default. No
assurances can be made that the Company will be able to repay all amounts due
under the Debentures and Demand Notes when required or that an event of default
will not occur prior to repayment.
Since 1998 the Company has been in default on certain elements of the
Debenture agreements. If the holders of the Debentures were to demand that the
Company cure these defaults, and if the Company was unable to comply, the
holders of the Debentures could demand immediate repayment of the Debentures. If
the Company were not able to find replacement financing to satisfy the Debenture
holders and to continue the operations of the Company, it would face the
prospect of essential shutdown of all operations. See also "Possible Change of
Control and Dilution from Convertible Debentures and Warrants."
Competition. The digital video and audio industry contains numerous
small and large competing companies. See "Competition" below. Additionally, the
Company competes in an industry segment in which numerous competitors have
substantially greater resources than the Company. No assurances can be given
that existing or potential competitors of the Company will not develop products
equal to or better than those developed by the Company or that such products
will not receive greater market acceptance.
Dependence on Independent Manufacturers/Subcontractors and Suppliers of
Components. The Company does not maintain its own manufacturing or production
facilities, aside from final assembly and test, and does not intend to do so in
the foreseeable future. The Company anticipates that major sub-assemblies of its
products will be manufactured and its components will be supplied by independent
companies. Many of these independent companies may also manufacture and supply
products for the Company's existing and potential competitors. Because the
Company does not have any licensing or other supply agreements with its
manufacturers and suppliers, they could terminate their relationship with the
<PAGE>6
Company at any time. In the event the Company was required to replace its
manufacturers and suppliers, the Company could experience delays in supplying
products to its customers.
Uncertainty of Market Acceptance. The Company has sold only limited
quantities of its products. The Company's success will depend upon continued and
increased acceptance of its products by the technology industry, including
independent third party companies and the general public. Achieving such
acceptance will require significant marketing investment. No assurances can be
given that the technology industry will accept the Company's existing and
proposed products at sufficient levels to support the operations of the Company.
Dependence on Technology Industries and Technological Obsolescence. The
digital video and audio industry is characterized by extensive research and
development and rapid technological changes, resulting in very short product
life cycles. Further, the video and audio industry is characterized by intense
competition among various technologies and their respective proponents.
Development of new or improved products, processes or technologies may render
the Company's products obsolete or less competitive. The Company will be
required to devote substantial efforts and financial resources to enhance its
existing products and to develop new products. No assurances can be given that
competing products or new products or technology will not be developed by
competing companies rendering the Company's products and technology obsolete.
Dependence on MPEG-2 Acceptance and Continuation as Standard. The
Company has focused much of its resources on the MPEG-2 technology and the
success of that standard will dramatically impact the Company's success. No
assurances can be given that the MPEG-2 standard will remain in favor in the
industry. Furthermore, should the standard be modified or replaced, no
assurances can be given that the Company's research and development work will
successfully transfer to an alternative standard.
Reliance on Integrators, Distributors, and OEM Customers. The Company's
success will depend to a significant extent upon its ability to develop a
distribution system with integrators, resellers, and original equipment
manufacturers ("OEMs") to distribute and sell the Company's products in the
marketplace. No assurances can be given that the Company will be successful in
obtaining and retaining the sales channel it requires to market and sell its
products successfully.
Protection of Intellectual Property. The Company has been issued one
patent, but this patent by itself does not provide significant protection for
the technology in the Company's current products, or for the products in
advanced stages of development. The Company is documenting its intellectual
properties so that it can file for additional patents, but currently has no
active patent applications. No assurances can be given that additional patents
will be awarded. The Company does hold trademarks on the Company's name and the
names of certain products.
No assurances can be given that another company will not attempt to
infringe upon any current or future licenses, patents, patent applications,
trademarks, or copyrights of the Company or its products and technology or that
the Company may not inadvertently infringe upon any current or future licenses,
patents, patent applications, trademarks, or copyrights of another company or
its products and technology. Such infringement could result in protracted and
costly litigation and sales losses. Further, no assurances can be given that
others will not independently develop products or technology that are equivalent
or superior to those of the Company or that such products will not utilize the
same or similar technology developed by the Company, whether protected or
unprotected by a license or patent.
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Concentration of Stock Ownership. As of March 15, 2000, the present
directors, executive officers, and stockholders owning more than 5% of the
outstanding Common Stock and their respective affiliates beneficially own
approximately 47.08% of the outstanding Common Stock of the Company. As a result
of their ownership, the directors, executive officers, and more than 5%
stockholders and their respective affiliates collectively will have substantial
control of all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions.
Possible Dilution from Employee, Director, and Other Options. As of
March 15, 2000, there were options outstanding to acquire an aggregate of
4,849,000 shares of the Company's Common Stock. These options, which are held by
current and former employees, directors, and consultants, are exercisable at
prices ranging from $0.16 to $3.375 per share with a weighted average exercise
price of approximately $0.40 per share. If these options are exercised, they
could dilute the value of other shareholders' stock, and increase the
concentration of stock ownership in the hands of directors and officers. The
presence of these options could depress the market price of the Company's stock
and affect the cost and terms of future stock placements, if any, by the
Company.
Possible Change of Control and Dilution from Convertible Debentures and
Warrants. As of March 15, 2000, the principal balance outstanding of Convertible
Debentures plus the related interest due was approximately $5,237,000. Under the
terms of the Convertible Debenture agreements, at that date, the balance could
have been converted into approximately 22,000,000 shares of Common Stock. The
price at which the Convertible Debentures can be converted into Common Stock in
most part depends upon the current market price of the stock, and is below the
market price of the Common Stock at March 15, 2000. In addition at March 15,
2000, the holders of the Convertible Debentures also held Warrants to purchase
3,500,000 shares of the Company's Common Stock at fixed prices ranging from
$0.25 to $1.00 per share. If these Convertible Debentures are converted into
Common Stock, or the Warrants are exercised, they could dilute the value of
other shareholders' stock. The presence of these Convertible Debentures and
Warrants could depress the market price of the Company's stock and effect the
cost and terms of future stock placements, if any, by the Company.
Conversion of all or a major part of the Convertible Debentures into
stock could give the holders of the Debentures ownership of an effective
controlling interest in the Company, and effective control of all matters
requiring stockholder approval. As of March 15, 2000, if the holders of the
Convertible Debentures had converted their Debentures and exercised their
Warrants, they would have owned approximately 43% of the Company's outstanding
Common Stock.
Possible Volatility of Securities Prices. The trading price of the
Company's Common Stock could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company, and other events or factors. Moreover, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the market price of the Company's Common
Stock could be materially and adversely affected. In addition, the stock market
in general, and the market prices for high-tech related companies in particular,
have experienced extreme volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's Common
Stock, regardless of the Company's operating performance.
Penny Stock Regulations. The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define "penny stock" to be
any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
<PAGE>8
exceptions. The Company's securities may be covered by the penny stock rules,
which impose additional sales practice requirements on broker-dealers who sell
to persons other than established customers and accredited investors (generally,
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by this rule, the broker-dealers
must make a special suitability determination for the purchase and receive the
purchaser's written agreement of the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's securities and also affect the ability of purchasers to sell their
shares in the secondary market.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the performance of its executive officers and key personnel and on
its ability to retain and motivate such personnel. Competition between high
technology companies for qualified personnel is very high, and opportunities for
key employees to move to other companies, including direct competitors, are
continually present. The loss of any of the Company's key personnel could have a
material adverse effect on the Company's business, financial condition and
operating results. The Company's success will also depend upon its ability to
hire and retain additional qualified personnel. An inability to locate and hire
additional qualified employees could have a material adverse effect on the
Company's business, financial condition and operating results. No assurance can
be given that the Company will be able to hire or retain such qualified
personnel.
Digital Video Industry Overview
In the past, video images were transmitted and stored almost exclusively
in analog formats. Digital video technology, including the Company's technology,
has been developed more recently and provides several benefits over analog. For
example, unlike analog, digital video can be compressed, providing significant
storage and transmission efficiencies, and can be duplicated and transmitted
without significant loss of quality. Digital video also allows editing,
indexing, distribution, and storage features not available in analog formats.
With the recent growth of high bandwidth network capacity, broadcast-quality
real-time video over networks using compressed digital video is rapidly becoming
available and cost effective.
The Moving Picture Experts Group ("MPEG") was formed in 1988 to develop
a worldwide industry standard for digital compression of video. In 1991, the
MPEG committee adopted the first technical standard of digital video compression
for full video motion for personal computers, which is known as "MPEG-1." The
MPEG committee determined that a higher quality digital video standard was
needed for broadcast quality video and eventually adopted the second-generation
standard of MPEG for video and audio compression ("MPEG-2"). The MPEG-2 video
compression standard defines the standards applicable to broadcast quality video
for compression, storage and transmission, and is the standard worldwide for
video compression at the professional level. It is the chosen standard for the
FCC-mandated migration to digital video broadcast, for all DVD applications, for
future HDTV and will appear on computing and networking and communication
platforms of all types.
The Company's Products and Technology
The Company develops core technologies and methodologies and integrates
complimentary third party products for digital video compression, transmission,
and processing technology applications. The Company adheres to MPEG-2
non-proprietary "open standards" to enhance flexibility and market appeal for
the Company's products. The Company has several products that are either
currently released for shipping, or that are in advanced stages of development
and are scheduled for release in 2000. In addition the Company has multiple
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development projects in process or under consideration to enhance the features
of products already released or to develop products in complimentary or closely
related applications.
TransPEG(TM). Until recently, video transmission over network was
restricted to low frame counts, small viewable windows, and low pixel counts
because of data rate limitations within the carriers. Alternatively, carriers
with the bandwidth to achieve higher quality video were too expensive for
widespread usage. The management of the Company believes that the rapidly
increasing data bandwidth now available and becoming available in affordable
networks, including both intranet and internet, has created a demand and
opportunity for substantial growth in video transmission products to supply
real-time, broadcast-quality video.
The Company is currently marketing four such transmission products in
its TransPEG product line. These are interchangeable digital multi-channel
transmissions systems that compress video, transmit in standard carrier formats,
and decompress at the viewer's location. TransPEG products are available for a
variety of standard carriers (ATM, T1/E1, etc.), support unicast, multicast and
broadcast transmission, and feature web based controls.
DVD Impact(TM). DVD Impact is a DVD premastering suite which integrates
MPEG-2 video compression developed by the Company with a number of software
tools developed by third parties and targets corporate and "prosumer" users for
the design of custom DVD's. DVD Impact is currently shipping. This product is
intended to be a price/performance leader with most of the functionality of
competing high-end systems, but at a much lower price.
DV-2110. Currently under development, the DV-2110 is an MPEG-2 encoder
board, designed to act as the system interface, I/O manager, and host for third
party MPEG-2 encoder chips. The Company intends to imbed the DV-2110 in
subsequent versions of its TransPEG and DVD Impact products, and to sell the
board as a stand-alone component, or packaged with certain Company-developed
software as an OEM product to customers in markets that the Company does not
currently service with its own system level products. The board is intended to
be compatible with personal computers running Windows 95 and NT operating
systems, and to operate with a variety of video compression hardware. Its
modular design and flexible architecture are designed to allow it to function in
a wide range of digital audio and video applications in many different hardware
and software environments.
Sales and Marketing
The Company markets its system-based solutions (TransPeg and DVD Impact)
to the professional video industry through direct sales calls from the Company's
sales force, through professional video dealerships, through system integrators,
and by attendance at national and international trade shows. At such time, if
any, as the DV2110 is completed, the Company intends to add selected OEM's to
its sales channel. Because the Company's products have been in the development
stage until recently, the Company has not achieved significant revenue from
sales.
Market for the Company's Products
The markets for the Company's currently shipping products can be divided
into two areas. The TransPEG products target users of digital video who wish to
transmit this video over standard network carriers. The DVDImpact is intended
for producers of digital video content who need to edit and master video in
preparation for end-user consumption of the video. Additional products under
development or under consideration would address the needs of users and
producers of broadcast quality video who are replacing their analog video with
<PAGE>10
digital video, and who require new tools to replace their analog-based
equipment.
Video Transmission
With the increase in bandwidth in the internet, in many intranets, and
in a variety of available standard point-to-point carriers, applications in
transmission of broadcast quality digital video are emerging rapidly. The
Company's target applications include: movement of video within multi-location
video production houses or between multiple contributors to the creation of
video content (video collaboration); real time medical diagnosis or consultation
between multiple locations; deposition or arraignment by video to avoid prisoner
transportation and to reduce costs; education or training from one central
location dispersed to satellite classrooms; surveillance or security in
applications where video quality is essential; and a wide range of other
situations. In general, as available carrier bandwidth increases, users are
finding ways to utilize broadcast quality digital video to improve their
operations, and providers are discovering that broadcast quality digital video
is good quality content to fill their pipelines and help justify the pipeline to
potential new users.
