As filed with the Commission on August 28, 2000 File No. 333-42766
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
InnovaCom, Inc.
------------------------------------------------
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Nevada 7373 88-0308568
-------------------------------- ----------------------------- --------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
</TABLE>
3400 Garrett Drive, Santa Clara, California 95054; (408) 727-2447
-----------------------------------------------------------------
(Address and telephone number of principal executive offices)
3400 Garrett Drive, Santa Clara, California 95054; (408) 727-2447
--------------------------------------------------------------------------------
(Address of principal place of business or intended principal place of business)
Frank Alioto, President & Chief Executive Officer
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, California 95054
(408) 727-2447
---------------------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
Scott E. Bartel, Esq.
Eric J. Stiff, Esq.
Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Telephone: (916) 442-0400
Approximate date of proposed sale to the public: As soon as practicable after
the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>ii
<TABLE>
<S> <C> <C> <C> <C>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
maximum maximum Amount of
Title of each class of Amount to be offering price aggregate registration
securities to be registered registered per share offering price fee
------------------------------ ---------------- --------------- ---------------- --------------
Common Stock (1) 30,000,000 $ 0.50 (2) $ 15,000,000
Common Stock (3) 48,985,731(3) $ 0.53 (2) $ 24,492,866
Common Stock (4) 6,169,500 $ 0.61 (4) $ 3,743,290
Common Stock (5) 50,000 $ 1.75 $ 87,500
Common Stock (6) 26,134 $ 0.50 (7) $ 13,067
Common Stock (8) 50,000 $ 0.26 (8) $ 13,000
------------------------------ ---------------- --------------- ---------------- --------------
Total Registration Fee $ 43,349,723 $ 11,444(9)
================ ==============
</TABLE>
(1) Represents shares of common stock that may be acquired by Jashell
Investment Limited from time to time pursuant to a common stock purchase
agreement.
(2) Fee calculated in accordance with Rule 457(c) of the Securities Act.
Estimated for the sole purpose of calculating the registration fee and
based upon the average quotation of the bid and asked price per share of
the registrant's common stock on July 31, 2000, as quoted on the OTC
Bulletin Board.
(3) Represents (i) two times the number of common stock that may issued upon
the conversion of $4,750,000 convertible debentures, and (ii) common stock
that may be issued for interest earned on such convertible debentures
through June 30, 2001.
(4) Represents common stock that may be issued upon the exercise of outstanding
warrants. The exercise price for the warrants ranges from $0.16 per share
to $2.43 per share, and average weighted exercise price is approximately
$0.61 per share.
(5) Represents common stock that may be issued upon the exercise of an
outstanding option. The exercise price is $1.75 per share.
(6) Represents outstanding common stock for resale.
(7) Estimated for the sole purpose of calculating the registration fee and
based upon the average quotation of the bid and asked price per share of
the registrant's common stock on August 18, 2000, as quoted on the OTC
Bulletin Board.
(8) Common stock that may be issued upon the exercise of warrants at an
exercise price of $.26 per share.
(9) Of which $11,437 already has been paid.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>1
Subject to Completion
PROSPECTUS August 28, 2000
INNOVACOM, INC.
Common Stock
--------------------
This prospectus relates to the resale by the selling stockholders of up
to 85,281,365 shares of common stock. The selling stockholders may sell stock
from time to time in the over-the-counter market at the prevailing market price
or in negotiated transactions. We will not receive any proceeds from the sale of
shares by the selling stockholders.
We have entered into an agreement with Jashell Investments Limited
requiring them to purchase our shares of common stock at our option. We will
receive proceeds upon the sale of shares to Jashell Investments, and we may
receive additional proceeds from the exercise of outstanding warrants held by
Jashell Investments, JNC Strategic Fund Ltd., JNC Opportunity Fund Ltd., and the
other holders of our warrants. Shares of common stock acquired by Jashell
Investments, JNC Strategic Fund, JNC Opportunity Fund, other holders of warrants
and other selling stockholders will be resold by this prospectus.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"MPEG." On August , 2000, the average of the bid and asked price of our common
stock was $____ per share, as quote by the OTC Bulletin Board.
Investing in our common stock involves a high degree of risk. You should
invest in our common stock only if you can afford to lose your entire
investment. See "Risk Factors" beginning on page 7 of this prospectus.
Neither the Securities Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August ___, 2000.
[The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.]
<PAGE>2
Please read this prospectus carefully. You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with different information. You should not assume that the
information provided by the prospectus is accurate as of any date other than the
date on the front of this prospectus.
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
<TABLE>
<S> <C>
TABLE OF CONTENTS
Forward-Looking Statements...................................................................2
Prospectus Summary...........................................................................3
The Offering.................................................................................4
Risk Factors.................................................................................7
Use of Proceeds.............................................................................12
Price Range of Common Stock.................................................................12
Dividend Policy.............................................................................13
Management's Discussion and Analysis of Financial Condition and Plan of Operations..........13
Business....................................................................................19
Management .................................................................................25
Selling Stockholders........................................................................32
Plan of Distribution........................................................................34
Certain Relationships and Related Transactions..............................................36
Description of Capital Stock................................................................36
Legal Proceedings ..........................................................................36
Legal Matters...............................................................................38
Experts.....................................................................................38
Where You Can Find More Information.........................................................38
</TABLE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, as that term is
defined in the Private Securities Litigation Reform Act of 1995. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update any of the forward-looking statements to conform these
statements to actual results.
As used in this prospectus, the terms "we," "us," "our," and "InnovaCom"
means InnovaCom, Inc. and its subsidiaries, unless otherwise indicated.
<PAGE>3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this prospectus. This summary is not complete and does not contain
all of the information you should consider before investing in our common stock.
You should read the entire prospectus carefully, including the "Risk Factors"
section.
InnovaCom, Inc.
We develop, market, and provide equipment and services that utilize the
Motion Picture Expert Group first and second generation standard for video and
audio compression know as MPEG-1 and MPEG-2. By utilizing our expertise in
MPEG-1 and MPEG-2 technology, we developed two lines of products which we call
TransPEG and DVDImpact.
Our TransPEG system allows delivery of high quality digital audio and
video content over broadband communication networks for applications such as
video broadcasting, distant learning, video calls, video conferences and other
video networking solutions. Our DVDImpact is a DVD pre-mastering system using
our latest MPEG-2 compression technology.
Our objective is to be a leading provider of high quality,
cost-effective, audio and video compression applications to industry
professionals, enterprise customers, and government agencies. Our strategy in
achieving this objective includes:
o providing products which are modular, scalable and affordable;
o enhancing and expanding our product lines;
o focusing on marketing to industry professionals, enterprise customers,
and government agencies;
o expanding on our technological expertise; and
o expanding sales, marketing, support, and service.
We were incorporated in Florida in March 1993 as a research and
development company. In 1996, we merged with Jettson Realty Development
Corporation, a Nevada corporation and changed our name to InnovaCom, Inc.
Our principal office is located at 3400 Garrett Drive, Santa Clara,
California 95054, and our telephone number is (408) 727-2447.
<PAGE>4
THE OFFERING
Equity Financing Facility
Of the shares of common stock being registered for resale by the selling
stockholders, 30,000,000 shares are being registered in connection with our
equity finance facility with Jashell Investment Limited or Jashell.
On June 19, 2000, as amended on July 26, 2000, we entered into a common
stock purchase agreement and related agreements with Jashell, a private equity
fund organized under the laws of the British Virgin Islands. Subject to the
fulfillment of certain conditions, the agreements provide us with an equity
financing facility through which we may sell up to a total of $10,000,000 worth
of shares of our common stock, at our option, to Jashell periodically over a
24-month period. Our ability to request a draw down under the facility is
subject to the continued effectiveness of a resale registration statement filed
with the Securities and Exchange Commission to cover the shares to be issued.
The amount of common stock to be sold at each draw down will not be less than
$250,000 nor more than $1 million. We have agreed to sell our shares to Jashell
at a price equal to the then current market price of our common stock during the
draw down period, less a discount of 21% or 24% specifically determined based
upon a formula. The number of shares that we may sell to Jashell varies
depending on certain factors, including the market price of the common stock and
the then current ownership interest of Jashell.
In connection with each draw down, we will grant Jashell a warrant to
purchase up to 50% of the number of shares acquired in a draw down at an
exercise price equal to the purchase price of the common stock acquired pursuant
to the draw down. The warrant will expire 22 business days after its issuance.
We also issued a warrant to Jashell to purchase up to 100,000 of our common
stock at an exercise price of $0.7027 per share. Jashell will either resell
their shares in the open market, resell their shares to other investors in
negotiated transactions, or hold our stock in their portfolio. This prospectus
covers the resale by Jashell either in the open market or to other investors.
The resale of the shares acquired pursuant to the equity financing
facility are included in this prospectus.
Convertible Debentures
Of the shares being registered, 48,985,731 shares of common stock are
being registered for resale upon conversion of our outstanding convertible
debentures, and payment of interest thereon accrued through June 30, 2001.
From June 1998 to January 1999, we issued a series of 7% convertible
debentures to JNC Strategic Fund for an aggregate principal amount of $4,750,000
pursuant to private placements in which:
o the principal amount of $2,000,000 and accrued interest thereon may be
converted, at JNC Opportunity Fund's option, into shares of our common
stock at $0.35 per share. JNC Opportunity Fund is an affiliate of JNC
Strategic Fund;
o the principal amount of $1,500,000 and accrued interest thereon may be
converted, at JNC Strategic Fund's option, into shares of our common
stock at the lower of the conversion rate of $0.2575 per share or 75%
<PAGE>5
of the average closing bid price over a 5-day trading period prior to
conversion on the OTC Bulletin Board as reported by Bloomberg
Financial L.P.;
o the principal amount of $500,000 and accrued interest thereon may be
converted, at JNC Strategic Fund's option, into shares of our common
stock at the lower of the conversion rate of $0.1775 per share or 75%
of the average closing bid price over a 5-day trading period prior to
conversion on the OTC Bulletin Board as reported by Bloomberg
Financial L.P.; and
o the principal amount of $750,000 and accrued interest thereon may be
converted, at JNC Strategic Fund's option, into shares of our common
stock at the lower of the conversion rate of $0.1275 per share or 75%
of the average closing bid price over a 5-day trading period prior to
conversion on the OTC Bulletin Board as reported by Bloomberg
Financial L.P.
In connection with the convertible debentures, we issued warrants to JNC
Strategic Fund to purchase up to 887,500 of our common stock in the aggregate at
an exercise price of $0.50 per share. JNC Strategic Fund will either resell
their shares in the open market, resell their shares to other investors in
negotiated transactions or hold our stock in their portfolio. This prospectus
covers the resale of the shares of common stock underlying the convertible
debenture and issuable upon the conversion of the warrants.
In addition to the warrants issued to JNC Strategic Fund, we have
warrants outstanding to purchase up to 540,000 shares of our common stock at
exercise prices of $0.34 and $2.43 per share to Cardinal Capital and 250,000
shares of our common stock at an exercise price of $1.75 per share to Elizabeth
Hagopian in connection with the issuance of the convertible debentures. The
resale of shares of our common stock issuable upon conversion of the warrants is
included in this prospectus.
Additional Shares We Are Registering
Of the shares being registered, 3,700,000 shares of common stock are
being registered for resale upon the exercise of warrants issued to JNC
Opportunity Fund in connection with a series of secured notes issued between May
1999 and August 2000. These warrants are exercisable into shares of our common
stock at an exercise price ranging from $0.25 to $ 1.00 per share. In addition
to the warrants issued to JNC Opportunity Fund, we are registering 572,000
shares of our common stock underlying outstanding warrants at an exercise price
ranging from $0.16 to $0.84 per share to Cardinal Capital, and 95,000 shares of
our common stock underlying outstanding warrants at an exercise price ranging
from $0.16 to $.84 per share to Elizabeth Hagopian issued in connection with the
issuance of the secured notes. The resale of shares of our common stock issuable
upon conversion of the warrants is included in this prospectus.
We are also registering 75,000 shares of our common stock for resale
upon exercise of the warrants issued to our attorneys. The exercise price for
these warrants is $0.53 per share. The resale of the common stock issuable upon
conversion of the warrants is included in this prospectus.
<PAGE>6
We are also registering 50,000 shares of our common stock for resale
upon the exercise of an option issued to Elizabeth Hagopian. The exercise price
of the option is $1.75 per share. The resale of the common stock issuable upon
the exercise of the option is included in this prospectus.
Finally, we are registering 26,134 shares of common stock issued for
services that may be resold by selling stockholders.
Summary Unaudited Consolidated Financial Data
This summary of unaudited consolidated financial data has been derived
from our annual and interim consolidated financial statements included elsewhere
in this prospectus. You should read this information in conjunction with those
financial statements, and notes thereto, along with the section entitled
"Management's Discussion and Analysis of Financial Condition."
<TABLE>
<S> <C> <C> <C> <C> <C>
March 3, 1993
Six Months ended (Inception)
Year Ended December 31, June 30, to June 30,
------------------------------ -------------------------- ---------------
1999 1998 2000 1999 2000
--------------- ------------ ------------- ----------- ---------------
Consolidated Statement of Operations
Data:
Revenue $ 507,076 $ 107,632 $ 386,150 $ 96,625 $ 1,149,858
Loss from operations (4,569,333) (10,469,450) (2,639,197) (2,346,941) (34,957,679)
Loss from continuing operations before
income taxes and discontinued operations (7,399,141) (15,481,389) (4,370,827) (4,222,786) (45,748,203)
Net Income (Loss) (7,139,859) (16,465,877) (4,337,890) (4,045,294) (47,204,724)
Income (Loss) per Share
Basic and diluted loss per share (0.28) (0.71) (0.13) (0.16) -
Shares used in per share calculation 25,099,278 23,032,965 33,669,082 25,002,535 -
</TABLE>
Consolidated Balance Sheet Data: As of
June 30,
2000
--------------
Cash...................................................... $ 107,744
Working Capital........................................... (14,888,352)
Total Assets.............................................. 966,038
Total Liabilities......................................... 15,712,882
Stockholders' Equity (Deficit)............................ $ (14,746,844)
<PAGE>7
RISK FACTORS
An investment in the shares of our common stock offered for resale by
the selling stockholders is very risky. You should carefully consider the risks
described below in addition to other information in this prospectus. Our
business, operating results, and financial condition could be seriously harmed
due to any of the following risks. The trading price of the shares of our common
stock could decline due to any of these risks, and you could lose all or part of
your investment.
