<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1997
REGISTRATION NO. 333-29547
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INNOVA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WASHINGTON 3663 91-1453311
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
GATEWAY NORTH, BUILDING 2
3325 SOUTH 116TH STREET
SEATTLE, WASHINGTON 98168-1974
(206) 439-9121
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN M. HEMINGWAY, SECRETARY AND CHIEF FINANCIAL OFFICER
GATEWAY NORTH, BUILDING 2
3325 SOUTH 116TH STREET
SEATTLE, WASHINGTON 98168-1974
(206) 439-9121
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES OF COMMUNICATIONS TO:
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JOHN M. STEEL, ESQ. H. JOHN MICHEL JR., ESQ.
BENJAMIN F. STEPHENS, ESQ. RACHEL GIULIANO, ESQ.
ALEJANDRO C. TORRES, ESQ. DRINKER BIDDLE & REATH LLP
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S. PHILADELPHIA NATIONAL BANK BUILDING
1001 FOURTH AVENUE PLAZA, SUITE 4500 1345 CHESTNUT STREET
SEATTLE, WASHINGTON 98154 PHILADELPHIA, PENNSYLVANIA 19107-3426
</TABLE>
------------------------
Approximate date of commencement of proposed sale to public: As soon as
possible 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, check the following box. [ ]
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. [X]
------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INNOVA CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART 1 ITEMS OF FORM S-1
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ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
---------------------------------------- ----------------------------------------------
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1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus..................... Inside Front and Outside Back Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges...... Outside Front Cover Page; Prospectus Summary;
Forward-Looking Statements; Risk Factors
4. Use of Proceeds......................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price......... Outside Front Cover Page; Underwriting
6. Dilution................................ Dilution
7. Selling Security Holders................ Not Applicable
8. Plan of Distribution.................... Outside and Inside Front Cover Pages;
Underwriting
9. Description of Securities to be
Registered.............................. Description of Capital Stock; Shares Eligible
for Future Sale
10. Interests of Named Experts and
Counsel................................. Not Applicable
11. Information With Respect to
the Registrant.......................... Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; Use of
Proceeds; Capitalization; Dividend Policy;
Dilution; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Principal Shareholders;
Certain Transactions; Description of Capital
Stock; Shares Eligible for Future Sale;
Underwriting; Additional Information;
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification For Securities Act
Liabilities............................. Not Applicable
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<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities
and Exchange Commission. These securities may not be sold nor may offers to
buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any
State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 5, 1997
2,500,000 Shares
[INNOVA LOGO]
Common Stock
------------------------------
All of the 2,500,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Innova Corporation ("Innova" or the "Company"). The Company
designs, manufactures and supports millimeter wave radios for use as
short-to-medium-distance wireless communications links in telecommunications
networks. Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for a
discussion of factors considered in determining the initial public offering
price. Following the Offering, the Company's directors and officers and their
affiliates will beneficially own approximately 65% of the Company's outstanding
Common Stock (assuming the exercise of all warrants and vested and unvested
options held by them) and will therefore have the ability to elect the Board of
Directors and control the management of the Company and its affairs and
business. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "INVA," subject to official notice of issue.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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=================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------------------------
Per Share...................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)....................... $ $ $
=================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $800,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 375,000 additional Shares of
Common Stock on the same terms set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public will be $ , Underwriting Discounts and Commissions will be
$ , and Proceeds to Company will be $ . See
"Underwriting."
------------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of the shares of Common Stock will be
made through the office of UBS Securities LLC, 299 Park Avenue, New York, New
York, on or about , 1997.
------------------------------
UBS SECURITIES
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
, 1997
<PAGE> 4
[Photograph of Company's XP4 Indoor and Outdoor Units]
[The artwork for the inside front cover of the Prospectus is a color photograph
of the Company's millimeter wave radio system, depicting the Indoor (IDU) and
Outdoor (ODU) units.]
[The artwork for the gate-fold within the front cover of the Prospectus is a
copy of the Company's XP4 radio system installation manual, which is two pages
in its entirety, and illustrates installation of the Company's radio systems.]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M UNDER THE SECURITIES ACT. SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
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 and the information under "Risk Factors." Unless
otherwise indicated, all information in this Prospectus (i) assumes that the
Underwriters' over-allotment option will not be exercised; (ii) reflects a 24:1
reverse stock split to be effected by the Company upon consummation of the
Offering; (iii) reflects the conversion of all outstanding shares of the
Company's Preferred Stock into 8,682,287 shares of Common Stock upon
consummation of the Offering; and (iv) the conversion of all outstanding
warrants to purchase Preferred Stock into warrants exercisable for an aggregate
of 481,977 shares of Common Stock.
THE COMPANY
Innova designs, manufactures and supports millimeter wave radios for use as
short- to medium-distance wireless communication links in developed and
developing telecommunications markets. Innova's products enable
telecommunications service providers to establish reliable and cost-effective
voice, data and video communications links within their networks. Innova's
products operate in frequencies ranging from 13-38 GHz and may be used in
various applications, including cellular and PCS/PCN networks, broadband
communications, local loop services and long distance networks.
In recent years, growing demand for telecommunications services has been
driven by the emergence of improved technologies and by the recognition that
effective communications can enhance business productivity and accelerate
economic growth. Regulatory changes, including the privatization of state-run
telephone monopolies, allocation of additional radio spectrum and licensing of
new entrants to the telecommunications market, have created a competitive
environment in which service providers are seeking to meet this demand and
capture market share by rapidly establishing new networks and expanding existing
networks.
Millimeter wave radios have become an increasingly critical component of
telecommunications networks. As a result, telecommunications service providers
have focused on the quality and lifetime ownership cost of these systems. Innova
has combined its expertise in radio frequency ("RF") systems architecture and
software design to create reliable, cost-effective, intelligent and feature-rich
millimeter wave radio systems that are easy to install, maintain and upgrade.
Innova's millimeter wave radio systems are designed to operate at multiple
E1/T1 rates in the high frequency bands used for the transmission of voice, data
and video traffic. Innova's products are based on a common system architecture
and are software configurable. Innova's radio systems consist of an Indoor Unit
("IDU"), which interfaces with the user's network and is digitally linked to an
Outdoor Unit ("ODU"), which transmits and receives the RF signal. The common
embedded software platform in the IDU and ODU is simple network management
protocol ("SNMP") compliant and provides the ability to remotely monitor and
manage Innova's radios within a network using the service provider's network
management system.
Innova's objective is to be a leading provider of digital millimeter wave
radios. Innova's strategy is to: (i) continue to focus on enhancing existing and
developing new solutions for the point-to-point millimeter wave radio market;
(ii) expand the geographic coverage and increase the market penetration of its
products by strengthening existing and establishing new strategic distribution
relationships; (iii) leverage its existing system architecture to be
first-to-market with high-quality, cost-effective radios; and (iv) further
automate its product calibration and test processes to promote quality control
and cost-effective manufacturing and to improve productivity.
Innova markets its products principally to systems integrators with a
strong regional presence in Europe, Latin America and Asia. Innova seeks to
develop strategic relationships with these systems integrators, which provide
field engineering, installation, project financing and support to service
providers. To date, Innova has entered into distribution agreements with MAS
Technology Limited ("MAS"), NERA ASA ("NERA") and Societe Anonyme de
Telecommunications ("SAT"). Innova also markets its products directly to service
providers in the U.S. and internationally. To date, the Company has supplied
products, either through distribution relationships or directly, to Alestra
(Mexico), Associated Communications (U.S.), Avantel (Mexico), Bouygues Telecom
(France), Globtel (Slovakia), Northern Telecom Limited ("Nortel") (Canada),
PacBell Mobile Services (U.S.) and Telcel (Venezuela), among others.
The Company was incorporated in Delaware in 1989 and reincorporated as a
Washington corporation in 1991. The Company's headquarters and principal place
of business are located at Gateway North, Building 2, 3325 South 116th Street,
Seattle, Washington 98168-1974. Its telephone number is (206) 439-9121.
3
<PAGE> 6
THE OFFERING
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Shares of Common Stock Offered by the Company.......... 2,500,000 Shares of Common Stock
Shares of Common Stock Outstanding after the
Offering............................................. 12,139,006 Shares of Common Stock(1)
Use of Proceeds........................................ Repayment of indebtedness, equipment
purchases, working capital and
general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol................. INVA
Risk Factors........................................... The Common Stock offered hereby
involves a high degree of risk. See
"Risk Factors."
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SUMMARY FINANCIAL DATA
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<CAPTION>
NINE MONTH FISCAL Six Months Ended
Years Ended March 31, PERIOD ENDED June 30,
------------------------------------- DECEMBER 31, -----------------------
1993 1994 1995 1996 1996(2) 1996 1997
------- ------- ------- ------- ------------------ ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............... $ 200 $ 877 $ 2,358 $ 1,962 $ 2,104 $ 200 $12,582
Gross profit (loss).......... (464) (1,186) (2,157) (1,980) (1,635) (1,852) 3,012
Loss from operations......... (3,903) (5,234) (6,116) (8,816) (7,186) (5,759) (2,675)
Net loss..................... $(5,099) $(5,400) $(6,318) $(9,061) $(7,329) $(5,890) $(3,013)
Pro forma net loss per
share(3)................... $ (0.73) $ (0.30)
Supplementary net loss per
share(3)................... $ (0.72) $ (0.27)
Shares used in computing pro
forma net loss per
share(3)................... 10,039,634 10,061,989
Shares used in computing
supplementary net loss per
share(3)................... 10,085,650 10,572,738
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................................... $ 3,834 $ 23,133
Working capital............................................................... 4,371 29,146
Total assets.................................................................. 20,208 39,365
Redeemable preferred stock(1)................................................. 47,769 --
Total stockholders' equity (deficit)(1)....................................... (39,297) 33,247
</TABLE>
- ---------------
(1) As of June 30, 1997. Excludes: (i) 1,655,298 shares of Common Stock issuable
upon exercise of stock options issued pursuant to the Company's 1990 Stock
Option Plan, at a weighted average exercise price of $2.19 per share; (ii)
an additional 377,774 shares of Common Stock reserved for future issuance
under the Company's 1990 Stock Option Plan; (iii) 48,263 shares of Common
Stock issuable upon exercise of stock options issued pursuant to the
Company's Director Stock Option Plan; (iv) an additional 71,737 shares of
Common Stock reserved for future issuance under the Company's Director Stock
Option Plan; and (v) 2,949,137 shares of Common Stock issuable upon exercise
of warrants to purchase Common Stock. See "Management -- Benefit Plans" and
"-- Certain Transactions," "Description of Capital Stock" and Notes to
Consolidated Financial Statements.
(2) Subsequent to March 31, 1996 the Company changed its fiscal year end to
December 31.
(3) See Note 1(q) to the Consolidated Financial Statements.
(4) As adjusted to give effect to the (i) conversion of all outstanding shares
of Preferred Stock into shares of Common Stock upon consummation of the
Offering, (ii) sale of the shares of Common Stock being offered hereby at an
assumed initial public offering price of $11.00 per share (after deducting
the underwriting discounts and commissions and estimated expenses of the
Offering) and (iii) application of the estimated net proceeds of the
Offering. See "Use of Proceeds."
4
<PAGE> 7
RISK FACTORS
An investment in the shares of Common Stock being offered by this
Prospectus involves a high degree of risk. In addition, this Prospectus contains
forward-looking statements that involve risks and uncertainties. Discussions
containing such forward-looking statements may be found in the material set
forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business," as
well as in this Prospectus generally. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including those set forth in the following risk factors
and elsewhere in this Prospectus. Accordingly, prospective investors should
consider carefully the following risk factors, in addition to the other
information concerning the Company and its business contained in this
Prospectus, before purchasing the shares of Common Stock offered hereby.
LIMITED OPERATING HISTORY; HISTORY OF SIGNIFICANT LOSSES
The Company was incorporated in 1989 and was in the development stage until
mid-1996, when it began shipment of XP4 products, its first line of millimeter
wave radios to be shipped in commercial quantities. From inception through June
30, 1997, the Company generated a cumulative net loss of approximately $43.4
million. From April 1, 1996 through June 30, 1997, the Company generated total
revenues of approximately $14.7 million, of which $14.2 million, or 97%, was
generated in the nine months ended June 30, 1997. For the quarter ended December
31, 1996, the quarter ended March 31, 1997, and the quarter ended June 30, 1997,
the Company's net losses were $2.5 million, $2.1 million, and $900,000,
respectively. Due to the Company's limited operating history, among other
things, there can be no assurance that revenues will not decline. The Company
intends to continue to invest significant amounts in its operations,
particularly to support existing and new product development, increased
manufacturing capacity and sales and marketing of its recently introduced
product line. Thus, the Company may continue to generate losses even if revenues
increase, and there can be no assurance that the Company will become profitable.
In view of its limited production history, an investment in the Common Stock
must be considered in light of the problems, expenses, complications and delays
frequently encountered in connection with the development of new products,
markets and operations. As a result of the Company's net losses and limited
operating and sales history, period-to-period comparisons of operating results
may not be meaningful and results of operations from prior periods may not be
indicative of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SIGNIFICANT CUSTOMER CONCENTRATION; DEPENDENCE ON LARGE CONTRACTS
The Company is dependent, in significant part, on large contracts with a
limited number of customers. Such contracts are often with systems integrators,
which in turn provide the Company's products to service providers as part of
larger telecommunications infrastructure projects. To date, approximately
eighteen customers have accounted for all of the Company's sales. During the 12
months ended June 30, 1997, three customers, Associated Communications, Nortel
and SAT, accounted for approximately 13%, 44%, and 29%, respectively, or an
aggregate of approximately 86%, of the Company's sales of XP4 products and six
customers accounted for over 93% of XP4 sales. Similarly, as of June 30, 1997,
two customers, Nortel and SAT, accounted for approximately 27% and 40%,
respectively, or an aggregate of approximately 67%, of the Company's backlog.
See "Business -- Backlog." Historically, a significant percentage of the
Company's products have been purchased by customers for use in single
large-scale projects. For example, virtually all of the Company's sales to
Nortel (or approximately 44% of the Company's total XP4 sales through June 30,
1997) were for use in a single large-scale project undertaken by Globtel in
Slovakia. Due to the Company's limited number of customers to date, it is
difficult, if not impossible, for the Company to accurately predict the mix or
nature of infrastructure projects which could be the basis for its product sales
to systems integrators. However, the Company anticipates that revenue derived
from current and future large customers and large-scale projects will continue
to represent a significant proportion of its total revenues. Because of the
small size of the Company's customer base, the loss of, or reduced demand for
products from any customer for any reason, including business failure of the
customer, abandonment or delay of the underlying project or changes in
government policy or general economic conditions, for example, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Customers."
5
<PAGE> 8
DEPENDENCE ON DISTRIBUTION RELATIONSHIPS
The Company's product distribution strategy is to rely principally on
developing relationships with wireless systems integrators for international
sales, and to make direct sales to service providers in North and Central
America and certain other countries on a case-by-case basis. To date, the
Company has established strategic relationships with NERA and SAT. See
"Business -- Distribution Relationships." There can be no assurance that the
Company will be able to establish distribution relationships with other systems
integrators or that existing relationships will be successful. Thus, the loss of
one or more major distribution relationships, or any significant reduction of
orders by or the business failure of a distributor, could have a material
adverse effect on the Company's business, financial condition and results of
operations. If the Company is unable to establish additional distribution
relationships, it will be unable to implement its distribution strategy and be
required to seek other distribution channels. There can be no assurance that the
Company will be able to successfully implement such alternative distribution
channels or that the costs of doing so, or the result of any delays in
establishing such channels, will not have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
if the Company is unable to produce and sell its products at margins that permit
it to provide systems integrators with a sufficient financial incentive to
distribute the Company's products without adversely affecting the Company's
profitability, the Company's distribution strategy could adversely affect the
Company's net income.
There are a number of other risks inherent in the Company's distribution
strategy. Agreements with systems integrators are typically terminable on short
notice and generally do not prohibit the systems integrators from distributing
products competitive with those manufactured by the Company. Thus, there can be
no assurance that such distributors will promote the Company's products
aggressively or achieve greater market penetration for the Company's products
than for competing products, that such relationships will not be terminated
prior to achievement of the Company's marketing objectives, or that the
establishment of multiple relationships will not result in excessive competition
among authorized distributors, resulting in price erosion or interference with
service provider relationships or other distribution arrangements. In addition,
because of its distribution strategy, the Company is dependent upon the
financial viability, reputation and success of its distributors, with the result
that the Company's business, financial condition and results of operations could
be adversely affected by factors unrelated to the Company's performance.