Video Content Creation
As the demand for broadcast quality digital video grows, so will the
demand for tools to produce it. The Company's first offering into this market is
the DVDImpact, an integrated suite of tools intended for a professional level
customer who plans to edit digital video content into a completed piece ready
for end-user consumption. The target customer includes not only the established
trade shop that is converting from analog based video technology to digital
technology, but also corporate, government, and institutional users who create
their own content for internal uses. The Company believes that creation of
digital video content by corporate, government, and institutional users for
internal consumption could increase sharply with the wide acceptance of DVD
format and the rapid decline in the costs associated with the production of
close-to-professional-quality digital video content that is seen currently.
The conversion of the video market from analog to digital is expected to
create demand for a wide range of products to replace software and hardware
tools that were built to service analog-based video. The Company is developing
or considering a number of potential products that are intended to address this
demand, with a user look and feel that mimics that of the analog tools being
replaced.
Competition
The Company faces competition from numerous companies, some of which are
more established, have greater market recognition, and have greater financial,
production, and marketing resources than the Company. The Company's products
compete on the basis of certain factors, including first to market, product
capabilities, product performance, price, support of industry standard, ease of
use, customer support, and user productivity.
The market for the Company's products is competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company faces direct and indirect
competition from a broad range of competitors who offer a variety of products
and solutions to the Company's current and potential customers. Many of the
Company's competitors have longer operating histories, including greater
experience in the market, significantly greater financial, technical, and other
resources than the Company, greater name recognition, and a larger installed
base of customers. Competition to supply the markets identified by the Company
can be expected to grow as the markets mature.
<PAGE>11
The Company's competitors include Spruce Technologies, Inc., Sonic
Solutions, and Minerva Systems, Inc., which market products that compete with
the DVD Impact, and FVC.COM, Inc. and Lucent Technologies, Inc., which market
products that compete with the Company's TransPEG products. Several other
companies market specialized professional video production boards that are
expected to compete with the DV-2110 board at such time, as any, that the
Company begins to ship this as an OEM product. Numerous other companies offer
products that do or will compete with the Company's products, and the number of
competing solutions can be expected to grow. This growth will come both from new
companies founded to participate in the markets, and from established companies
in related markets widening their product offerings into the markets identified
by the Company.
The Company's competitors can be expected to continue to improve the
design and performance of their products, to introduce new products with more
competitive prices and performance features, and to market more aggressively
into the Company's markets. Creating and maintaining technological and other
advantages for the Company's products over its competitors' products will
require a continued high level of investment by the Company in research and
development and in operations. No assurances can be given that the Company will
be able to continue to make such investments or that the Company will be able to
achieve the technological advances necessary to secure competitive advantages.
Research and Development
For the past two years, the majority of the Company's efforts have been
devoted toward the research and development of digital video compression,
transmission, and processing. Product development is performed mostly at the
Company's headquarters in California by engineering and technical employees,
assisted in certain specialized areas by consultants. The Company's total
expenditures for research and development were approximately $1,823,000 and
$3,400,000 for the years ended December 31, 1999 and 1998, respectively.
Sierra Vista Entertainment, Inc.
Sierra Vista Entertainment, Inc. ("Sierra Vista") was incorporated under
the laws of Nevada on April 3, 1996, for the purpose of engaging in the
production of television or theatrical feature films. The Company and Sierra
Vista entered into a Plan and Agreement of Reorganization in which the Company
acquired 100% of Sierra Vista's issued and outstanding common stock in exchange
for 8,514,500 shares of Common Stock of the Company and Sierra Vista became a
wholly-owned subsidiary of the Company. In June 1998, the Company's operations
were reduced to concentrate on a few products deemed by management to be closest
to market release. As part of the steps taken to reduce the Company's use of
cash, Sierra Vista was closed, its employees terminated, and its assets
liquidated. There are no plans to re-activate Sierra Vista's production
activities in the future.
China Joint Venture
The Company entered into a joint venture agreement with CRI, a Chinese
corporation located in Beijing ("CRI"), in September 1997. The joint venture
intended to establish an exhibition facility in China in cooperation with NATV
Marketing ("NATV"). In June 1998, the Company initiated steps to terminate the
contracts with both CRI and NATV. In April 1999, the Company reached agreement
with both CRI and NATV to terminate the contracts between those entities and the
Company. As part of the termination, the Company agreed to issue an additional
100,000 shares of the Company's Common Stock to the principal of NATV, and made
cash payments to both CRI and NATV. The amount of the payments was not material
to the Company.
<PAGE>12
Intelligent Instruments Corporation
In 1997, the Company's Board of Directors tentatively approved the
acquisition of Intelligent Instruments, a company wholly-owned by Mark C. Koz,
the Company's former President and Chief Executive Officer, for 2 million shares
of Common Stock of the Company, subject to certain conditions. In 1998, this
tentative approval was withdrawn and the acquisition did not occur. There are no
plans to resume this acquisition effort.
Technical Systems Associates, Inc.
The Company entered into an interim agreement to acquire Technical
Systems Associates, Inc. ("TSA"), an antenna company located in Orlando,
Florida, in March of 1997. In October 1997, the Company entered into an
agreement for a release from the interim agreement. In January 1998, the Company
fully terminated the relationship with TSA. Payments by the Company to TSA under
the interim agreement and the subsequent release totaled approximately $358,000.
Employees
As of March 15, 2000, the Company had 27 full-time employees.
Item 2. Description of Property
The Company is currently renting approximately 18,000 square feet of
space in Santa Clara, California, which includes offices and research space
under a lease agreement that runs through December 2002, with an option for a
three-year extension. The monthly base rent was $28,800 at lease inception in
1998, increasing by $900 per month for each year thereafter, plus operating
expenses for the common areas of the entire complex equal to the Company's
pro-rata square footage of the complex (approximately 47% of the building, 27%
of the project). The offices house all of the Company's operations including the
assembly and final testing required for shipment of the Company's products.
Sierra Vista previously occupied approximately 2,800 square feet of
office space in Beverly Hills, California under a three (3) year lease agreement
effective October 1, 1997, at a rate of $5,882 per month for the first eighteen
months and $6,162 per month thereafter. This lease was guaranteed by InnovaCom,
Inc. This space was vacated by Sierra Vista in 1998 and was subsequently re-let
by the landlord to an independent third party without adverse financial impact
to the Company.
Sierra Vista had also previously leased a single-family residence of
approximately 2,500 square feet in Beverly Hills, California at a cost of $7,000
per month. This lease was terminated in 1998.
Item 3. Legal Proceedings
Haynes, et. al. On November 10, 1997, InnovaCom filed suit against
Michael D. Haynes, David S. Jett, Manhattan West, Inc., Marketing Direct
Concepts, Inc., Checkers Foundation, Silicon Software International, Atlas Stock
Transfer Corporation ("Atlas"), Arun Pande, Edwin Reedholm, and others in the
Superior Court of the County of San Francisco (Case Number 990965). The
complaint alleged that in connection with the reverse merger of Jettson Realty
Development Corporation and InnovaCom, a Florida corporation, the Company issued
shares of Common Stock to Michael D. Haynes and David S. Jett and entities
controlled by them based upon fraudulent representations. Further, the Company
alleged, that Manhattan West, Marketing Direct Concepts, and Checkers Foundation
and Silicon Software International, two entities alleged to be controlled by
<PAGE>13
Messrs. Haynes and Jett, were issued fees, Common Stock, and options to acquire
shares of Common Stock based upon misrepresentations, including that they could
raise capital to assist the Company in its business. The Company also alleged
that Atlas Stock Transfer, the Company's former transfer agent, breached its
contract in issuing shares of Common Stock in these transactions. In addition,
the Company alleged that Mr. Pande, a former director and officer of InnovaCom,
violated his fiduciary duty by receiving shares of InnovaCom Common Stock based
upon misrepresentations and inadequate or no consideration, and made
inappropriate and unauthorized expenditures on behalf of the Company for his
personal benefit, and that Mr. Reedholm, a former director of the Company,
received shares of Common Stock of the Company without the payment of adequate
consideration. The Company alleged RICO (Racketeer Influenced Corrupted
Organizations Act) violations against all defendants. The Company sought damages
in excess of $26 million plus punitive damages.
Settlements have been reached with Mr. Pande, Mr. Reedholm, Marketing
Direct Concepts, Manhattan West, Inc., Atlas, and with one other defendant for
payments of cash by the defendants and relief of a debt previously owed by the
Company to two defendants, all in the amount of approximately $725,000. In
addition as a part of the settlements, options to purchase 1,099,999 shares of
the Company's Common Stock held by the defendants were cancelled. The settlement
with Mr. Reedholm included release of his claims against the Company in the
Decorah Company lawsuit, discussed below. The settlement with Atlas included the
assignment by Atlas to the Company of certain claims that Atlas might have
against other parties for their actions in accepting and processing the
Company's stock certificates.
A number of defendants have defaulted and InnovaCom has received entries of
judgment against them. As a result, the Company cancelled 1,010,329 shares of
its Common Stock, options to purchase 700,000 shares of its Common Stock, and
liabilities of $247,000, and seized a cash balance held by a third party of
approximately $12,000. The Company is pursuing efforts to fully collect its
judgment from the defaulted defendants.
There is currently no active litigation with any of the original parties
under this suit. In all instances the Company has settled with the parties,
dropped them from the suit, or received judgments against them.
In 1999 and 2000, the Company amended its complaint and named four
additional defendants. Additional defendants may be named shortly. These new
defendants and potential defendants are brokers whom the Company alleges
accepted for deposit or negotiated fraudulent stock certificates in 1996 and
1997. The amended litigation is still in its initial stages and discovery is
continuing.
Swiss American Securities, Inc., et. al. On February 25, 2000, InnovaCom
filed suit against Swiss American Securities, Inc., and five other stock
brokerages in the San Jose Division of the United States District Court (Case
Number C-0020214). The complaint alleges that the defendants in this action
guaranteed improper endorsements of stock certificates issued as part of the
reverse merger of Jettson Realty Development Corporation and InnovaCom, a
Florida corporation, in 1996. The Company's claims in this action were assigned
to InnovaCom by Atlas as part of the settlement with Atlas in the Haynes
litigation discussed above. The litigation is in its initial stages and
discovery has not yet begun.
Hoffer, et. al. On September 24, 1998, InnovaCom filed suit against its
former auditor and its former attorney in Santa Clara County Superior Court
(Case CV 776606), which matter was subsequently transferred to Orange County
Superior Court No. 803328. This case was dismissed in 1999. On November 1, 1999
the complaint was refiled against the Company's former auditor (Orange County
Superior Court No. 816504). The 1999 complaint alleges malpractice and conflict
<PAGE>14
of interest with respect to the auditor's actions in the time frame covered by
the allegations in the Haynes suit, discussed above. This litigation is still in
its initial stages and discovery has not yet commenced.
Decorah Company. On June 9, 1997, the Decorah Company and Edwin Reedholm, a
former director of the Company, filed a complaint against Digital Hollywood, the
Company and Mark C. Koz in the Circuit Court of Cook County, Illinois County
Department, Law Division, Case No. 97L06866. The Company had filed suit against
Mr. Reedholm for breach of fiduciary duty in the Haynes, et. al. litigation. The
Company's involvement with this suit was settled in conjunction with the
settlement discussed above of Mr. Reedholm's involvement in the Haynes, et. al.
Lawsuit. Mr. Koz and Digital Hollywood have also settled with Mr. Reedholm and
Decorah Company.
Securities and Exchange Commission. In August 1998, the Staff of the
Division of Enforcement of the Securities and Exchange Commission advised the
Company that the Commission had issued a formal order for private investigation.
The investigation involves allegations that, since January 1, 1995, certain of
the Company's present or former officers, directors, employees, business
consultants, investment bankers, and/or certain other persons or entities
associated with the Company, may have employed devices, schemes, or artifices to
defraud, by, among other things, making undisclosed payments to certain
registered representatives relating to sales of the Company's securities, and by
manipulating the Company's stock price. The Company's management does not
believe that any sanctions the Company is likely to receive from the Securities
and Exchange Commission based upon this investigation will materially affect the
Company's financial position or operations. Discovery has been initiated.
Collection. Since 1998, the Company has had a number of overdue accounts
payable to vendors. Several of these vendors have filed suit against the Company
to enforce collection. As of March 15, 2000, all of these suits had been settled
or otherwise dismissed.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock began trading on the OTC Bulletin Board under
the symbol "MPEG" on July 19, 1996. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The high and low prices of the Company's Common
Stock on a quarterly basis for the past two fiscal years are as follows:
Quarter High Low
-------- ----- -----
March 31, 1998 $2.80 $1.53
June 30, 1998 $2.80 $0.22
September 30, 1998 $0.39 $0.08
December 31, 1998 $0.19 $0.08
March 31, 1999 $0.50 $0.08
June 30, 1999 $0.84 $0.19
September 30, 1999 $0.45 $0.16
December 31, 1999
$0.36 $0.14
<PAGE>15
Item 6. Management's Discussion and Analysis or Plan of Operation
The following sections discuss the Company's financial condition and
results of operations based upon the Company's consolidated financial statements
which have been prepared in accordance with generally accepted accounting
principles. The following sections also contain forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Certain Considerations" section and elsewhere in this Annual
Report.