We have a limited operating history.
Since inception, our primary activities have been the research and
development of MPEG-1 and MPEG-2 products for digital video compression and
processing technology. Although during the six months ended June 30, 2000, and
year ended December 31, 1999, revenues from product sales were approximately
$386,000 and $507,000, respectively, revenues prior to these periods were
insignificant. Our success is dependent upon our ability to substantially
increase sales of our current products, and to develop, market and sell new
products.
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 our products and their sales includes:
o new or competing products developed by our competitors;
o the need to develop customer support capabilities and market
expertise;
o delays in product development, manufacturing difficulties, market
acceptance, product quality problems that require sales returns or
allowances; and
o the success or failure of sales and marketing activities.
Failure to increase the sales of our current products and to develop,
market and sell new products may have a materially adverse effect on our
financial condition and results of operations.
We have incurred significant losses and expect to continue to do so in
the near future.
Since our inception, we have incurred significant losses. For the six
months ended June 30, 2000, and years ended December 31, 1999 and 1998, we have
incurred net losses of approximately $4,338,000, $7,140,000 and $16,466,000,
respectively. At June 30, 2000, we had an accumulated deficit of approximately
$47,205,000 since inception. We expect to continue to incur losses until we
develop and market our products and achieve revenues that exceed our expenses.
We do not anticipate operating profits before the end of 2000, and we cannot
assure you that we will ever achieve profitability.
We have received a qualified opinion from our independent accountant
regarding our ability to continue as a going concern.
The report by our independent accountants contains an explanatory
paragraph regarding our ability to continue as a going concern. Among the
factors cited by the accountants as raising substantial doubt as to our ability
<PAGE>8
to continue as a going concern include the fact that we have no established
source of operating income and that we have recurring losses from operations.
We need additional capital to finance our operations and to develop new
products.
Our future capital requirements will depend on many factors, including
cash flow from operations, progress in developing new products, competing
technological and market developments, and our ability to successfully market
our products. Because we currently do not have sufficient revenues to support
our activities, we will be required to raise additional capital through equity
or debt offerings to fund our operations. Traditionally, we relied on the sale
of debt to meet our capital requirements. Debt financing will result in interest
expense, and if convertible into equity, could also dilute then-existing
stockholders. Any equity financing could result in dilution to our then-existing
stockholders. If we are unable to raise additional funds, we may be required to
reduce or suspend our operations.
There may be a change of control and dilution upon conversion of the
convertible debentures and exercise of warrants.
JNC Opportunity Fund and its affiliate JNC Strategic Fund may convert
their convertible debentures into shares of our common stock at conversion
prices equal to the lower of a fixed price and a discount from the current
market price of the common stock as of the date of conversion. In addition, at
August 15, 2000, JNC Opportunity Fund and JNC Strategic Fund also held warrants
to purchase 4,587,500 shares of our common stock at exercise prices ranging from
$0.26 to $1.00 per share. If JNC Opportunity Fund and JNC Strategic Fund convert
their convertible debentures, and exercise their warrants, they could obtain
control over us and significantly dilute the value of other stockholders. As of
August 15, 2000, if the holders of the convertible debentures had converted
their debentures and exercised their warrants, they would have owned
approximately 41% of our outstanding common stock. However, their ownership
interest may be significantly more at such time as they actually convert since
the conversion and sale of the common stock could have an adverse effect on the
price of our common stock. The existence of these convertible debentures and
warrants could depress the market price of our stock and effect the cost and
terms of our future stock placements.
Future sales of our common stock pursuant to this prospectus may depress
our stock price.
Sales of a substantial number of shares of our common stock in the
public market could cause a reduction in the market price of our common stock.
We had 36,624,593 common shares issued and outstanding as of August 15, 2000,
which does not include the shares covered by this prospectus. Through this
offering, the selling stockholders may be reselling up to 85,281,365 shares of
our common stock. In addition, as of August 15, 2000, we had options outstanding
to purchase 4,822,113 shares of our common stock. As a result of this offering
and future common stock issuance pursuant to options, a substantial number of
our shares of common stock are becoming available for resale which could have an
adverse effect on the price of our common stock.
We are highly leveraged and all of our assets are secured.
For at least the past two years, we have financed our operations
primarily through the issuance of convertible debentures and secured promissory
notes. As of June 30, 2000, the amount outstanding in convertible debentures was
$4,750,000 and the amount outstanding in secured promissory notes was
$6,475,000. These convertible debentures and secured promissory notes have been
secured primarily by all of our assets. If we default on any of these
<PAGE>9
convertible debentures, or if the holders of the secured promissory notes
immediately demand repayment, it would have a material adverse effect on our
business.
We do not have the cash to make potential payment obligations.
As of June 30, 2000, we have outstanding secured promissory notes in the
aggregate amount of $6,475,000 with JNC Opportunity Fund. In addition, we have
outstanding a series of five year convertible debentures in the aggregate amount
outstanding of $4,750,000 with JNC Strategic Fund and JNC Opportunity Fund. We
are in technical default for failure to meet certain covenants under the
convertible debentures and the holders of the convertible debentures may demand
immediate repayment. Further, under the terms of the convertible debentures, we
owe the holders thereof liquidated damages of $1,567,500 for failure to register
with the Securities and Exchange Commission within a specified time shares
underlying the convertible debentures. Although neither JNC Strategic Fund or
JNC Opportunity Fund have given notice for immediate repayment, if either JNC
Strategic Fund or JNC Opportunity Fund demand repayment of these promissory
notes, convertible debentures, or liquidated damages we do not have sufficient
cash to repay these obligations. Failure to pay on these promissory notes or
convertible debentures will have a significant adverse effect on our business.
The competition is intense in the digital audio and video industry.
The digital video and audio industry contains numerous small and large
competing companies. Many of our actual or potential competitors have:
o greater name recognition;
o a larger installed base of networking products and stronger
relationships with their customers;
o more extensive engineering, manufacturing, marketing and distribution
capabilities; and
o greater financial, technological and personnel resources.
Additionally, we compete in an industry segment which is undergoing a
period of consolidation in which companies resulting from the consolidation
could increase their market shares, customer bases, sales forces, product
offerings and technology, and marketing expertise. In addition, we cannot assure
you that our competitors will not develop products equal to or better than those
developed by us or that such products will not receive greater market
acceptance.
We are dependent on third party manufacturers.
We do not maintain our own manufacturing or production facilities, aside
from final assembly and testing, and we do not intend to do so in the
foreseeable future. We anticipate that major sub-assemblies of our products will
be manufactured and our components will be supplied by independent companies.
Many of these independent companies may also manufacture and supply products for
our existing and potential competitors. Because we do not have any licensing or
other supply agreements with our manufacturers and suppliers, they could
terminate their relationships with us at any time. In the event we are required
<PAGE>10
to replace our manufacturers and suppliers, we could experience delays in
supplying products to our customers.
The market acceptance of our products is uncertain.
We have sold only limited quantities of our products. Our success will
depend upon continued and increased acceptance of our products by the technology
industry, including independent third party companies and the general public.
Achieving such acceptance will require significant marketing investment. We can
not assure you that our existing and proposed products will be accepted by the
technology industry at sufficient levels to support our operations.
Our current and proposed products are dependent on the technology
industry which has a history of technological obsolescence.
The digital audio and video industry is characterized by extensive
research and development and rapid technological changes, resulting in very
short product life cycles. Further, the audio and video 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 our products obsolete or less competitive, which
could adversely affect our business and results of operations. We will be
required to devote substantial efforts and financial resources to enhance our
existing products and to develop new products.
We are dependent on MPEG-1 and MPEG-2 acceptance and continuation as
standards.
We have focused much of our resources on products that utilizes MPEG-1
and MPEG-2 technology and the success of those standards will dramatically
impact our success. We cannot assure you that the MPEG-2 standard will remain
the standard in the industry. Furthermore, should the standard be modified or
replaced, no assurances can be given that our products can be successfully
transferred to the alternative standard.
We rely on integrators, distributors, and original equipment
manufacturers.
Our success will depend to a significant extent upon our ability to
develop a distribution system with integrators, resellers, and original
equipment manufacturers, or OEM's, to distribute and sell our products in the
marketplace. We cannot assure you that we will be successful in obtaining and
retaining the sales channel that is required to market and sell our products
successfully.
We rely on intellectual property.
We have been issued one patent, but this patent by itself does not
provide significant protection for the technology in our current products, or
for the products in advanced stages of development. We are documenting our
intellectual properties so that we can file for additional patents, but
currently we have no active patent applications. We also hold trademarks on our
name and the names of certain products.
No assurances can be given that another company will not attempt to
infringe upon any of our current or future licenses, patents, patent
applications, trademarks, copyrights, or our products and technology or that we
may not inadvertently infringe upon any current or future licenses, patents,
<PAGE>11
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 ours or that such products will not utilize the same or similar
technology developed by us, whether protected or unprotected by a license or
patent.
There may be possible shareholder dilution from employee, director, and
other option holders.
As of August 15, 2000, there were options outstanding to acquire an
aggregate of 4,822,113 shares of our common stock. These options, which are held
by current and former employees, directors, and consultants, are exercisable at
prices ranging from $0.16 to $2.59 per share. If these options are exercised,
they could dilute the value of other stockholders 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 our stock and affect
the cost and terms of our future stock placements.
Our stock prices may be volatile.
The trading price of our common stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by us or our
competitors, changes in financial estimates by securities analysts, the
operating and stock price performance of other companies that investors may deem
comparable to us, and other events or factors. Moreover, some of our future
quarter operating results may fall below the expectations of securities analysts
and investors. In such event, the market price of our 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 our common stock, regardless of our
operating performance.
We may be subject to penny stock regulations.
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price, as defined, less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. Our 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 such as, institutions with assets in excess of $5,000,000
or an individual with net worth in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 jointly with his or her 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 our securities and also affect the ability of
purchasers to sell their shares in the secondary market.
The loss of one of our key personnel may adversely affect our
operations.
Our performance is substantially dependent on the performance of our
executive officers and key personnel and on our 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
<PAGE>12
companies, including direct competitors, are continually present. The loss of
any of our key personnel could have a material adverse effect on our business,
financial condition, and operating results. Our success will also depend upon
our ability to hire and retain additional qualified personnel, particularly
those technical employees with MPEG qualifications for whom demand is very high.
An inability to locate and hire additional qualified employees could have a
material adverse effect on our business, financial condition and operating
results. We can not assure you that we will be able to hire or retain such
qualified personnel.
USE OF PROCEEDS
We will not receive any proceeds from the resale of shares of common
stock by the selling stockholders. We will receive proceeds from any sales of
shares pursuant to the common stock purchase agreement with Jashell and upon any
exercise of warrants issued to Jashell, JNC Strategic Fund, JNC Opportunity
Fund, and the other selling shareholders. We intend to use the proceeds from our
sales to Jashell and the exercise of warrants primarily for the development of
our MPEG-2 products, for working capital and other general corporate purposes.
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low bids quoted for our
common stock during each quarter for the past two fiscal year ends and quarters
ended March 31 and June 30, 2000, as quoted on the OTC Bulletin Board.
Common Stock
Quarter Ended High Low
---------------------- ------ ------
June 30, 2000 2.00 .65
March 31, 2000 3.49 0.31
December 31, 1999 0.36 0.14
September 30, 1999 0.45 0.16
June 30, 1999 0.84 0.19
March 31, 1999 0.50 0.08
December 31, 1998 0.19 0.08
September 30, 1998 0.39 0.08
June 30, 1998 2.80 0.22
March 31, 1998 2.81 1.63
These quotations reflect inter-dealer prices, without retail markup,
mark-down or commission, and may not represent actual transactions.
As of August 15, 2000, we had 36,624,593 shares of common stock
outstanding and approximately 262 stockholders of record. The number of
stockholders does not include those who hold our common stock in street name.
<PAGE>13
DIVIDEND POLICY
We have not declared or paid any cash dividends since our inception. We
currently intend to retain future earnings, if any, for use in the operation and
expansion of the business. We do not intend to pay any cash dividends in the
foreseeable future. The declaration of dividends in the future will be at the
discretion of the board and will depend upon our earnings, capital requirements,
and financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
General
We were founded in 1993, and began significant operations in 1996
concentrating our efforts on the development of a number of chip, board, and
system level MPEG-2 related products in 1996. In 1997, we merged with Sierra
Vista, a Nevada corporation, a development stage company in the field of feature
length film production and distribution. As a result of the merger with Sierra
Vista, we gained access to approximately $3 million of working capital and a
credit facility of up to $5 million.
During 1998, we underwent a series of changes resulting in a change of
management and a change in business direction, and we decided to direct our
focus and our resources to those products that we believed the most promising
and closest to market. In pursuit of that effort, we discontinued our single
chip MPEG-2 encoder development efforts, closed Sierra Vista, which has
subsequently been dissolved, laid off approximately half of our then employees,
took substantial steps to reduce our expenses, and directed our energy on the
completion of those board and system level MPEG-2 products closest to market. As
a result of our efforts, we shipped our first product to our customers before
the end of 1998. In 1999, we continued to emerge from the development stage into
full production with a significant increase in shipments in the last quarter of
the year.