The Company has granted SAT exclusive distribution rights with respect to
France, Hungary, Poland, Italy, Monaco and Andorra, which in certain instances
could survive for up to five years after termination of the Company's
distribution agreement with SAT and prevent the Company from distributing XP4
products in these countries. To the extent that the Company grants similar
rights to other distributors in the future, it will be solely dependent upon the
success of its chosen distributor for sales into a particular territory. In
certain instances, even the establishment of non-exclusive distribution
relationships may preclude or make it more difficult to establish similar
relationships with other systems integrators who compete directly with the
Company's distributors, or prevent the Company from marketing its products
directly. The Company has also granted SAT and NERA the right to produce the
Company's products, and, in certain instances, the right to use the Company's
technology. See "-- Risks Associated with Grants of Limited Manufacturing
Rights." The Company's distribution agreements with SAT and NERA contain
"most-favored customer" clauses, and the Company anticipates that additional
distribution arrangements which it enters in the future may contain similar
clauses. These contractual limitations on the Company's ability to price its
products may adversely affect the Company's operating margins and volume of
sales and, therefore, its business, financial condition and results of
operations.
SIGNIFICANT FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company may in the future experience significant fluctuations in sales,
gross margins and operating results. In connection with its efforts to ramp-up
production of recently introduced products, the Company expects to continue to
make substantial capital investments in equipment, to recruit and train
additional personnel, and possibly to increase outsourcing of components or
invest in additional manufacturing facilities. The Company anticipates that
these expenditures may be made in advance of, and in anticipation of, increased
sales and, therefore, that its gross margins will be adversely affected from
time-to-time due to short-term inefficiencies associated with addition of
equipment, personnel or facilities, and that costs may increase as a percentage
of revenues from time-to-time on a periodic basis. As a result, the Company's
operating results will vary. Because of the relatively small size of the
6
<PAGE> 9
Company's customer base and the large-scale nature of the projects in which the
Company's products are typically used, revenues derived from current and future
large customers and large-scale projects will likely represent a significant
portion of revenue in any given period. Thus, a decrease in demand for products
from any customer for any reason, including the business failure of the customer
or abandonment or delay of a particular project, or change in government policy
or general economic conditions may result in significant periodic fluctuations
in sales. Similarly, revenues derived from large-scale projects are often
difficult to forecast due to the relatively long time frame for implementing
such projects. Delays can be caused by delays in site acquisition by service
providers, late deliveries by other vendors, changes in implementation
priorities, slower than anticipated growth, declining demand for the services
that the Company's products support and delays in obtaining regulatory approvals
for installation of such systems. Delays and reductions in the planned
deployment of systems utilizing the Company's products can also be caused by
declines in the local economy or capital availability, and by import controls.
The Company's operating results for a particular period may be materially
adversely affected by delay, rescheduling or cancellation of one or more
purchase orders. Moreover, purchase orders are often received and accepted
substantially in advance of shipment, and the failure to reduce costs to the
extent anticipated, or an increase in anticipated costs before shipment, could
materially adversely affect the gross margins for such order, and as a result,
the Company's business, financial condition and results of operations. Many new
service providers do not have the financial resources of existing service
providers. To the extent these new service providers are unable to adequately
finance their operations, they may cancel orders. The Company has at times
failed to fill orders on a timely basis due principally to capacity constraints.
A delay in a shipment near the end of a particular quarter, due to, for example,
an unanticipated shipment rescheduling, a cancellation or deferral by a
customer, competitive or economic factors, unexpected manufacturing or other
difficulties, delays in deliveries of components, subassemblies or services by
suppliers, or the failure to receive an anticipated order, may cause sales in a
particular period to fall significantly below the Company's expectations and may
materially adversely affect the Company's business, financial condition and
results of operations for such period.
A large portion of the Company's expenses are fixed and difficult to reduce
should revenues not meet the Company's expectations, thus magnifying the
material adverse effect of any revenue shortfall. Furthermore, announcements by
the Company or its competitors of new products and technologies could cause
customers to defer or cancel purchases of the Company's systems, which would
materially adversely affect the Company's business, financial condition and
results of operations. Additional factors that have caused or may cause the
Company's sales, gross margins and results of operations to vary significantly
from period to period include: existing and new product development,
introduction and enhancement, including related costs; the Company's ability to
manufacture and produce sufficient products to meet customer requirements;
limitations on manufacturing capacity; the Company's ability to reduce costs;
gain or loss by the Company of significant customers; changes in pricing by the
Company, its customers or suppliers; inventory obsolescence; market acceptance
and the timing of availability of new products by the Company or its customers;
use of different distribution and sales channels; natural disasters or adverse
weather; fluctuations in foreign currency exchange rates; delays or changes in
regulatory approval of the Company's products; increases in warranty and
customer support expenses; and general economic and political conditions. In
addition, the Company's results of operations have been, and will continue to
be, influenced significantly by competitive factors including the pricing and
availability of, and demand for, competitive products. All of the above factors
could materially adversely affect the Company's business, financial condition
and results of operations. As a result, the Company believes that
period-to-period comparisons are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock may be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON SINGLE PRODUCT LINE
Substantially all of the Company's product sales since mid-1996 have been
derived from sales of its 18 GHz, 23 GHz and 38 GHz XP4 radio systems. The
Company's business strategy includes efforts to reduce its reliance on revenues
from its existing products by developing new products and product enhancements,
including a lower cost product line and a high-capacity system. The Company's
prior generation of radios, the XP3, did not achieve market
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acceptance, and there can be no assurance that the Company will be able to
reduce its reliance on sales of its current XP4 products by developing new
products that achieve market acceptance or enhancing its existing products. As a
result, any factor adversely affecting the sales of such products would have a
material adverse effect on the Company's business, financial condition, and
results of operations. See "Business -- Products."
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's success will depend upon its recently developed XP4 radio
systems achieving broad market acceptance. The Company believes that this
acceptance is dependent upon the XP4's ability to successfully compete on the
basis of performance, reliability, cost, ease of installation, adaptability and
upgradeability. The Company must, among other things, offer additional products
with superior price/performance characteristics, supply its products on a timely
and cost-effective basis in sufficient volume to satisfy prospective customers'
requirements and otherwise overcome any reluctance on the part of systems
integrators or service providers to transition to new products. There can be no
assurance that service providers or systems integrators will design
telecommunications networks to include the Company's products, or will continue
to include the Company's systems in their networks in the future, or that the
Company's products will replace existing products or achieve widespread
acceptance in the wireless telecommunications market.
From its inception through 1992, the Company manufactured a line of
Television Receive Only antennas, most of which were sold to a single customer
in Europe. This product line was discontinued by the Company in 1992. In 1992,
the Company began developing millimeter wave radios. In 1993, the Company
shipped its first radios, based on its initial architecture, the XP3. Because
the XP3 failed to gain market acceptance and proved difficult to manufacture in
commercial quantities, the Company discontinued its production in 1994. Any
failure of the XP4 radio systems to gain and maintain market acceptance, or of
the Company to improve upon its current market position or to achieve acceptable
gross margins, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
LIMITED PRODUCTION CAPACITY; NO ASSURANCE OF SUCCESSFUL EXPANSION OF OPERATIONS
During the last three fiscal quarters, demand for the Company's XP4
products exceeded its production capacity. This resulted in some delays in
delivery of products and some lost orders. The Company believes that its present
manufacturing capacity continues to be inadequate to meet anticipated demand on
a timely basis. The Company's business plan is to continue to expand its
manufacturing capacity by purchasing additional equipment, hiring additional
personnel, further developing its proprietary test software to improve
productivity, increasing the efficiency of its production processes, and, in
certain instances, by externally subcontracting additional assembly, calibration
and testing processes. In addition, if the Company is to achieve its objectives,
it will be required to significantly expand its sales, marketing and customer
support capabilities. Due to the Company's limited experience with large scale
operations, there can be no assurance that the Company will be able to develop
internally, or contract with third parties for, additional manufacturing
capacity on acceptable terms, that it will be able to maintain the quality of
its products as production increases, or that it will develop the administrative
and other structures necessary to support expanded operations. If the Company is
unable to increase its production capacity significantly, it will not realize
its business plan.
The Company's arrangements with its customers typically require that orders
be shipped not more than 60 days after the order. There can be no assurance that
the Company will be able to increase its production capacity at an acceptable
cost or rapidly enough to fill its orders. The failure to assemble and ship
products on a timely basis could damage relationships with customers and result
in cancellation of orders or lost orders, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Manufacturing" and "-- Distributor Relationships."
The Company currently conducts its manufacturing operations for all of its
products in a single facility in Seattle, Washington. If the Company's
facilities or the facilities of its suppliers were incapable of operating, even
temporarily, or were unable to operate at or near full capacity for any extended
period, the Company's business, financial condition and results of operations
could be materially adversely affected. In connection with the expansion of its
capacity, the Company may seek to develop one or more additional manufacturing
facilities, including, possibly, facilities located
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outside the Seattle, Washington area. Although there can be no assurance such a
facility will be added, the development of any such facilities would
significantly increase the complexity of the Company's operations.
NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY
The Company's ability to achieve sales will depend in significant part upon
its ability to obtain and fulfill orders from, maintain good relationships with,
and provide support to existing and new customers, and to manufacture products
on a timely and cost-effective basis to meet stringent customer performance
requirements and shipment and delivery dates. Some early shipments of XP4
products experienced some problems with a power source component produced by a
third party. Because of the Company's short operating history and the short time
that the XP4 products have been in production, there can be no assurance that
problems will not occur with respect to the quality, performance and reliability
of the Company's products. If such problems occur, the Company could experience
increased costs or delays in, cancellations of, or rescheduling of orders or
shipments, any of which may have a material adverse effect on the Company's
business, financial condition and results of operations.
REQUIREMENT FOR RESPONSES TO RAPID TECHNOLOGICAL CHANGE AND REQUIREMENT FOR
FREQUENT NEW PRODUCT INTRODUCTIONS
The wireless communications market is subject to rapid technological
change, frequent new product introductions and enhancements, product
obsolescence, changes in customer requirements and evolving industry standards.
To be competitive, the Company must successfully develop, introduce and sell new
products or product enhancements that respond to changing customer requirements
on a timely and cost-effective basis. Any success of the Company in developing
new and enhanced products will depend on a variety of factors including: timely
and efficient completion of system design; timely and efficient implementation
of assembly, calibration, and test processes; sourcing of components;
development and completion of related software; the reliability, cost and
quality of its products; market acceptance; and development and introduction of
competitive products by competitors. The Company has experienced and may
experience delays from time-to-time in completing development and introduction
of new products. Moreover, there can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products or
product enhancements. The inability of the Company to introduce in a timely
manner new products or product enhancements that contribute to sales could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, changes in manufacturing operations to
incorporate new products and processes could cause disruptions in production,
which, in turn, could adversely affect customer relationships and the market's
acceptance of the Company's products, and have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Manufacturing" and "-- Research and Development."
MANAGEMENT OF GROWTH
The growth of the Company's operations since the introduction of the XP4
product line has imposed, and will continue to impose, a significant strain on
the Company's financial resources as well as its product design, assembly, test
and calibration capabilities. To alleviate the impact of the strain, the Company
must successfully manage the transition to higher manufacturing volumes,
establishment of additional facilities, control of overhead expenses and
inventories, development, introduction, marketing and sales of new products and
product enhancements, management and training of its employees, and monitoring
of third-party contractors and suppliers. Accordingly, the Company will need to
significantly expand its internal management and information systems and
implement necessary procedures and controls. Failure to develop and implement
these systems, procedures and controls to effectively manage the Company's
growth in operations in a timely manner could have a material adverse effect on
the Company's business, financial condition and results of operations.
The principal means by which the Company maintains its books and records as
well as the bulk of its purchasing and manufacturing data is a relatively simple
PC-network based system. To the extent that the Company continues to grow, this
system may need to be replaced or upgraded.
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NO ASSURANCE OF COST REDUCTIONS
To compete successfully, the Company believes that it needs to achieve
significant reductions in production costs. The Company's objective is to
achieve these reductions through engineering improvements and economies of scale
in production and purchasing. There can be no assurance that the Company will be
able to achieve the desired cost savings. Its failure to do so would have a
material adverse effect on its business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
POSSIBLE DECLINE IN PRICES
The Company believes that average selling prices and gross margins for its
products will decline as such products mature, as volume price discounts in
contracts take effect and as competition intensifies, among other factors. To
offset declining selling prices, the Company believes that it must successfully
reduce the costs of production of its existing products and introduce and sell
new products and product enhancements on a timely basis at a lower cost or that
incorporate features that enable them to be sold at higher average selling
prices. To the extent that the Company is unable to reduce costs sufficiently to
offset declining average selling prices, the Company's gross margins will
decline, and such decline would have a material adverse effect on the Company's
business, financial condition, results of operations and particularly on the
Company's ability to profitably pursue its distribution strategy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Research and Development" and "-- Distribution
Relationships".
SINGLE OR LIMITED SOURCES OF SUPPLY
Certain parts and components used in the Company's products, including the
field programmable gate arrays supplied by Xilinx, monolithic microwave
integrated circuits ("MMICs") and hybrids of certain frequencies supplied by
Hewlett-Packard, saw filters supplied by Sawtek, microprocessors supplied by
Motorola and power supplies supplied by Calex are presently only available from
a single source. Certain other parts and components used in the Company's
products are available from a limited number of sources. The Company's reliance
on these single source or limited source suppliers involves certain risks and
uncertainties, including the possibility of a shortage or discontinuation of
certain key components and reduced control over delivery schedules,
manufacturing capability, quality and cost. Any reduced availability of such
parts or components when required could materially impair the Company's ability
to manufacture and deliver its products on a timely basis and result in the
cancellation of orders which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the purchase of certain key components involves long lead times and, in the
event of unanticipated increases in demand for the Company's products, the
Company may be unable to obtain such components in sufficient quantities to meet
its customers' requirements. The Company does not have guaranteed supply
arrangements with many of its single or limited source suppliers, does not
maintain an extensive inventory of parts or components and customarily purchases
single or limited source parts and components pursuant to purchase orders.
Business disruptions, production shortfalls or financial difficulties of a
single or limited source supplier could materially and adversely impact the
Company by increasing product costs, or reducing or eliminating or delaying the
availability of such parts or components. In such event, the inability of the
Company to develop alternative sources of supply quickly and on a cost-effective
basis could materially impair the Company's ability to manufacture and deliver
its products on a timely basis and could have a material adverse effect on its
business, financial condition and results of operations. See
"Business -- Manufacturing."
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued contributions of each of its eight key technical and senior management
personnel, including Francois Grenon, the Company's Chief Executive Officer,
each of whom would be difficult to replace, as there is a limited number of
people with the necessary skills and experience to develop and manufacture
millimeter wave radios. See the table under the caption "Management" for a list
of these eight persons. The development and manufacture of millimeter wave
radios is extremely complicated, and the knowledge and experience of each of its
key technical and management personnel is critical to the Company's ability to
develop new products and product enhancements. The Company has not entered into
long-term employment or non-competition agreements with any of such personnel,
or any other employees, the Company does not maintain key-man life insurance on
any of its key technical or senior management personnel and its senior manage-
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ment personnel do not generally have significant equity interests in the
Company. In addition, the Company anticipates that it will need additional
management personnel if it is to be successful in increasing production capacity
and the scale of its operations. There can be no assurance that it will be able
to obtain such personnel on acceptable terms.
The Company's future operating results also depend in significant part upon
its ability to attract and retain qualified engineering, manufacturing, quality
assurance, sales, marketing and customer support personnel. Competition for such
personnel is intense. The Company has experienced difficulties over the past
nine months in recruiting sufficient qualified engineering and manufacturing
personnel in the Seattle area, and there can be no assurance that the Company
will be successful in attracting or retaining such personnel. There may be only
a limited number of persons with the requisite skills to serve in these
positions, and it may be increasingly difficult for the Company to hire such
personnel over time. The loss of any key employee, the failure of any key
employee to perform in his or her current position, the Company's inability to
attract and retain skilled employees as needed or the inability of the officers
and key employees of the Company to expand, train and manage the Company's
employee base could materially adversely affect the Company's business,
financial condition and results of operations. See "Business -- Employees" and
"-- Management."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
Approximately 84% of the Company's XP4 sales through June 30, 1997 were
made to customers located outside of the United States. For the nine month
fiscal period ended December 31, 1996, 50% of total sales were to a single
customer in Canada, and 50% and 28% of total sales for the six months ended June
30, 1997 were to a single customer in each of Canada and France, respectively.