General
The Company is in transition from a development stage company to a
manufacturing stage company, focusing on digital video compression,
transmission, and processing technology compliant with MPEG-2 standards. The
Company was founded in 1993, and began significant development efforts on a
number of chip, board, and system level products in 1996. In 1997, the Company
merged with Sierra Vista, a Nevada corporation in the development stages of
production and distribution of feature length films.
In June 1998, the Company's management and direction changed
significantly. The Company discontinued its chip development efforts, closed
Sierra Vista, laid off approximately half of its employees, and took substantial
steps to reduce all expenses. At the same time the Company's resources were
focused on the completion of those board and system level product projects that
management deemed most promising and closest to market. In the second half of
1998, the first of the Company's products were released to production and the
first deliveries were made to customers. In 1999, the Company continued to
emerge from development stage into full production with a significant increase
in shipments in the last quarter of the year.
Management expects that revenue in 2000 will be significantly higher
than in 1999, but that the Company will not achieve profitability from
operations before the end of 2000. Modest staffing increases are planned in all
departments of the Company to accommodate this growth. The Company will be
required to raise additional capital in 2000 to fund its losses and to fund
anticipated increases in accounts receivable and inventory. No assurances can be
given that the Company's revenues will increase in 2000, that the Company will
become profitable, or that additional funding will be available or, if
available, that it will be on terms favorable to the Company.
Product development in 2000 will concentrate on increasing the
functionality of existing products and expanding their application into new
markets in both the TransPeg and the DVD Impact products. Release of the
DV-2110, which was scheduled for 1999, was delayed due to design changes but is
now scheduled for mid 2000.
The Company does not believe that inflation will have an impact on its
results of operations and does not believe that its business is seasonal.
Results of Operations
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto and other
financial information included elsewhere in this Annual Report.
<PAGE>16
Year Ended December 31, 1999 Compared to December 31, 1998
Revenues
Revenues increased to approximately $507,000 for the year ended December
31, 1999, from approximately $108,000 for the year ended December 31, 1998.
Approximately 66% of the revenue in 1999 was recognized in the last quarter of
the year. This reflects the first volume shipments of the Company's products to
customers for installation in large-scale projects. The majority of the revenue
reported in 1998 was for shipments of pre-production and sample products.
Cost of goods sold
Cost of goods sold was approximately $492,000 for the year ended
December 31, 1999, as compared to approximately $339,000 for the year ended
December 31, 1998. The increase from 1999 to 1998 is primarily a result of
increased shipments but also reflects cost increases attributable to the
transition from a development stage to manufacturing stage enterprise. Cost of
good sold as a percentage of sales as seen in both 1999 and 1998 is not
necessarily representative of the level that the Company might experience in
2000 or later at such time, as any, that volume production levels become
commonplace.
Research and development
Research and development expense declined to approximately $1,823,000 in
the year ended December 31, 1999, from approximately $3,400,000 for the year
ended December 31, 1998. This reduction results primarily from the actions taken
in June of 1998 to reduce the Company's spending in all areas including research
and development. Partially offsetting this reduction was an increase in research
and development spending recognized as some costs previously allocated to other
departments were reclassified into research and development in the last quarter
of 1999.
Selling, general and administrative
Selling, general and administrative expenses decreased to approximately
$2,762,000 for the year ended December 31, 1999, from approximately $5,902,000
during the same period in 1998. The decrease from 1998 to 1999 results primarily
from the substantial cuts in spending made in June 1998.
Impairment loss on property and equipment
In June 1998, the Company abandoned its chip development efforts, which
reduced the value of the development equipment and software that had been
purchased for this work. The Company recognized an expense of approximately
$937,000 at that time to write these assets down to their realizable value. No
corresponding expense occurred in 1999.
Interest expense, net of interest income
Interest expense, net of interest income decreased to approximately
$2,832,000 during the year ended December 31, 1999, from approximately
$4,761,000 for the year ended December 31, 1998. The largest single component of
interest expense in both years relates to interest imputed from conversion
features of the debt, and from warrants issued in connection with the debt
placement recognized at the time new debt was issued. In 1998, most new debt was
in the form of debentures that could convert into stock at a price below market,
which generated large amounts of imputed interest. Most new debt in 1999 was in
<PAGE>17
the form of demand notes, which were not convertible and did not cause the
recognition of imputed interest. The decline in imputed interest resulting from
new debt issuance, and from the issuance of associated warrants from 1998 to
1999, was approximately $2,357,000. This decline was partially offset by an
increase in stated interest of approximately $559,000 resulting from an increase
in overall debt levels from 1998 to 1999.
Interest income was not material in either 1999 or 1998.
Income Tax Expense
Income tax expense was approximately $2,000 for the two years ended
December 31, 1999 and 1998. This represents the minimum franchise tax payable to
the State of California for the Company and its non-operating Florida
subsidiary.
Loss from discontinued operations
On June 15, 1998, the Company's Board of Directors decided to
discontinue the operations of Sierra Vista, its wholly-owned subsidiary and
entertainment segment of the business. At that date, the Company wrote down
Sierra Vista's assets to disposal value and recognized a loss on disposal of
discontinued operations of approximately $1,155,000. Sierra Vista's operations
lost approximately $400,000 in 1998.
Gain from early extinguishments of debt
In 1999 and 1998, the Company settled a number of liabilities at
discounts to face amount. The total of these discounts declined to approximately
$235,000 in 1999 from approximately $573,000 in 1998. This decline reflects the
reduction in creditor claims for past due liabilities pressed against the
Company in 1999 relative to 1998.
Liquidity and Capital Resources
As of December 31, 1999, the Company had negative working capital of
approximately $17,309,000. In 1999, the Company's revenues were not sufficient
to support its operations, and revenues will not be large enough to support
operations until such time, as any, that the Company's current products and
future products, if any, attain substantial market acceptance. Historically, the
Company has funded its operations through sale of equity and debt. The Company
expects to continue to finance its operations in this manner for the immediate
future. The Company is currently in discussions with several investors to
finance the Company through the issuance of stock or convertible debentures, but
no assurance can be given that these discussions and negotiations will culminate
in adequate funding, or any funding at all. In the event that the Company is
unable to obtain adequate financing, there will be a material adverse effect on
the Company's ability to meet its business objectives.
Net cash used in operating activities from continuing operations totaled
approximately $4,905,000 during fiscal 1999 and $7,182,000 during fiscal 1998.
Discontinued operations used additional cash of approximately $319,000 in 1998.
This cash usage resulted primarily from the net losses of approximately
$7,140,000 in 1999 and $16,466,000 in 1998. The net loss in 1999 was offset
principally by non-cash interest expense imputed on the issuance of debt in 1999
and by interest and penalties accrued on the Convertible Debentures and Demand
Notes outstanding during the year. The net loss during 1998 was offset
principally by non-cash interest expense imputed on the Convertible Debentures
issued in 1997 and 1998, increase in accounts payable and accrued liabilities,
<PAGE>18
write down of the discontinued assets of Sierra Vista, and the write down of
assets impaired when the Company closed its chip development efforts.
Net cash flows from financing activities rose to approximately
$5,158,000 in fiscal 1999 from approximately $4,603,000 in 1998. During 1999 the
Company received $4,200,000 from the sale of Demand Notes, and an additional
$750,000 from the sale of Convertible debentures. During 1998 the Company
received $4,000,000 from the sale of Convertible Debentures. Also in 1998 the
Company received approximately $778,000 from four other lenders of which
approximately $174,000 was repaid, and approximately $468,000 converted into
Common Stock.
In 1999 the Company purchased approximately $9,000 of property and
equipment as compared to approximately $1,217,000 in 1998.
Between December 1997 and January 1999, the Company issued a total of
$9,750,000 face value of Convertible Debentures to two investors who are related
to each other. The convertible debentures bear interest at 7% and are due five
years after issuance.
At the end of 1999, the Company owed $9,440,000 on Convertible
Debentures, which is net of $310,000 converted into Common Stock during 1998 and
1999, $4,200,000 on secured promissory notes, and another $100,000 on short term
notes to related parties. Accrued liabilities included approximately $2,486,000
in accrued interest and penalties related to these debts.
On December 22, 1997, the Company issued $5 million in the aggregate of
Convertible Debentures receiving approximately $4,609,000 in net proceeds. The
convertible debentures bear interest at 7% and are due December 22, 2002. The
Debentures are convertible into shares of the Company's Common Stock at a
conversion price equal to the lesser of (i) $3.47 and (ii) 80% of the average
closing market price for the five trading days prior to conversion. In
connection with the private placement, the Company issued five-year warrants to
purchase 250,000 shares of Common Stock at $3.00 per share and for 250,000 at
$4.00 per share. These warrants were replaced by warrants with similar terms
except for an exercise price of $0.50 in August 1998. Through February 29, 2000,
the holders of these Debentures converted a total of $2,900,000 face value, plus
approximately $418,000 of accumulated interest, into 8,422,644 shares of Common
Stock. In March 2000 the remaining $2,100,000 face value of the December 22,
1997 Debenture plus approximately $330,000 of accrued interest was converted
into 1,988,947 shares of Common Stock.
On June 29, 1998, the Company issued $2 million in the aggregate of
Convertible Debentures that bear interest at 7% and are due June 29, 2003. The
debentures are convertible into the Company's Common Stock at a conversion price
of $.35 per share. In connection with the issuance of these Debentures, the
Company issued the Debenture holder five-year warrants to purchase 500,000
shares of Common Stock at $.50 per share.
On August 28, 1998, the Company issued additional Debentures in the
aggregate principal amount of $500,000, with the right to issue up to an
additional $1 million more Debentures under the same terms. In October and
November of 1998, a total of $1 million more Debentures were issued. The
Debentures accrue interest at the rate of 7% per annum and are convertible into
shares of the Company's Common Stock at a conversion price equal to the lesser
of (i) 125% of the five-day average share price at the time of issuance and (ii)
80% of the five day average share price at the time of conversion 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
<PAGE>19
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.
The Company is obligated under the terms of all the Debenture agreements
to register the Common Stock underlying the conversion provisions with the
Securities Exchange Commission so that upon conversion, the Debenture holders
would received unrestricted stock. As of February 29, 2000 such registration had
not been accomplished for the Debentures issued in June 1998 through January
1999. Registration has been obtained for the Common Stock underlying the
conversion feature of the Debenture issued in December 1997.
In 1999, the Company borrowed a total of $4,200,000 from the investor
who had purchased the majority of the Debentures evidenced in the form of ten
separate notes. An additional $375,000 was borrowed on another note in January
2000. The notes bear interest at 13% and are due on demand. In conjunction with
this funding, the Company issued the holder of the notes five-year warrants to
purchase up to 2,487,500 shares of Common Stock at prices ranging from $0.25 to
$0.60 per share.
In connection with the sales of the Debentures and notes in 1997 through
January 2000, the Company issued five-year warrants to purchase up to an
aggregate total of 2,365,000 shares of common stock at prices ranging from $0.11
per share to $2.43 per share to two investment brokers.
Impact of the Year 2000 Issue
The Company has experienced no disruptions in its operations that
management can attribute to Year 2000 software issues. In addition, the Company
has seen no Year 2000 related problems itself or received any reports of such
problems from its customers related to the Company's products.
Item 7. Financial Statements
The financial statements for the Company are attached beginning on page
F-1.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
<PAGE>20
Part III
Item 9. Directors, Executive Officers, Promoters and control Persons; Compliance
With Section 16(a) of the Exchange Act
Executive Officers and Directors
The directors and executive officers of the Company as of March 15,
2000, are as follows:
Held Position
Name Age Position Since
---- --- -------- -------------
Frank J. Alioto 51 President, Chief Executive June 1998
Officer, Director
James D. Casey 56 Chief Financial Officer, November 1999
Director
Mark C. Koz 44 Director March 1993
Tony Low 45 Director October 1996
Robert Sibthorpe 50 Director May 1997
John Champlin, M.D. 43 Director October 1997
The following sets forth the principal occupations during the past five
years of the directors and executive officers of the Company and it
subsidiaries.
Frank J. Alioto (age 51) has been President and a Director since July 1,
1998, and Chairman since December 1998. From 1993 until 1997, Mr. Alioto was
Chief Operating Officer of Alamar Electronics, a broadcast television equipment
manufacturer that he joined as part of a successful financial turnaround project
that led to eventual acquisition by Philips NV in 1995. Previously, he
co-founded ALTA Group, a manufacturer of advanced digital video systems for
professional use, and served as Vice President of Marketing and Sales until the
company was acquired by Dynatech. Mr. Alioto has over 25 years of experience in
broadcast television, and in management of advanced electronic equipment
manufacturers who service the broadcast and video markets.