During calendar year 2000, we will be concentrating our product
development on increasing the use of our existing products and expanding their
application into new markets. We expect that our revenues in 2000 will be higher
than in 1999, but we will not achieve profitability from operations before the
end of 2000. We anticipate modest staffing increases in all departments to
accommodate this growth. We will be required to raise additional capital in 2000
to fund our losses and to fund anticipated increases in accounts receivable and
inventory.
Results of Operations
Six Months Ended June 30, 2000, Compared to the Six Months Ended June 30, 1999
Revenues
Revenues were approximately $89,000 and $386,000 for the three and six
month periods ended June 30, 2000, as compared to approximately $61,000 and
$97,000 for the same periods in 1999. Revenues in 2000 and 1999 were from the
sale of our standard transmission products.
<PAGE>14
Costs of goods sold
Costs of goods sold were approximately $59,000 and $296,000 for the
three and six month periods ended June 30, 2000, as compared to approximately
$50,000 and $79,000 for the same periods in 1999. The product margins for all
periods presented in these statements are not necessarily indicative of those
that we might experience at such time, if any, that standard products begin to
be shipped in full-production quantities for installation by end-users.
Research and development
Research and development expense increased to approximately $507,000 and
$978,000 in the three and six month periods ended June 30, 2000, from
approximately $367,000 and $736,000 in the same periods in 1999. The increase in
research and development expenditures represents our ongoing program to develop
products to meet market opportunities.
Selling, general and administrative
Selling, general and administrative expense declined to approximately
$726,000 in the three months ended June 30, 2000, from approximately $884,000 in
the same period in 1999, a reduction of about 18%. The decrease in the current
quarter came almost entirely from a reduction in general and administrative
expense due to a reclass of production period costs in 1999 from cost of sales
to G&A that was not required in 2000. For the six months ended June 30, 2000,
selling, general and administrative expense increased about 7%, to approximately
$1,751,000 from approximately $1,629,000 in the same period in 1999. The
increase is due to the hiring of additional sales staff and compensation expense
recognized upon the issuance of stock options and warrants in the first quarter
of 2000 offset by the reclass of production period costs discussed above.
Interest expense, net of interest income
Interest expense decreased to approximately $795,000 in the three months
ended June 30, 2000, from approximately $1,217,000 in the same period in 1999, a
reduction of about 35%. This reduction was the net result of a lower balance in
outstanding convertible debentures and the expiration of the agreement to pay a
finder's fee for any funding from the holders of the convertible debentures and
the secured promissory notes. For the six months ended June 30, 2000, interest
expense decreased about 8%, to approximately $1,732,000 from approximately
$1,876,000 in the same period in 1999. This reduction was the net result of a
lower balance in outstanding convertible debentures and the expiration of the
agreement to pay a finder's fee for any funding from the holders of the
convertible debentures and the secured promissory notes.
Loss from continuing operations
As a result of the financial results explained above, loss from
continuing operations decreased to approximately $1,998,000 in the three months
ended June 30, 2000, from approximately $2,457,000 in the same period in 1999, a
reduction of about 19%. For the six months ended June 30, 2000, the loss from
continuing operations increased $148,000 or about 4%, to approximately
$4,373,000 from approximately $4,225,000 in the same period in 1999. This is a
direct reflection of the increased expenditures in manufacturing and research
and development expenses to roll out product offset by the decrease in finance
costs associated with the borrowings.
<PAGE>15
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 our 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.
Costs of Goods Sold
Costs 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. Costs of
goods sold as a percentage of sales as seen in both 1999 and 1998 is not
necessarily representative of the level that we might experience at such time,
as any, that products begin to ship in volume production levels.
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 our 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, we abandoned our MPEG-2 chip development efforts, which
reduced the value of the development equipment and software that had been
purchased for this work. We 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
$4,751,000 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
<PAGE>16
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
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 by us and our non-operating Florida subsidiary.
Loss from Discontinued Operations
On June 15, 1998, our board of directors decided to discontinue the
operations of Sierra Vista, our wholly-owned subsidiary and entertainment
segment of the business. At that date, we 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 on Extinguishment of Liabilities
In 1999 and 1998, we 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 us in 1999 relative to
1998.
Liquidity and Capital Resources
Since our inception, our revenues were not sufficient to support our
operations, and revenues will not be large enough to support operations until
such time, if any, that our current products and future products, if any, attain
substantial market acceptance. Historically, we funded our operations through
sale of equity and debt, and we expect to continue to finance our operations in
this manner for the immediate future. However, in the event that we are unable
to obtain adequate financing, there will be a material adverse effect on our
ability to meet our business objectives.
On June 30, 2000, we had a cash balance of approximately $108,000 and a
working capital deficit of approximately $14,889,000. This compares with cash of
approximately $303,000 and a working capital deficit of approximately
$17,309,000 at December 31, 1999. The decrease in working capital deficit is
largely a result of the conversion of $4,690,000 of convertible debentures to
equity less an increase in secured promissory notes and other liabilities of
approximately $2,300,000.
During the quarter ended June 30, 2000, we borrowed an additional total
of $1,300,000 from the investor who previously provided funds to us. This
borrowing is evidenced in the form of three notes. The notes bear interest at
13% and are due on demand. In conjunction with this funding, we issued the
<PAGE>17
holder of the notes five year warrants to purchase up to 650,000 shares of
common stock at prices ranging from $0.37 to $0.50 per share.
On July 11, 2000, we borrowed $425,000 from an investor in the form of a
note. The note bears interest at 13% and is due on demand. In conjunction with
this note, we issued five year warrants to purchase up to 212,500 shares of
common stock at $.30 per share.
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,
write down of the discontinued assets of Sierra Vista, and the write down of
assets impaired when we closed our 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 we
received $4,200,000 from the sale of demand notes, and an additional $750,000
from the sale of convertible debentures. During 1998 we received $4,000,000 from
the sale of convertible debentures. Also in 1998 we received approximately
$778,000 from four other lenders of which approximately $174,000 was repaid, and
approximately $468,000 of such debt converted into our common stock. Total debt
converted into common stock in 1998 was $4,936,876.
In 1999 we purchased approximately $9,400 of property and equipment as
compared to approximately $1,217,000 in 1998.
Between December 1997 and January 1999, we 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, we owed $9,440,000 on convertible debentures, which
is net of $310,000 converted into our 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 $2,482,000 in
accrued interest and penalties related to these debts.
On December 22, 1997, we issued $5 million in the aggregate of
convertible debentures receiving approximately $4,690,000 in net proceeds. The
convertible debentures bear interest at 7% and are due December 22, 2002. The
debentures are convertible into shares of our 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, we issued five-year warrants to purchase 250,000 shares of
our 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
convertible 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,
<PAGE>18
1997, convertible debenture plus approximately $330,000 of accrued interest was
converted into 1,988,947 shares of common stock.
On June 29, 1998, we 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 our common stock at a conversion price of $.35 per share.
In connection with the issuance of these convertible debentures, we issued the
debenture holder five-year warrants to purchase 500,000 shares of our common
stock at $.50 per share.
On August 28, 1998, we issued additional convertible debentures in the
aggregate principal amount of $500,000, with the right to issue up to an
additional $1 million more convertible debentures under the same terms. In
October and November of 1998, a total of $1 million more convertible debentures
were issued. The convertible debentures accrue interest at the rate of 7% per
annum and are convertible into shares of our 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 convertible
debentures have a term of five years, expiring August 28, 2003, and are secured
by all of our assets. As part of the issuance of the convertible debentures, we
issued to the debenture holders five-year warrants to purchase up to 75,000
shares of our common stock at $.50 per share. Also in this transaction, we
canceled previously issued warrants to purchase up to 250,000 shares of our
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 our
common stock at a price of $.50 per share.
On December 15, 1998, we issued an additional $500,000 in convertible
debentures for working capital under the same terms as those issued in August of
1998. In conjunction with the sale of these convertible debentures, we issued to
the debenture holders five-year warrants to purchase up to 125,000 shares of our
common stock at $.50 per share.
On January 15, 1999, we issued an additional $750,000 in convertible
debentures for working capital under the same terms as those issued in August
and December of 1998. In conjunction with the sale of these convertible
debentures, we issued to the debenture holders five-year warrants to purchase up
to 187,500 shares of our common stock at $.50 per share.
In 1999, we borrowed a total of $4,200,000 from JNC Strategic Fund or
JNC Opportunity Fund who had purchased the convertible debentures evidenced in
the form of ten separate notes. An additional $975,000 was borrowed on another
three notes in the quarter ended March 31, 2000. The notes bear interest at 13%
and are due on demand. In conjunction with these thirteen notes, we issued the
holder of the notes five-year warrants to purchase up to 487,500 shares of our
common stock at prices ranging from $0.30 to $1.00 per share.
In connection with the sales of the convertible debentures and demand
notes in 1997 through 1999, we issued five-year warrants to purchase up to an
aggregate total of 1,457,000 shares of our common stock at prices ranging from
$0.16 per share to $2.43 per share to two finders.
We do not believe we will be able to internally generate the cash that
will be required to fund our operations and to pay off the liabilities incurred
in prior periods for at least the balance of 2000. Accordingly, we will require
<PAGE>19
additional funding to finance its operations. Since December 1997, we have
financed our operations through the issuance of convertible debentures and
demand notes to two investment funds that are affiliated with each other, but no
assurance can be given that these investors will continue to provide funds to
us. In this event, we will need to secure additional financing from alternative
sources. We are already actively pursuing alternative funding sources through
the equity financing facility with Jashell. There can be no assurance that
additional funding will be available on terms favorable to us.
BUSINESS
Overview
We develop, market and provide equipment and services that utilize the
Motion Picture Expert Group's first and second generation standards for video
and audio compression known respectively as MPEG-1 and as MPEG-2. In the past,
video images were transmitted and stored almost exclusively in analog formats.
Digital video technology, including our technology, has been developed more
recently and provides several benefits over analog. For example, unlike analog
video, 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 or 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 known as 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.
We have been focusing on the development of products utilizing the
MPEG-2 standard since 1996. By utilizing our expertise in MPEG-2 technology, we
developed a suite of products to meet the emerging demand for audio and video
compression products. In year 2000, we developed MPEG-1 versions of some of our
MPEG-2 TransPeg products to sell into markets where lower costs, limited
feature-set systems, are attractive. By designing our products to be modular and
scalable, we provide customers the flexibility of setting up a system to meet
their needs.
Corporate History
We were originally incorporated in Florida in March of 1993 as a
research and development company and were essentially dormant until 1996. In
March of 1996, we began to emphasize the development of broadcast quality
encoded video utilizing the MPEG-2 standard for video and audio compression and
began development of a video compression chip and related MPEG-2 technology.
<PAGE>20
In July 1996, we merged with Jettson Realty Development Corporation, a
Nevada corporation. The merger took the form of a share for share exchange, in
which all of our outstanding shares were exchanged for approximately 52% of
Jettson Realty Development. The merger was accounted for under the reverse
take-over method of accounting. Thereafter, the name of Jettson was changed to
"InnovaCom, Inc."
In May 1997, we acquired Sierra Vista Entertainment, Inc., a Nevada
corporation in a share for share exchange by issuing shares of our common stock
to Sierra Vista shareholders. Sierra Vista was a motion picture production
company and as a result of the acquisition, we gained access to approximately $3
million of working capital and a credit facility of up to $5 million.
After the Jettson Realty Development merger and Sierra Vista
Entertainment acquisition, we continued to focus on developing digital video
compression and processing technology to provide broadcast quality video
encoding and processing products and systems utilizing the MPEG-2 standard. At
that time, our emphasis was the development of single chips, multiple chips,
circuit boards, software, and complete digital video compression and processing
systems.
During 1998, we underwent a cash crisis which resulted in a series of
changes including a change of management and a change in business direction. We
decided to direct our focus and our resources to those products that we believed
the most promising and closest to market. In pursuit of that effort, we
discontinued our single chip MPEG-2 encoder development efforts, closed Sierra
Vista, which has subsequently been dissolved, laid off approximately half of our
then employees, took substantial steps to reduce our expenses, and directed our
energy on the completion of those board and system level MPEG-2 products closest
to market. As a result of our efforts, we shipped our first product to our
customers before the end of 1998. In 1999, we continued to emerge from the
development stage into full production with a significant increase in shipments
in the last quarter of that year.
Our Strategy
Our objective is to be a leading provider of high quality,
cost-effective, audio and video compression applications to industry
professionals, enterprise customers and government agencies. To achieve our
business objective, we have identified the following key components to our
business strategy:
Providing products which are modular, scalable and affordable.
Because the digital audio and video compression market is emerging, we
believe we have to remain flexible to changes. By providing a product
that is modular, scalable and affordable, we believe that we can provide
a products that meets the demands and specific needs of our customers in
a variety of markets and industries.
Focusing on marketing to industry professionals, enterprise
customers and government agencies. Our products are designed to provide
high quality audio and video output which is currently used by industry
professionals, enterprise customers and government. We intend to focus
our marketing efforts on these customers.
Expanding on our technological expertise. We believe that in
order to succeed in this market, we need to be able to respond to and
rapidly incorporate new technologies. We intend to continue to invest in
<PAGE>21
the development of new technologies and products to address evolving
customer requirements.
Expanding our sales of support and service. We believe there is
significant opportunity to expand our sales of extended warrant and
service contracts.