The Company anticipates that international sales will continue to account
for at least a majority of its sales for the foreseeable future. The Company's
international sales may be denominated in foreign or United States currencies.
The Company does not currently engage in foreign currency hedging transactions
as all sales to date have been in U.S. dollars. However, if a material amount of
future sales are denominated in foreign currency, a decrease in the value of
foreign currencies relative to the United States dollar could result in losses
from such transactions. In such event, the Company might seek to limit its
exposure to foreign currency transactions by hedging strategies. There can be no
assurance that any such strategy would be successful in avoiding
exchange-related losses. With respect to the Company's international sales that
are United States dollar denominated, such a decrease could make the Company's
systems less price-competitive, or could cause distributors or customers to
renegotiate prices for subsequent purchases, both of which could have a material
adverse effect upon the Company's business, financial condition and results of
operations. Additional risks inherent in the Company's international business
activities include changes in regulatory requirements, tariffs and other trade
barriers, political and economic instability, difficulties in staffing and
managing foreign operations, difficulties in managing distributors, customs
requirements, potentially adverse tax consequences, the burden of complying with
a wide variety of complex foreign laws and treaties, difficulties in obtaining
necessary equipment authorizations and the possibility of difficulty in accounts
receivable collections. Distribution and sales agreements entered into with
foreign customers may be governed by foreign laws which may differ significantly
from U.S. laws. Therefore, the Company may be limited in its ability to enforce
its rights under such agreements and to collect damages, if awarded. There can
be no assurance that any of these factors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
If service providers in developing markets do not construct wireless
telecommunications systems, or construction of such systems is delayed, demand
for the Company's products in those markets will be also limited or delayed. In
relying on direct or indirect sales to service providers in developing markets,
the Company may also face economic, political and foreign currency fluctuations
that are more volatile than those commonly experienced in the United States and
other areas.
DEPENDENCE ON GROWTH OF WIRELESS COMMUNICATIONS MARKET
The future operating results of the Company depend to a significant extent
upon the continued growth and increased availability and acceptance of cellular
and PCS/PCN and wireless local loop access telecommunications services
internationally and, to a lesser extent, in the United States. There can be no
assurance that the volume and
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variety of wireless telecommunications services or the markets for and
acceptance of such services will grow, or that such services will create a
demand for the Company's systems. If the millimeter wave radio market fails to
grow, or grows more slowly than anticipated, the Company's business, financial
condition and results of operations would be materially adversely affected.
Certain sectors of the communications market will require the development and
deployment of an extensive and expensive communications infrastructure. In
particular, the establishment of cellular and PCS/PCN networks in the U.S. and
other countries will require very large capital expenditures. There can be no
assurance that communications providers have the ability, or be willing to, make
the necessary investment in such infrastructure, or that the creation of this
infrastructure will occur in a timely manner. Moreover, purchase of the
Company's systems for local loop service is dependent on the pricing of wireless
telecommunications services at rates competitive with those charged by wireline
telephone companies. In the U.S., rates for wireless access are currently
substantially higher than those charged by wireline companies, and there can be
no assurance that rates for wireless access will be competitive with rates
charged by wireline companies in the U.S. or elsewhere. If wireless access rates
are not competitive, demand for wireless access may be materially adversely
affected. If the Company allocates its resources, or relies heavily on a system
provider that allocates it resources, to any market segment that does not grow
as rapidly as projected, it may be unable to reallocate its resources to other
market segments in a timely manner, which may curtail or eliminate its ability
to enter such market segments, and may have a material adverse effect on the
Company's business, financial condition and results of operations.
INTENSELY COMPETITIVE INDUSTRY
The wireless communications market is intensely competitive. The Company's
millimeter wave radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission services. The principal
competitive factors in this market include product performance and reliability,
ability to meet delivery requirements, price, ease of installation, adaptability
and upgradeability and other product features. The Company experiences intense
competition worldwide from a number of leading telecommunications companies that
offer a variety of competitive products and broader telecommunications product
lines, including Alcatel Network Systems, California Microwave, Inc., Digital
Microwave Corporation, Ericsson Limited, Harris Corporation -- Farinon Division,
Nokia Telecommunications and P-COM, Inc., all of which have substantially
greater installed bases, financial resources and production, marketing,
manufacturing, engineering and other capabilities than the Company. The Company
may also face competition in the future from new market entrants offering
competing technologies. In addition, the Company's current and prospective
customers and distributors have developed, are currently developing or could
develop the capability to manufacture products competitive with those that have
been or may be developed by the Company. Certain distributors have access to the
Company's technology or have been granted the right to use the technology for
purposes of manufacturing under defined circumstances. See "-- Risks of Limited
Manufacturing Rights." The Company's future results of operations may depend in
part upon the extent to which these customers elect to purchase rather than
develop and manufacture their own radio systems. The Company expects that its
competitors will continue to improve the performance and lower the price of
their current products, and to introduce new products or new technologies that
may be comparable or superior to the Company's current products, which could
cause a significant decline in sales or loss of market acceptance of the
Company's products or render the Company's technologies obsolete or
non-competitive. The Company expects to continue to experience significant price
competition that may materially adversely affect its gross margins and its
business, financial condition and results of operations. The Company believes
that to be competitive, it will be required to expend significant resources on,
among other items, new product development, and product enhancement and cost
reduction. As a result there can be no assurance that the Company will be able
to compete successfully. See "Business -- Competition."
POSSIBLE NEED FOR ADDITIONAL CAPITAL
The Company's future capital requirements will depend upon many factors,
including the success or failure of the Company's efforts to expand its
production, sales and marketing efforts, the status of competitive products, and
the requirements of the Company's efforts to develop new products and product
enhancements. The Company believes that current capital resources, together with
the anticipated net proceeds from the Offering are adequate to fund its
operations for at least twelve months. There can be no assurance, however, that
the Company will not require additional financing to accomplish its planned
expansion of production capacity and related infrastructure. In such event,
there can be no assurance that additional financing will be available to the
Company on acceptable terms, or at
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all, or that such financing may not result in further dilution to existing
stockholders. The Company may be required to obtain funds through its
arrangements with partners or others that may require the Company to relinquish
rights to certain of its technologies or potential products or other assets. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate its expansion of production, administration, and its research
and development programs. Any inability to obtain needed financing by the
Company could have a material adverse effect on its business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN BACKLOG
The Company's current backlog consists of a relatively small number of
large orders for XP4 equipment, principally from SAT for use by Bouygues Telecom
and Nortel for use by Globtel, and is attributable largely to limitations in the
Company's current production capacity. Purchase orders are often received and
accepted substantially in advance of shipment and are generally cancelable prior
to shipment. As a result, backlog may not result in revenues or, as of any
particular date, be a reliable indicator of sales for any future period.
Furthermore, the Company's business strategy is to reduce the period between
receipt and shipment of orders by increasing production capacity. Thus, the
Company does not expect backlog will remain at current levels as a percentage of
sales. Furthermore, due to the many factors affecting decisions by customers to
place orders and the relative impact of a small number of large orders, backlog
may fluctuate significantly. Such fluctuations may adversely affect the price of
the Common Stock. See "Business -- Backlog."
RISKS ASSOCIATED WITH GRANTS OF LIMITED MANUFACTURING RIGHTS
Some of the Company's existing and anticipated distribution relationships
with systems integrators involve or may involve the granting of rights enabling
the systems integrators to manufacture millimeter wave radios using the
Company's proprietary designs and technologies. For example, the Company has
granted SAT certain non-exclusive perpetual rights to use XP4 technology to
develop new radios for frequencies below 15GHz, and to manufacture and sell XP4
products in that frequency range, subject to limitations as to the place of
manufacture. The Company has also granted SAT non-exclusive perpetual rights to
manufacture and sell certain XP4 products of 18GHz or greater, subject to
limitations as to the place of manufacture, as well as quantity restrictions
which may be released under certain conditions. As a result of these grants, SAT
may be able to compete directly with the Company in the production and sale of
radios in various frequency ranges. The Company has granted NERA rights to
manufacture XP4 products in the event that the Company fails to meet its
delivery requirements under its distribution agreement with NERA. Distribution
arrangements that the Company enters in the future may contain similar grants of
manufacturing rights. See "Business -- Distribution Relationships." The
negotiation of limited manufacturing rights typically involves highly sensitive
business issues such as sharing of the Company's proprietary information, rights
to Company-developed and jointly-developed improvements, preservation of rights
to next-generation product designs, conditions and limitations under which such
manufacturing rights may be utilized and compensation for the use of proprietary
information and technologies. Because the negotiated compensation to the Company
from third-party-manufactured units results in lower margins than those earned
on Company manufactured units, the Company attempts to negotiate limits on the
amount of third-party manufacturing and to contractually protect its business
interests although it is not always able to do so. There can be no assurance
that negotiated limitations, if any, on the exercise of such rights will be
sufficient to prevent such exercise from having a material adverse effect on the
Company's business, financial condition and results of operations. Nor is there
any assurance that contractual provisions and related legal remedies will be
adequate to prevent distributors from making unauthorized disclosures, or
excessive or unanticipated uses of the Company's proprietary designs and
technologies or sales of such products. Granting of manufacturing rights, in
general may also create competition between the Company and its distributors
over access to critical components that may be in limited or short supply. See
"Business -- Manufacturing".
EXTENSIVE GOVERNMENT REGULATION
Radio communications are subject to extensive regulation by foreign and
U.S. laws and international treaties. The Company's systems must conform to a
variety of international and domestic requirements established to, among other
things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. In order
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for the Company's radios to be used in a foreign jurisdiction, regulatory
approval for its systems must be obtained and end users must comply with such
regulations. Regulatory bodies worldwide are continuing the process of adopting
new standards for wireless communication products. The delays inherent in this
governmental approval process may cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company's
customers, which in turn may have a material adverse effect on the sale of
systems by the Company to such customers. The Company's arrangements with its
distributors generally provide for the distributor to obtain the regulatory
approvals applicable to use of the Company's products in the countries into
which they are sold by the distributors. The Company believes that its XP4
products currently comply with all applicable U.S. and foreign regulations in
countries in which its sales are material, but changes in these regulations, the
need to comply with regulations in additional countries in the event of sales
into those countries, or a failure by the Company's distributors to obtain
necessary approvals or permits in connection with sales to service providers in
a country could require the Company to change the features of its radio systems
and thereby incur substantial costs and experience delays in radio system
installation or operation in countries in which its sales are material.
Equipment to support new services can be marketed only if permitted by suitable
frequency allocations, auctions and regulations, and the process of establishing
new regulations is complex and lengthy. To the extent systems integrators or
service providers are delayed in deploying these systems, the Company could
experience delays in orders. These delays could have a material adverse effect
on the Company's business, financial condition and results of operations.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting network development efforts by the Company's customers
or end users, making current systems obsolete or increasing the opportunity for
additional competition. Any such regulatory changes could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company might deem it necessary or advisable to modify its
systems to operate in compliance with such regulations. Such modifications could
be extremely expensive and time-consuming. See "Business -- Government
Regulation."
UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS
The Company does not hold any patents regarding the technology and
expertise involved in the assembly, calibration and testing of its XP4 products.
The Company relies on technological innovations, trade secrets and expertise to
develop and maintain its competitive position, and upon common law remedies and
contractual provisions to protect its proprietary rights. The Company's
agreements with its distributors may contain non-competition and non-disclosure
provisions prohibiting the distributor from manufacturing products based on the
Company's designs for the term of the agreement and for a short period
thereafter. In general, the Company has not entered into non-competition
agreements with its management and other employees or into confidentiality and
non-disclosure agreements with system integrators or service providers.
The Company's success will depend in part on its ability to protect its
technology and preserve its trade secrets through common law and contractual
restrictions. There can be no assurance that the trade secrecy or other measures
taken by the Company will be adequate to prevent misappropriation of its
technology, or that competitors will not be able to independently develop
technologies having similar or better functions or performance characteristics.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the Company will have adequate legal remedy to prevent
or seek redress for future unauthorized misappropriation of the Company's
technology.
The telecommunications industry is characterized by rapid technological
change, with frequent introductions of new products and technologies. As a
result, industry participants often find it necessary to develop products and
features similar to those introduced by others, increasing the risk that their
products and processes may give rise to claims that they infringe the patents of
others. Accordingly, the Company's current and future products and processes, or
uses thereof, may conflict with patents that have been granted or may be granted
to competitors or others. Such competitors or others could bring legal actions
against the Company or its customers, claiming damages and seeking to enjoin
manufacturing, marketing or use of the affected product or processes. Similarly,
the Company may in the future find it necessary to commence litigation in order
to enforce and protect its proprietary rights. If the Company becomes involved
in any such litigation, it could consume a substantial portion of the Company's
resources and result in a significant diversion of management's attention. If
the outcome of any such litigation were adverse to the
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Company or its customers, its business, financial condition and results of
operations could be materially adversely affected. In addition to any potential
liability for damages, the Company or its customers could be enjoined from
continuing to manufacture, market or use the affected product or process, and
could be required to obtain a license in order to continue such manufacture,
marketing or use. There can be no assurance that the Company or its customers
would prevail in any such action or that any license required under any such
patent would be made available on acceptable terms, if at all.
LIMITATIONS ON USE OF NET OPERATING LOSS CARRYFORWARDS
Section 382 of the Internal Revenue Code of 1986 (the "Code") imposes
certain limitations on the ability of a "loss corporation" to use its net
operating losses ("NOLs") to offset its future taxable income in taxable years
following an "ownership change" (including an ownership change resulting from
the issuance of stock). In general, an ownership change occurs if the percentage
(as measured by value) of the loss corporation's stock (other than certain
preferred stock) which is owned, directly or indirectly, by one or more 5%
shareholders (or certain groups of shareholders collectively treated as a 5%
shareholder) is increased by more than 50 percentage points over the lowest
percentage of stock owned by such 5% shareholders at any time during the
applicable "testing period" of three years or less. In the event of an ownership
change, the amount of pre-change NOLs that the loss corporation can use to
offset its taxable income in a post-change taxable year will generally be
limited to an amount equal to the product of the "long-term tax-exempt rate" in
effect on the date of the ownership change and the value of the loss
corporation's stock immediately prior to the ownership change (without taking
into account for such valuation purposes certain capital contributions received
by the loss corporation during the two-year period preceding the ownership
change) (the "Section 382 limitation"). The long-term tax-exempt rate is an
interest rate based upon certain specified U.S. Treasury debt obligations
adjusted for differences between rates on taxable and tax-exempt obligations and
announced on a monthly basis by the Internal Revenue Service. In addition, if
the loss corporation does not continue its historic business or continue to use
a substantial portion of its historic assets in its business for a two-year
period following an ownership change, the Section 382 limitation would be
reduced to zero, with the effect that no portion of the pre-change NOLs would be
available to offset future taxable income (except in certain very limited
circumstances).
The Company has reviewed past issuances of stock, grants of options and
warrants to acquire Company stock and issuances of debt instruments convertible
into Company stock, as well as share transfers among its shareholders, to
determine the effect of such events under Section 382 of the Code. Based on such
review, the Company believes that ownership changes occurred on both February
20, 1992 and February 13, 1995, and that as a result, the NOLs incurred by the
Company prior to such dates are subject to the Section 382 limitation. Thus, to
the extent that the Company's taxable income in a post-change taxable year
exceeds the amount of the Section 382 limitation, the Company's federal income
tax liability for such taxable year would be greater than it would otherwise be
if the pre-change NOLs were fully available to offset such taxable income. The
Company believes that the availability of the cumulative NOL incurred through
February 13, 1995 will not be limited by the Section 382 limitation. The Company
further believes that its issuance of Common Stock pursuant to the Offering,
when combined with other events subsequent to February 13, 1995, should not
result in another ownership change. However, there can be no assurance that
future events, such as the Company's issuance of additional shares of Common
Stock or transfers of outstanding shares of Common Stock by the Company's
shareholders, will not cause an ownership change to occur in the future. In the
event of any such future ownership change, the Company's ability to use some or
all of its NOLs incurred after February 13, 1995 to offset its future taxable
income would also become subject to the Section 382 limitation. As of June 30,
1997 the Company had remaining NOLs of approximately $37.2 million.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiations between the Company and the Representatives of the Underwriters
and may not be indicative of the market price for the Common Stock in the
future. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. There can be no assurance that an
active trading market will develop or be sustained after this Offering. The
Company believes that factors such as announcements of developments related to
the Company's business; announcements of technological innovations or new
products or enhancements by the Company or its competitors; sales by
competitors, including sales to the
15
<PAGE> 18
Company's customers; sales of the Company's Common Stock into the public market,
including by members of management; developments in the Company's relationships
with its customers, partners, distributors and suppliers; shortfalls or changes
in revenues, gross margins, earnings or losses or other financial results from
analysts' expectations; regulatory developments; fluctuations in results of
operations; and general conditions in the Company's market, or the markets
served by the Company's customers, or the economy could cause the price of the
Company's Common Stock to fluctuate, perhaps substantially. In addition, in
recent years the stock market, in general, and the market for shares of small
capitalization and technology stocks in particular, have experienced extreme
price fluctuations, which have often been unrelated to the operating performance
of affected companies. Many companies in the telecommunications industry have
recently experienced historic highs in the market price of their common stock.