James D. Casey (age 56) has been Chief Financial Officer since November
1999 and was appointed to the Board of Directors in February 2000. From 1994
until 1999, Mr. Casey was the Chief Financial Officer and VP Finance of Rebus
Software, a privately held company in the field of CAD/Process Design software.
Previously he held similar positions with a number of other high technology
semiconductor, software, and telecommunications companies including Macronix,
OmniTel and Forte Communications, Inc. Mr. Casey is a CPA and holds a BS degree,
cum laude, from Northeastern University, and an MBA from the Amos Tuck School of
Business at Dartmouth College.
Mark Koz (age 44) has been a Director since March 3, 1993. Previously,
at various times, he was also Chairman, Chief Executive Officer and President,
and Chief Technical Officer of the Company. Mr. Koz was also Chief Executive
Officer, Chief Technical Officer and a Director of FutureTel from 1993 to 1995,
and has been Chief Executive Officer of Intelligent Instruments Corporation
since 1993. Currently he is employed as an independent consultant in the
telecommunication industry. Mr. Koz has five years of technical education at
Florida Technological University (University of Central Florida). In addition,
<PAGE>21
he is a voting member of the Moving Picture Experts Group, the international
standards-setting body for MPEG.
Tony Low (age 46) has been a Director of the Company since October 1996.
Since July 1997, Mr. Low has been Chief Operating Officer of Darwin Digital, a
Saatchi & Saatchi Vision Company involved in interactive advertising and media
buying. Prior to that, from January 1996 through June 1997, Mr. Low was Director
of Business Affairs at the Los Angeles based Saatchi Entertainment Group, a
division of Saatchi & Saatchi, the multinational advertising agency. From June
1993 through January 1996, he was President of Tercer Mundo, Inc., a company
marketing sound recordings, and from October 1983 through June 1993 he was
Partner and Business Manager at Oberman, Tivoli, Miller and Low, an
entertainment industry accounting firm.
Robert Alan Sibthorpe (age 51) has been a Director of the Company since May
1997. Mr. Sibthorpe has been owner of Mag South Research, Inc., a geological and
financial consulting firm since October 1996. From June 1986 through April 1996,
Mr. Sibthorpe was with Yorkton Securities, Inc. involved in investment banking.
Mr. Sibthorpe has an MBA in Finance and a Bachelor of Science in Earth Sciences
both from the University of Toronto.
John Joseph Champlin, M.D. (age 44) has been a Director of the Company
since October 1997. He has been owner and president of the Med Center Medical
Clinic in Carmichael, California, since 1993. Prior to founding Med Center
Medical Clinic, he was a medical director of Madison Center from 1988 to 1993.
He is also associate clinical professor, family practice, at the University of
California at Davis since 1986. Mr. Champlin earned his M.D. at the University
of Florida.
Committees of the Board
The Board has an Audit Committee and a Compensation Committee. The Audit
Committee consists of Messrs. Low and Sibthorpe, and the Compensation Committee
consists of Messrs. Koz and Sibthorpe.
The primary functions of the Audit Committee are to review the scope and
results of audits by the Company's independent auditors, the Company's internal
accounting controls, the non-audit services performed by the independent
accountants, and the cost of accounting services. The audit committee did not
meet in 1999, but is scheduled to do so in the first half of 2000 to review the
results of the years ended December 31, 1998 and 1999, and to consider the
performance and results of the audits.
The Compensation Committee administers the Company's 1996 Incentive and
Nonstatutory Stock Option Plan, the 1999 Nonstatutory Stock Option Plan, and
approves compensation, remuneration, and incentive arrangements for officers and
employees of the Company.
1999 PLAN
Section 16(a) Beneficial Ownership Reporting Compliance
Based on the Company's information, all of the directors, officers and
beneficial owners of more than 10% of any class of equity securities have filed
their initial report on Form 3.
<PAGE>22
Item 10. Executive Compensation
Executive Compensation
The following table sets forth the Compensation of the President, and
all other officers who received annual compensation in excess of $100,000 during
1999. As of December 31, 1999, Mr. Alioto had deferred receipt of approximately
$39,000 of compensation, and Mr. Bennett had deferred approximately $31,000.
These deferred amounts are not included in the table below.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
------------------------ ----------------------- ---------
Other Restricted Securities
Annual Stock Underlying LTIP
Name and Principal Compensation Award(s) Options Payouts All Other
Position Year Salary ($) ($) (#) ($) Compensation
- ----------------- ---- ------ ------------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Frank Alioto 1999 $ 95,625 - - - - -
President and CEO 1998 $ 67,500 $51,171(1) - 1,300,000(2) - -
Donald Bennett 1999 $118,750 - - 50,000(3) - -
Vice President 1998 $ 79,038 - - 150,000(4) - -
Deborah McDonald 1999 $117,757 $ 4,525(5) - 200,000(6) - -
Vice President
Janek Kaliczak 1999 $150,000 $ 5,000(7) - 50,000(3) - -
Vice President 1998 $122,500 - - 150,000(4) - -
Steven Levine 1999 $150,000 $25,000(7) - 50,000(3) - -
Vice President 1998 $107,292 $15,000(7) - 150,000(4) - -
</TABLE>
(1) Effective June 23, 1998, Mr. Alioto was elected president of the Company.
Prior to this date, Mr. Alioto served as a consultant to the Company. The
$51,171 represents consulting fees paid to Mr. Alioto.
(2) Represents options to acquire 1,000,000 shares of Common Stock at $0.26 per
share and 300,000 shares at $0.16 per share.
(3) Represents options to acquire shares of Common Stock at $0.17 per share.
(4) Represents options to acquire shares of Common Stock at $0.26 per share.
(5) Represents sales commissions.
(6) Represents options to acquire 150,000 shares of Common Stock at $0.25 per
share and 50,000 shares of Common Stock at $0.17 per share.
(7) Represents a bonus.
<PAGE>23
Employment Contract
On June 23, 1998, the Company hired Mr. Frank Alioto to become President
effective July 1, 1998. Pursuant to his employment contract, Mr. Alioto receives
a salary of $135,000 per year along with other benefits granted to employees of
the Company. Additionally, Mr. Alioto received options to acquire, during a five
(5) year term, up to 1,000,000 shares of Common Stock of the Company at an
exercise price equal to $0.26 per share. On June 26, 1998, options to acquire
166,667 shares of Common Stock vested and became immediately exercisable.
Options to acquire 166,667 shares of Common Stock shall vest on June 26, 1999,
and options to acquire 166,666 shares of Common Stock shall vest on June 26,
2000. Options to acquire the remaining 500,000 shares of Common Stock shall vest
on June 26, 2003, or earlier as determined by the Compensation Committee based
on performance goals. These options shall remain exercisable until June 26,
2003, and in addition shall not expire earlier than two (2) years from the date
of any change of control. Finally, pursuant to his employment contract, Mr.
Alioto shall be indemnified and held harmless by the Company in connection with
his serving as President and Chief Executive Officer of the Company.
Mr. Alioto's employment is on an "at-will" basis. Either the Company or
Mr. Alioto may terminate the employment at any time for any reason. However, in
the event of termination without "cause," the Company shall pay Mr. Alioto a
minimum severance salary, which is equal to three months pay at Mr. Alioto's
then-existing salary as well as twelve (12) additional months of medical and
dental insurance coverage for Mr. Alioto and his dependents. In general, the
term "cause" means a willful breach of the duties Mr. Alioto is required to
perform under the terms of the employment contract, or the commission of such
acts of dishonesty, fraud, or other acts of moral turpitude as would prevent the
effective performance of Mr. Alioto's duties. Mr. Alioto was elected to the
Board of Directors on June 13, 1998, and became Chairman of the Board on
December 15, 1998.
Options Granted in Last Fiscal Year
The following table sets forth options granted by InnovaCom during the last
fiscal year to the executives listed in the summary compensation table.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Percentage of
Total
Options/SARs
Granted to
Options/SARs Employees in Exercise Price
Name Granted Fiscal Year $/sh Expiration Date
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Frank Alioto - - - -
Donald Bennett 50,000 4.93% 0.17 11/15/04
Deborah McDonald 150,000 0.25 03/08/04
50,000 19.71% 0.17 11/05/04
Janek Kaliczak 50,000 4.93% 0.17 11/15/04
Steven Levine 50,000 4.93% 0.17 11/15/04
</TABLE>
<PAGE>24
Aggregate Option Exercise in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth the value of exercised and unexercised options
and SARs held by the executives listed in the summary compensation table at
fiscal year end.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Value of
Unexercised
in-the Money
Options/SARs at Options/ SARs at
Fiscal Year-End Fiscal Year-End
Exercisable Exercisable (E)/
Shares Acquired Value Realized (E)/ Subject to Subject to
Name on Exercise ($) Repurchase (U) Repurchase (U)
---- ---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Frank Alioto None None 633,334 / 666,666 $102,200 / $77,667
Donald Bennett None None 45,000 / 155,000 $5,175 / $22,230
Deborah McDonald None None 0 / 200,000 $0 / $28,905
Janek Kaliczak None None 45,000 / 155,000 $5,175 / $22,230
Steven Levine None None 45,000 / 155,000 $5,175 / $22,230
</TABLE>
Director Compensation
Each director receives, on the date of appointment as a director,
options to acquire shares of Common Stock of the Company. The exercise price of
the option is equal to the trading price of a share of Common Stock as of the
date of grant. A director who also serves as an officer of the Company shall be
entitled to options to purchase 300,000 shares of Common Stock. All other
directors receive options to purchase 200,000 shares of Common Stock.
Item 11. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 15, 2000, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (ii) each officer named in the
compensation table, (iii) each director of the Company as of March 15, 2000, and
(iv) directors and executive officers of the Company, as of March 15, 2000, as a
group.
As of March 15, 2000, there were 36,359,408 shares of Common Stock
outstanding.
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
---------------- --------- ------------
JNC 26,786,389(2) 43.16%
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM 11, Bermuda
<PAGE>25
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
---------------- --------- ------------
Frank Alioto 633,334(3) 1.87%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95053
James D. Casey 390,450(3) 1.16%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
John Champlin, MD 200,900 *
4373 Meadow Circle
Rescue, CA 95672
Robert Sibthorpe 200,000 *
6311 E. Naumann Dr.
Paradise Valley, AZ 85253
Tony Low 200,000(3) *
The Saatchi Entertainment Group
37 26th Avenue
Venice, CA 90291
Mark C. Koz 1,400,000(4) 4.17%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Donald Bennett 45,000(3) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Deborah McDonald 65,000(5) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Janek Kaliczak 45,000(3) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Steven Levine 45,000(3) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
<PAGE>26
All officers and directors as a
group (10 persons) 3,236,984(6) 9.20%
- ----------------------------
*Less than one percent
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed above, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable. Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to options or warrants
currently exercisable, or exercisable within 60 days, are deemed
outstanding for purposes of computing the percentage ownership of the
person holding such options or warrants, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
(2) Includes 22,204,745 shares of Common Stock that may be acquired upon the
conversion of outstanding Debentures, and 3,500,000 shares of Common Stock
that may be acquired upon the exercise of outstanding Warrants.
(3) Represents shares of Common Stock that may be acquired within sixty days
upon exercise of options.
(4) Includes options to acquire 300,000 shares of Common Stock exercisable
within 60 days.
(5) Includes options to acquire 30,000 shares of Common Stock exercisable
within 60 days and 35,000 shares of Common Stock owned by Ms. McDonald's
spouse.
(6) Includes options to acquire 1,901,084 shares of Common Stock exercisable
within 60 days.
Item 12. Certain Relationships and Related Transactions
Micro Technology Credit Facility. In July 1997, a promissory note (the
"Note") was issued to Micro Technology in connection with a credit facility
agreement (the "Credit Facility"). The Credit Facility and Note provided for an
aggregate amount not to exceed $5 million. The Credit Facility terminated and
the Note was due on June 30, 1998, and bore interest at the lower of 10% or the
maximum rate allowed by law (Federal Reserve Bank of San Francisco's rate plus
5%) The Company had the right to prepay the Note. The principal and interest on
the Note might be converted, at the option of the holder, into shares of Common
Stock in an amount equal to 80% of the trading price of a share of Common Stock
on the date an advance of funds was made pursuant to the Credit Facility.
Advances made under the Credit Facility were secured by all of the assets of the
Company including, but not limited to, receivables, goods, equipment, inventory,
contract rights and other property interests.
In May 1998, Micro Technologies converted $4,181,421 of its line of
credit to the Company in exchange for 1,742,362 shares of Common Stock.