Target Markets
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 for
transmission of broadcast quality digital video are emerging rapidly. Our
targeted applications include:
o movement of video within multi-location video production houses or
between multiple contributors to the creation of video content (video
collaboration);
o real time medical diagnosis or consultation between multiple locations
for medical purposes or for collaborative efforts in the general
business environment;
o deposition or arraignment by video to avoid prisoner transportation
and to reduce costs;
o education or training from one central location dispersed to satellite
classrooms;
o surveillance or security in applications where video quality is
essential; and
o 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
bandwidth and infrastructure providers are discovering that broadcast quality
digital video is not only content to fill their pipelines, but can serve as new
sources of revenue. In addition, it helps infrastructure providers justify the
costs associated with some broadband networks.
Video Content Creation
As the demand for broadcast quality digital video grows, so will the
demand for tools to produce it. Our 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.
We believe 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.
<PAGE>22
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. We are 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.
Our Products and Technology
We have developed core technologies and methodologies and integrate
complimentary third party products for digital video compression, transmission,
and processing technology into our applications. We adhere to MPEG-1 and MPEG-2
non-proprietary "open standards" to enhance flexibility and market appeal for
our products. We have several products that are either currently released for
shipping, or that are in advanced stages of development and are scheduled for
release in late 2000. In addition we have multiple development projects in
process or under consideration to enhance the features of products already
released or to develop products in complimentary or closely related
applications. We currently sell and support the following products:
TransPEG(R)
Until recently, video transmission over networks 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. We believe
that the rapidly increasing broadband 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.
We are currently marketing three such transmission products in our
TransPEG line of products. These are interchangeable digital multi-channel
transmissions systems that compress video, transmit in standard carrier formats,
and decompress at the viewer's location. The TransPEG line of products are
available for a variety of standard carriers such as ATM, T1/E1 and 10/100
BaseT, support unicast, multicast and broadcast transmission, and feature web
based controls. The TransPEG line of products are as follows:
o TransPEG Transmission Systems. TranPEG Transmission Systems are a
cost-effective solution for high quality video transmission and have
been used successfully in multiple applications, including a 24x7
emergency response system, TV broadcasts using terrestrial carrier
lines, desktop video-conferencing and training at a major
pharmaceutical firm, airborne video surveillance, and telemedicine
between a major hospital and its outlying clinics.
o TransPEG TDLT. The TransPEG TDLT is designed to deliver the utmost in
reliability, flexibility and video quality for distant learning
application. We designed the system to address the needs of education,
enterprise and government clients for remote education, video
conferencing and video surveillance application.
o TransPEG TNET. The TransPEG TNET is a compact, cost-effective, and
proven enabler of quality digital video over existing broadband
networks in business critical environments. We designed the TransPEG
TNET for high demand video transport such as uni-directional
<PAGE>23
applications such as point-to-point video transport or network node in
space-constrained environments.
Sales for the six months ended June 30, 2000, and year ended December
1999 and 1998, from the TransPEG System were approximately $386,150, $945,000,
and $41,000, respectively.
On August 15, 2000, we entered into an agreement with ClubCom, Inc.
whereby ClubCom will acquire our TransPEG servers to integrate into ClubCom's
product and service offerings to allow for demographic specific video
programming. Under the terms of the contract, ClubCom has agreed to initially
purchase 55 units and may purchase additional subject to purchase orders.
DVDImpact(TM)
DVDImpact is a DVD premastering suite which integrates MPEG-2 video
compression technology developed by us with a number of software tools developed
by third parties. DVDImpact targets corporate and professional users for the
design of custom DVD's. We intended the DVDImpact to be a price and performance
leader with most of the functionality of competing high-end systems, but at a
much lower price.
Sales for the year ended December 31, 1999, for the DVDImpact System,
were approximately $43,000. There were no sales of the DVDImpact System in 1998
or in the six months ended June 30, 2000.
Sales and Marketing
We are marketing our system-based TransPEG and DVDImpact line of
products to the professional video industry through:
o direct sales calls o professional video dealerships
o system integrators o attendance at national and
o strategic partnerships with larger, more international trade shows
established networking companies
Because our products have been in the development stage until
recently, we have not achieved substantial revenue from sales.
Competition
We face competition from numerous companies, some of which are more
established, have greater market recognition, and have greater financial,
production, and marketing resources than we do. Our products compete on the
basis of certain factors, including:
o first to market; o product capabilities;
o product performance; o price;
o support of industry standard; o ease of use;
o customer support; o user productivity;
o system reliability; o system stability.
<PAGE>24
The market for our products is competitive, subject to rapid change and
significantly affected by new product introductions and other market activities
of industry participants. We face direct and indirect competition from a broad
range of competitors who offer a variety of products and solutions to our
current and potential customers. Many of our competitors have longer operating
histories, a larger installed base of customers and greater market experience,
and greater financial, technical, name recognition and other resources than we
do. Competition to supply the markets identified by us can be expected to grow
as the markets mature.
Our main competitors for the video transmission market include FVC.COM,
Inc., Optibase, Optivision, and Lucent Technologies, Inc. Our main competitors
for the video content creation market include Spruce Technologies, Inc., Sonic
Solutions, and Minerva Systems, Inc. Numerous other companies offer products
that do or will compete with our 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 us.
Research and Development
Since our inception, we have made substantial investments in research
and development. We are continually designing and developing new generations of
products to provide improved performance and enhance functions.
For the past two years, the majority of our efforts have been devoted
toward the research and development of digital video compression, transmission,
and processing. Product development is performed mostly at our headquarters in
California by engineering and technical employees, assisted in certain
specialized areas by consultants. Our 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.
We are currently developing an MPEG-2 encoder board which we call the
DV-2110. The DV- 2100 is designed to act as the system interface, I/O manager,
and host for third party MPEG-2 encoder chips. We intends to embed the DV-2110
in subsequent versions of our TransPEG and DVDImpact lines of product, and to
sell the board as a stand-alone component, or packaged with certain our
developed software as an OEM product to customers in markets that we does not
currently service with our 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. The
modular nature and flexible architecture of our products are designed to allow
it to function in a wide range of digital audio and video applications in a
variety of different hardware and software environments.
Employees
As of June 30, 2000, we had approximately 24 full-time employees. None
of our employees is represented by any collective bargaining agreements and we
have never experience a work stoppage. We consider our relationship with our
employees to be good and we have not experienced any interruptions of operations
due to labor disagreement.
<PAGE>25
Facilities
We are 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 is currently $30,600, increasing by $900 per
month for each year through the end of the lease term, plus operating expenses
for the common areas of the entire complex equal to our pro-rata square footage
of the complex (approximately 47% of the building, 27% of the project). The
offices house all of our operations including the assembly and final testing
required for shipment of our products.
Sierra Vista previously occupied approximately 2,800 square feet of
office space in Beverly Hills, California under a three (3) year original 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
us. In 1998, Sierra Vista vacated the space and it was subsequently re-let by
the landlord to an independent third party without adverse financial impact to
us.
MANAGEMENT
Our directors and executive officers, their ages, positions held, and
duration as such, are as follows:
<TABLE>
<S> <C> <C> <C>
Name Position Age Period
---------------------- --------------------------------------- ----- --------------------------
Frank J. Alioto President, Chief Executive Officer, 52 June 1998 - Present
Director
James D. Casey Chief Financial Officer, Director 57 November 1999 - Present
Mark Koz Director 45 March 1993 - Present
Tony Low Director 46 October 1996 - Present
Robert Sibthorpe Director 51 May 1997 - Present
John Champlin, M.D. Director 44 October 1997 - Present
</TABLE>
Business Experience
The following is a brief account of the education and business
experience during at least the past five years of each director, executive
officer, and key employee, indicating the principal occupation and employment
during that period, and the name and principal business of the organization in
which such occupation and employment were carried out.
Frank J. Alioto has served as our president and director since July 1,
1998, and a director since June 30, 2000, and chairman of the board 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
<PAGE>26
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 has served as our 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 vice president of
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 bachelor of science degree, cum laude, from Northeastern University,
and an master of business administration from the Amos Tuck School of Business
at Dartmouth College.
Mark Koz has served as our director since March 3, 1993. Previously, at
various times, he also served as our chairman of the board, chief executive
officer and president, and chief technical officer. Mr. Koz was also chief
executive officer, chief technical officer and a director of FutureTel from 1993
to 1995, and has been chief executive officer of Intelligent Instruments
Corporation since 1993. Currently he is employed as an independent consultant in
the telecommunication industry. Mr. Koz has five years of technical education at
Florida Technological University (University of Central Florida). In addition,
he is a voting member of the Moving Picture Experts Group, the international
standards-setting body for MPEG.
Tony Low has served as our director 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. 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 Sibthorpe has served as our director since May 1997. Since
December 1998, Mr. Sibthorpe has served as a financial consultant to Canaccord
Capital. Mr. Sibthorpe has also been the 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 master of business administration in
finance and a bachelor of science in Earth Sciences both from the University of
Toronto.
John Champlin, M.D. has served as our director 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 also has been associate
clinical professor, family practice, at the University of California at Davis
since 1986. Mr. Champlin earned his doctor of medicine degree at the University
of Florida.
Committees of the Board
The board has an audit committee and a compensation committee. The audit
committee consists of Mr. Low and Mr. Sibthorpe and the compensation committee
consists of Mr. Koz and Mr. Sibthorpe.
<PAGE>27
The primary functions of the audit committee are to review the scope and
results of audits by the our independent auditors, the our internal accounting
controls, the non-audit services performed by the independent accountants, and
the cost of accounting services. The audit committee met 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 our various option plans, and
approves compensation, remuneration, and incentive arrangements for our officers
and employees.
Director Compensation
Each director receives, on the date of appointment as a director,
options to acquire shares of our common stock. In general, the exercise price of
the option is equal to the trading price of a share of our common stock as of
the date of grant. A director who also serves as our officer shall be entitled
to options to purchase 300,000 shares of our common stock. All other directors
receive options to purchase 200,000 shares of our common stock.
In February 2000, Mr. Jim Casey received 300,000 shares of our common
stock at the exercise price of $.26 per shares, which was less than the fair
market value at the time of grant.
Executive Compensation
The following summarizes all compensation earned by or paid to our chief
executive officer and each of our highest paid executive officers whose total
salary and bonuses for 1999 exceeded $100,000. 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>
<S> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Annual
Compensation Long-Term Compensation
------------------------------------------- -----------------------------
Other Securities
Name and Annual Underlying All Other
Principal Position Year Salary Compensation Options Compensation
---------------------- ------ ----------- ----------------- ------------- --------------
Frank J. 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>
<PAGE>28
(1) Effective June 23, 1998, Mr. Alioto was elected as our president. Prior to
this date, Mr. Alioto served as our consultant. The $51,171 represents
consulting fees paid to Mr. Alioto.
(2) Represents options to acquire 1,000,000 shares of our common stock at $0.26
per share and 300,000 shares at $0.16 per share.
(3) Represents options to acquire shares of our common stock at $0.17 per
share.
(4) Represents options to acquire shares of our common stock at $0.26 per
share.
(5) Represents sales commissions.
(6) Represents options to acquire 150,000 shares of our common stock at $0.25
per share and 50,000 shares of our common stock at $0.17 per share.
(7) Represents a bonus.
Employment Agreements
On June 23, 1998, we hired Mr. Frank Alioto to become our 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 our
employees. Additionally, Mr. Alioto received options to acquire, during a five
(5) year term, up to 1,000,000 shares of our common stock at an exercise price
equal to $0.26 per share. On June 26, 1998, options to acquire 166,667 shares of
our common stock vested and became immediately exercisable. Options to acquire
166,667 shares of our common stock vested on June 26, 1999, and options to
acquire 166,666 shares of our common stock shall vest on June 26, 2000. Options
to acquire the remaining 500,000 shares of our 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 us in connection with his service as
our President and Chief Executive Officer.
Mr. Alioto's employment is on an "at-will" basis. Either of us may
terminate the employment at any time for any reason. However, in the event of
termination without "cause," we 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 on June 13, 1998, and
became chairman of the board on December 15, 1998.
Stock Option Plans
We established a 1999 Nonstatutory Stock Option Plan or the 1999 Plan to
serve as a vehicle to attract and retain the services of key employees and to
help them realize a direct proprietary interest in us. The 1999 Plan provides
for the grant of up to 5,000,000 non-qualified stock options to be administered
by the compensation committee. The compensation committee has the discretion to
determine the optionees, the number of shares to be covered by each option, the
exercise schedule, and other terms of the options. The 1999 Plan may be amended,
suspended, or terminated by the board, but no such action may impair rights
<PAGE>29
under a previously granted option. As of June 30, 2000, 2,147,923 options to
acquire shares of common stock were outstanding under the 1999 Plan.
We established a 1996 Incentive and Nonstatutory Stock Option Plan or
the 1996 Plan. The purpose of the 1996 Plan is to encourage stock ownership by
our employees and officers to give them a greater personal interest in the
success of our business. A total of 1,500,000 shares of our common stock are
authorized to be issued under the 1996 Plan. The exercise price of any incentive
stock option granted under the 1996 Plan may not be less than 100% of the fair
market value of the our common stock on the date of grant. The fair market value
for which an optionee may be granted incentive stock options in any calendar
year may not exceed $100,000. Shares subject to options under the 1996 Plan may
be purchased for cash. The 1996 Plan is administered by the compensation
committee which has discretion to determine optionees, the number of shares to
be covered by each option, the exercise schedule, and other terms of the
options. The 1996 Plan may be amended, suspended, or terminated by the board,
but no such action may impair rights under a previously granted option. Each
qualified option is exercisable, during the lifetime of the optionee, only so
long as the optionee remains employed by us. No option is transferrable by the
optionee other than by will or the laws of descent and distribution. As of June
30, 2000, 1,246,190 options to acquire shares of common stock were outstanding
under the 1996 Plan.