There can be no assurance that the market price of the Company's Common Stock
will not experience significant fluctuations in the future, including
fluctuations that are unrelated to the Company's performance. Such fluctuations
could materially adversely affect the market price of the Company's Common
Stock.
RISKS ASSOCIATED WITH DEVELOPING TECHNOLOGIES; PRODUCT LIABILITY
If wireless telecommunications systems are determined, perceived or alleged
to create a health risk, the Company could be named as a defendant, and held
liable, in product liability lawsuits commenced by individuals alleging that the
Company's products harmed them. The occurrence of any of such event could have a
material adverse effect on the Company's business, results of operations and
financial condition. Any alleged health or environmental risk could also lead to
a delay or prohibition against the installation of wireless networks which could
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, an inability to maintain insurance at an
acceptable cost or to otherwise protect against potential product liability
could inhibit the commercialization of the Company's products and have a
material adverse effect on the Company's business, results of operations and
financial condition. Further, the installation of wireless networks may be
delayed or prohibited by various environmental regulations. Any such delay or
prohibition would have a material adverse effect on the Company's business,
results of operations and financial condition.
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS
The Company expects to use approximately $5.6 million of the net proceeds
to repay the outstanding principal and interest on its outstanding credit
facility, approximately $8.5 million for the purchase of equipment, and the
remaining $10.0 million for working capital and other general corporate
purposes, such as supporting growth in inventory and receivables, and hiring
additional personnel in connection with the Company's efforts to increase its
production capacity and scope of operations and research and development and
sales and marketing activities. The Company's management will have broad
discretion to allocate the proceeds of the Offering, and the amounts actually
expended for each use listed above may vary significantly depending on a number
of factors, including the amount of future revenues, the amount of cash
generated or used by the Company's operations, the progress of the Company's
product development efforts, technological advances, and the status of
competitive products.
SHARES ELIGIBLE FOR FUTURE SALE AFTER THE OFFERING
Upon completion of this Offering, 12,139,006 shares of Common Stock will be
outstanding, assuming no exercise of outstanding options or warrants to purchase
stock of the Company, (12,514,006 shares if the Underwriters' over-allotment
option is exercised in full) of which the 2,500,000 shares offered hereby
(2,875,000 if the Underwriters over-allotment is exercised in full) will be
freely tradable on the public market, except to the extent that such shares are
held by an affiliate of the Company. Of the remaining 9,639,006 outstanding
shares, 444,629 shares are eligible for public sale immediately after this
Offering pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), 9,175 shares will become eligible for public sale 90 days
after the date of this Offering pursuant to Rule 701 under the Securities Act
and 7,719,666 shares will become eligible for public sale 180 days after the
date of this Offering upon the expiration of lock-up agreements entered into by
holders of substantially all of the Common Stock not being sold in this Offering
(the "Lock-Up Agreements"). All officers, directors and significant shareholders
and substantially all of the other shareholders of the Company have agreed not
to sell, offer to sell, solicit an offer to buy, contract to sell, grant any
option to purchase, contract to require any other person to purchase, or
otherwise transfer or dispose of any interest in, any shares of capital stock of
the Company, or any securities convertible into or
16
<PAGE> 19
exercisable or exchangeable for capital stock of the Company, for a period of
180 days after the date of this Prospectus without the prior written consent of
UBS Securities LLC, with certain limited exceptions, and the Company has agreed
that it will not, until 180 days following the date of this Prospectus, without
the prior written consent of UBS Securities LLC, sell, offer or agree to sell,
contract to sell, grant any option to purchase, make any short sale or otherwise
dispose of any shares of Common Stock, except that the Company may grant
additional options and issue stock under the 1990 Stock Option Plan and the
Director Stock Option Plan or issue shares of Common Stock upon the exercise of
outstanding stock options and warrants. As of the date of this Prospectus, an
additional 1,709,517 shares were issuable upon exercise of outstanding stock
options. Of the 633,458 shares issuable upon currently exercisable stock
options, 456,188 are subject to Lock-Up Agreements. Upon expiration of the
Lock-Up Agreements, such shares will be eligible for immediate public sale.
An additional 2,949,137 shares of Common Stock are issuable upon exercise
of warrants outstanding at June 30, 1997, all of which are currently
exercisable. Of these shares, 2,907,233 shares are subject to Lock-Up
Agreements.
Shareholders who will hold an aggregate of 9,549,177 shares of Common Stock
after this Offering have the right to require the Company to register their
shares for sale under the Securities Act, beginning 180 days after the closing
of this Offering. Sales of substantial numbers of shares of Common Stock in the
public market following this Offering could materially adversely affect the
market price for the Common Stock. See "Shares Eligible for Future Sale" and
"Descriptions of Common Stock -- Registration Rights."
CONTROL BY EXISTING SHAREHOLDERS; EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Following the completion of this Offering, members of the Board of
Directors and the officers of the Company, together with entities that may be
deemed affiliates of or related to such persons or entities, will beneficially
own approximately 63% (approximately 65% on a fully diluted basis, assuming the
exercise of all warrants and vested and unvested options held by such persons
and outstanding at June 30, 1997) of the outstanding shares of Common Stock of
the Company. Accordingly, these stockholders are able to significantly influence
the election of the members of the Company's Board of Directors and
significantly influence the outcome of corporate actions requiring stockholder
approval, such as mergers and acquisitions. This level of ownership, together
with certain provisions of the Company's articles of incorporation, equity
incentive plans, bylaws and Washington law, may have a significant effect in
delaying, deferring or preventing a change in control of the Company and may
adversely affect the voting and other rights of other holders of Common Stock.
See "Management -- Directors and Executive Officers," "-- Principal
Stockholders" and "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors in Common Stock in the Offering will experience immediate
dilution in the net tangible book value of their shares. Assuming an initial
public offering price of $11.00 per share, dilution to new investors would be
$8.26 per share. Additional dilution will occur upon exercise of outstanding
stock options and warrants. If all of the shares issuable upon the exercise of
stock options granted pursuant to the Company's stock option plans were issued,
dilution to new investors would be $8.30 per share. If the Company seeks
additional capital in the future, the issuance of shares or convertible debt to
obtain such capital may lead to further dilution. See "Dilution."
17
<PAGE> 20
THE COMPANY
The Company was incorporated on June 30, 1989 as a Delaware corporation and
reincorporated as a Washington corporation through a merger with a wholly-owned
subsidiary on May 31, 1991. Unless the context otherwise requires, the term
"Company" refers to Innova Corporation and its subsidiaries, Innova Europe
Limited and Techinnova S.A. de C.V. The Company's principal executive offices
are located at Gateway North, Building 2, 3325 South 116th Street, Seattle,
Washington 98168-1974, and its telephone number is (206) 439-9121.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby, based on an assumed initial public offering price
of $11.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company, are
estimated to be $24,775,000 ($28,611,250 if the Underwriters' over-allotment
option is exercised in full).
The Company intends to use a portion of the net proceeds from the Offering
to repay the outstanding principal and accrued interest of its credit line with
Greyrock Business Credit, a Division of NationsCredit Commercial Corporation
("Greyrock Business Credit"). As of June 30, 1997, the outstanding balance of
this credit line, which matures October 31, 1997, was approximately $4.1
million. The Company will also use a portion of the net proceeds of the Offering
to repay the Company's outstanding principal balance and accrued interest on its
term loan with Greyrock Business Credit, which will become due upon consummation
of the Offering. As of June 30, 1997, the outstanding balance on this term loan
was approximately $1.5 million. The credit line and the term loan each bear
interest at the greater of 4.75% above LIBOR or 8% per annum. The Company has
used both the credit line and the term loan for inventory, supplies and
equipment used to manufacture XP4 products and for general working capital
purposes. The Company currently estimates that approximately $8.5 million of the
proceeds will be applied to acquire equipment. The Company expects to use the
balance of the proceeds from the Offering, approximately $10 million, for
working capital and other general corporate purposes, such as supporting growth
in inventory and receivables and hiring additional personnel in connection with
the Company's efforts to increase its production capacity and scope of
operations and research and development and sales and marketing activities.
Pending their application, the Company intends to invest the net proceeds
from this Offering in government securities or short-term, interest- or
dividend-bearing investment-grade securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings, if any, to finance the growth and
development of its business and does not anticipate paying any cash dividends or
other distributions on its Common Stock in the foreseeable future.
18
<PAGE> 21
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at June 30, 1997 (after giving effect to a 24:1 reverse stock split
and changes in authorized common and redeemable preferred stock, to be effective
upon closing of the Offering) and the short-term debt and capitalization of the
Company as adjusted to give effect to the: (i) conversion of all outstanding
shares of Preferred Stock upon consummation of the Offering; (ii) sale by the
Company of the 2,500,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share, after deducting the
underwriting discounts and commissions and estimated Offering expenses; (iii)
application of the estimated net proceeds of the Offering. See "Use of Proceeds"
and Note 17 of Notes to Consolidated Financial Statements. The information set
forth below is unaudited and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
ACTUAL AS ADJUSTED
-------- ------------
(in thousands)
<S> <C> <C>
Notes payable......................................................... $ 5,618 $ --
Current installments of obligations under capital leases.............. 1,562 1,562
-------- --------
Total short-term debt............................................... $ 7,180 $ 1,562
======== ========
Obligations under capital leases, excluding current installments...... $ 1,035 $ 1,035
Redeemable preferred stock, no par value.
13,379,164 shares authorized; 8,682,287 shares issued and
outstanding; 5,000,000 shares authorized and 0 shares issued and
outstanding, as adjusted(1)......................................... 47,769 --
Stockholders' equity (deficit)
Common Stock, no par value: 16,666,666 shares authorized; 956,719
shares issued and outstanding; 30,000,000 shares authorized and
12,139,006 shares issued and outstanding, as adjusted(2)......... 1,398 73,942
Additional paid-in capital.......................................... 3,262 3,262
Deferred stock option compensation expense.......................... (624) (624)
Cumulative translation adjustment................................... 54 54
Accumulated deficit................................................. (43,387) (43,387)
-------- --------
Total stockholders' equity (deficit)............................. (39,297) 33,247
-------- --------
Total capitalization............................................. $ 9,507 $ 34,282
======== ========
</TABLE>
- ---------------
(1) At June 30, 1997, the Company had 13,379,164 shares of Preferred Stock
authorized, of which 4,166,666 shares were designated as Series A Preferred
Stock, 2,083,333 shares were designated Series B Preferred Stock, 833,333
shares were designated Series C Preferred Stock, 625,000 shares were
designated Series C1 Preferred Stock, 4,166,666 shares were designated as
Series D Preferred Stock, 1,000,000 shares were designated as Series E
Preferred Stock, and 504,166 shares were designated as Series F Preferred
Stock.
(2) As of June 30, 1997. Excludes: (i) 1,655,298 shares of Common Stock issuable
upon exercise of stock options issued pursuant to the Company's 1990 Stock
Option Plan at a weighted average exercise price of $2.19 per share; (ii) an
additional 377,774 shares of Common Stock reserved for future issuance under
the Company's 1990 Stock Option Plan; (iii) 48,263 shares of Common Stock
issuable upon exercise of stock options issued pursuant to the Company's
Director Stock Option Plan; (iv) an additional 71,737 shares of Common Stock
reserved for future issuance under the Company's Director Stock Option Plan;
and (v) 2,949,137 shares of Common Stock issuable upon exercise of Warrants
to Purchase Common Stock. See "Management -- Benefit Plans" and "-- Certain
Transactions," "Description of Capital Stock" and Notes to Consolidated
Financial Statements.
19
<PAGE> 22
DILUTION
As of June 30, 1997, the pro forma net tangible book value of the Company's
Common Stock was approximately $8,330,000, or $0.86 per share. Pro forma net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding, after giving effect to pro forma adjustments consisting of the
conversion of the Preferred Stock into Common Stock. Additionally, after giving
effect to the sale by the Company of the shares of Common Stock offered hereby
and after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company, the pro forma net tangible book value
of the Company as of June 30, 1997 would have been approximately $33,247,000 or
$2.74 per share. This represents an immediate increase in net tangible book
value of $1.88 per share to existing shareholders and an immediate dilution of
$8.26 per share of Common Stock to new investors purchasing shares of Common
Stock in this Offering. Dilution is determined by subtracting pro forma net
tangible book value per share after the Offering from the amount of cash paid by
a new investor for a share of Common Stock.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public Offering price per share......................... $ 11.00
Pro forma net tangible book value per share as of June
30, 1997.............................................. $ 0.86
Increase per share attributable to the Offering......... $ 1.88
------
-
Pro forma net tangible book value per share after this
Offering(3)........................................... $ 2.74
-------
Dilution per share to investors(3)...................... $ 8.26
=======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company and shares of
Common Stock issuable upon exercise of stock options issued pursuant to the
Company's stock option plans, the total consideration paid or payable to the
Company upon exercise of stock options issued pursuant to the Company's stock
option plans and the average price per share payable by Option holders under the
Company's stock option plans or paid by existing shareholders and by new
investors purchasing the shares of Common Stock offered hereby (before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)(2)............ 9,639,006 70% $49,530,651 61% $ 5.14
Existing option holders(1)............. 1,703,561 12 $ 4,100,011 5 $ 2.41
Investors(1)........................... 2,500,000 18 $27,500,000 34 $ 11.00
---------- --- ----------- --- ------
Total........................ 13,842,567 100% $81,130,662 100% $ 5.86
========== === =========== === ======
</TABLE>
- ---------------
(1) The foregoing table reflects ownership at June 30, 1997, giving effect to
the conversion of all outstanding shares of Preferred Stock into Common
Stock, and a 24:1 reverse stock split to be effective upon the closing of
the Offering, and assumes no exercise of the Underwriters' over-allotment
option. Exercise of the Underwriters' over-allotment option in full would
reduce the proportion of shares held by existing shareholders to 68% of the
total number of shares of Common Stock outstanding after the Offering and
shares of Common Stock issuable upon exercise of stock options pursuant to
the Company's stock option plans, reduce the proportion of shares subject to
option held by existing option holders to 12% of such total number of
shares, and increase the number of shares held by investors in the offering
to 2,875,000 shares or 20% of such total number of shares.
(2) As of June 30, 1997. Excludes: (i) an additional 377,774 shares of Common
Stock reserved for future issuance under the Company's 1990 Stock Option
Plan; (ii) an additional 71,737 shares of Common Stock reserved for future
issuance under the Company's Director Stock Option Plan; and (iii) 2,949,137
shares of Common Stock issuable upon exercise of warrants to purchase Common
Stock. See "Management -- Benefit Plans" and "-- Certain Transactions,"
"Description of Capital Stock" and Notes to Consolidated Financial
Statements. To the extent such stock options and warrants are exercised,
there will be further dilution to new investors in the Offering. See
"Management -- Stock Options," "-- Benefit Plans" and "Risk
Factors -- Dilution."
(3) The pro forma net tangible book value per share after this offering would be
$2.70 and the dilution per share to investors $8.30 if all of the shares
issuable upon the exercise of stock options pursuant to the Company's stock
option plans were issued.
20
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The selected financial data for the
fiscal periods ended March 31, 1993, 1994, 1995 and 1996, and December 31, 1996
are derived from the Consolidated Financial Statements of the Company audited by
KPMG Peat Marwick LLP, independent accountants. The selected financial data as
of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are derived
from unaudited financial statements prepared by the Company on a basis
consistent with the Company's audited Consolidated Financial Statements and, in
the opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results for such
periods. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for any other interim
period or for the year ending December 31, 1997.