On June 26, 1998, Micro Technologies converted its remaining balance on
the credit facility of $317,357 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.
<PAGE>27
Through the merger with Sierra Vista, Micro Technology received
2,500,000 shares of Common Stock, which at the time represented approximately a
14% interest in the Company. Prior to their investment in Sierra Vista, the
owners of Micro Technology were unaffiliated with Sierra Vista and the Company.
Acquisition of Intelligent Instruments Corporation. In 1997, the
Company's Board of Directors tentatively approved the acquisition of Intelligent
Instruments, a company wholly-owned by Mark C. Koz, the Company's former
President and Chief Executive Officer for 2 million shares of Common Stock of
the Company, subject to certain conditions. In 1998 this tentative approval was
withdrawn and the acquisition did not occur. There are no plans to resume this
acquisition effort.
FutureTel. The Company has a license ("FutureTel License Agreement")
from FutureTel to manufacture, use, distribute, sell and otherwise deal with
certain video compression technology which was incorporated into the Company's
design of its single chip MPEG-2 Gecko encoder chip, and when the design effort
on this chip was suspended in 1998, the Company ceased using the technology.
Aside from a sale or license by the Company to another party of the Company's
encoder chip design, an event not considered likely by the Company's management,
the Company has no plans to resume use of the technology licensed from
FutureTel.
In 1998, the Company rented certain items of engineering test equipment
from Mark Koz, or from his wife, for a total rental amount of approximately
$13,000. These rental arrangements were terminated in December 1998.
Robert Sibthorpe. In 1998, the Company borrowed $50,000 from Robert
Sibthorpe on an unsecured demand note at an interest rate of 10% per annum. As
of December 31, 1999, the principal balance outstanding on this note was $5,000.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
3. 1 Certificate of Incorporation, as amended, of the Company (originally filed
as exhibit 2.1)(1)
3.2 Amended and Restated Bylaws of the Company (originally filed as exhibit
2.2)(1)
10.1 Plan and Agreement of Reorganization, dated February 27, 1997, as amended
April 1, 1997 and May 14, 1997, between the Company and Sierra Vista
(originally filed as exhibit 6.1)(1)
10.2 License Agreement, dated as of March 7, 1996, between the Company and
FutureTel (originally filed as exhibit 6.2)(1)
10.3 Employment Agreement with Mark C. Koz, dated as of May 15, 1997
(originally filed as exhibit 6.3)(1)
10.4 Employment Agreement with F. James Anderson, dated as of May 15, 1997
(originally filed as exhibit 6.4)(1)
10.5 Escrow Agreement and Instructions between the Company, Sierra Vista and
Bartel Eng Linn & Schroder, dated as of February 27, 1997 (originally
filed as exhibit 6.5)(1)
10.6 Lease between Cooperage-Rose Properties II and the Company (originally
filed as exhibit 6.6)(1)
10.7 Credit Facility Agreement between the Company and Micro Technology S.A.,
dated as of July 1, 1997 (originally filed as exhibit 6.7)(1)
<PAGE>28
10.8 Security Agreement between the Company and Micro Technology S.A., dated as
of July 1, 1997 (originally filed as exhibit 6.8)(1)
10.9 Convertible Debenture Purchase Agreement, dated as of December 22, 1997,
with JNC (originally filed as exhibit 6.9)(2)
10.10 7% Convertible Debentures, due December 22, 2002, payable to JNC
(originally filed as exhibit 6.10)(2)
10.11 Registration Rights Agreement, dated as of December 22, 1997, with JNC
(originally filed as exhibit 6.11)(2)
10.12 Escrow Agreement, dated December 22, 1997, between the Company, JNC and
Robinson Silverman Pearce Aronsohn & Berman LP (originally filed as
exhibit 6.12)(2)
10.13 Warrants dated December 22, 1997, to purchase up to 500,000 shares of
Common Stock held by JNC (originally filed as exhibit 6.13)(2)
10.14 Warrants dated December 22, 1997, to purchase up to 250,000 shares of
Common Stock held by Cardinal (originally filed as exhibit 6.14)(2)
10.15 Addendum to Credit Facility, dated December 18, 1997, with Micro
Technology S.A. (originally filed as exhibit 6.15)(2)
10.16 Settlement Agreement between the Company and Mark Koz (originally filed as
exhibit 6.16)(3)
10.17 Joint Venture contract between the Company and CRI, dated September 13,
1997 (3)
10.18 Accord and satisfaction and Release Agreement between the Company and
Technical Systems Associates, Inc., dated January 16, 1998 (3)
10.19 Employment Agreement with Thomas E. Burke, dated March 23, 1998 (3)
10.20 1996 Incentive and Nonstatutory Stock Option Plan (originally filed as
exhibit 3.1)(1)
10.21 Voting Agreement of InnovaCom, Inc., dated February 27, 1997, and amended
as of April 1, 1997, May 14, 1997, June 10, 1997, and December 1, 1997,
between Mark Koz and 507784 BC Ltd. (originally filed as exhibit 5.1)(1)
10.22 Convertible Debenture Purchase Agreement dated as of June 29, 1998 between
InnovaCom, Inc. and JNC Strategic Fund Ltd.(4)
10.23 Convertible Debenture Purchase Agreement dated August 28, 1998 between
InnovaCom, Inc. and JNC Strategic Fund Ltd. (4)
10.24 Form of Debenture(4)
10.25 Waiver Agreement dated as of September 18, 1998(4)
10.26 Convertible Debenture Purchase Agreement dated December 15, 1998 between
InnovaCom, inc. and JNC Strategic Fund Ltd.(5)
10.27 The Second Amended and Restated Security Agreement between the Company and
JNC Strategic Fund Ltd., dated as of December 15, 1998(5)
10.28 Employment Agreement with Frank Alioto, dated March 15, 1998(5)
10.29 Asset Purchase Agreement with John Champlin, MD(5)
10.30 Amended Employment Agreement with Mark Koz, dated April 20, 1998(5)
16.1 Letter regarding change in certifying accountant(3)
21.1 Subsidiary of the small business issuer(3)
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
- -------------------------------------------------------------------------------
(1) Previously filed with the Company's Form 10-SB on December 12, 1997.
(2) Previously filed with the Company's Registration Statement on Form SB-2
filed on February 9, 1998.
(3) Previously filed with the Company's Pre-Effective Amendment No. 1 to
Registration Statement on form SB-2 filed on April 15, 1998.
<PAGE>29
(4) Previously filed with the Company's Form 10-QSB for the quarterly period
ended March 31, 1998, filed on September 24, 1998.
(5) Previously filed with the Company's Form 10-KSB for the year ended December
31, 1998.
(b) Reports on Form 8-K.
None
<PAGE>30
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant causes this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
InnovaCom, Inc.
FRANK ALIOTO
By: Frank Alioto, President
In accordance with the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
March 22, 2000 FRANK ALIOTO
Frank Alioto, President and Chairman of
the Board of Directors
Principal Executive Officer)
March 22, 2000 JAMES J. CASEY
James J. Casey, Chief Financial Officer
and Director (Principal Financial and
Accounting Officer)
March 22, 2000 MARK KOZ
Mark Koz, Director
March 22, 2000 TONY LOW
Tony Low, Director
March __, 2000 ______________________________________
Robert Sibthorpe, Director
March 21, 2000 JOHN CHAMPLIN
John Champlin, Director
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report................................................F-2
Consolidated Balance Sheet - December 31, 1999..............................F-3
Consolidated Statements of Operations - For the Years
Ended December 31, 1999 and 1998, and For the Period From
March 3, 1993 (inception) to December 31, 1999...........................F-4
Consolidated Statement of Stockholders' Equity (Deficit) -
For the Period From March 3, 1993 (inception) to December 31, 1999........F-5
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1999 and 1998, and For the Period From
March 3, 1993 (inception) to December 31, 1999...........................F-10
Notes to Consolidated Financial Statements..................................F-12
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
InnovaCom, Inc. and Subsidiaries (a Development Stage Enterprise)
Santa Clara, California
We have audited the accompanying consolidated balance sheet of InnovaCom, Inc.
and subsidiaries (a Development Stage Enterprise) as of December 31, 1999, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended December 31, 1999 and 1998, and
for the period from March 3, 1993 (inception) to December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of InnovaCom, Inc. and
subsidiaries (a Development Stage Enterprise) as of December 31, 1999, and the
results of their operations and cash flows for the years ended December 31, 1999
and 1998, and for the period from March 3, 1993 (inception) to December 31, 1999
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
and as of December 31, 1999 has negative working capital of $17,309,248, and has
a stockholders' deficit of $17,128,098, that raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also described in Note 3. The financial statements do not
include any adjustments relating to the recoverability and classification of
reported asset amounts or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
/S/HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
January 28, 2000, except for Note 14 which is as of March 15, 2000
<PAGE>F-3
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
1999
------------
ASSETS
CURRENT ASSETS:
Cash $ 302,701
Accounts receivable,
less: allowance for doubtful accounts of $10,000 149,075
Other receivables 6,750
Inventory, net 210,536
Prepaid expenses 49,044
------------
Total current assets 718,106
PROPERTY AND EQUIPMENT, net 143,950
DEPOSITS 37,200
------------
TOTAL ASSETS $ 899,256
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable - related parties $ 100,000
Secured promissory notes 4,200,000
Convertible debentures 9,440,000
Accounts payable 1,222,312
Accrued liabilities 3,002,110
Liabilities in excess of assets of discontinued
operations 62,932
------------
Total current liabilities 18,027,354
COMMITMENTS AND CONTINGENCIES (Notes 3, 8 and 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 150,000,000 shares
authorized, 25,784,238 shares issued and outstanding 25,785
Warrants 2,329,325
Additional paid-in capital 23,383,626
Deficit accumulated during development stage (42,866,834)
------------
Total stockholders' (deficit) (17,128,098)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 899,256
============
See accompanying notes to these consolidated financial statements.