The following table shows for the fiscal year ended December 31, 1999,
certain information regarding options granted during the fiscal year to our
executive officers named in the Summary Compensation Table under "Executive
Compensation."
<TABLE>
<S> <C> <C> <C> <C>
Option Grants In The Fiscal Year Ended December 31, 1999
Number of
Securities
Underlying % of Total Options
Options Granted to Employees in Exercise or Base Expiration
Name Granted 1999 Fiscal Year 1999 Price ($/Share) Date
-------------------- --------------- ------------------------ ------------------ -----------
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>
The following table shows for the fiscal year ended December 31, 1999,
certain information regarding options exercised by and held at year-end by our
executive officers named in the Summary Compensation Table under "Executive
Compensation."
<PAGE>30
<TABLE>
<S> <C> <C> <C> <C>
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 (E)/ Exercisable (E)/
Shares Acquired Value Realized Subject to Subject to
Name on Exercise ($) Repurchase (U) Repurchase (U)
------------------ ---------------- --------------- ----------------- ------------------
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>
Principal Stockholders
The following table sets forth certain information as of August 15,
2000, with respect to the beneficial ownership of our common stock for each
director, all directors and officers as a group, and each person known to us to
own beneficially five percent (5%) or more of the outstanding shares of our
common stock.
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
-------------------------------------- ------------- --------------
Frank J. Alioto 800,000(2) 2.1%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95053
James D. Casey 390,750(2) 1.06%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
John Champlin, MD 0 *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
<PAGE>31
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
-------------------------------------- ------------- --------------
Robert Sibthorpe 0 *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Tony Low 200,000(2) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Mark C. Koz 923,150(3) 2.5%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Donald Bennett 90,000(2) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Deborah McDonald 65,000(4) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Janek Kaliczak 90,000(2) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Steven Levine 90,000(2) *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
All officers and directors as a group 2,648,900(5) 6.9%
(10 persons)
---------------------
* Less than one percent
(1) Except as otherwise indicated, we believes that the beneficial owners of
our 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.
<PAGE>32
(2) Represents shares of our common stock that may be acquired within sixty
days upon exercise of options.
(3) Includes options to acquire 300,000 shares of our common stock exercisable
within 60 days. We are currently evaluating whether such warrants should be
cancelled due to certain actions by Mr. Koz.
(4) Includes options to acquire 30,000 shares of our common stock exercisable
within 60 days and 35,000 shares of our common stock owned by Ms.
McDonald's spouse.
(5) Includes options to acquire 1,990,750 shares of our common stock
exercisable within 60 days. As discussed in note (3), we are currently
evaluating whether warrants to purchase 300,000 shares of common stock
should be cancelled.
Limitation of Liability and Indemnification Matters
We adopted certain indemnification provisions to our bylaws that allow
us to indemnify current and former directors, officers, employees or agents for
expenses, including attorney fees, as a result of any threatened, pending suit
or proceedings arising as a result of such person being our director, officer,
employee or agent. Further, we have entered into indemnification agreements with
our officers and directors, and have obtained liability insurance.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of shares of common stock by the selling stockholders as of
August 15, 2000, and the number of shares of common stock covered by this
prospectus. The number of shares in the table represents an estimate of the
number of shares of common stock to be offered by the selling stockholders,
including shares that may be acquired upon the exercise of warrants or other
rights to acquire shares.
The shares being offered by Jashell consist of shares of common stock
that it may purchase from us pursuant to the common stock purchase agreement,
including upon exercise of such warrant issued pursuant to that agreement. For
additional information about the stock purchase agreement, please see the
"Equity Finance Facility" subsection of "THE OFFERING" section of this
prospectus. The address of Jashell International Limited is c/o Dr. Batliner &
Partner, Aeulestrasse 74, FL-9490 Vaduz, Liechtenstein.
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of Number of Common
Common Shares Beneficially Number of Common Shares Beneficially
Owned Shares Offered Owned Following
Name of Stockholder Prior to the Offering Hereby(1) the Offering(1)
------------------------------- ------------------------------ ----------------- -------------------------
# of Shares % of Class # of Shares # of Shares % of Class
---------------- ------------- ----------------- ------------ ----------
Jashell International Limited 100,000(7) * 30,000,000(2) -0- -0-
JNC Strategic Fund Ltd. 1,823,076(3)(4) 4.9% 19,821,427(3)(4) -0- -0-
JNC Opportunity Fund Ltd. 1,873,076(5)(6) 4.9% 33,751,804(5)(6) -0- -0-
Cardinal Capital Management, Inc. 1,112,000(7) 3.0% 1,112,000 -0- -0-
<PAGE>33
Number of Number of Common
Common Shares Beneficially Number of Common Shares Beneficially
Owned Shares Offered Owned Following
Name of Stockholder Prior to the Offering Hereby(1) the Offering(1)
------------------------------- ------------------------------ ----------------- -------------------------
# of Shares % of Class # of Shares # of Shares % of Class
---------------- ------------- ----------------- ------------ ----------
Elizabeth Hagopian 395,000(7) * 395,000 -0- -0-
Bartel Eng Linn & Schroder 75,000(7) * 75,000 -0- -0-
Fred Hoot 3,067 * 3,067 -0- -0-
Phil C. Hu 3,067 * 3,067 -0- -0-
Donald S. Sherman 20,000 * 20,000 -0- -0-
</TABLE>
(1) Assumes the sale of the shares of common stock which have been offered
pursuant to this prospectus.
(2) Includes the resale of up to 30,000,000 shares of common stock which may be
sold pursuant to the equity finance facility, and 100,000 shares that may
be acquired upon the exercise of warrants.
(3) The convertible debentures and the warrants issued to such selling
shareholder, among other things, prohibit the holder thereof from
converting a principal amount of such convertible debentures or exercising
the warrants to the extent that such conversion or exercise, as the case
may be, would result in the holder, together with any affiliate thereof,
beneficially owning in excess of 4.999% of the outstanding common shares
following such conversion or exercise, as the case may be. Such
restrictions may be waived by the holder of the convertible debentures and
the warrants as to itself upon not less than 61 days' notice to us. The
number of common stock listed as beneficially owned by such selling
shareholder represents the number of common stock issuable to such selling
shareholder, subject to the limitation set forth in the first sentence of
this footnote, upon (i) conversion of $1,250,000 principal amount of such
selling shareholder's convertible debentures, at a conversion prices from
$0.1775 to $0.1275, (ii) exercise of the warrants issued to such selling
shareholder in conjunction with the sale of the convertible debentures and
secured notes for the purchase of an aggregate of 887,500 common shares,
and (iii) interest on the convertible debenture through June 30, 2001.
(4) Includes the common stock issuable to such selling shareholder upon (i)
conversion of the convertible debentures issued to such selling shareholder
at the corresponding conversion price. We have contractually agreed to
include herein an aggregate of 19,821,427 common stock issuable upon
conversion of the convertible debentures and exercise of the warrants
issued to the selling shareholders.
(5) The convertible debentures and the warrants issued to such selling
shareholder, among other things, prohibit the holder thereof from
converting a principal amount of such convertible debentures or exercising
the warrants to the extent that such conversion or exercise, as the case
may be, would result in the holder, together with any affiliate thereof,
beneficially owning in excess of 4.999% of the outstanding common shares
following such conversion or exercise, as the case may be. Such
restrictions may be waived by the holder of the convertible debentures and
the warrants as to itself upon not less than 61 days' notice to us. The
number of common stock listed as beneficially owned by such selling
shareholder represents the number of common stock issuable to such selling
shareholder, subject to the limitation set forth in the first sentence of
this footnote, upon (i) conversion of $3,500,000 principal amount of such
selling shareholder's convertible debentures, at a conversion prices from
$0.35 to $0.2575, (ii) exercise of the warrants issued to such selling
shareholder in conjunction with the sale of the convertible debentures and
secured notes for the purchase of an aggregate of 3,700,000 common shares,
and (iii) interest on the convertible debenture through June 30, 2001.
(6) Includes the common stock issuable to such selling shareholder upon (i)
conversion of the convertible debentures issued to such selling shareholder
at the corresponding conversion price. We have contractually agreed to
include herein an aggregate of 33,751,804 common stock issuable upon
conversion of the convertible debentures and exercise of the warrants
issued to the selling shareholders.
(7) Represents common stock that may be acquired upon exercise of warrants or
option within sixty days.
* Less than 1%.
<PAGE>34
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees, and
successors-in-interest may, from time to time, sell any or all or none of their
common stock on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling common stock:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealer may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of ours or derivatives of
our securities and may sell or deliver common stock in connection with these
trades. The selling stockholders may pledge their common shares to their brokers
under the margin provisions of customer agreements. If a selling stockholder
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged common shares.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of common shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are
involved in selling the common stock may be deemed to be "underwriters" within
the meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such broker-dealers or agents and any profit on the
<PAGE>35
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the common stock, including fees and disbursements of counsel to
the selling shareholders. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Jashell Investments Limited
We have been advised by Jashell that it may sell the common stock from
time to time in transactions on the OTC Bulletin Board, or any exchange where
the common stock is then listed, in negotiated transactions, or otherwise, or by
a combination of these methods, at fixed prices which may be changed, at market
prices at the time of sale, at prices related to market prices or at negotiated
prices. Jashell may effect these transactions by selling the common stock to or
through broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from Jashell or the purchasers of common stock to or
through broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from Jashell or the purchasers of common stock for
whom the broker-dealer may act as an agent or to whom it may sell the common
stock as a principal, or both. The compensation to a particular broker-dealer
may be in excess of customary commissions.
Jashell is an "underwriter" within the meaning of the Securities Act in
connection with the sale of the common stock offered hereby. Assuming that we
are in compliance with the conditions of the common stock purchase agreement we
entered into in connection with the equity finance facility, Jashell must accept
draw downs of shares from us, subject to maximum aggregate dollar amounts,
during the term of the agreement. Broker-dealers who act in connection with the
sale of the common stock may also be deemed to be underwriters. Profits on any
resale of the common stock as a principal by such broker-dealers may be deemed
to be underwriting discounts and commissions under the Securities Act. Any
broker-dealer participating in such transactions as agent may receive
commissions from Jashell and, if they act as agent for the purchaser of our
common stock, from such purchaser. Broker-dealers may agree with Jashell to sell
a specified number of shares of our common stock at a stipulated price per
share, and, to the extent such a broker-dealer is unable to do so acting as
agent for Jashell, to purchase as principal any unsold common stock at the price
required to fulfill the broker-dealer commitment to Jashell. Broker-dealers who
acquire common stock as principal may thereafter resell the common stock from
time to time in transactions (which may involve crosses and block transactions
and which may involve sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market, in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices, and in connection with such resales may pay to or
receive from the purchasers of such common stock commissions computed as
described above.
The common stock offered hereby is being registered pursuant to our
contractual obligations, and we have agreed to pay the costs of registering the
shares hereunder. We have also agreed to reimburse Jashell's costs and expenses
incurred in connection with the common stock purchase agreement, including fees,
expenses and disbursements of counsel for Jashell for the preparation of the
agreement up to a maximum of $22,500, and all reasonable fees incurred in
connection with any amendment, modification or waiver, to or enforcement of the
agreement.
<PAGE>36
The price at which the common shares will be issued by us to Jashell
will fluctuate. The price will be between 79% and 82% of the daily volume
weighted average price over an 22-day trading period on the OTC Bulletin Board
as reported by Bloomberg Financial L.P. In the event of a draw down related to a
special activity, such as any one-time charge we expect to incur for any reason,
including, in connection with the acquisition of another business, the price
will be 76% of the daily volume weighted average price.
Please see the "Equity Financing Facility" subsection of this prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two fiscal years, we have entered into certain
transactions with two of our current directors. However, the amount of the
transaction involving each director did not exceed $60,000.
DESCRIPTION OF CAPITAL STOCK
Under our certificate of incorporation, we are authorized to issue
150,000,000 shares of common stock, $0.001 par value, of which 36,624,593 were
outstanding as of August 15, 2000.
Common Stock
Each stockholder is entitled to one vote for each share of common stock
held on all matters submitted to a vote of stockholders. For the election of
directors, each holder of common stock has the right to cumulate his votes,
which means each share shall have the number of votes equal to the number of
directors to be elected and all of which votes may be cast for any one nominee.
The common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon the liquidation, dissolution, or winding up, the
holders of common stock outstanding at that time would be entitled to share
ratably in all assets remaining after the payment of liabilities. Each
outstanding share of common stock now is, and all shares of common stock that
will be outstanding after completion of the offering will be, fully paid and
non-assessable.
Warrants and Options
As of August 15, 2000, we had outstanding warrants to purchase 6,432,000
shares of our common stock at exercise prices ranging between $.16 and $2.00 per
share and we had outstanding options to purchase 4,822,113 shares of our common
stock at exercise prices ranging between $.16 and $2.59 per share.
Transfer Agent
Computershare Trust Company, Inc., formerly American Securities
Transfer, 12039 W. Alameda Parkway, Suite Z-2, Lakewood, Colorado 80228 is the
transfer agent for our common stock.
LEGAL PROCEEDINGS
On November 10, 1997, we 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,
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, we issued shares of our common stock to Michael D. Haynes
and David S. Jett and entities controlled by them based upon fraudulent
<PAGE>37
representations. Further, we alleged, that Manhattan West, Marketing Direct
Concepts, and Checkers Foundation and Silicon Software International, two
entities alleged to be controlled by Messrs. Haynes and Jett, were issued fees,
common stock, and options to acquire shares of common stock based upon
misrepresentations, including that they could raise capital to assist us in our
business. We also alleged that Atlas Stock Transfer, our former transfer agent,
breached its contract in issuing shares of common stock in these transactions.