<TABLE>
<CAPTION>
NINE MONTH
FISCAL
PERIOD SIX MONTHS ENDED
YEARS ENDED MARCH 31, ENDED JUNE 30,
---------------------------------------- DECEMBER 31, ---------------------
1993 1994 1995 1996 1996(1) 1996 1997
------- ------- ------- ------- ------------ ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues:
Net product sales......................... $ 200 $ 877 $ 1,151 $ 445 $ 2,051 $ 33 $12,582
Manufacturing contract service revenues... -- -- 1,207 1,517 53 167 --
------- ------- ------- ------- ------- ------- -------
200 877 2,358 1,962 2,104 200 12,582
Total cost of products sold:
Cost of products sold..................... 664 2,063 3,703 2,425 3,686 1,885 9,570
Manufacturing contract service expenses... -- -- 812 1,517 53 167 --
------- ------- ------- ------- ------- ------- -------
664 2,063 4,515 3,942 3,739 2,052 9,570
Gross profit (loss)......................... (464) (1,186) (2,157) (1,980) (1,635) (1,852) 3,012
Operating expenses:
Selling, general and administrative....... 1,132 1,566 2,067 2,317 2,585 1,533 3,471
Research and development.................. 2,307 2,482 1,892 4,519 2,966 2,374 2,216
------- ------- ------- ------- ------- ------- -------
Loss from operations........................ (3,903) (5,234) (6,116) (8,816) (7,186) (5,759) (2,675)
Other income (expense)...................... (13) (166) (202) (245) (143) (131) (338)
Loss from discontinued operations........... (591) -- -- -- -- -- --
Loss on disposal of discontinued
operations................................ (592) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net loss.................................... $(5,099) $(5,400) $(6,318) $(9,061) $ (7,329) $(5,890) $(3,013)
======= ======= ======= ======= ======= ======= =======
Pro forma net loss per share(2)........... $ (0.73) $ (0.30)
======= =======
Supplementary net loss per share(2)....... $ (0.72) $ (0.27)
======= =======
Shares used in computing pro forma net
loss per share(2)....................... 10,039,634 10,061,989
Shares used in computing supplementary net
loss per share(2)....................... 10,085,650 10,572,738
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, 1997
----------------------------------------- DECEMBER 31, -------------------------
1993 1994 1995 1996 1996(1) Actual As Adjusted(3)
-------- -------- -------- -------- ------------ -------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 713 $ 527 $ 1,922 $ 287 $ 173 $ 3,834 $ 23,133
Working capital (deficit).............. (1,763) (2,388) 1,815 2,156 (289) 4,371 29,146
Total assets........................... 1,968 2,798 5,093 6,747 7,305 20,208 39,365
Current liabilities.................... 2,916 4,353 1,206 2,156 4,809 10,701 5,083
Longterm obligations................... 150 -- 443 330 542 1,035 1,035
Mandatorily convertible notes payable
for preferred stock.................. -- -- -- 6,984 -- -- --
Redeemable preferred stock(4).......... 9,540 13,198 24,497 27,362 39,313 47,769 --
Common stock(4)........................ 6 1,290 1,302 1,330 1,377 1,398 73,942
Additional paid-in capital............. 1,605 1,605 1,605 1,605 1,605 3,262 3,262
Accumulated deficit.................... (12,267) (17,667) (23,985) (33,046) (40,375) (43,387) (43,387)
Total stockholders' equity
(deficit)(4)......................... (10,558) (14,753) (21,052) (30,085) (37,360) (39,297) 33,247
</TABLE>
- ---------------
(1) Subsequent to March 31, 1996, the Company changed its fiscal year end to
December 31.
(2) See Note 1(q) to Consolidated Financial Statements.
(3) As adjusted to give effect to the (i) conversion of all outstanding shares
of Preferred Stock into shares of Common Stock upon consummation of the
Offering, (ii) sale of the shares of Common Stock being offered hereby at an
assumed initial public offering price of $11.00 per share (after deducting
the underwriting discounts and commissions and estimated expenses of the
Offering) and (iii) application of the estimated net proceeds of the
Offering. See "Use of Proceeds."
(4) As of June 30, 1997. Excludes: (i) 1,655,298 shares of Common Stock issuable
upon exercise of stock options issued pursuant to the Company's 1990 Stock
Option Plan, at a weighted average exercise price of $2.19 per share; (ii)
an additional 377,774 shares of Common Stock reserved for future issuance
under the Company's 1990 Stock Option Plan; (iii) 48,263 shares of Common
Stock issuable upon exercise of stock options issued pursuant to the
Company's Director Stock Option Plan; (iv) an additional 71,737 shares of
Common Stock reserved for future issuance under the Company's Director Stock
Option Plan; and (v) 2,949,137 shares of Common Stock issuable upon exercise
of warrants to purchase Common Stock. See "Management -- Benefit Plans" and
"-- Certain Transactions," "Description of Capital Stock" and Notes to
Consolidated Financial Statements.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
OVERVIEW
Innova designs, manufactures and supports millimeter wave radios for use as
short- to medium-distance wireless communications links in developed and
developing telecommunications markets. The Company began shipping the 23, 26 and
38 GHz models of its XP4 radio systems in the quarter ended September 30, 1996.
As of June 30, 1997 the Company had sold its XP4 radios to a total of 18
customers, generating $12.2 million in total revenues, $6.8 million of which
occurred in the quarter ended June 30, 1997. Through June 30, 1997 approximately
44%, 29% and 13% of the Company's XP4 sales have been to Nortel, SAT and
Associated Communications, respectively. Through June 30, 1997 approximately 84%
of the Company's XP4 sales were made to customers located outside of the United
States. The Company anticipates that international sales will continue to
account for at least a majority of its sales for the foreseeable future. The
Company was a development stage company from its incorporation in 1989 through
March 31, 1996. As of June 30, 1997, the Company had an accumulated deficit of
approximately $43.4 million. After March 31, 1996 the Company changed its fiscal
year-end to December 31.
The Company's net sales consist primarily of sales of point-to-point
millimeter wave radios to systems integrators, other equipment resellers and
service providers, principally for installation outside the U.S. Other revenues
are generated from the resale of related telecommunications equipment such as
antennas, cables and enclosures. The Company recognizes revenue upon shipment.
In the period from calendar 1989 to calendar 1992 the Company developed and
manufactured a line of TVRO (Television Receive Only) antennas. Approximately
$3.2 million of these antennas were sold, primarily to a single customer in
Europe, before the product line was discontinued in calendar 1992. The Company
began developing millimeter wave radios early in calendar 1992. The Company
generated its first revenue from the shipment of radios, based on its initial
architecture, the XP3, in late calendar 1993. The Company subsequently
determined that the technology and architecture upon which the XP3 product line
was based was not suitable to meet the evolving needs of the target market. In
late calendar 1994, the Company decided to curtail further development of the
XP3 product line and concentrate its development efforts on a new product
architecture, which it believed would be more reliable and would incorporate
features that would be more attractive to customers. In November 1994, the
Company ceased marketing XP3 products, and for approximately the next year, its
only material revenues consisted of subcontractor fees for manufacturing a
revised model of the XP3 for SAT. During this period, research and development
efforts were devoted to the development of the XP4 product line.
In calendar 1995, the Company began making significant additions of
experienced management in the engineering, manufacturing, sales and
administrative areas, including a new Chief Executive Officer who took office in
early calendar 1996. From late calendar 1995 to the latter part of calendar
1996, the Company continued to invest in product development and manufacturing
infrastructure, in anticipation of the launch of the XP4 product line, which
occurred in the third quarter of calendar 1996. After an initial evaluation
period, orders for XP4 radios increased late in the final quarter of calendar
1996 and continued to increase in the first two quarters of 1997. Since
launching the XP4 product line, the Company has increased expenditures in an
effort to increase sales and expand manufacturing capacity. In light of the
fundamental changes in the character of the Company's operations during the past
three years, which resulted in the Company changing from a development stage
Company to an operating Company during its most recent fiscal year, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an accurate indicator of future performance.
Since introduction of the XP4 product line, orders have increased more
rapidly than the Company has been able to expand its manufacturing capacity,
resulting in delayed shipping dates and lost orders. The Company's backlog was
approximately $11.6 million as of June 30, 1997. The Company includes in backlog
only customer commitments for which it has received signed purchase orders and
assigned shipment dates within the following 180 days. The Company's
distribution agreements generally provide that products are to be shipped not
more than 60 days after the order and that orders may be cancelled prior to
shipment. The Company believes the current level of backlog, as a
22
<PAGE> 25
percentage of sales, is due to inadequate manufacturing capacity and anticipates
that the backlog will decrease as a percentage of sales as manufacturing
capacity increases and delivery times decrease. The Company intends to continue
its efforts to increase manufacturing capacity but expects that sales may
continue to be constrained by capacity limitations through 1997 and into 1998.
As sales have increased since introduction of the XP4 in the third quarter
of calendar 1996, the Company's gross margins have improved, due to the
Company's ability to absorb fixed and semi-variable operating costs over larger
manufacturing volumes. The Company's gross profits over the past three quarters
have also been favorably affected by lower component costs, particularly
fabricated metal parts and transmit and receive hybrids. These component cost
savings are principally a result of higher volume purchasing, the substitution
of lower cost parts and the redesign of components and circuits. In addition to
component cost savings, the Company is pursuing programs to simplify and reduce
the cost of its assembly, test and manufacturing processes. Realization of
further planned savings is necessary if the Company is to improve gross margins.
There can be no assurance, however, that the Company will be successful in
achieving further cost reductions. The Company also expects that its gross
margins will continue to be affected by a variety of other factors, such as:
increases in lower-margin sales through large distributors; increased investment
in manufacturing facilities or equipment; changes in labor costs resulting from
increasing manufacturing capacity; increased manufacturing or testing
arrangements with distributors; changes in product mix; receipt of royalties
under limited manufacturing licenses; increased sourcing of components and
subassemblies from third-party manufacturers; and potential increased price
competition.
Continued expansion of the Company's manufacturing capacity will be
required for the Company to achieve its business plan. Such expansion will
require substantial investments in additional capital equipment, the recruiting
and training of additional personnel, and possibly increased sourcing of
components from third-parties or investment in additional manufacturing
facilities. Addition of a new facility and increased manufacturing capacity,
particularly if located in another state or country, is likely to add
significant amounts of fixed overhead to the Company's manufacturing costs and
to appreciably increase the complexity of the Company's operations.
To the extent sales volumes continue to grow, the accounting and other
systems used by the Company may not be suitable to handle the volume and
complexity of the resulting transactions. At present, the principal means by
which the Company maintains its books and records, as well as the bulk of its
purchasing and manufacturing data, is a relatively simple PC-network based
system. To the extent the Company continues to grow, this system may need to be
replaced or upgraded. The Company is currently in the process of upgrading its
current information management software; however, this upgrade may prove to be
only a first step in dealing with the anticipated needs of the Company.
The Company has entered into distribution agreements whereby it has agreed
to sell XP4 products at various fixed prices. Certain of these distribution
agreements include "most favored customer" pricing commitments which require the
Company to offer lower prices to such distributors in the event such prices are
offered under like terms and conditions to other customers. In addition, some of
these agreements grant limited manufacturing licenses under certain conditions
or impose penalties for late delivery. The Company anticipates that certain of
its distributors will manufacture a portion of the XP4 radios they sell. To the
extent such manufacturing by the Company's distributors decreases the number of
XP4 units built by the Company, the Company's manufacturing gross profit will be
reduced. As of June 30, 1997, no XP4 products have been manufactured by any of
the Company's distributors.
The Company's sales may also be affected by a variety of other factors
including the establishment of new distribution relationships, the addition of
direct sales personnel or sales offices, the introduction of new products by the
Company or its competitors, and competitive and other conditions affecting the
telecommunications industry generally. The Company remains dependent on
significant contracts from a limited number of customers. Such contracts are
often with systems integrators, which in turn provide the Company's products to
service providers as part of larger telecommunication system infrastructure
buildouts. Due to the Company's limited operating history and limited number of
customers to date, it is difficult, if not impossible for the Company to
accurately predict the mix or nature of infrastructure projects that provide the
basis for its product sales to systems integrators. The Company anticipates,
however, that revenue derived from current and future large customers and
large-scale projects will continue to represent a significant portion of its
total revenues. Because of the small size of the Company's customer base, the
loss of or reduced demand for products from any customer for any reason,
including business failure of the
23
<PAGE> 26
customer, abandonment of the underlying project, or changes in government policy
or general economic conditions, for example, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that price competition among manufacturers of millimeter
wave radios is likely to increase over time, which could adversely affect the
Company's sales and margins.
In addition to expanding the XP4 product line with additional frequencies
and data rates, the Company is also developing point-to-point millimeter wave
radios with different architectures that are designed to address different
market needs than the XP4. To maintain current or target additional market
opportunities, the Company will need to undertake additional development
programs and to produce new products and product enhancements on a timely and
cost-effective basis. Accordingly, research and development costs are expected
to increase over time.
The Company has granted non-qualified stock options to its employees which
in some cases have required attainment of performance goals prior to vesting.
Generally, these options have been granted at exercise prices which the Company
believed to be no less than the fair market value of the underlying Common Stock
as of the date of grant. In 1997, the Company amended previously granted options
to eliminate performance-related vesting criteria. In connection with these
amendments, the Company recorded a non-cash charge to operations of $965,533 for
the six months ended June 30, 1997, which is due primarily to the estimated fair
market value of these amended options exceeding the exercise price on the
amendment date. Additional compensation expense of up to $623,744 will be
recorded over the next 4 years as these options vest.
The Company accrues for warranty expenses on an estimated basis, based on a
fixed dollar amount for each radio system shipped. Due to the limited operating
history of the Company, this estimate is based in part on experience with the
XP4 and, to a greater extent, on management's experience in the millimeter wave
radio industry generally. Actual warranty expenses for XP4 sales may vary
significantly from the Company's estimates. If warranty expenses exceed the
Company's estimate, or if the Company is required to make in-the-field repairs
or adjustments to a significant number of radio systems, the Company's business,
financial condition and results of operations could be materially adversely
affected.
The fifth, sixth, seventh, eighth, ninth, tenth and eleventh paragraphs of
this "Overview" section contain forward looking statements. Actual results could
differ materially from those projected in the forward looking statements, as a
result of a number of factors, including those set forth in the section entitled
"Risk Factors." In particular, note the "Risk Factors" entitled "Potential
Significant Fluctuations in Results of Operations," "Significant Customer
Concentration; Dependence on Large Customers," "Intensely Competitive Industry"
and "Limited Production Capacity; No Assurance of Successful Expansion of
Operation."
24
<PAGE> 27
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
from the Company's Consolidated Statements of Operations expressed as a
percentage of total revenues.
<TABLE>
<CAPTION>
NINE MONTH
FISCAL
PERIOD SIX MONTHS ENDED
YEARS ENDED MARCH 31, ENDED JUNE 30,
----------------------------------------- DECEMBER 31, --------------------
1993 1994 1995 1996 1996 1996 1997
-------- ------ ------ ------ ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total Revenues:
Net product sales........................... 100.0% 100.0% 48.8% 22.7% 97.5% 16.5% 100.0%
Manufacturing contract service revenues..... -- -- 51.2 77.3 2.5 83.5 --
100.0 100.0 100.0 100.0 100.0 100.0 100.0
Total cost of products sold:
Cost of products sold....................... 332.0 235.2 157.0 123.6 175.2 944.7 76.1
Manufacturing contract service expenses..... -- -- 34.4 77.3 2.5 83.5 --
332.0 235.2 191.4 200.9 177.7 1,020.2 76.1
Gross margin (deficit)........................ (232.0) (135.2) (91.4) (100.9) (77.7) (928.2) 23.9
Operating expenses:
Selling, general and administrative......... 566.0 178.6 87.6 118.1 122.9 768.3 27.6
Research and development.................... 1,153.5 283.0 80.2 230.3 141.0 1,189.6 17.6
Loss from operations.......................... (1,951.5) (596.8) (259.2) (449.3) (341.6) (2,886.1) (21.3)
Other income (expense)........................ (6.5) (18.9) (8.7) (12.5) (6.8) (65.6) (2.7)
Loss from discontinued operations............. (295.5) -- -- -- -- -- --
Loss on disposal of discontinued operations... (296.0) -- -- -- -- -- --
------ ------ ------ ------ ------ -------- -----
Net loss...................................... (2,549.5)% (615.7)% (267.9)% (461.8)% (348.4)% (2,951.7)% (24.0)%
====== ====== ====== ====== ====== ======== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
TOTAL REVENUES. Net product sales increased to $12.6 million for the six
months ended June 30, 1997, as compared to minimal levels for the six months
ended June 30, 1996. The increase is attributable to sales of XP4 radios, which
were not sold until the quarter ended September 30, 1996. International sales
represented 87% of total net product sales for the six months ended June 30,
1997. Manufacturing contract service revenues, which consisted of fees received
for manufacturing a revised XP3 for SAT, were eliminated due to SAT's decision
to discontinue production of XP3 radios in Innova's facilities for the six
months ended June 30, 1996.