<PAGE>F-4
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 3, 1993
FOR THE YEARS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
----------------------------------
1999 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES $ 507,076 $ 107,632 $ 763,708
-------------- -------------- --------------
COSTS AND EXPENSES:
Costs of goods sold 491,633 338,763 882,934
Research and development 1,822,603 3,399,715 12,321,526
Selling, general and administrative 2,762,173 5,901,604 18,940,730
Impairment loss on property and equipment - 937,000 937,000
-------------- -------------- --------------
Total costs and expenses 5,076,409 10,577,082 33,082,190
-------------- -------------- --------------
OPERATING LOSS (4,569,333) (10,469,450) (32,318,482)
-------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest income - 10,025 22,109
Interest expense (2,831,589) (4,761,319) (8,822,139)
Debt conversion expense - (260,645) (260,645)
Other income 1,781 - 1,781
-------------- -------------- --------------
Total other income (expense) (2,829,808) (5,011,939) (9,058,894)
-------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAX EXPENSE AND DISCONTINUED OPERATIONS (7,399,141) (15,481,389) (41,377,376)
INCOME TAX EXPENSE 1,600 1,600 8,000
-------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS: (7,400,741) (15,482,989) (41,385,376)
-------------- -------------- --------------
Gain/(loss) on disposal of discontinued
operations 25,789 (1,155,823) (1,130,034)
Loss from operations of discontinued
operation, net of income tax expense - (400,000) (1,159,452)
-------------- -------------- --------------
GAIN/(LOSS) FROM DISCONTINUED OPERATIONS 25,789 (1,555,823) (2,289,486)
GAIN ON EXTINGUISHMENT OF LIABILITIES 235,093 572,935 808,028
-------------- -------------- --------------
NET LOSS $ (7,139,859) $ (16,465,877) $ (42,866,834)
============== ============== ==============
BASIC AND DILUTED NET LOSS PER SHARE:
Continuing operations $ (.29) $ (.67)
Discontinued operations - (.07)
Extraordinary item .01 .03
-------------- --------------
Basic and diluted net loss per share $ (.28) $ (.71)
============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 25,099,278 23,032,965
============== ==============
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>F-5
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
---------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
----------- -------- ----------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock, issued to form
company at $0.0017 per
share (March 1993) 5,100,000 $ 5,100 $ - $ 3,400 $ - $ 8,500
Net loss - - - - (800) (800)
----------- -------- ----------- ------------ ------------- -------------
BALANCES, December 31, 1993 5,100,000 5,100 - 3,400 (800) 7,700
Net loss - - - - (800) (800)
----------- -------- ----------- ------------ ------------- -----------
BALANCES, December 31, 1994 5,100,000 5,100 - 3,400 (1,600) 6,900
Net loss - - - - (800) (800)
----------- -------- ----------- ------------ ------------- -----------
BALANCES, December 31, 1995 5,100,000 5,100 - 3,400 (2,400) 6,100
Issuance of common stock at
$0.50 per share to directors
for services performed (March 1996) 900,000 900 - 449,100 - 450,000
Acquisition of Jettson Realty
Development, Inc. at $0.30 per
shares (June 1996) 561,069 561 - 168,184 - 168,745
Sale of common stock, net of expenses
at $0.16 per share (July 1996) 4,620,015 4,620 - 715,380 - 720,000
Issuance of common stock at $0.50
per share to employees for
services performed (July 1996) 500,000 500 - 249,500 - 250,000
Issuance of common stock at $1.36 per
share for consulting services
performed (July 1996) 250,000 250 - 388,960 - 389,210
Sale of common stock at $5.00 per
share, net of expenses
(October 1996) 280,000 280 - 1,399,720 - 1,400,000
Compensation recognized upon issuance
of stock options - - - 2,493,873 - 2,493,873
Contribution of product license - - - 1,275,000 - 1,275,000
Net loss - - - - (8,193,395) (8,193,395)
----------- -------- ----------- ------------ ------------- -----------
BALANCES, December 31, 1996 12,211,084 12,211 - 7,143,117 (8,195,795) (1,040,467)
<PAGE>F-6
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1999
(Continued)
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
--------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
---------- -------- ----------- -------------- ------------- ---------------
Issuance of common stock in
exchange for technology at
$5.00 per share (January 1997) 100,000 $ 100 $ - $ 499,900 $ - $ 500,000
Sale of common stock, net of
expenses at $2.90 per share
(Frebruary 1997) 229,310 229 - 664,771 - 665,000
Acquisition of Sierra Vista at
$0.50 per share (May 1997) 8,514,500 8,515 - 4,248,735 - 4,257,250
Issuance of common stock at $2.43
per share for legal services
rendered (June 1997) 7,003 7 - 16,976 - 16,983
Shares returned per settlement
agreement at par value (500,000) (500) - 500 - -
Warrants issued with sale of
convertible debentures
(December 1997) - - 968,578 - - 968,578
Allocation of proceeds from notes
payable and long-term liabilities
due to beneficial conversion feature - - - 2,086,988 - 2,086,988
Compensation recognized upon issuance
of stock options - - - 1,558,666 - 1,558,666
Net loss - - - - (11,065,303) (11,065,303)
----------- -------- ----------- ------------ ------------- -----------
BALANCES, December 31, 1997 20,561,897 20,562 968,578 16,219,653 (19,261,098) (2,052,305)
Issuance of common stock at $1.75
per share in connection with
issuance of notes payable
(May 1998) 125,000 125 - 218,625 - 218,750
Issuance of common stock at $2.40
per share in connection with
conversion of notes payable -
related party (May 1998) 1,742,362 1,742 - 4,179,679 - 4,181,421
Issuance of common stock at $1.39
per share in connection with
conversion of debentures (May 1998) 7,431 7 - 10,285 - 10,292
<PAGE>F-7
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1999
(Continued)
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
--------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
---------- -------- ----------- -------------- ------------- ---------------
Issuance of common stock at $0.26
per share in connection with
conversion of notes payable to
a related party (June 1998) 2,057,146 $ 2,057 $ - $ 532,800 $ - $ 534,857
Issuance of common stock at $0.29
per share in connection with
conversion of debentures (June 1998) 70,339 71 - 20,638 - 20,709
Issuance of common stock at $0.32
per share in connection with
conversion of debentures (June 1998) 63,971 64 - 20,624 - 20,688
Issuance of common stock at $0.26
per share for services (June 1998) 100,000 100 - 25,900 - 26,000
Issuance of common stock at $0.19
per share in connection with
conversion of debentures (July 1998) 56,184 56 - 10,372 - 10,428
Issuance of common stock at $0.26
per share in connection with
conversion of debentures (July 1998) 121,654 122 - 31,021 - 31,143
Issuance of common stock at $0.17
per share in connection with
conversion of debentures
(September 1998) 60,160 60 - 10,432 - 10,492
Issuance of common stock at $0.10
per share in connection with
conversion of debentures
(October 1998) 110,264 110 - 10,475 - 10,585
Issuance of common stock at $0.11
per share in connection with
conversion of debentures
(November 1998) 969,536 970 - 105,291 - 106,261
Shares canceled from default at par (510,329) (510) - 510 - -
Shares canceled from default
judgement issued for services at
$0.50 per share (500,000) (500) - (249,500) - (250,000)
Compensation recognized upon
issuance of stock options - - - 366,303 - 366,303
<PAGE>F-8
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1999
(Continued)
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
--------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
---------- -------- ----------- -------------- ------------- ---------------
Allocation of proceeds from notes
payable and debentures due to
beneficial conversion feature - $ - $ - $ 859,140 $ - $ 859,140
Warrants issued with sale of
convertible debentures - - 338,825 - - 338,825
Debt conversion expense - - - 260,645 - 260,645
Contested proceeds from private
placements reclassified from
accrued liabilities due to
defaults - - - 250,959 - 250,959
Net Loss - - - - (16,465,877) (16,465,877)
----------- -------- ----------- ------------ ------------- -------------
BALANCES, December 31, 1998 25,035,615 25,036 1,307,403 22,883,852 (35,726,975) (11,510,684)
Issuance of common stock at $0.15
per share for services (March 1999) 200,000 200 - 29,800 - 30,000
Shares canceled originally issued
for services at share $0.26 per
share (June 1998) (100,000) (100) - (25,900) - (26,000)
Issuance of common stock at $0.57
per share for services (May 1999) 40,000 40 - 22,670 - 22,710
Proceeds from the exercise of stock
options 6,000 6 - 1,554 - 1,560
Issuance of common stock at $0.19
per share in connection with
conversion of debentures
(December 1999) 602,623 603 - 113,689 - 114,292
Warrants issued with sale of
convertible debentures - - 1,021,922 - - 1,021,922
Allocation of proceeds from notes
payable and debentures due to
beneficial conversion feature - - - 76,480 - 76,480
Compensation recognized upon
issuance of stock options - - - 40,234 - 40,234
<PAGE>F-9
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1999
(Continued)
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
--------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
---------- -------- ----------- -------------- ------------- ---------------
Proceeds received from settlement
agreement, net of legal costs - - - 241,247 - 241,247
Net Loss - - - - (7,139,859) (7,139,859)
----------- -------- ----------- ------------ ------------- -------------
BALANCES, December 31, 1999 25,784,238 $ 25,785 $ 2,329,325 $ 23,383,626 $ (42,866,834) $ (17,128,098)
=========== ======== =========== ============ ============= =============
</TABLE>
<PAGE>F-10
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
MARCH 3, 1993
FOR THE YEARS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
----------------------------------
1999 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (7,400,741) $ (15,482,989) $ (41,385,376)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 144,343 291,363 872,860
Provision for inventory obsolescence 40,182 - 40,182
Provision for doubtful accounts 20,000 - 20,000
Amortization of discount on long-term debt - 2,345,866 2,345,866
Loss on sale of fixed assets 24,630 - 24,630
Impairment loss on property and equipment - 937,000 939,559
Interest related to beneficial conversion
feature and warrants issued in connection
with notes payable and convertible
debentures 1,098,402 1,197,965 3,397,474
Compensation recognized upon issuance of
stock and stock options 66,945 611,053 5,836,730
Shares canceled from default judgement - (250,000) (250,000)
Contribution of product license - - 1,275,000
Write down of purchased incomplete
research and development - - 500,000
Gain on extinguishment of liabilities 235,093 572,935 808,028
Debt conversion expense - 260,645 260,645
Write-off of related party receivable - - 139,594
Write-off of acquisition costs - 68,364 68,364
Changes in operating assets and
liabilities:
Cash - restricted - 8,481 -
Accounts receivable (150,330) (8,745) (159,075)
Other receivables 61,498 (16,748)
Inventory (250,718) (250,718)
Prepaid expenses (47,298) 96,631 (49,048)
Deposits - 52,679 (37,200)
Accounts payable (498,538) 1,438,485 1,631,194
Accrued liabilities 1,751,112 678,309 3,602,601
------------- -------------- --------------
Net cash used in operating activities
from continuing operations (4,905,420) (7,181,958) (20,385,438)
------------- -------------- --------------
Net loss from discontinued operations 25,789 (1,555,823) (2,289,486)
Loss on disposal of assets - 48,568 48,568
Write-down of film rights and film costs
inventory - 277,500 250,000
Write-down of goodwill - 848,129 848,129
Change in liabilities in excess of assets
of discontinued operations - 62,932 62,932
------------- -------------- --------------
Net cash provided by (used in)
operating activities from
discontinued operations 25,789 (318,694) (1,079,857)
</TABLE>
<PAGE>F-11
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
MARCH 3, 1993
FOR THE YEARS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
----------------------------------
1999 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition of Sierra
Vista Entertainment $ - $ - $ 2,916,798
Cost incurred for organization of joint
venture - - (68,364)
Advance to related party - - (139,594)
Purchases of property and equipment (9,934) (1,216,870) (2,200,151)
Proceeds from sale of assets 525 - 4,025
------------- -------------- --------------
Net cash provided by (used in)
investing activities $ (9,409) $ (1,216,870) $ 512,714
------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 777,500 4,865,490
Proceeds from secured promissory notes 4,200,000 - 4,200,000
Net proceeds from sale of convertible
debentures with detachable warrants 750,000 4,000,000 9,358,593
Principal payments on notes payable-related
party (35,000) (174,478) (309,278)
Proceeds from sale of common stock - - 2,897,670
Proceeds from issuance of stock options 1,560 - 1,560
Proceeds from settlements 241,247 - 241,247
------------- -------------- --------------
Net cash provided by financing
activities $ 5,157,807 $ 4,603,022 $ 21,255,282
------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 268,767 (4,114,500) 302,701
CASH AND CASH EQUIVALENTS, beginning of
period 33,934 4,148,434 -
------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 302,701 $ 33,934 $ 302,701
============= ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ - $ - $ 9,079
============= ============== ==============
Income taxes $ 2,400 $ 2,400 $ 11,200
============= ============== ==============
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net assets acquired, net of cash,
through acquisition of Sierra
Vista Entertainment $ - $ - $ 1,340,452
============= ============== ==============
Return of 500,000 shares of common
stock per settlement agreement $ - $ - $ 500
============= ============== ==============
Acquisition of technology for stock $ - $ - $ 500,000
============= ============== ==============
Conversion of notes payable, debentures
and accrued interest to equity $ 114,292 $ 4,936,876 $ 5,051,168
============= ============== ==============
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>F-12
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
InnovaCom, Inc. (the "Company") was formed to develop digital video
compression and processing technology to provide broadcast quality video
encoding and processing products and systems.
The Company was formed pursuant to a business reorganization effective
July 10, 1996 between Jettson Realty Development, Inc. ("JRD"), a Nevada
corporation formed in 1990 and InnovaCom Corp. (InnovaCom Florida), a
Florida corporation formed in 1993. Under the reorganization, JRD issued
6,000,000 previously unissued restricted common shares in exchange for all
of the issued and outstanding common stock of InnovaCom Florida. JRD's
board of directors then changed the name of JRD to InnovaCom, Inc. and
InnovaCom Florida became its wholly owned subsidiary. Prior to the
reorganization, JRD had no operations. This transaction was accounted for
as a reverse acquisition of JRD by InnovaCom Florida.
On May 14, 1997, the Company acquired 100% of the issued and outstanding
shares of Sierra Vista Entertainment, Inc., a Nevada Corporation ("Sierra
Vista"), in exchange for 8,514,500 previously unissued shares of common
stock of the Company. The transaction was accounted for as a purchase. The
fair market value per share of the common stock issued in the transaction
was $0.50. The resulting purchase price was $4,257,250 with $1,090,452
being allocated to goodwill. Sierra Vista was formed to acquire, produce
and distribute low-budget feature films. On June 15, 1998 (measurement
date), the Company's Board of Directors decided to discontinue the
operations of Sierra Vista. Accordingly, Sierra Vista is accounted for as
a discontinued operation in the accompanying consolidated financial
statements.
Liabilities in excess of assets of discontinued operations consist of
Sierra Vista accounts payable as of December 31, 1999. Since inception,
Sierra Vista has never generated any revenues.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. The actual results could
differ from those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the estimated useful lives selected for property and
equipment and the adequacy of valuation allowances. Due to the
uncertainties inherent in the estimation process, it is at least
reasonably possible that these estimates will be further revised in the
near term and such revisions could be material.
<PAGE>F-13
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Cash Flows - For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over the
estimated useful lives (3 years) of the respective assets. The cost of
normal maintenance and repairs is charged to operations as incurred.
Material expenditures that increase the life of an asset are capitalized
and depreciated over the estimated remaining useful life of the asset. The
cost of fixed assets sold, or otherwise disposed of, and the related
accumulated depreciation or amortization is removed from the accounts, and
any gains or losses are reflected in current operations.