In addition, we alleged that Mr. Pande, our former director and officer,
violated his fiduciary duty by receiving shares of our common stock based upon
misrepresentations and inadequate or no consideration, and made inappropriate
and unauthorized expenditures on our behalf for his personal benefit, and that
Mr. Reedholm, a former director, received shares of our common stock without the
payment of adequate consideration. We alleged RICO (Racketeer Influenced
Corrupted Organizations Act) violations against all defendants. We 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 Stock Transfer, and with one other
defendant for payments of cash by the defendants and relief of a debt previously
owed by us 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
our common stock held by the defendants were canceled. The settlement with Mr.
Reedholm included release of his claims against us in the Decorah Company
lawsuit. The settlement with Atlas Stock Transfer included the assignment by
Atlas Stock Transfer to us certain claims that Atlas Stock Transfer might have
against other parties for their actions in accepting and processing our stock
certificates.
A number of defendants have defaulted and we have received entries of
judgment against them. As a result, we canceled 1,010,329 shares of our common
stock, options to purchase 700,000 shares of our common stock, and liabilities
of $247,000, and seized a cash balance held by a third party of approximately
$12,000. We are pursuing efforts to fully collect our judgment from the
defaulted defendants.
There is currently no active litigation with any of the original parties
under this suit. In all instances we have settled with the parties, dropped them
from the suit, or received judgments against them.
In 1999 and 2000, we amended our complaint and named six additional
defendants. Additional defendants may be named shortly. These new defendants and
potential defendants are brokers whom we allege 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.
On February 25, 2000, we 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. Our claims in this action were
assigned to us by Atlas Stock Transfer as part of the settlement with Atlas
Stock Transfer in the Haynes litigation discussed above. The litigation is in
its initial stages and discovery has not yet begun.
On November 1, 1999, we filed a complaint against our former auditor
Michael Hoffer (Orange County Superior Court No. 816504). The 1999 complaint
alleges malpractice and conflict 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 is
continuing.
<PAGE>38
In August 1998, the staff of the Division of Enforcement of the
Securities and Exchange Commission advised us that the Securities and Exchange
Commission had issued a formal order for private investigation. The
investigation involves allegations that, since January 1, 1995, certain of our
present or former officers, directors, employees, business consultants,
investment bankers, and/or certain other persons or entities associated with us,
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 our securities, and by manipulating our stock price. We
do not believe that any sanctions that we may likely receive from the Securities
and Exchange Commission based upon this investigation will materially affect our
financial position or operations. Discovery has been initiated.
LEGAL MATTERS
The validity of the shares of common stock offered by selling
stockholders will be passed upon by the law firm of Bartel Eng Linn & Schroder,
Sacramento, California. Certain of its members own shares of common stock
representing less than 1% of our outstanding shares of common stock. In
addition, the firm holds a warrant to purchase up to 75,000 shares of common
stock.
EXPERTS
The consolidated balance sheet as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the two years then ended and from inception, included in this
prospectus have been included herein in reliance on the report of Hein +
Associates LLP, independent certified public accountants, given the authority of
that firm, as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. Our Securities
and Exchange Commission filings are available to the public over the Internet at
the SEC's Website at http://www.sec.gov. You may also read and copy any document
we file at the Securities and Exchange Commission's public reference room at 450
Fifth Street, NW, Washington, D.C. 20549, Seven World Trade Center, 13th Floor,
New York, New York 10048 and 500 West Madison 1-800-SEC-0330 for further
information about the public reference room.
We have filed with the Securities and Exchange Commission a registration
statement on Form SB- 2 under the Securities Act with respect to the securities
offered under this prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in the
registration statement, certain items of which are omitted in accordance with
the rules and regulations of the Securities and Exchange Commission. Statements
contained in this prospectus as to the contents of any contract or other
documents are not necessarily complete and in each instance reference is made to
the copy of such contact or documents filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such reference
and the exhibits and schedules thereto. For further information regarding us and
the securities offered under this prospectus, we refer you to the registration
statement and such exhibits and schedules which may be obtained from the
Securities and Exchange Commission at its principal office in Washington, D.C.
upon payment of the fees prescribed by the Securities and Exchange Commission.
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
Independent Auditor's Report.......................................................................................F-2
Consolidated Balance Sheet - December 31, 1999 and June 30, 2000 (unaudited).......................................F-3
Consolidated Statements of Operations - For the Years Ended December 31, 1999
and 1998, For the Six Months Ended June 30, 2000 and 1999 (unaudited), and
For the Period From March 3, 1993 (inception) to June 30, 2000 (unaudited)....................................F-4
Consolidated Statement of Stockholders' Equity (Deficit) - For the Period From
March 3, 1993 (inception) to June 30, 2000 (The period from January 1, 2000
through June 30, 2000 is unaudited)...........................................................................F-6
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1999
and 1998, For the Six Months Ended June 30, 2000 and 1999 (unaudited), and
For the Period From March 3, 1993 (inception) to June 30, 2000 (unaudited)...................................F-12
Notes to Consolidated Financial Statements........................................................................F-15
</TABLE>
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
InnovaCom, Inc. and Subsidiaries (a Development Stage Enterprise)
Santa Clara, California
We have audited the accompanying consolidated balance sheet of InnovaCom, Inc.
and subsidiaries (a Development Stage Enterprise) as of December 31, 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 paragraph 2 of Note 8, paragraph 8 of Note 9, and
paragraph 9 through paragraph 13 of Note 11 which are as of March 15, 2000
<PAGE>F-3
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C>
DECEMBER 31, JUNE 30,
1999 2000
------------------- ------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 302,701 $ 107,744
Accounts receivable,
less: allowance for doubtful accounts of $10,000 and
$10,000 (unaudited) 149,075 93,950
Other receivables 6,750 5,300
Inventory, net 210,536 376,195
Prepaid expenses 49,044 158,506
Deferred offering costs - 82,835
------------------ ------------------
Total current assets 718,106 824,530
PROPERTY AND EQUIPMENT, net 143,950 104,308
DEPOSITS 37,200 37,200
------------------ ------------------
TOTAL ASSETS $ 899,256 $ 966,038
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable - related parties $ 100,000 $ 100,000
Secured promissory notes 4,200,000 6,475,000
Convertible debentures 9,440,000 4,750,000
Accounts payable 1,222,312 1,067,982
Accrued liabilities 3,002,110 3,256,968
Liabilities in excess of assets of discontinued operations 62,932 62,932
------------------ ------------------
Total current liabilities 18,027,354 15,712,882
COMMITMENTS AND CONTINGENCIES (Notes 3, 9 and 12)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 150,000,000 shares
authorized, 25,784,600 and 36,534,593 (unaudited)
shares issued and outstanding 25,785 36,535
Warrants 2,329,325 3,155,863
Additional paid-in capital 23,383,626 29,265,482
Deficit accumulated during development stage (42,866,834) (47,204,724)
------------------ ------------------
Total stockholders' (deficit) (17,128,098) (14,746,844)
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 899,256 $ 966,038
================== ==================
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>F-4
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
MARCH 3, 1993
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED (INCEPTION) TO
DECEMBER 31, JUNE 30, JUNE 30,
1999 1998 2000 1999 2000
------------------ ----------------- ------------------- ------------------- -----------------
(unaudited) (unaudited) (unaudited)
REVENUES $ 507,076 $ 107,632 $ 386,150 $ 96,625 $ 1,149,858
------------------ ----------------- ------------------- ------------------- -----------------
COSTS AND EXPENSES:
Costs of goods sold 491,633 338,763 295,775 79,096 1,178,709
Research and development 1,822,603 3,399,715 978,193 735,671 13,299,719
Selling, general and
administrative 2,762,173 5,901,604 1,751,379 1,628,799 20,692,109
Impairment loss on property
and equipment - 937,000 - - 937,000
------------------ ----------------- ------------------- ------------------- -----------------
Total costs and
expenses 5,076,409 10,577,082 3,025,347 2,443,566 36,107,537
------------------ ----------------- ------------------- ------------------- -----------------
OPERATING LOSS (4,569,333) (10,469,450) (2,639,197) (2,346,941) (34,957,679)
------------------ ----------------- ------------------- ------------------- -----------------
OTHER INCOME (EXPENSE):
Interest income - 10,025 - - 22,109
Interest expense (2,831,589) (4,761,319) (1,731,630) (1,875,845) (10,553,769)
Debt conversion expense - (260,645) - - (260,645)
Other income 1,781 - - - 1,781
------------------ ----------------- ------------------- ------------------- -----------------
Total other income
(expense) (2,829,808) (5,011,939) (1,731,630) (1,875,845) (10,790,524)
------------------ ----------------- ------------------- ------------------- -----------------
LOSS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAX EXPENSE,
DISCONTINUED
OPERATIONS AND
EXTRAORDINARY ITEM (7,399,141) (15,481,389) (4,370,827) (4,222,786) (45,748,203)
INCOME TAX EXPENSE 1,600 1,600 1,600 1,600 9,600
------------------ ----------------- ------------------- ------------------- -----------------
LOSS FROM CONTINUING
OPERATIONS $ (7,400,741) $ (15,482,989) $ (4,372,427) $ (4,224,386) $ (45,757,803)
------------------ ----------------- ------------------- ------------------- -----------------
</TABLE>
<PAGE>F-5
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
MARCH 3, 1993
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED (INCEPTION) TO
DECEMBER 31, JUNE 30, JUNE 30,
1999 1998 2000 1999 2000
------------------ ----------------- ------------------- ------------------ -------------------
(unaudited) (unaudited) (unaudited)
Gain/(loss) on disposal of
discontinued operations $ 25,789 $ (1,155,823) $ - $ - $ (1,159,452)
Loss from operations of
discontinued operation,
net of income tax
expense - (400,000) (800) (800) (1,130,834)
------------------ ----------------- ------------------- ------------------ -------------------
GAIN/(LOSS) FROM
DISCONTINUED
OPERATIONS 25,789 (1,555,823) (800) (800) (2,290,286)
EXTRAORDINARY ITEM:
GAIN ON EXTINGUISHMENT OF
LIABILITIES 235,093 572,935 35,337 179,892 843,365
------------------ ----------------- ------------------- ------------------ -------------------
NET LOSS $ (7,139,859) $ (16,465,877) $ (4,337,890) $ (4,045,294) $ (47,204,724)
================== ================= =================== ================== ===================
BASIC AND DILUTED NET LOSS PER
SHARE:
Continuing operations $ (.29) $ (.67) $ (.13) $ (.17)
Discontinued operations - (.07) - -
Extraordinary item .01 .03 - .01
------------------ ----------------- ------------------- ------------------
Basic and diluted net loss
per share $ (.28) $ (.71) $ (.13) $ (.16)
================== ================= =================== ==================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 25,099,278 23,032,965 33,669,082 25,002,535
================== ================= =================== ==================
</TABLE>
See accompanying notes to these consolidated financial statements.
<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 JUNE 30, 2000
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
------------------------ PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
---------- ------------ --------- ----------- ------------ ------------
Common Stock, issued to form company at
$0.0017 per share (March 1993) 5,100,000 $ 5,100 $ - $ 3,400 $ - $ 8,500
Net loss - - - - (800) (800)
---------- ------------ --------- ----------- ------------ ------------
BALANCES, December 31, 1993 5,100,000 5,100 - 3,400 (800) 7,700
Net loss - - - - (800) (800)
---------- ------------ --------- ----------- ------------ ------------
BALANCES, December 31, 1994 5,100,000 5,100 - 3,400 (1,600) 6,900
Net loss - - - - (800) (800)
---------- ------------ --------- ----------- ------------ ------------
BALANCES, December 31, 1995 5,100,000 5,100 - 3,400 (2,400) 6,100
Issuance of common stock at $0.50 per share to
directors for services performed (March 1996) 900,000 900 - 449,100 - 450,000
Acquisition of Jettson Realty Development, Inc.