GROSS PROFIT (LOSS). Gross profit increased to $3.0 million for the six
months ended June 30, 1997, as compared to a loss of $1.9 million for the six
months ended June 30, 1996. The increase in gross profit was attributable to the
sales of XP4 radios, increased manufacturing volumes and reduced unit material
and outside processing costs resulting from higher-volume purchases and lower,
negotiated prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $3.5 million for the six months ended June
30, 1997 as compared to $1.5 million for the six months ended June 30, 1996. The
increase was due primarily to a $864,000 charge to compensation expense in
connection with amendments to stock options granted in calendar 1996 as well as
increased compensation expense associated with the addition of sales and
marketing staff in the U.S. and U.K. offices to support the launch of the XP4
product line. The Company may incur additional compensation expense in
connection with opening additional sales offices, particularly in certain
international markets and in connection with adding administrative personnel.
The Company anticipates that selling, general and administrative expenses will
continue to increase.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased to
$2.2 million for the six months ended June 30, 1997 as compared to $2.4 million
for the six months ended June 30, 1996. The decrease in research and development
expenses was primarily due to a $710,000 reduction in consulting expenses, which
was partially offset by an increase in employee compensation costs due to
increased headcount. Research and development expenses incurred for the six
months ended June 30, 1997 were related to refinements and expansion of the XP4
product line and initial planning for the possible development of other
products. The Company believes research and development expenses will increase
in future periods, as the Company continues to increase research and development
headcount.
25
<PAGE> 28
OTHER INCOME (EXPENSE). Other expense increased to $337,000 for the six
months ended June 30, 1997 as compared to $131,000 for the six months ended June
30, 1996. The increase was due primarily to increases in interest expense
resulting from additional capitalized leases and borrowings on the Company's
working capital line. The Company anticipates that net interest expense will
decrease due to repayment of debt from the proceeds of the Offering and
investment of the remaining balance.
INCOME TAXES. No provision for income taxes has been recorded, as the
Company incurred net operating losses through June 30, 1997. As of June 30,
1997, the Company had remaining net operating loss carryforwards of $37.2
million and additional loss carryovers relating to its U.K. subsidiary. The U.S.
net operating loss carryforwards will expire in various amounts from 2005 to
2012. Although the application of these amounts is subject to certain annual
limitations under the Internal Revenue Code of 1986, as amended, the Company
believes that the availability of the cumulative Federal net operating loss
carryforward is not currently limited. However, there can be no assurances that
future events, such as the issuance of additional shares of Common Stock or
transfers of outstanding shares of Common Stock by the Company's shareholders,
will not cause an ownership change to occur in the future and limit availability
of the NOLs. The Company anticipates that its effective income tax rate will
approach the statutory rate after these amounts are applied or expire. The
Company has provided a full valuation allowance on the deferred tax assets
because of the uncertainty regarding realizability. See Note 11 of Notes to
Consolidated Financial Statements.
NINE MONTH FISCAL PERIOD ENDED DECEMBER 31, 1996 COMPARED TO THE FISCAL YEARS
ENDED MARCH 31, 1996 AND 1995
TOTAL REVENUE. Net product sales increased to $2.1 million for the nine
month fiscal period ended December 31, 1996, as compared to $445,000 and $1.2
million for the fiscal years ended March 31, 1996 and March 31, 1995,
respectively. The increase in net product sales for the nine month fiscal period
ended December 31, 1996 was due to the launch of the XP4 product line in the
quarter ended September 30, 1996. International sales during this nine month
period represented 69% of net product sales. The decrease for the fiscal year
ended March 31, 1996, as compared to the fiscal year ended March 31, 1995, was
due to the decision to discontinue production of XP3 radios. Manufacturing
contract service revenues increased to $1.5 million for the fiscal year ended
March 31, 1996, as compared to $1.2 million for the fiscal year ended March 31,
1995. Manufacturing contract service revenues in each of these periods related
to manufacture of the XP3 radios for SAT, which was substantially discontinued
in the quarter ended March 31, 1996.
GROSS PROFIT (LOSS). The Company's gross profit increased to a loss of $1.6
million for the nine month fiscal period ended December 31, 1996, as compared to
a loss of $2.0 million and $2.2 million for the fiscal years ended March 31,
1996 and March 31, 1995, respectively. The increase in gross profit for the nine
month fiscal period ended December 31, 1996 was due to increased revenue
resulting from sales of the XP4 products, which more than offset increased
expenses and the decrease in manufacturing contract sales revenue and related
costs resulting from termination of subcontracting services. Losses in the
fiscal years ended March 31, 1996 and March 31, 1995 were the result of the
ramp-up of production capabilities for the XP3 and fixed manufacturing costs
associated therewith. Due to the planned introduction of the XP4, these fixed
costs were not reduced after the decision to end XP3 production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $2.6 million for the nine month fiscal
period ended December 31, 1996, as compared to $2.3 million and $2.1 million for
the fiscal years ended March 31, 1996 and March 31, 1995, respectively. The
increase for the nine month fiscal period ended December 31, 1996 was due to
increased staffing, both in the U.S. and U.K. offices, associated with launch of
the XP4 product line. Selling, general and administrative expenses for the
fiscal years ended March 31, 1996 and March 31, 1995 reflect continued
investment in marketing and other staff in anticipation of the launch of the XP4
after ending production of XP3 radios. Selling, general and administrative
expenses are anticipated to continue to increase.
RESEARCH AND DEVELOPMENT. Research and development expenditures were $3.0
million for the nine month fiscal period ended December 31, 1996 as compared to
$4.5 million and $1.9 million for the fiscal years ended March 31, 1996 and
March 31, 1995, respectively. The decrease for the nine month fiscal period
ended December 31, 1996, was due to the shorter period and to the Company's
decision to reduce consulting expenses, which were partially offset by increases
in internal research and development headcount. Research and development
expenses for the nine
26
<PAGE> 29
month fiscal period ended December 31, 1996 were devoted to development of the
XP4 product line, including the development of several frequency and data rate
product variations. The Company anticipates research and development expenses
will increase as the Company focuses on new products in addition to the XP4
product line. The increase in expenses for the fiscal year ended March 31, 1996
as compared to the fiscal year ended March 31, 1995 was attributable to
increased efforts associated with development of the XP4 product line, and
increased expenditures for engineering consulting services.
OTHER INCOME (EXPENSE). Other expense for the nine month fiscal period
ended December 31, 1996 decreased as compared to the fiscal year ended March 31,
1996. Other expense decreased due to interest income from investment of proceeds
of equity financing. The increase in interest expense for the fiscal year ended
March 31, 1996 as compared to the fiscal year ended March 31, 1995 was due
primarily to higher average borrowings in anticipation of equity financings. The
Company anticipates that interest expense may increase substantially over time
if sales and, therefore, eligible accounts receivable and working capital line
borrowings, increase and the Company expands its manufacturing capacity. The
Company, however, intends to use the proceeds from the Offering to pay down
working capital borrowings and reduce interest expense.
The paragraphs entitled "Selling, General and Administrative Expenses,"
"Research and Development," and "Other Income (Expense)" in the Section entitled
"Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996,"
and the paragraphs entitled "Selling, General and Administrative Expenses,"
"Research and Development," and "Other Income (Expense)" in the Section entitled
"Nine Month Fiscal Period Ended December 31, 1996 Compared to the Fiscal Years
Ended March 31, 1996 and 1995," contain Forward Looking Statements. Actual
results could differ materially from those anticipated or projected in the
Forward Looking Statements as a result of a number of factors, including those
set forth in the Section entitled "Risk Factors." In particular, note the Risk
Factors entitled "Significant Fluctuations in Results of Operations,"
"Significant Customer Concentration; Dependence on Large Contracts," "Limited
Production Capacity; No Assurance of Successful Expansion of Operations" and
"Intensely Competitive Industry."
QUARTERLY RESULTS OF OPERATIONS
The significant fluctuations in the Company's historical quarterly
operating results are principally a function of the fact that the Company was,
until mid-1996, a development stage company. In consequence, these fluctuations
are largely explained by variation in expenses incurred in connection with the
development of the Company's XP4 systems. In addition, the historical quarterly
operating results have been affected by the launch and subsequent
discontinuation of the XP3 radio line, along with the fluctuation in revenues
received by the Company under its agreement with SAT for the subcontract
manufacture for SAT of XP3 products. The discontinuation of XP3 manufacture or
subcontract manufacture did not result in a corresponding decrease in expenses
as the Company maintained staffing levels in anticipation of the launch of the
XP4 product line. The Company may continue to experience significant quarterly
fluctuations in sales, gross margins and operating results; however, these
fluctuations are likely to be caused by different factors than those that
existed in the past, making prediction of the Company's performance difficult,
if not impossible.
In connection with its efforts to ramp up production of recently introduced
products, the Company expects to continue to make substantial capital
investments in equipment, recruit and train additional personnel, and may
increase outsourcing of components, or invest in additional manufacturing
facilities. The Company anticipates that these expenditures may be made in
advance of, and in anticipation of, increased sales and, therefore, that its
gross margins will be adversely affected from time to time due to short-term
inefficiencies associated with addition of equipment, personnel or facilities,
and that each cost category will increase as a percentage of revenues from time
to time on a periodic basis. As a result, the Company's operating results will
vary. Because of the relatively small size of the Company's customer base and
large-scale nature of the projects in which the Company's products are typically
used, revenues derived from current and future large customers and large-scale
projects will likely represent a significant portion of revenue in any given
period. Thus, a decrease in demand for products from any customer for any
reason, including the business failure of the customer or abandonment of a
particular project, may result in significant periodic fluctuations in sales.
Similarly, revenues derived from large-scale projects are often difficult to
forecast due to a relatively long time frame for implementing such projects.
Delays can be caused by late deliveries by other vendors, changes in
implementation priorities, slower than anticipated growth and declining demand
for the services that the
27
<PAGE> 30
Company's products support, and delays in obtaining regulatory approvals for
installation of such systems. Delays and reductions in the planned deployment of
systems utilizing the Company's products can also be caused by fluctuations in
the local economy, capital availability, and changes in import controls.
The Company has at times failed to fill orders on a timely basis due
principally to capacity constraints. Delay in a shipment near the end of a
particular quarter, for any reason, may cause sales in that quarter to fall
significantly below the Company's expectations and materially adversely affect
the Company's operating results for that quarter.
Additional factors that may cause the Company's sales, gross margins and
results of operations to vary significantly from period to period include: new
product introductions and enhancements, including related costs; the Company's
ability to manufacture and produce sufficient products to meet customer
requirements; limitations on the Company's manufacturing capacity; the Company's
ability to reduce costs; gain or loss by the Company of significant customers;
reduced demand for the Company's products; existing and new product development
expenses; pricing changes by the Company, its customers or suppliers; inventory
obsolescence; natural disasters or adverse weather; market acceptance and the
timing of availability of new products by the Company or its customers; use of
different distribution and sales channels; fluctuations in foreign currency
exchange rates; delays or changes in regulatory approval of the Company's
products; warranty and customer support expenses; income taxation; and general
economic and political conditions.
Because of the many factors which may affect the Company's performance in
any particular period and because the Company changed from a development stage
Company to an operating Company during its most recent fiscal year, the Company
believes that period to period comparisons are not necessarily meaningful and
should not be relied upon as indications of future performance.
The following table sets forth the unaudited results of operations for each
of the six fiscal quarters beginning January 1, 1996 and ending June 30, 1997.
In the opinion of the Company's management, this unaudited financial information
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein, when read in
conjunction with the Company's audited Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus.
Results of operations for any quarter are not necessarily indicative of the
results that may be expected for any future period. There can be no assurance
that the Company will not experience significant variations in its future
results of operations. See "Risk Factors -- Significant Fluctuations in Results
of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
1996 1997
--------------------------------------------- --------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- ------- -------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Revenues:
Net product sales............................... $ 12 $ 21 $ 373 $1,657 $ 4,910 $7,672
Manufacturing contract service revenues......... 125 42 4 7 -- --
------- ------- ------- ------- ------- -------
137 63 377 1,664 4,910 7,672
Total cost of products sold:
Cost of products sold........................... 985 900 1,097 1,689 4,081 5,489
Manufacturing contract service expenses......... 125 42 4 7 -- --
------- ------- ------- ------- ------- -------
1,110 942 1,101 1,696 4,081 5,489
Gross profit (loss)............................... (973) (879) (724) (32) 829 2,183
Operating expenses:
Selling, general and administrative............. 796 737 754 1,094 1,638 1,833
Research and development........................ 1,576 798 814 1,354 1,111 1,105
------- ------- ------- ------- ------- -------
Loss from operations.............................. (3,345) (2,414) (2,292) (2,480) (1,920) (755)
Other income (expense)............................ (70) (59) (19) (65) (199) (139)
------- ------- ------- ------- ------- -------
Net loss.......................................... $(3,415) $(2,473) $(2,311) $(2,545) $(2,119) $ (894)
======= ======= ======= ======= ======= =======
</TABLE>
28
<PAGE> 31
The following table sets forth, for the periods indicated, the unaudited
results of operations as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
1996 1997
------------------------------------------------- --------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
---------- --------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues:
Net product sales............................. 8.8% 33.3% 98.9% 99.6 % 100.0% 100.0%
Manufacturing contract service revenues....... 91.2 66.7 1.1 0.4 -- --
------- ------- ------- ------- ------- -------
100.0 100.0 100.0 100.0 100.0 100.0
Total cost of products sold:
Cost of products sold......................... 719.0 1,428.6 291.0 101.5 83.1 71.5
Manufacturing contract service expenses....... 91.2 66.7 1.1 0.4 -- --
------- ------- ------- ------- ------- -------
810.2 1,495.3 292.1 101.9 83.1 71.5
Gross profit (loss)............................. (710.2) (1,395.3) (192.1) (1.9) 16.9 28.5
Operating expenses:
Selling, general and administrative........... 581.0 1,169.8 200.0 65.7 33.4 23.9
Research and development...................... 1,150.4 1,266.7 215.9 81.4 22.6 14.4
------- ------- ------- ------- ------- -------
Loss from operations............................ (2,441.6) (3,831.8) (608.0) (149.0) (39.1) (9.8)
Other income (expense).......................... (51.1) (93.6) (5.0) (3.9) (4.1) (1.8)
------- ------- ------- ------- ------- -------
Net loss........................................ (2,492.7)% (3,925.4)% (613.0)% (152.9)% (43.2)% (11.6)%
======= ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally for capital equipment, investment
in product development activities, operations and more recently for financing
accounts receivable and inventory. To date, the Company has financed its
operations primarily from private placements of equity securities, and, more
recently, bank borrowings. During the nine month fiscal period ended December
31, 1996, and the fiscal years ended March 31, 1996, 1995 and 1994, the Company
raised $9,735,000, $6,790,000, $9,143,000 and $16,274,000, respectively from the
sale of debt and equity securities. Since December 31, 1996, the Company has
raised an additional $8.5 million from the private placement of equity
securities. Investing activities were minimal during these periods.
The Company has a credit facility with a commercial bank, which provides
for a revolving credit line and a term loan. Outstanding balances on the credit
line bear interest at the greater of the LIBOR rate in effect each month plus
4.875% per annum, or 8% per annum, and matures on October 31, 1997. The term
loan accrues interest at the same rate and is payable upon the consummation of
the Offering. The Company has used both the credit line and the term loan for
inventory, supplies and equipment in the manufacturing of XP4 products, and for
general working capital purposes.
The Company intends to use a portion of the proceeds of this Offering to
retire all outstanding borrowings under its credit facilities and to terminate
the revolving credit line and term loan. Under the revolving credit line,
outstanding balances and available borrowing capacity as of June 30, 1997 were
$4.1 million, with $38,000 available to be drawn down. There was $1.5 million
outstanding under the term loan at June 30, 1997, with no additional amount
available to be borrowed.