Goodwill - Goodwill, representing the excess of the cost over the net
tangible and identifiable intangible assets of the acquired business, was
stated at cost and was amortized on a straight-line basis, over the future
periods to be benefited estimated to be three years. Due to the
discontinuance of Sierra Vista, goodwill in the amount of $848,129 was
written off during the year ended December 31, 1998.
Impairment of Long-Lived Assets - In the event that facts and
circumstances indicate that the cost of long-lived assets may be impaired,
an evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required.
Revenue Recognition - The Company allows customers to demo units, for a
period specified in the purchase order, prior to committing to a sale.
Revenue is recognized once the customer has committed to purchase the demo
units
Debt Issuance Costs - Debt issue costs represent the offering costs
associated with the sale of the debentures (See Note 9) and were being
amortized using the interest method over the life of the debentures. The
Company was in violation of certain covenants under the terms of the
debentures. Consequently, the debentures are classified as current in the
accompanying consolidated financial statements and debt issue costs of
$664,815 capitalized as of December 31, 1997 were written off during the
year ended December 31, 1998. Debt issue costs associated with debentures
sold during the years ended December 31, 1999 and 1998 were immediately
expensed due to the violation of certain covenants under the terms of the
debentures.
Research and Development Costs - Research and development costs are
charged to operations in the period incurred.
Income Taxes - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between
the financial statements and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
<PAGE>F-14
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation - The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB25) and related interpretations in accounting for its
employee stock options. In accordance with FASB123 entitled "Accounting
for Stock-Based Compensation"; the Company will disclose the impact of
adopting the fair value accounting of employee stock options. Transactions
in equity instruments with non-employees for goods or services have been
accounted for using the fair value method prescribed by FASB123.
Concentrations of Credit Risk - Credit risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk
(whether on or off balance sheet) that arise from financial instruments
exist for groups of customers or groups of counterparties when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly effected by changes in economic or
other conditions. In accordance with FASB105 entitled "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", the credit risk
amounts shown do not take into account the value of any collateral or
security.
The Company operates primarily in one industry segment and a concentration
exists because the Company's has two primary customers that generate more
than 61% of revenues. Financial instruments that subject the Company to
credit risk consist principally of accounts receivable.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments, under FASB107 entitled "Disclosures about Fair
Value of Financial Instruments", are determined at discrete points in time
based on relevant market information. These estimates involve
uncertainties and cannot be determined with precision. The estimated fair
values of the Company's financial instruments, which includes all cash,
accounts receivable, accounts payable, short term demand notes,
convertible debentures, and other debt, approximates the carrying value in
the consolidated financial statements at December 31, 1999.
Earnings per Share - Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted average number of shares of common stock outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. All such
securities or other contracts were anti-dilutive for all periods presented
and, therefore, excluded from the computation of earnings per share.
Impact of Recently Issued Standards - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133 (FASB133), "Accounting for Derivative Instruments and
Hedging Activities". This statement is effective for fiscal years
beginning after June 15, 1999. Earlier application is encouraged; however,
the Company does not anticipate adopting FASB133 until the fiscal year
beginning January 1, 2000. FASB133 requires that entities recognize all
derivatives as assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company does not
believe the adoption of FASB133 will have a material impact on its
financial statements.
Reclassification - Certain reclassifications have been made to conform
1998 financial statements to the presentation in 1999. The
reclassifications had no effect on net income.
<PAGE>F-15
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BASIS OF PRESENTATION:
The financial statements have been prepared on a going concern basis,
which contemplates, among other things, the realization of assets and the
satisfaction of liabilities in the normal course of business. However,
there is substantial doubt about the Company's ability to continue as a
going concern because of the magnitude of its loss of $7,139,859 for the
year ended December 31, 1999, and its negative working capital of
$17,309,248 and its stockholder's deficit of $17,128,098 as of December
31, 1999. The Company's continued existence is dependent upon its ability
to raise substantial capital, to generate revenues to significantly
improve operations and ultimately achieve profitability.
During 1999, the Company sold $750,000 in 7% convertible debentures,
converted $114,292 of debt and accrued interest to equity, settled
$481,506 of accounts payable for a discount resulting in a gain on
extinguishment of liabilities totaling $235,093, and borrowed $4,200,000
through the issuance of 13% secured promissory notes, due on demand, and
is attempting to raise additional capital. Management believes that these
actions will allow the Company to continue as a going concern.
Accordingly, the financial statements do not include any adjustments
relating to the recoverabilty and classification of recorded asset amounts
or the amount and classification of liabilities or any other adjustment
that might be necessary should the Company be unable to continue as a
going concern.
4. INVENTORY:
Inventories are stated at the lower of cost or market and consist
primarily of the following:
Raw materials $ 110,249
Work in process 66,766
Finished Goods 73,703
----------
250,718
Less: Inventory reserve (40,182)
----------
$ 210,536
==========
The inventory reserve includes estimated costs to rework the demo units
returned by customers and a provision for units not returned.
<PAGE>F-16
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
Computer and equipment $ 273,965
Office equipment and furniture 125,774
----------
399,739
Accumulated depreciation (255,789)
----------
$ 143,950
==========
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
Accrued payroll and benefits $ 283,788
Accrued interest 1,385,552
Accrued penalty related to
convertible debentures 1,096,225
Other 236,545
-----------
$ 3,002,110
===========
7. NOTES PAYABLE - RELATED PARTIES:
Note payable to a former
director in the original amount
of $50,000 bearing interest at $ 5,000
10%, due on demand
Note payable to a former
director in the original amount
of $125,000 bearing interest at
8% with monthly payments of
$10,000, due on demand 95,000
-----------
$ 100,000
===========
In connection with the notes payable - related parties discussed above,
the Company issued 100,000 shares of common stock to the related parties
and has recognized $175,000 in interest expense for the year ended
December 31, 1998 for the fair value of the shares issued.
<PAGE>F-17
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, the Company entered into a revolving convertible debt
facility with a shareholder which bore interest at 10% and provided for
the conversion of all amounts outstanding into common stock at a
conversion price equal to 80% of the market price for a share of common
stock at the time a draw is funded. In May 1998, the shareholder converted
$4,181,421 of the amount outstanding into 1,742,362 shares of common
stock. In June 1998, the shareholder converted its remaining balance
outstanding of $317,357 into common stock and terminated the credit
facility. As an inducement to make this conversion, the Company allowed
the shareholder to convert the remaining balance into 1,220,608 shares of
common stock based on the market price of the stock of $0.26 per share as
opposed to the conversion price of $2.40 per share. During 1998, the
Company recognized an additional expense of $260,645 for the value of the
additional shares issued to induce the conversion.
7. SECURED PROMISSORY NOTES:
During 1999, the Company entered into promissory note agreements totaling
$4,200,000 that are due on demand and accrue interest at 13% per annum.
The notes are secured by substantially all of the Company's assets. As
part of the issuance of the notes, the Company issued to the note holder
five-year warrants to purchase 2,300,000 shares of common stock at prices
ranging from $0.25 to $0.65. In addition, the Company issued five-year
warrants to purchase 840,000 shares of common stock at prices ranging from
$0.16 to $0.84 per share as a finder's fee.
The Company recognized interest expense of $1,004,163, related to the
promissory notes, during the year ended December 31, 1999 that is
attributable to the fair value of the warrants issued.
8. LONG-TERM DEBT:
In December 1997, the Company issued $5,000,000 of 7% convertible
debentures due in December 2002. The debentures accrue interest at 7% per
annum and are convertible into shares of common stock at a conversion
price equal to the lesser of $3.47 per share or 80% of the five day
average market price per share prior to conversion. As part of the
issuance of the debentures, the Company issued to the debenture holders
five year warrants to purchase 250,000 shares of common stock at $3.00 per
share and 250,000 shares of common stock at $4.00 per share. In addition,
the Company issued a five-year warrant to purchase 250,000 shares of
common stock at $2.43 per share as a finder's fee.
In June 1998, the Company issued $2,000,000 of 7% convertible debentures
due in June 2003. The debentures accrue interest at 7% per annum and are
convertible into shares of common stock at a conversion price equal to
$0.35 per share. As part of the issuance of the debentures, the Company
issued to the debenture holders five-year warrants to purchase 500,000
shares of common stock at $0.50 per share. In addition, the Company issued
five-year warrants to purchase 400,000 shares of common stock at $0.34 per
share as a finders fee.
<PAGE>F-18
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 1998, the Company issued $1,500,000 of 7% convertible debentures
due in August 2003. The debentures accrue interest at 7% per annum and are
convertible into shares of common stock at a conversion price equal to the
lesser of $0.26 per share or 75% of the five day average market price per
share prior to conversion. As part of the issuance of the debentures, the
Company issued to the debenture holders five year warrants to purchase
75,000 shares of common stock at $0.50 per share, and cancelled the
500,000 warrants issued with the December 1997 debentures and issued new
five year warrants to purchase 500,000 shares of common stock at $0.50 per
share. In addition, the Company issued five-year warrants to purchase
300,000 shares of common stock at $0.21 per share as a finders fee.
In December 1998, the Company issued $500,000 of 7% convertible debentures
due in December 2003. The debentures accrue interest at 7% per annum and
are convertible into shares of common stock at a conversion price equal to
the lesser of $0.18 per share or 75% of the five day average market price
per share prior to conversion. As part of the issuance of the debentures,
the Company issued to the debenture holders five-year warrants to purchase
125,000 shares of common stock at $0.50 per share. In addition, the
Company issued five-year warrants to purchase 100,000 shares of common
stock at $0.14 per share as a finder's fee.
In January 1999, the Company issued $750,000 of 7% convertible debentures
due in January 2004. The debentures accrue interest at 7% per annum and
are convertible into shares of common stock at a conversion price equal to
the lesser of $0.1275 per share or 75% of the five day average market
price per share prior to conversion. As part of the issuance of the
debentures, the Company issued to the debenture holders five-year warrants
to purchase 187,500 shares of common stock at $0.50 per share. In
addition, the Company issued five-year warrants to purchase 150,000 shares
of common stock at $0.11 per share as a finder's fee.
All of the debentures are secured by all of the assets of the Company. The
Company is in violation of certain covenants related to the debentures;
consequently all of the debentures have been classified as current in the
accompanying financial statements. Pursuant to the convertible debenture
agreements, the Company has accrued a penalty of 1 1/2% of the outstanding
balance of the debentures totaling $1,096,225 at December 31, 1999 as a
penalty for the violation of certain of the covenants.
The unamortized debt issuance costs and discount in the amount of
$2,345,866 associated with the December 1997 debentures were written-off
during the year ended December 31, 1998. The Company has also recognized
additional interest expense of $94,239 and $1,093,879 during the years
ended December 31, 1999 and 1998, respectively, which is attributable to
the fair value of the warrants and the beneficial conversion features
associated with the debentures issued.
In the year ended December 31, 1998, the holders of the December 1997
debentures converted $210,000 in principal and $10,597 in accrued interest
into 1,459,539 shares of common stock. During 1999, the holders of the
December 1997 debentures converted $100,000 in principal and $14,292 in
accrued interest into 602,623 shares of common stock.
<PAGE>F-19
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY:
In 1999, the Board of Directors approved an amendment to increase in the
authorized number of common stock to 150,000,000 shares at a par value
of $0.001 per share.
In May 1998, the Company borrowed $217,500 that was converted into
836,538 shares of common stock. In connection with this borrowing, the
Company issued 25,000 shares of common stock and recognized $43,750 in
interest expense for the year ended December 31, 1998 for the fair value
of the 25,000 shares issued.
10. STOCK OPTION PLANS:
In October 1996, the Company adopted the 1996 Incentive and
Non-statutory Stock Option Plan (the 1996 Plan) covering 1,500,000
shares. In 1997 this was increased to 3,000,000 shares pending
shareholder approval. Under the plan, the Company can grant to key
employees, directors, and consultants either incentive, non-statutory,
or performance based stock options. The price of the options granted
pursuant to the plan shall not be less than 100% of the fair market
value of the shares on the date of grant. The board of directors will
decide the vesting period of the options, if any, and no option will be
exercisable after ten years from the date granted. Prices for incentive
options granted to employees who own 10% or more of the Company's stock
is at least 110% of market value at date of grant.
In January 1999, the Company adopted the 1999 Non-statutory Stock Option
Plan (the 1999 plan) covering 5,000,000 shares. The 1999 plan is a "dual
plan" which provides for the grant of both incentive stock options and
non-qualified stock options and was designed to attract and retain the
services of employees, officers, directors, and consultants. The price
of the options granted pursuant to the plan shall not be less than 100%
of the fair market value of the shares on the date of grant. The plan
will be administered by a compensation committee consisting of two or
more disinterested non-employee board members whom will decide the
vesting period of the options, if any, and no option will be exercisable
after ten years from the date granted. Prices for incentive options
granted to employees who own 10% or more of the Company's stock is at
least 110% of market value at date of grant.