at $0.30 per share (June 1996) 561,069 561 - 168,184 - 168,745
Sale of common stock, net of expenses at $0.16
per share (July 1996) 4,620,015 4,620 - 715,380 - 720,000
Issuance of common stock at $0.50 per share to
employees for services performed (July 1996) 500,000 500 - 249,500 - 250,000
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)
</TABLE>
<PAGE>F-7
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO JUNE 30, 2000
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
--------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
------------- ------------ ---------- ------------- ------------ --------------
Issuance of common stock in exchange for
technology at $5.00 per share (January 1997) $ 100,000 $ 100 $ - $ 499,900 $ - $ 500,000
Sale of common stock, net of expenses at
$2.90 per share (February 1997) 229,310 229 - 664,771 - 665,000
Acquisition of Sierra Vista at $0.50 per
share (May 1997) 8,514,500 8,515 - 4,248,735 - 4,257,250
Issuance of common stock at $2.43 per share
for legal services rendered (June 1997) 7,003 7 - 16,976 - 16,983
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
</TABLE>
<PAGE>F-8
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO JUNE 30, 2000
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
------------------------ PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
----------- ----------- ---------- ----------- ------------ --------------
Issuance of common stock at $0.26 per share
in connection with conversion of 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
</TABLE>
<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 JUNE 30, 2000
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
-------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
------------ ------------ ------------ ------------- ------------ -------------
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 $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
Issuance of common stock at $0.19 per share
in connection with conversion of debentures
(December 1999) 602,985 603 - 113,689 - 114,292
Proceeds from the exercise of stock options 6,000 6 - 1,554 - 1,560
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
</TABLE>
<PAGE>F-10
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO JUNE 30, 2000
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
---------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
--------------- ------------ ---------- ------------- ------------ --------------
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 25,784,600 25,785 2,329,325 23,383,626 (42,866,834) (17,128,098)
Issuance of common stock at $0.26 per share
in connection with conversion of debentures
(January 2000) (unaudited) 402,764 403 - 102,705 - 103,108
Issuance of common stock at $0.40 per share
in connection with conversion of debentures
(January 2000) (unaudited) 290,380 290 - 114,468 - 114,758
Issuance of common stock at $0.32 per share
in connection with conversion of debentures
(February 2000) (unaudited) 708,197 708 - 229,314 - 230,022
Issuance of common stock at $0.37 per share
in connection with conversion of debentures
(February 2000) (unaudited) 1,556,149 1,556 - 573,597 - 575,153
Issuance of common stock at $0.44 per share
in connection with conversion of debentures
(February 2000) (unaudited) 1,312,158 1,312 - 573,938 - 575,250
Issuance of common stock at $0.66 per share
in connection with conversion of debentures
(February 2000) (unaudited) 2,090,653 2,091 - 1,383,716 - 1,385,807
Issuance of common stock at $1.10 per share
in connection with conversion of debentures
(March 2000) (unaudited) 1,153,367 1,153 - 1,271,241 - 1,272,394
Issuance of common stock at $1.38 per share
in connection with conversion of debentures
(March 2000) (unaudited) 835,580 836 - 1,156,275 - 1,157,111
</TABLE>
<PAGE>F-11
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO JUNE 30, 2000
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
------------------------ PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
------------ ---------- ----------- -------------- ------------- ---------------
Proceeds from the exercise of stock options
(unaudited) 1,045,517 1,045 - 270,383 - 271,428
Exercise of stock options in a cashless
exchange transaction (unaudited) 437,627 438 - (438) - -
Exercise of warrants in a cashless exchange
transaction (unaudited) 907,601 908 - (908) - -
Warrants issued with sale of secured
promissory notes (unaudited) - - 741,985 - - 741,985
Compensation recognized upon issuance of
stock options (unaudited) - - - 200,700 - 200,700
Warrants issued for legal services rendered
(unaudited) - - 31,093 - - 31,093
Warrants issued in connection with the equity
credit line (unaudited) - - 53,460 - - 53,460
Issuance of common stock at $.69 per share
in connection with the equity line of credit
(June 2000) (unaudited) 10,000 10 - 6,865 - 6,875
Net loss (unaudited) - - - - (4,337,890) (4,337,890)
------------ ---------- ----------- -------------- ------------- ---------------
BALANCES, June 30, 2000 (unaudited) 36,534,593 $ 36,535 $3,155,863 $ 29,265,482 $ (47,204,724) $ (14,746,844)
============ ========== =========== ============== ============= ===============
</TABLE>
See accompanying notes to these consolidated financial statements
<PAGE>F-12
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED MARCH 3, 1993
DECEMBER 31, JUNE 30, (INCEPTION) TO
------------------------------- ------------------------------- JUNE 30,
1999 1998 2000 1999 2000
------------- --------------- --------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing
operations $ (7,400,741) $(15,482,989) $ (4,372,427) $ (4,224,386) $(45,757,803)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 144,343 291,363 58,970 75,903 931,830
Provision for inventory
obsolescence 40,182 - 44,654 - 84,836
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 1,197,965 741,985 1,058,200 4,139,459
Compensation recognized upon
issuance of stock and stock
options 66,945 611,053 231,793 18,344 6,068,523
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 35,337 179,892 843,365
Debt conversion expense - 260,645 - - 260,645
Write-off of related party
receivable - - - - 139,594
Write-off of acquisition costs - 68,364 - - 68,364
</TABLE>
<PAGE>F-13
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED MARCH 3, 1993
DECEMBER 31, JUNE 30, (INCEPTION) TO
---------------------------- ------------------------------ JUNE 30,
1999 1998 2000 1999 2000
------------ -------------- ----------- ------------- --------------
(unaudited) (unaudited) (unaudited)
Changes in operating assets and liabilities:
Cash - restricted $ - $ 8,481 $ - $ - $ -
Accounts receivable (150,330) (8,745) 55,125 (21,485) (103,950)
Other receivables 61,498 - 1,450 (15,057) (15,298)
Inventory (250,718) - (210,313) (228,777) (461,031)
Prepaid expenses and other (47,298) 96,631 (131,962) (34,259) (181,010)
Deposits - 52,679 - - (37,200)
Accounts payable (498,538) 1,438,485 (154,330) (407,206) 1,476,864
Accrued liabilities 1,751,112 678,309 978,461 797,947 4,581,062
------------ -------------- ----------- ------------- --------------
Net cash used in operating
activities from continuing
operations (4,905,420) (7,181,958) (2,721,257) (2,800,884) (23,106,695)
------------ -------------- ----------- ------------- --------------
Net loss from discontinued
operations 25,789 (1,555,823) (800) (800) (2,290,286)
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) (800) (800) (1,080,657)
------------ -------------- ----------- ------------- --------------
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) (19,328) (5,216) (2,219,479)
Proceeds from sale of assets 525 - - - 4,025
------------ -------------- ----------- ------------- --------------
Net cash provided by (used
in) investing activities $ (9,409) $ (1,216,870) $ (19,328) $ (5,216) $ 493,386
------------ -------------- ----------- ------------- --------------
</TABLE>
<PAGE>F-14
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED MARCH 3, 1993
DECEMBER 31, JUNE 30, (INCEPTION) TO
----------------------------- ----------------------------- JUNE 30,
1999 1998 2000 1999 2000
-------------- -------------- --------------- -------------- ---------------
(unaudited) (unaudited) (unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable $ - $ 777,500 $ - $ 2,065,500 $ 4,865,490
Proceeds from secured promissory
notes 4,200,000 - 2,275,000 - 6,475,000
Net proceeds from sale of
convertible debentures with
detachable warrants 750,000 4,000,000 - 750,000 9,358,593
Principal payments on notes
payable-related party (35,000) (174,478) - (66,293) (309,278)
Proceeds from sale of common
stock - - - - 2,897,670
Proceeds from exercise of stock
options 1,560 - 271,428 272,988
Proceeds from settlements 241,247 - - 77,710 241,247
-------------- -------------- --------------- -------------- ---------------
Net cash provided by
financing activities 5,157,807 4,603,022 2,546,428 2,826,917 23,801,710
-------------- -------------- --------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 268,767 (4,114,500) (194,957) 20,017 107,744
CASH AND CASH EQUIVALENTS, beginning
of period 33,934 4,148,434 302,701 33,934 -
-------------- -------------- --------------- -------------- ---------------
CASH AND CASH EQUIVALENTS,
end of period $ 302,701 $ 33,934 $ 107,744 $ 53,951 $ 107,744
============== ============== =============== ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ - $ - $ - $ - $ 9,079
============== ============== =============== ============== ===============
Income taxes $ 2,400 $ 2,400 $ 1,600 $ 1,600 $ 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 $ 5,413,603 $ - $ 9,741,168
============== ============== =============== ============== ===============
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>F-15
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
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-16
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
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-17
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
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 during the year ended December 31,
1999. 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.
<PAGE>F-18
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
Reclassification - Certain reclassifications have been made to conform
1998 financial statements to the presentation in 1999. The
reclassifications had no effect on net income.
Interim Financial Information - The June 30, 2000 and 1999 financial
statements have been prepared by the Company without audit. In the
opinion of management, the accompanying financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary for
a fair presentation of the Company's financial position as of June 30,
2000 and the results of operations and cash flows for the six months
ended June 30, 2000 and 1999. The results of operations for the six
months ended June 30, 2000 and 1999 are not necessarily indicative of
those that will be obtained for the entire fiscal year.
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:
<TABLE>
<S> <C> <C>
December 31, June 30,
1999 2000
---------------------- ----------------------
Raw materials $ 110,249 $ 186,847
Work in process 66,766 48,723
Finished Goods 73,703 225,460
------------------ ------------------
250,718 461,030
Less: Inventory reserve (40,182) (84,835)
------------------ ------------------
$ 210,536 $ 376,195
================== ==================
</TABLE>
The inventory reserve includes estimated costs to rework the demo units
returned by customers and a provision for units not returned.
<PAGE>F-19
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<S> <C> <C>
December 31, June 30,
1999 2000
------------------- -------------------
Computer and equipment $ 273,965 $ 293,294
Office equipment and furniture 125,774 125,774
------------------- -------------------
399,739 419,068
Accumulated depreciation (255,789) (314,760)
------------------- -------------------
$ 143,950 $ 104,308
=================== ===================
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
December 31, June 30,
1999 2000
------------------- -------------------
Accrued payroll and benefits $ 283,788 $ 181,522
Accrued interest 1,385,552 1,221,809
Accrued penalty related to
convertible debentures 1,096,225 1,567,500
Other 236,545 286,137
-------------------- -------------------
$ 3,002,110 $ 3,256,968
==================== ====================
</TABLE>
<PAGE>F-20
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
<TABLE>
<S> <C> <C>
7. NOTES PAYABLE - RELATED PARTIES: December 31, June 30,
1999 2000
---------------------- ----------------------
Note payable to a former director
in the original amount of $50,000
bearing interest at 10%, due on
demand $ 5,000 $ 5,000
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 95,000
---------------------- ----------------------
$ 100,000 $ 100,000
====================== ======================
</TABLE>
In connection with the notes payable - related parties discussed above,
the Company issued 100,000 shares of common stock to the related parties
and has recognized $175,000 in interest expense for the year ended
December 31, 1998 for the fair value of the shares issued.
During 1997, the Company entered into a revolving convertible debt
facility with a shareholder which bore interest at 10% and provided for
the conversion of all amounts outstanding into common stock at a
conversion price equal to 80% of the market price for a share of common
stock at the time a draw is funded. In May 1998, the shareholder
converted $4,181,421 of the amount outstanding into 1,742,362 shares of
common stock. In June 1998, the shareholder converted its remaining
balance outstanding of $317,357 into common stock and terminated the
credit facility. As an inducement to make this conversion, the Company
allowed the shareholder to convert the remaining balance into 1,220,608
shares of common stock based on the market price of the stock of $0.26
per share as opposed to the conversion price of $2.40 per share. During
1998, the Company recognized an additional expense of $260,645 for the
value of the additional shares issued to induce the conversion.
8. SECURED PROMISSORY NOTES:
During the year ended December 31, 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.
<PAGE>F-21
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
During the six months ended June 30, 2000, the Company entered into
promissory note agreements totaling $2,275,000 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
1,137,500 shares of common stock at prices ranging from $0.30 to $1.00.
The Company recognized interest expense of $741,985, related to the
promissory notes, during the six month period ended June 30, 2000 that is
attributable to the fair value of the warrants issued.
During the six months ended June 30, 2000, the Company issued 907,601
shares of common stock at the par value of $0.001 in a cashless exercise
of warrants originally issued in connection with the secured promissory
notes.
9. 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 five-year warrants to purchase 500,000
shares of common stock at $2.43 and $1.75 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.
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.
<PAGE>F-22
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
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 with an additional $427,500 being accrued for the six
month period ended June 30, 2000 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 $10,598 in accrued
interest into 1,459,539 shares of common stock. During the year ended
December 31, 1999, the holders of the December 1997 debentures converted
$100,000 in principal and $14,292 in accrued interest into 602,985 shares
of common stock. During the six-month period ended June 30, 2000, the
holders of the December 1997 debenture converted the remaining balance of
$4,690,000 in principal and $723,603 in accrued interest into 8,349,248
shares of common stock.
10. STOCKHOLDERS' EQUITY:
In 1999, the Board of Directors approved an amendment to increase 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.
<PAGE>F-23
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
11. 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. 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.
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.
<PAGE>F-24
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
During 1999, the Company granted options to purchase 997,400 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 $0.14 to $0.51 per share. The options expire in 2004 and
vest over three years.
In February 2000, the Company granted 1999 plan options to purchase
300,000 shares of common stock to an officer. The options were granted
with an exercise price of $0.26 per share and vest immediately.
Compensation expense of $192,000 was recognized in the period ended
June 30, 2000 for services provided.
In February 2000, the Company granted 1999 plan options to purchase
50,000 shares of common stock to an employee. The options were granted
with an exercise price of $0.26 per share. One third of the options
vest immediately and the remainder vest over two years. Compensation
expense of $8,700 was recognized in the period ended June 30, 2000 for
services provided.
During the six months ended June 30, 2000, the Company granted options
to purchase 110,000 shares of common stock to employees under the 1999
plan. The options were granted with exercise prices equal to market on
the date of grant and range from $0.50 to $2.22 per share. The options
expire in 2005 and vest over three years.
The following table sets forth activity for all options granted under
the 1996 and 1999 Plans:
<TABLE>
<S> <C> <C>
AVERAGE EXERCISE
NUMBER OF SHARES PRICE PER SHARE
------------------ ------------------
BALANCE, December 31, 1997 2,808,323 $ 2.36
Granted 2,419,833 .32
Forfeited (2,558,323) 2.57
Exercised - -
------------------ ------------------
BALANCE, December 31, 1998 2,669,833 $ .31
================== ==================
Granted 997,400 .24
Forfeited (89,683) .26
Canceled/Expired (271,000) .26
Exercised (6,000) .26
------------------ ------------------
BALANCE, December 31, 1999 3,300,550 $ .29
================== ==================
Granted 460,000 .57
Forfeited (55,400) .26
Exercised (245,517) .26
------------------ ------------------
BALANCE, June 30, 2000 3,459,633 $ .33
================== ==================
</TABLE>
<PAGE>F-25
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
At December 31, 1999 and June 30, 2000, options to purchase 1,007,025
and 1,880,431 shares, respectively, were exercisable at prices ranging
from $0.17 to $2.59 per share. The remaining 1,579,202 options
outstanding at June 30, 2000 become exercisable at prices ranging from
$0.14 to $2.22 per share through March 2004.