The Company's cash and cash equivalents increased to $3.8 million at June
30, 1997 as compared to $173,000 at December 31, 1996. Working capital increased
to $4.4 million at June 30, 1997 as compared to a negative ($300,000) at
December 31, 1996. This increase was partly due to receipt of $7.0 million in
proceeds from redeemable preferred stock during the period. Accounts receivable
increased to $5.1 million at June 30, 1997, as compared to $1.7 million at
December 31, 1996. This was the result of increased sales volumes in the six
months ended June 30, 1997. Inventories also increased to $5.9 million at June
30, 1997, as compared to $2.5 million at December 31, 1996. This increase was
related to the increase in manufacturing levels necessary to support increased
sales. The outstanding balance on the working capital line increased to $4.1
million at June 30, 1997 compared to $506,000 at December 31, 1996. Accounts
payable increased to $3.0 million at June 30, 1997 as compared to $1.9 million
at December 31, 1996 largely due to the ramp-up related to the XP4 product.
Investment in equipment and leasehold improvements in the fiscal year ended
March 31, 1996 and the nine-month fiscal period ended
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<PAGE> 32
December 31, 1996 was $1.0 million in both periods. Investment in equipment and
leasehold improvements in the six months ended June 30, 1997 was $2.8 million.
Accounts receivable increased to $5.1 million at June 30, 1997, from $1.7
million at December 31, 1996. This increase resulted from the addition of
receivables from sales of the Company's XP4 products. While the Company
anticipates that the proceeds from the Offering together with cash generated
from operations will be sufficient to finance an anticipated increase in
inventory and receivables, should receivables and inventories increase faster
than anticipated, the Company could be required to incur additional
indebtedness.
As of June 30, 1997 the Company had made $2.8 million of capital
expenditures in 1997, and plans to spend an additional $6.1 million over the
remainder of the fiscal year. The Company anticipates financing these
expenditures with the proceeds of the Offering.
The Company believes that the net proceeds of this Offering, together with
funds provided by operations, will be sufficient to meet its liquidity
requirements for at least the next 12 months; however, the Company anticipates
securing a new credit facility after the closing of the Offering, although it
has not yet contacted any lender regarding such facility or made any
determination as to the possible terms thereof. To the extent additional capital
is necessary, the Company could be required to obtain additional credit
facilities sell additional equity, debt or convertible securities. There can be
no assurance that additional financing will be available at the time or in the
amounts that may be needed, or that any financing which is available will be on
terms favorable to the Company and its shareholders.
Approximately 84% of the Company's XP4 sales through June 30, 1997 were
made to customers located outside the United States. While the operating income
the Company will rely upon to meet a portion of its liquidity needs will come in
significant part from international customers, the Company has experienced no
appreciable difference in pricing, inventory levels or receivables realization
between its domestic and international customers. Additionally, as all of the
Company's sales to date have been denominated in U.S. dollars and the Company
anticipates that this will continue for the foreseeable future, the Company's
operating revenues are not subject to appreciable exchange rate risk and the
Company has consequently not implemented any programs to specifically address
such risk.
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<PAGE> 33
BUSINESS
OVERVIEW
Innova designs, manufactures and supports millimeter wave radios for use as
short- to medium-distance wireless communication links in developed and
developing telecommunications markets. Innova's products enable
telecommunications service providers to establish reliable and cost-effective
voice, data and video communications links within their networks. Innova's
products operate in frequencies ranging from 13-38 GHz and may be used in
various applications, including cellular and PCS/PCN networks, broadband
communications, local loop services and long distance networks.
Innova's millimeter wave radio systems are designed to operate at multiple
E1/T1 rates, are based on a common system architecture and are software
configurable. Innova's radio systems consist of an Indoor Unit, which interfaces
with the user's network and is digitally linked to an Outdoor Unit, which
transmits and receives the RF signal. The common embedded software platform in
the IDU and ODU is SNMP-compliant and provides the ability to remotely monitor
and manage Innova's radios within a network using the service provider's network
management system.
Innova markets its products principally to systems integrators with a
strong regional presence in Europe, Latin America and Asia. Innova seeks to
develop strategic relationships with these systems integrators, which provide
field engineering, installation, project financing and support to service
providers. To date, Innova has entered into distribution agreements with MAS,
NERA and SAT. Innova also markets its products directly to certain service
providers in the U.S. and internationally. To date, the Company has supplied
products, either through distribution relationships or directly, to Alestra
(Mexico), Associated Communications (U.S.), Avantel (Mexico), Bouygues Telecom
(France), Globtel (Slovakia), Nortel (Canada), PacBell Mobile Services (U.S.)
and Telcel (Venezuela), among others.
INDUSTRY BACKGROUND
In recent years, worldwide demand for telecommunications services has
increased dramatically. In developed countries, much of the demand has been for
mobile services, while in developing countries demand has been principally for
basic voice service. This demand has been driven by the recognition that
effective communications enhance business productivity and can accelerate
economic growth. Demand has also been driven by the emergence of technologies
that allow the development and deployment of cost-effective, reliable
telecommunications systems.
Changes in the regulatory environment in many countries, including the
elimination of monopolies for public telecommunications services, privatization
of government-owned telecommunications organizations and allocation and
licensing of radio frequency spectrum by regulatory authorities, have led to an
increase in the number of telecommunications service providers seeking to meet
this demand. In Europe, for example, recent EU directives prohibit each member
country from restricting competitive access to mobile and local service after
January 1, 1998. In the U.S., the Telecommunications Act of 1996 mandated
competitive access to local telephone networks, and spectrum has been allocated
for five wireless carriers per market. Similar trends are occurring in
developing countries, creating significant opportunities for new entrants in the
telecommunications markets.
Telecommunications service providers are seeking to rapidly capture market
share by establishing new networks and expanding existing networks in response
to the opportunities created by deregulation, technological advances and
increasing consumer demand. As demand for telecommunications services has
increased, mobile and local service providers have committed significant amounts
of capital to the installation of network infrastructure. In developed
countries, new service providers have the option to lease network capacity from
existing service providers, but often choose not to do so since such leasing
arrangements may be with competitors, may be comparatively expensive and would
not allow the service provider to control the network. As a result, many new
service providers are seeking to build their own networks to provide new or
improved service. In addition, existing service providers have continued to
upgrade and expand their networks to respond to customer demand and increased
competition. In developing countries, both new and existing service providers
are investing heavily to build out network infrastructure to respond to the
demand for basic service.
Telecommunications links are a critical element of network infrastructure.
Service providers must choose between wireline or wireless equipment for each of
the many telecommunications links that connect various parts of their
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<PAGE> 34
networks. Wireless links are frequently used within telecommunications networks
to interconnect cell sites, switching systems, wireline transmission systems and
other fixed facilities. Wireless links generally involve relatively low initial
capital costs, and may be quickly deployed, especially in urban areas, as no
terrestrial rights of way need to be acquired or cables installed. In addition,
new wireless links can be rapidly added to upgrade or expand existing
telecommunications networks and installed links can be quickly relocated to
respond to shifts in demand.
Telecommunications infrastructure developers rely increasingly upon
millimeter wave radio systems for short- to medium-distance wireless links. The
narrower antenna-beam width of millimeter wave frequencies allows a higher
density of links in a given geographic area as compared to lower frequencies.
The atmospheric attenuation of millimeter wave frequencies also allows these
frequencies to be re-used after relatively short distances. As a result,
millimeter wave radios are particularly well-suited to provide wireless
transmission over short- to medium-distances, especially in areas of dense
usage.
The following diagram illustrates one possible application for millimeter
wave radios within a mobile telecommunications network:
LOGO
The following diagram illustrates one possible application for millimeter
wave radios within a local loop network:
LOGO
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<PAGE> 35
As millimeter wave radios have become an increasingly critical component of
telecommunications networks, service providers have focused on the quality and
lifetime ownership cost of these systems. Thus, service providers now demand
more reliable millimeter wave radios in order to reduce costly service
interruptions resulting from the failure of critical links within their
telecommunications networks. Due to increased sensitivity to aesthetic concerns,
congestion in urban environments and use of wireless systems in developing
countries, base stations are becoming smaller and are being placed in less
suitable locations. As a result, service providers now seek radio systems which
are smaller and which perform reliably under adverse conditions. In addition,
larger and more complex telecommunications networks require millimeter wave
radios which can be easily integrated with other parts of the network, avoiding
the need for multiple network management systems. Moreover, the need to rapidly
deploy and upgrade networks requires millimeter wave radios which can be easily
installed without sophisticated tools or special skills, and which can be easily
and quickly reconfigured or field upgraded.
INNOVA SOLUTION
Innova's millimeter wave radio systems are reliable, intelligent,
feature-rich and easy to install, maintain and upgrade. The Company's XP4 radio
systems have been selected for deployment by major systems integrators and new
service providers since their introduction in 1996. The Company believes its
products provide the following benefits:
Reliability. The Company develops and manufactures radio systems capable of
performing reliably under extreme temperatures. The Company believes the low
parts count, low power consumption and high tolerance to temperature extremes of
its XP4 radio systems make them inherently more reliable than competing
products. In addition, the all-digital communications interface between the XP4
radio systems' Indoor Unit and Outdoor Unit provides greater immunity to
electromagnetic and radio-frequency-induced interference.
Ease of Installation and Maintenance. The lightweight XP4 can be easily
installed by a single technician without a PC, additional software, specialized
tools or test equipment. The comprehensive embedded software program facilitates
accurate installation by alerting the installer to configuration mistakes with
blinking LEDs. The diagnostic features of the embedded software platform
simplify maintenance by permitting field technicians to determine proper
operation of an installed terminal without disconnecting the radio unit from the
antenna. The XP4 software platform allows control of the entire radio link from
either end of the link, or from a single remote location. In addition, the SNMP
interface allows operation of the entire system from a central, common network
management center. XP4 radio systems also feature a high degree of modular
commonality across frequency bands and data rates. This common architecture
reduces spare parts inventory and training costs.
Adaptability. The Company believes it is the first to provide millimeter
wave radio systems which provide an open network management capability, thereby
facilitating inclusion of the systems into a variety of telecommunications
networks. Innova's compact XP4 radio systems are designed to occupy less space
and are well-suited to operate in various settings where small size and
resistance to temperature extremes are necessary. The high immunity to
interference provided by the digital communications link between the IDU and the
ODU also allows the XP4 to be deployed in less suitable sites currently
prevalent in developing countries and congested urban areas.
Ease of Reconfiguration and Upgradeability. Common hardware and a common
software platform across all XP4 radio systems facilitate integration into
network management systems and provide remote reconfiguration and upgrade
capabilities. The comprehensive embedded software platform common to all of
Innova's XP4 radio systems allows network operators to download new code into
the radio units without interrupting traffic or upgrading each unit on site. The
ability to easily reconfigure and upgrade the XP4 systems allow service
providers to enhance and expand their networks without having to replace
installed XP4s.
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<PAGE> 36
INNOVA STRATEGY
Innova's objective is to be a leading provider of digital millimeter wave
radios. Innova intends to address the needs of major systems integrators using
millimeter wave radios for wireless connectivity solutions in mobile and local
loop networks, including broadband capability. Innova's strategy includes the
following key elements:
Continue To Focus on Millimeter Wave Radio Market. The Company intends to
continue to focus its product development efforts on new and existing
point-to-point millimeter wave radios, and to maintain its competitive advantage
by continuing to focus its development efforts on small, lightweight systems
which perform reliably at extreme temperatures and can be produced, installed
and maintained on a cost-effective basis. The Company believes it was the first
to provide millimeter wave radio systems with a SNMP-compliant architecture, and
that it was the first to develop, produce and deliver 24 GHz equipment for use
in the U.S. market in response to allocation of 24 GHz spectrum by the FCC. The
Company intends to further expand the frequency range and traffic capacity of
its systems, and is in the process of developing prototypes of possible products
designed for new applications and upgrades of several of the existing products.
Expand Distribution Through Strategic Relationships. The Company intends to
expand the geographic coverage and increase the market penetration of its
products by strengthening existing, and establishing new, strategic
relationships with major systems integrators with strong regional presences
throughout the world. The Company believes that the cost-effective architecture
of its products provides a competitive advantage in developing relationships
with major systems integrators. The Company intends to focus on further reducing
the cost of its radio systems to maintain that advantage. The Company also
believes that service providers will rely more often on third parties to supply
and build their network infrastructure and, therefore, that its relationships
with major systems integrators will become increasingly important. The Company
believes the ability of many major systems integrators to offer financing on
larger projects, and supply complementary products and services necessary to
build telecommunications networks, facilitates sales of the Company's products.
Leverage System Architecture. The Company intends to leverage its system
architecture to realize efficiencies in its product design, assembly and test
processes. The Company believes these attributes will enable the Company to be
first to market with new, reliable products that are cost-effective and meet the
evolving demands of systems integrators and service providers. The Company plans
to continue to design its system architecture to minimize the number of
components in each system and to maximize the use of common components across
the full range of the Company's products. The Company believes its use of common
modules, components and a common software platform facilitates product
enhancement and new product development by reducing the number of components
that need to be re-engineered.
Simplify Product Assembly and Test Processes. The Company continually seeks
to refine and simplify its product design and assembly, calibration and test
processes, which are the most significant components of production cost. The
Company believes its rigorous testing processes, including operation of radio
systems at extreme temperatures and use of proprietary software and test
stations, provide a significant competitive advantage. The Company intends to
continue to develop software that increases automation and process reliability
and improves productivity. The Company also believes that increased automation
could allow it to reduce dependence on skilled labor and enable it to establish
additional manufacturing facilities in developing markets to increase market
opportunity.
PRODUCTS
The Company's radio systems are designed to operate in millimeter wave
bands used for the transmission of voice, data and video traffic over short- to
medium- distances. The Company's XP4 products are based on a common system
architecture and are software configurable. The Company's XP4 systems operate at
data rates up to and including 4E1 and 4T1, and have been certified for use in
the Czech Republic, France, Germany, Mexico, Slovakia, the U.K. and the U.S.
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The following table provides transmission distances and the number of
access lines offered by the 13 GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz and 38 GHz
systems currently being marketed by the Company.
XP4 PRODUCT LINE
<TABLE>
<CAPTION>
NUMBER OF ACCESS LINES
-----------------------------
FREQUENCY IN 2E1/4E1 AND 4T1 OR OPERATIONAL
GHZ 4E1/8E1(1) 4T1/8T1(1) RANGE IN MILES
- ------------ ----------- ------------- --------------
<S> <C> <C> <C>
13 Yes Yes 15
15 Yes Yes 15
18 Yes Yes 10
23 Yes Yes 6
24 No Yes 5
26 Yes No 5
38 Yes Yes 3
</TABLE>
- ---------------
(1) The Company expects that the 8E1 and 8T1 configurations will be available
for volume shipments during the third quarter of 1997.
The Company's products are designed to connect to the end user's network
through multiple high-capacity lines. In transmission mode, the Company's Indoor
Unit accepts the customer's traffic from these multiple lines. The
microprocessors in the IDU then combine the multiple signals into a single,
digital signal, which is combined with data used to control functions and
parameters of the radio link, and digitally transmitted over a single coaxial
cable to the Outdoor Unit. The frequency shift key ("FSK")
modulator/demodulator, housed in the ODU, converts the digital signal into the
appropriate radio frequency. The RF signal is then fed into the hybrid
"transmit" module, which increases the signal to the transmitting frequency. The
high-frequency, millimeter wave signal is then passed through a diplexer filter
to the antenna and broadcast to the receiving unit. In receive mode, the signal
is passed from the antenna through the diplexer filter to the hybrid "receive"
module, where the signal is amplified and stepped down to a lower frequency. The
signal is then passed through the demodulator and converted into a digital
signal, before being routed down the coaxial cable to the IDU. In the IDU, the
end user's traffic is separated from the system control data and delivered to
multiple lines for transmission to the end user's network.
The diagram below depicts a millimeter wave radio link. Each radio system
consists of an Indoor and an Outdoor Unit which are described more fully in the
following paragraphs.
[DIAGRAM]
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Indoor Unit. The IDU is the interface to the user's network. It is an
assembly mounted indoors, or in a base station, that contains digital signal
processing electronics, including line interface and digital multiplexing
circuitry. The IDU also includes the alarm and diagnostic ports, service channel
and SNMP-compliant network management capability. The IDU provides for the
ability to set capacity, frequency and power output of the radio link through
software configuration without requiring access to the outdoor unit.
Configuration of the Company's radio systems, including frequency
selection, power output setting, capacity and link ID, along with alarm
monitoring and receive signal level indications, are performed using the
five-button keypad located on the front panel of the IDU, or by using a PC and
the Company's proprietary XPView software interface. In contrast, many competing
millimeter wave systems require mechanical adjustment and manual tuning, which
involve sending maintenance personnel with test equipment to the radio's
installed location. Software embedded in the Company's radio system also
facilitates upgrades of system capacity, with minimal hardware changes.