During 1998, the Company granted options to purchase 1,966,400 shares of
common stock to employees under the 1996 plan. The options were granted
with exercise prices equal to market on the date of grant and range from
$0.26 to $2.50 per share. The options expire in 2003 and vest over three
years.
In March 1998, the Company granted non-plan options to purchase 50,000
shares of common stock to an employee. The options were granted with an
exercise price of $1.75 per share. One third of the options vest
immediately and the remainder vest over two years. Compensation expense
of $8,854 was recognized in the year ended December 31, 1998 for
services provided.
<PAGE>F-20
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 1998, the Company granted options to purchase 1,000,000 shares of
common stock at an exercise price of $1.75 per share in connection with
the hiring of a new president. In December 1998, the Company settled a
claim with this individual in which 500,000 of these options were
forfeited.
In October 1998, the Company granted non-plan options to purchase
300,000 shares of common stock to a director. The options were granted
with an exercise price equal to market on the date of grant ($0.16 per
share) and vest immediately.
In January 1999, the Company granted non-plan options to purchase
300,000 shares of common stock to an officer. The options were granted
with an exercise price equal to market on the date of grant ($0.12 per
share) and vest immediately.
During 1999, the Company granted options to purchase 962,400 shares of
common stock to employees under the 1996 and 1999 plans. The options
were granted with exercise prices equal to market on the date of grant
and range from $0.17 to $0.51 per share.
The options expire in 2004 and vest over three years.
The following table sets forth activity for all options granted under
the 1996 and 1999 Plans:
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- -------
BALANCE, December 31, 1997 2,808,323 $ 2.63
Granted 2,419,833 .32
Forfeited (2,558,323) 2.57
Exercised - -
---------- -------
BALANCE, December 31, 1998 2,669,833 $ .59
========== =======
Granted 962,400 .22
Forfeited (89,683) .25
Canceled/Expired (271,000) .26
Exercised (6,000) .26
---------- -------
BALANCE, December 31, 1999 3,265,550 $ .52
========== =======
At December 31, 1999 options to purchase 1,007,025 shares were
exercisable at prices ranging from $0.17 to $2.59 per share. The
remaining 2,258,525 options outstanding become exercisable at prices
ranging from $0.17 to $1.75 per share through June 2003.
<PAGE>F-21
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If not previously exercised the outstanding plan options will expire as
follows:
AVERAGE
NUMBER OF EXERCISE PRICE
YEAR ENDING DECEMBER 31, SHARES PER SHARE
------------------------ ------------ --------------
2001 159,000 $ .26
2002 426,600 1.58
2003 1,773,550 .43
2004 906,400 .24
--------- ------
3,265,550 $ .52
========= ======
The following is a summary of all of the activity for non-plan options:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
BALANCE, December 31, 1997 4,750,493 $ 2.86
Options granted to employees 1,050,000 1.75
Options granted to directors 1,800,000 .24
Expired/cancelled options (4,366,665) 2.78
---------- --------
BALANCE, December 31, 1998 3,233,828 $ 1.24
Options granted to employees 300,000 .12
Expired/cancelled options (771,326) 2.92
---------- --------
BALANCE, December 31, 1999 2,762,502 $ 1.24
========== ========
At December 31, 1999 options to purchase 2,412,502 shares were
exercisable at prices ranging from $0.12 to $3.37 per share. The
remaining 350,000 options outstanding become exercisable at a price of
$1.75 per share through 2001.
If not previously exercised or forfeited, all options will expire during
the years ended December 31, 2000 through 2008.
<PAGE>F-22
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As stated in Note 2, the Company has not adopted the fair value
accounting prescribed by FASB123 for employees. Had compensation cost
for stock options issued to employees been determined based on the fair
value at grant date for awards in 1999 and 1998 consistent with the
provisions of FASB123, the Company's net loss and net loss per share
would have been adjusted to the proforma amounts indicated below:
1999 1998
Net loss $ (7,713,626) $ (21,539,607)
============= =============
Basic and diluted net loss per
common share $ (0.31) $ (0.94)
============= =============
The fair value of each option was estimated on the date of grant using
the Black-Scholes option-pricing model using the following assumptions:
risk-free interest rates ranging from 4.70% to 5.84%, expected life of
three years; dividend yield of 0%; and expected volatility ranging from
136.7% to 150.9%. The weighted-average fair value of the options on the
grant date for 1999 and 1998 was $0.20 and $1.41 per share,
respectively.
11. COMMITMENTS AND CONTINGENCIES:
In July 1997, the board of directors approved the Company entering into
an agreement to obtain a 66% interest in a joint venture with China
International Radio Development. As part of this agreement, the Company
will have to fund up to $200,000 of expenses. The purpose of the joint
venture is to develop an exhibition center in China to display new
high-tech products. In connection with obtaining the joint venture
interest, during 1998, the Company issued 100,000 shares of common stock
to a third party as a finder's fee upon closing of the agreement and
recognized $26,000 in expense for services provided. During the year
ended December 31, 1998, the Company entered into an agreement to obtain
a release from all obligations under the joint venture agreement. As
part of the agreement, in March 1999, the Company paid $53,000 for past
consulting fees, canceled the 100,000 shares previously issued for
services in 1998, and issued 200,000 new shares at a price of $0.15 per
common share.
Leases - The Company leases office space in California. The Company's
leases include the cost of real property taxes and maintenance expenses.
Insurance and utilities are the Company's responsibility. Future minimum
lease payments for all non-cancelable operating leases are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------------
2000 345,600
2001 345,600
2002 345,600
------------
$ 1,036,800
============
Rent expense was $410,306 and $427,826 for 1999 and 1998, respectively.
<PAGE>F-23
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation - On November 10, 1997 the Company filed a suit against
former officers and directors of the Company for breach of fiduciary
duty and third parties who were involved in the initial merger between
the Company and Jettson Realty Development as well as the private
placements of the Jettson Realty Development stock. The suit claims
fraud, breach of fiduciary duty and negligence surrounding the
acquisition. Management intends to pursue this lawsuit vigorously and
believes that no material adverse impact will arise as a result of the
litigation. During 1997, the Company has entered into a settlement
agreement with the Company's former president related to this suit
whereby the Company's president agreed to return 500,000 shares of
common stock. During 1998, the Company obtained defaults against certain
of the defendants whereby the Company was awarded approximately $25
million in damages, allowed to cancel 1,010,329 shares of its common
stock previously issued to the defendants, and retain $250,959 of
contested proceeds from a private placement. The Company has given no
accounting recognition to the $25 million in damages.
During 1999, the Company entered into a settlement agreement and mutual
release with a party named in the November 10, 1997 lawsuit for proceeds
in favor of the Company equaling $80,000. In addition, the Company
entered into another settlement agreement with a party named in the
November 10, 1997 lawsuit for proceeds in favor of the Company totaling
$70,000 to be paid in two payments of $20,000 on September 15, 1999 and
October 15, 1999 and three annual payments of $10,000 due September 15,
2000 through 2002.
In connection with the November 10, 1997 lawsuit, the Company has
entered into a settlement agreement with the transfer agent named in the
lawsuit in November 1999. In exchange for the mutual release of all
claims, the transfer agent agreed to a judgement in favor of the Company
for $750,000 to be paid in one payment of $350,000 on December 15, 1999
and eight annual payments of $50,000 due December 15, 2000 through 2007.
In August 1998, the Staff of the Division of Enforcement of the
Securities and Exchange Commission advised the Company that the
Commission had issued a formal order for private investigation. The
investigation involves allegations that, since January 1, 1995, certain
of the Company's present or former officers, directors, employees,
business consultants, investment bankers, and/or certain other persons
or entities associated with the Company may have employed devices,
schemes, or artifices to defraud, by, among other things, making
undisclosed payments to certain registered representatives relating to
sales of the Company's securities, and by manipulating the Company's
stock price. Discovery has been initiated. Management believes based on
current information, that there will be no material adverse impact on
the Company as a result of this investigation.
<PAGE>F-24
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES:
Income tax expense is comprised of the following:
MARCH 3, 1993
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
-----------------------
1999 1998 1999
-------- -------- --------
Current:
Federal $ - $ - $ -
State 1,600 1,600 8,000
-------- -------- --------
1,600 1,600 8,000
-------- -------- --------
Deferred:
Federal - - -
State - - -
-------- -------- --------
Income tax expense $ 1,600 $ 1,600 $ 8,000
======== ======== ========
Deferred income tax assets (liabilities) are comprised of the following
at December 31, 1999:
Current deferred income tax assets (liabilities):
Provision for inventory obsolescence $ 16,004
Provision for doubtful accounts 7,966
Accrued vacation 26,434
Accrued wages 86,598
Accrued interest for convertible debt 436,626
Stock based compensation 1,776,050
Other 816
------------
2,350,494
Valuation allowance (2,350,494)
------------
Net current deferred tax asset $ -
============
Long-term deferred tax assets (liabilities):
Depreciation/amortization $ 2,283,473
Net operating loss carryforward 10,155,910
Research and development credit 1,126,419
------------
13,565,802
Valuation allowance (13,565,802)
------------
Net long-term deferred tax asset $ -
============
<PAGE>F-25
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total income tax expense differed from the amounts computed by applying
the U.S. federal statutory tax rates to pre-tax income as follows:
MARCH 3, 1993
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
--------------------- --------------
1999 1998 1999
------- ------ ------
Total expense (benefit)
computed by applying the
U.S. statutory rate (34.0%) (34.0%) (34.0%)
Nondeductible license costs - - 1.0
Nondeductible goodwill - 5.5 2.6
Non deductible interest 1.0 13.9 7.9
Other .1 .4 .2
Change in beginning balance
of valuation allowance 32.9 14.2 22.3
----- ----- -----
-% -% -%
===== ===== =====
As of December 31, 1999, the Company has available net operating loss
carryforwards for income taxes of $23,634,607 for federal purposes and
$23,983,524 for California purposes that begin to expire in the year
2011 and 2001, respectively. The Company has $760,132 and $366,287 of
credit carryforwards for federal and California, respectively. The
benefit of the net operating loss and credit carryovers to offset future
taxable income may be subject to limitation as a result of changes in
stock ownership as prescribed in Internal Revenue Code Section 382.
13. PROFIT SHARING PLAN:
During 1998, the Company established the InnovaCom, Inc. 401(K) Profit
Sharing Plan (the Plan) covering substantially all of its employees.
Management determines, at its discretion, the amount of any matching or
other contributions to the Plan. The Company made no such contributions
to the Plan during the year ended December 31, 1999 and 1998.
14. SUBSEQUENT EVENTS:
Subsequent to December 31, 1999, the Company entered into promissory
note agreements in the amount of $625,000 that are due on demand and
accrue interest at 13% per annum. As part of the issuance of the notes,
the Company issued to the note holder five-year warrants to purchase
487,500 shares of common stock. In addition, the Company issued
five-year warrants to purchase 106,250 shares of common stock as a
finder's fee.
Subsequent to December 31, 1999, in connection with the December 1997
convertible debenture, the note holder converted $4,690,000 in principal
and $723,063 of accrued interest into 8,687,958 shares of common stock.
Subsequent to December 31, 1999, the Company issued 1,846,933 shares of
common stock pursuant to the exercise of warrants and stock options.
<PAGE>F-26
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to December 31, 1999, the Company granted non-plan options to
purchase 300,000 shares of common stock at $0.26 per share to an
officer. The options expire in 2005 and vest immediately.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(333-81587) on Form S-8 of InnovaCom, Inc. of our report dated January 28, 2000,
except for Note 14, which is as of March 15, 2000, relating to the consolidated
balance sheet of InnovaCom, Inc. and subsidiaries as of December 31, 1999, and
the related statements of operations, shareholders' equity (deficit) and cash
flows for the years ended December 31, 1999 and 1998, which report appears in
the December 31, 1999 annual report on Form 10-KSB of InnovaCom, Inc.
\S\HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
March 21, 2000
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<LEGEND>
(Replace this text with the legend)
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 302,701
<SECURITIES> 0
<RECEIVABLES> 149,075
<ALLOWANCES> 10,000
<INVENTORY> 210,536
<CURRENT-ASSETS> 718,106
<PP&E> 143,950
<DEPRECIATION> 144,343
<TOTAL-ASSETS> 899,256
<CURRENT-LIABILITIES> 18,027,354
<BONDS> 0
0
0
<COMMON> 25,785
<OTHER-SE> 25,712,951
<TOTAL-LIABILITY-AND-EQUITY> 899,256
<SALES> 507,076
<TOTAL-REVENUES> 507,076
<CGS> 491,633
<TOTAL-COSTS> 5,076,409
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (4,569,833)
<INTEREST-EXPENSE> 2,831,589
<INCOME-PRETAX> (7,399,141)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (7,400,741)
<DISCONTINUED> 25,789
<EXTRAORDINARY> 235,093
<CHANGES> 0
<NET-INCOME> (7,139,859)
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