If not previously exercised the outstanding plan options will expire as
follows:
AVERAGE
NUMBER OF EXERCISE PRICE
PERIOD ENDED JUNE 30, SHARES PER SHARE
--------------------- ------------------ ----------------
2001 30,000 $ .26
2002 310,753 .64
2003 1,741,380 .26
2004 917,500 .24
2005 460,000 .56
---------------- ---------------
3,459,633 $ .33
================ ===============
The following is a summary of all of the activity for non-plan options:
<TABLE>
<S> <C> <C>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
----------------- ------------------
BALANCE, December 31, 1997 4,750,493 $ 2.87
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 1.25
Options granted to employees 300,000 .12
Expired/cancelled options (771,326) 2.92
----------------- -----------------
BALANCE, December 31, 1999 2,762,502 .66
Options exercised by employees (300,000) .12
Options exercised by directors (1,000,000) .26
----------------- -----------------
BALANCE, June 30, 2000 1,462,502 $ 1.05
================= =================
</TABLE>
<PAGE>F-26
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
At December 31, 1999 and June 30, 2000 options to purchase 2,412,502
and 1,242,502 shares, respectively, were exercisable at prices ranging
from $0.26 to $3.37 per share. The remaining 220,000 options
outstanding at June 30, 2000 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.
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 2000 consistent with the
provisions of FASB123, the Company's net loss and net loss per share
would have been adjusted to the proforma amounts indicated below:
<TABLE>
<S> <C> <C> <C> <C>
December 31, December 31, June 30, June 30,
1999 1998 2000 1999
------------------ ------------------ ----------------- ------------------
Net loss $ (7,714,095) $ (21,539,607) $ (4,588,766) $ (4,387,355)
================== ================== ================= ==================
Basic and diluted net loss
per common share $ (0.31) $ (0.94) $ (0.14) $ (0.18)
================== ================== ================= ==================
</TABLE>
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 6.67%, expected life of
three years; dividend yield of 0%; and expected volatility ranging from
136.7% to 175.8%. The weighted-average fair value of the options on the
grant date for years ended December 31, 1999 and 1998 and the six
months ended June 30, 2000 and 1999 was $0.16, $1.41, $0.25, and $0.13
per share, respectively.
12. 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.
<PAGE>F-27
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
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 the year ended December 31,
1999 and 1998, respectively.
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.
<PAGE>F-28
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
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.
13. INCOME TAXES:
Income tax expense is comprised of the following:
<TABLE>
<S> <C> <C> <C>
FOR THE YEAR ENDED MARCH 3, 1993
DECEMBER 31, (INCEPTION) TO
------------------------------------------- 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
===================== ================== ===================
</TABLE>
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 $ -
==================
<PAGE>F-29
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
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 $ -
===================
Total income tax expense differed from the amounts computed by applying
the U.S. federal statutory tax rates to pre-tax income as follows:
<TABLE>
<S> <C> <C> <C>
MARCH 3, 1993
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
------------------------------------ --------------------
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
---------------- ---------------- --------------------
- % -% -%
================ ================ ====================
</TABLE>
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.
14. 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 or the six months
ended June 30, 2000.
<PAGE>F-30
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
15. SUBSEQUENT EVENTS(UNAUDITED):
On June 19, 2000, as amended on July 26, 2000, the Company entered into
a common stock purchase agreement and related agreements with Jashell
Investments Limited (Jashell), a private equity fund. Subject to the
fulfillment of certain conditions, the agreements provide the Company
with an equity financing facility through which the Company may sell up
to a total of $10,000,000 worth of shares of common stock, at their
option, to Jashell periodically over a 24 month period. The Company's
ability to request a draw down under the facility is subject to the
continued effectiveness of a resale registration statement filed with
the Securities and Exchange Commission to cover the shares to be
issued. The amount of common stock to be sold at each draw down will
not be less than $250,000 nor more than $1,000,000. The Company has
agreed to sell the shares to Jashell at a price equal to the then
current market price of the common stock during the draw down period,
less a discount of 21% or 24%, specifically determined based upon a
formula. The number of shares the Company may sell to Jashell varies
depending on certain factors, including the market price of the common
stock and the then current ownership interest of Jashell. In connection
with each draw down, the Company granted Jashell a warrant to purchase
up to 50% of the number of shares acquired in a draw down at an
exercise price equal to the purchase price of the common stock acquired
pursuant to the draw down. The warrant will expire 22 business days
after its issuance.
As part of the issuance of the Common Stock purchase agreement, the
Company issued to the investor warrants to purchase 100,000 shares of
common stock at an exercise price of $0.70 per share. In addition,
10,000 shares of common stock were issued at the market price of
$0.6875 per share on June 19, 2000 as a finders fee.
During July and August 2000, the Company entered into promissory note
agreements totaling $525,000 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 262,500 shares
of common stock for $0.30 and $0.50.
During May, 2000, the Company granted options to purchase 3,000 shares
of common stock to employees under the 1999 plan. The options were
granted with exercise prices equal to market on the date of grant of
$0.80 per share. In addition, during August 2000, the Company granted
options to purchase 173,000 shares of common stock to employees under
the 1999 plan. The options were granted with exercise prices equal to
market on the date of grant ranging from $0.52 to $0.72 per share. The
options expire in 2005 and vest over three years.
On July 14, 2000, the Company issued 6,134 shares of common stock to a
consultant for services provided in connection with the Company's web
site. Also, on August 14, 2000, the Company issued 20,000 shares of
common stock at a market price of $0.50 per share as partial payment
for recruiting services.
<PAGE>II-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
We have adopted Section 78.7502 of the Domestic and Foreign Corporation
Laws of the State of Nevada in its bylaws. Section 78.7502 states:
1. A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, except an action by or in the right of
the corporation, by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by
him in connection with the action, suit or proceeding if he acted in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal
action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
2. A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him
in connection with the defense or settlement of the action or suit if he
acted in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to
which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to
the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit
was brought or other court of competent jurisdiction determines
upon application that in view of all the circumstances of the case, the
person is fairly and reasonably entitled to indemnity for such expenses
as the court deems proper.
<PAGE>II-2
We have entered into indemnification agreements with its officers and
directors. Pursuant to the agreements, we agreed to defend and indemnify such
officers and directors for all expenses and liabilities for acting as such.
In addition, we carry directors' and officers' insurance pursuant to
authority in our Bylaws to maintain a liability insurance policy which insures
directors or officers against any liability incurred by them in their capacity
as such, or arising out of their status as such.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. No expenses shall be borne by the selling stockholders. All of the
amounts shown are estimates, except for the SEC Registration Fees.
SEC registration fee $ 11,444
Printing and engraving expenses * $ 2,000
Accounting fees and expenses * $ 25,000
Legal fees and expenses * $ 25,000
Transfer agent and registrar fees * $ 5,000
Fees and expenses for qualification
under state securities laws $ -0-
Miscellaneous * $ 1,000
TOTAL $ 69,444
*estimated
Item 26. Recent Sales of Unregistered Securities.
(a) On August 15, 2000, we entered into three agreements to sell 26,134
shares in the aggregate to three individuals for technology and personnel
recruiting services. No commissions were paid. The transactions were exempt from
registration in reliance upon Section 4(2) of the Act.
(b) On June 19, 2000, we entered into an agreement to sell shares of our
common stock, at our option, to Jashell Investment, a corporation organized in
the British Virgin Islands. To date, no sales have occurred under the agreement.
In connection with the agreement, we issued a warrant to purchase 100,000 shares
of our common stock to Jashell Investment at the exercise price of $0.7027 per
share. No commission was paid, however, we issued 10,000 shares of our common
stock to the Triton West Group as a finder's fee. The transaction was exempt
from registration in reliance upon Section 4(2) of the Securities Act.
(c) On January 24, 2000, we issued a warrant to purchase 75,000 shares
of our common stock to our outside legal counsel for past services. No
commission was paid in connection with this transaction. The warrant has an
exercise price of $0.53 per share. The transaction was exempt from registration
in reliance upon Section 4(2) of the Securities Act.
(d) From May 7, 1999 to July 12, 2000, we issued a series of warrants to
purchase 3,650,000 shares of our common stock to JNC Opportunity, an
institutional investor in connection with the issuance of a series of secured
<PAGE>II-3
promissory notes in the aggregate amount of $5,175,000. The series of warrants
has an exercise price ranging from $0.25 to $1.00. Further, in connection with
the secured promissory notes, we issued warrants to purchase 572,000 shares of
our common stock were issued to Cardinal Capital Management at an exercise price
ranging from $.16 to $.84 per share, and warrants to purchase 95,000 shares of
our common stock at an exercise price ranging from $.16 to $.84 per share were
issued to Elizabeth Hagopian as finders' fees. The transactions were exempt from
registration upon reliance of Section 4(2) and Regulation D of the Securities
Act.
(e) From June 29, 1998 to January 14, 1999, we sold to JNC Strategic, an
institutional investor, 7% Convertible Debentures in the aggregate principal
amount of $4,750,000 million and warrants to purchase 887,500 shares of our
common stock at an exercise price of $0.50 per share. In connection with the
transactions, warrants to purchase 290,000 shares of our common stock at an
exercise price of $.34 per share were issued to Cardinal Capital Management for
investment advisory services, and warrants to purchase 250,000 shares of our
common stock at an exercise price of $1.75 per share were issued to Elizabeth
Hagopian as a finder's fee. The transactions were exempt from registration upon
reliance of Section 4(2) and Regulation D of the Securities Act.
(f) On May 1998, Transamerica, a Canadian corporation, converted its
$217,500 loan to the Company into 836,538 shares of common stock. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act. No commissions were paid.
(g) On December 22, 1997, the Company sold to JNC, an institutional
investor, 7% Convertible Debentures in the aggregate principal amount of $5
million and warrants to purchase 250,000 shares of common stock at an exercise
price of $3.00 per share and warrants to purchase 250,000 shares of common stock
at an exercise price of $4.00 per share. At the same time, the Company issued
warrants to purchase 250,000 shares of common stock at $2.43 per share to
Cardinal Capital Management, Inc., an institutional investor, in consideration
for investment advisory services provided in connection with the private
placement. In addition, the Company commissions in the aggregate amount of
$300,000 to Cardinal Capital Management, Inc. The transactions were exempt from
registration upon reliance of Section 4(2) and Regulation D of the Securities
Act.
Item 27. 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)
5.1 Opinion of Bartel Eng Linn & Schroder re Legality
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)
<PAGE>II-3
10.7 Credit Facility Agreement between the Company and Micro Technology S.A.,
dated as of July 1, 1997 (originally filed as exhibit 6.7)(1)
10.8 Security Agreement between the Company and Micro Technology S.A., dated as
of July 1, 1997 (originally filed as exhibit 6.8)(1)
10.9 Convertible Debenture Purchase Agreement, dated as of December 22, 1997,
with JNC (originally filed as exhibit 6.9)(2)
10.10 7% Convertible Debentures, due December 22, 2002, payable to JNC
(originally filed as exhibit 6.10)(2)
10.11 Registration Rights Agreement, dated as of December 22, 1997, with JNC
(originally filed as exhibit 6.11)(2)
10.12 Escrow Agreement, dated December 22, 1997, between the Company, JNC and
Robinson Silverman Pearce Aronsohn & Berman LLP (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)(2)
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 Common Stock Purchase Agreement between Jashell Investment Limited and
InnovaCom, Inc., dated June 19, 2000(4)
10.23 Amendment to Common Stock Purchase Agreement(4)
10.24 Employment Contract with Frank Alioto(4)
10.25 Purchase Agreement with ClubCom, Inc
21.1 We have one subsidiary, InnovaCom, Inc., a Florida corporation
23.1 Consent of Hein + Associates LLP
23.2 Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5.1
--------------
(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 on
February 9, 1998.
(3) Previously filed with the Company's Registration Statement on amendment no.
1 to Form SB-2 on April 16, 1998.
(4) Purchase Agreement with ClubCom, Inc.
<PAGE>II-5
Item 28. Undertakings.
The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the aggregate offering
price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii)Include any additional changed material information on the plan
of distribution.
(2) For purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the undersigned registrant pursuant to the foregoing provisions, or otherwise,
the undersigned registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
undersigned registrant of expenses incurred or paid by a director, officer or
controlling person of the undersigned registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
undersigned registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
<PAGE>II-6
SIGNATURE
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this pre-effective amendment number 1 to Form
SB-2 and authorized this registration statement to be signed on its behalf by
the undersigned, in the City of Santa Clara, State of California, on August 24,
2000.
InnovaCom, Inc.,
a Nevada corporation
By: /s/ FRANK ALIOTO
-------------------------------------
Frank Alioto,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Frank Alioto and James J. Casey or either
of them as his true and lawful attorneys-in-fact and agent, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agent or any of them, or of their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Date
--------------------------------------------------------- ------------------
/s/ FRANK ALIOTO August 24, 2000
----------------------------------------------------
Frank Alioto,
President, Chairman of the Board of Directors
(Principal Executive Officer)
/s/ JAMES J. CASEY August 24, 2000
-----------------------------------------------------
James J. Casey, Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
<PAGE>II-7
/s/ MARK C. KOZ August 24, 2000
-----------------------------------------------------
Mark C. Koz, Director
/s/ TONY LOW August 24, 2000
-----------------------------------------------------
Tony Low, Director
/s/ ROBERT SIBTHORPE August 24, 2000
-----------------------------------------------------
Robert Sibthorpe, Director
/s/ JOHN CHAMPLIN August 28, 2000
------------------------------------------------------
John Champlin, Director