Outdoor Unit. The ODU consists of a lightweight, compact, integrated RF
electronics enclosure that attaches directly to an antenna. The RF enclosure
contains electronics that, when transmitting, convert, modulate and amplify the
digital signal received from the IDU. Typically, the ODU is installed outdoors
on a tower or rooftop. A simple latch secures the ODU to the antenna, allowing
for vertical or horizontal installation, and permits removal of the ODU without
tools and without affecting antenna alignment.
Software. The Company's embedded software platform is common to all XP4
frequency bands and capacity models. It enables control of user configurable
features from the five-button keypad on the IDU. The embedded software code is
also compatible with the Company's custom manufacturing test and calibration
software. This approach facilitates automation of the final test process by
enabling adjustments to equipment parameters through software commands, rather
than the traditional method of manual dip-switches or pots.
The Company's XPView software provides a remote means of configuring the
Company's radio systems, as well as providing for advanced diagnostics and
maintenance capabilities, including code downloading. The optional SNMP feature
is implemented via a small plug card in the IDU which provides Ethernet, RS232,
and RS422 communication ports for remote link control and remote collection of
status and alarm data.
The diagram below depicts the internal system architecture of Innova's
millimeter wave radio system.
[DIAGRAM]
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SYSTEM ARCHITECTURE
The Company's system architecture is designed to offer advantages in
reliability, cost, installation and maintenance when compared to competitive
systems. The Company employs a common set of modules and components for all data
rates and frequencies with the exception of the transmit and receive modules and
diplexer filters. This substantially simplifies the logistics of customer
support, purchasing, and manufacturing. The Company incorporates the four-level
FSK modulator/demodulator into the ODU, rather than including it in the IDU. The
Company believes this results in a more reliable design by permitting digital
communications between the IDU and ODU, thereby reducing interference from EMI
or ground loop, by permitting filtering of undesirable noise and eliminating
cable equalization circuitry completely. This also reduces the electronics
contained in the IDU, resulting in a compact indoor unit which occupies only one
rack unit mounting space in telecom cabinets or base stations.
The Company's ODU uses advanced miniature, multifunction transmit or
receive hybrid modules which provide for lower power consumption, smaller size
and fewer interconnection cables or assemblies than conventional millimeter wave
radio systems. In addition the Company's proprietary compact diplexer filter
design eliminates the need for bulky separate transmit and receive filters and
an associated circulator. This design approach results in a lighter, more
compact ODU than competing systems.
The embedded software platform reduces the number of manufacturing models
by facilitating production of radio systems for use with varying frequency plans
in different countries. In contrast, traditional systems require hardware
variations to adjust to different frequency plans in each country. In addition,
each ODU will support multiple traffic capacities without any hardware changes,
as these modifications are also governed by software. Transmit power level is
also controlled electronically from the IDU. As a result, no field adjustments,
switch settings or other modifications are required to operate an ODU within its
designated tuning range regardless of frequency plan, traffic capacity or
transmitter output power. The intuitive built-in software interface permits
terminal configuration without extensive training or special tests using the
five-button keypad on the face of the IDU. The embedded software platform also
facilitates accurate installation by alerting the installer to mistakes with
blinking LEDs. Software configurability enables the provision of advanced field
diagnostic tools such as RF terminal loopback. In this mode, the transmitter is
tuned to the frequency of the local receiver, enabling operation of the terminal
in RF loopback and verification of proper, error-free performance. In order to
perform similar functions, competing systems require either the use of a bulky,
external turnaround oscillator or the use of complex, internal mechanical
assemblies.
CUSTOMERS
The Company's customers consist principally of systems integrators, which
incorporate XP4 radio systems into a variety of telecommunications networks to
be sold to telecommunications service providers. Systems integrators may also
provide engineering and installation services and project financing for service
providers. These systems integrators develop the network design and provide the
field effort necessary to install, commission and maintain the Company's
systems. Systems integrators are extensively used by fixed and mobile service
providers in Europe, Asia and developing countries. The Company also sells its
products directly to service providers, principally in North America. Service
providers can use the Company's products for various applications, including
cellular and PCS/PCN networks, broadband communications, local loop services,
and access to long distance networks. As of June 30, 1997, 76% of the Company's
sales have been to systems integrators, with the remaining 24% being made
directly to service providers.
The systems integrators and service providers set forth below have each
placed significant orders for XP4 radios since introduction of the product line
in the quarter ended September 30, 1996. The Company has also received orders
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for lesser quantities, principally for use as demonstration units, from Bosch
Telecom, Lucent Technologies, MAS and Mitec.
<TABLE>
<CAPTION>
SYSTEMS INTEGRATORS SERVICE PROVIDERS
---------------------------- -------------------------------------
<S> <C>
Ericsson Alestra (Mexico)
NERA Associated Communications (U.S.)
Nortel Avantel (Mexico)
SAT Bachow Communications (U.S.)
Simtel Bouygues Telecom (France)(1)
Globtel (Slovakia)(1)
Iusacel (Mexico)
PacBell Mobile Services (U.S.)
Telcel (Venezuela)(1)
</TABLE>
- ---------------
(1) Indicates service providers that purchased equipment from a systems
integrator.
To date, approximately eighteen customers have accounted for all of the
Company's sales of XP4 systems. Sales to Associated Communications, Bachow
Communications and Nortel accounted for approximately 15%, 12% and 44% of the
Company's XP4 sales, respectively, in calendar 1996. For the six months ended
June 30, 1997, Associated Communications, Nortel and SAT accounted for 12%, 44%
and 33%, respectively, of the Company's XP4 sales, and as of June 30, 1997, two
customers, Nortel and SAT, accounted for approximately 27% and 40%,
respectively, or an aggregate of 67%, of the Company's backlog scheduled for
shipment in the six months subsequent to June 30, 1997. Paul Bachow, a director
and greater-than-10% beneficial owner of the Company's Common Stock, is the only
shareholder and the President of Bachow Communications. SAT is a greater-than-5%
beneficial owner of the Company's Common Stock. See "Principal Shareholders" and
"Certain Transactions." The Company has entered into agreements with SAT for
exclusive distribution in France, Italy, Poland, Hungary, Andorra and Monaco and
non-exclusive distribution in other countries; with NERA, for distribution
principally in Asia, Latin America and parts of Europe; and with MAS for
distribution principally in New Zealand and Southeast Asia. The Company has also
sold a significant portion of its products to Nortel. The Company anticipates
that its sales will continue to be to a relatively small group of customers,
consisting principally of international systems integrators and, in North
America, service providers. For the nine month fiscal period ended December 31,
1996, 50% of total sales were to a single customer in Canada, and 50% and 28% of
total sales for the six months ended June 30, 1997 were to a single customer in
each of Canada and France, respectively. See Note 13 to Consolidated Financial
Statements.
The Company's ability to achieve or increase its sales in the future will
depend in significant part upon its ability to obtain and fulfill orders from
existing and new customers and maintain relationships with and provide support
to existing and new customers, its ability to manufacture systems on a timely
and cost-effective basis and to meet stringent customer performance and other
requirements and shipment delivery dates. As a result, any cancellation,
reduction or delay in orders by, or shipments to, any customer, as a result of
manufacturing difficulties or otherwise, may have a material adverse effect upon
the Company's business, financial condition and results of operations. There can
be no assurance that the Company's sales will continue to increase in the future
or that the Company will be able to retain and support existing customers or to
attract new customers.
DISTRIBUTION RELATIONSHIPS
The Company markets its products principally to systems integrators with a
strong regional presence in countries in Europe, Latin America and Asia. The
Company believes these relationships are a critical component of its ability to
include its systems in major network buildout projects. To date, the Company has
entered into agreements with NERA and SAT (the material terms of which are
dicussed below) as well as other system integrators.
NERA Arrangements. NERA ASA has entered into an OEM Purchase and Limited
Licensing Agreement with the Company (the "NERA Agreement") to purchase at least
$5 million of XP4 product kits and components prior to May 30, 1998. The NERA
Agreement authorizes NERA and its affiliated companies to purchase products from
the Company on most-favored-customer pricing and terms and to distribute such
products on a non-exclusive basis in all countries other than France, Hungary,
Poland, Italy, Monaco and Andorra (collectively, the "SAT Territories"), where
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<PAGE> 41
sales by NERA are to be coordinated with SAT on a case-by-case basis. Under the
NERA Agreement, the Company and NERA have committed to cooperative development
of certain new XP4 products and features, and the Company has granted NERA
certain design approval rights, as well as testing rights on XP4 kits purchased
from the Company. The Company has also granted NERA a royalty-free right to
manufacture and test XP4 indoor units solely for sale with the Company's outdoor
units; and a royalty-bearing right to use the Company's designs and technologies
for the purpose of manufacturing XP4 products, effective only upon the
occurrence of one of the following restrictive conditions: (i) the failure of
the Company to timely deliver products for over two months, (ii) the bankruptcy,
termination of business or dissolution of the Company, or (iii) the termination
of manufacturing and promotion by the Company of XP4 products under the NERA
Agreement. The NERA Agreement provides for the Company to pay penalties for late
delivery, to the extent NERA is obligated to make penalty payments to its
customers due to the late delivery. The NERA Agreement has a five-year term
expiring May 30, 2002, at which time all distribution, manufacturing and other
rights will terminate. However, the Company's warranty, maintenance and repair
obligations survive termination. NERA is obligated, during the term of the
agreement and for a two-year period following its termination, not to develop,
manufacture or sell any product based on the Company's products or technologies,
except as described above. The Company also is considering outsourcing some
circuit board assembly to NERA's Singapore facility.
SAT Arrangements. The Company has entered into a Cooperation Agreement with
SAT under which it has granted distribution rights to SAT for its XP4 products,
including exclusive rights in the SAT Territories and non-exclusive rights in
all other countries except in North America, Australia and New Zealand. The
Cooperation Agreement prohibits the Company from selling XP4 products directly
or indirectly in any of the SAT Territories. The Cooperation Agreement also
grants distribution rights to the Company with respect to certain SAT products;
assures each of the parties most-favored-customer pricing and terms; specifies
the maximum production capacity required to be allocated to SAT by the Company;
assures SAT access to the Company's supply relationships for custom design parts
and components, on comparable commercial terms; grants SAT the right to
advertise the XP4 products as its own; and provides for cooperation in the
development of certain features of the Company's XP4 product line, and sharing
of technical data on an ongoing basis, subject to confidentiality and other
restrictions on use.
The Cooperation Agreement also grants SAT a right to immediate use of the
Company's XP4 designs and technologies for the purpose of developing and
manufacturing (i) any product below 15 GHz within the SAT Territories and (ii)
certain products above 15 GHz, subject to limitations as to the place of
manufacture and, in certain cases, to quantity limitations. SAT is also granted
additional rights to use the Company's designs and technologies for the purpose
of manufacturing certain other XP4 products, subject to limitations as to the
place of manufacture but without quantity limitations. These additional rights
are effective only upon the occurrence of certain failures by the Company to
perform certain obligations under the Cooperation Agreement, such as failure of
the Company to timely deliver a minimum percentage of products for over three
months, discontinuation of manufacture of products, wrongful rejection of
purchase orders or failure to afford SAT "most favored customer" terms. In any
such case, the Company's failure must involve at least $100,000 of products. SAT
is required to pay specified royalties to the Company on products manufactured
pursuant to both its conditional and unconditional rights. The Cooperation
Agreement has an initial term of 5 years, expiring October 31, 2001, but is
automatically renewed for successive five-year terms unless terminated by either
party with one year's notice. Upon expiration of the initial term or upon
termination of the Cooperation Agreement due to an uncured material breach by
the Company, all manufacturing rights which are at that time effective will
become irrevocable and fully paid, and SAT will thereafter be entitled to
manufacture certain XP4 products free of any royalties or other compensation to
the Company.
In conjunction with the Cooperation Agreement, the Company and SAT have
also entered into a Master Purchase Agreement which includes confidential
conditional commitments by SAT to purchase a fixed number of XP4 products in
various frequencies and configurations from the Company within an initial
specified period, and to purchase a specified dollar amount of XP4 products
within a subsequent specified period. The Master Purchase Agreement contains
other provisions regarding product acceptance testing procedures applicable to
SAT's purchase commitment. See "Certain Transactions -- XP4 Product
Arrangements."
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<PAGE> 42
RESEARCH AND DEVELOPMENT
The Company has an ongoing research and development program to enhance its
existing products and to introduce new products. The Company invested
approximately $4.5 million and $1.9 million in the fiscal years ended March 31,
1996 and 1995, respectively, and $3 million in the nine month fiscal period
ended December 31, 1996 in research and development efforts. Research and
development expense decreased to $2.2 million for the six months ended June 30,
1997 as compared to $2.4 million for the six months ended June 30, 1996. This
decrease was due primarily to savings realized upon transfering research and
development functions from consultants to Company employees. The Company expects
to continue to invest significant resources in product research and development.
The Company's research and development efforts focus on using existing
product architectures and technology to maintain commonality and minimize
time-to-market for new products and enhancements. The Company's research and
development efforts are currently focused on developing additional models of the
Company's XP4 product line to address higher capacity applications and greater
modulation efficiency, and on leveraging the Company's temperature resistant
technology to develop a low-cost, all-outdoor radio, and the Company has
developed prototypes of these products. The common architecture of the Company's
XP4 products, by limiting the number of new components needed to develop
products or new frequencies, also allows the Company to react quickly to
changing regulatory environments. The Company was the first manufacturer to
develop and ship radios operating in the 24 GHz range in response to the recent
licensing of the 24 GHz spectrum in the U.S. The Company's research and
development efforts continually strive to enhance software features contained in
its products, and to develop products which can be manufactured in a simple and
cost-effective manner.
The wireless communications market is subject to rapid technological
change, frequent new product introductions and enhancements, product
obsolescence, changes in customer requirements and evolving industry standards.
To be competitive, the Company must successfully develop, introduce and sell new
products or product enhancements that respond to changing customer requirements
on a timely and cost-effective basis. Any success of the Company in developing
new and enhanced products will depend on a variety of factors including: timely
and efficient completion of system design; timely and efficient implementation
of assembly, calibration, and test processes; development and completion of
related software; the reliability, cost and quality of its products; market
acceptance; and development and introduction of competitive products by
competitors. The Company has experienced and may experience delays from time to
time in completing development and introduction of new products. Moreover, there
can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products or product enhancements.
The inability of the Company to introduce in a timely manner new products or
product enhancements that contribute to sales could have a material adverse
effect on the Company's business, financial condition and results of operations.
MANUFACTURING
The Company performs final assembly and test, quality assurance, packaging
and shipping at its facility in Seattle, Washington. The Company purchases all
of the circuit boards, integrated circuits and other components used in its
products from third-party suppliers. The Company inspects these components for
quality, groups the components into kits by production order and ships the kits
to its subcontractors for initial assembly. As a result of the use of common
components across the full range of XP4 products, the Company's manufacturing
process is flexible and can accommodate significant changes in the frequency or
data rate of radios produced on a daily basis. This flexibility also reduces the
Company's need to maintain a large inventory of finished goods, as radios may be
produced to meet specific customer requirements without the need for significant
lead times, setup costs or changes to the manufacturing process.
The Company designs its products to provide a high degree of reliability.
The Company inspects and tests its products during the assembly process and
tests finished products using internally developed procedures. The Company
believes its testing procedures at extreme temperatures are among the most
rigorous in the industry. The Company's quality inspection and testing also
include "burn-in" procedures throughout the assembly process to ensure the
quality and reliability of the Company's products. The Company has extensively
invested in computerized test stations reducing dependency on skilled labor and
facilitating a gradual increase in capacity. The Company believes that its
practice of conducting all testing and calibration internally has contributed to
the reliability of its products.
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The Company believes the reliability of its XP4 radio systems is the result of
its quality assurance procedures. The Company received ISO 9001 certification in
May 1996.
Certain parts incorporated in the Company's products are only available
from a single source, including the field programmable gate arrays supplied by
Xilinx, MMICs and hybrids of certain frequencies supplied by Hewlett-Packard,
saw filters supplied by Sawtek, microprocessors supplied by Motorola and power
supplies supplied by Calex and incorporated in the Company's products. Certain
other parts and components used in the Company's products are available from a
limited number of sources. The Company's reliance on these single source or
limited source suppliers involves certain risk and uncertainties, including the
possibility of a shortage or discontinuation of certain key components and
reduced control over delivery schedules, manufacturing capability, quality and
cost. Any reduced availability of such parts or components when required could
materially impair the Company's ability to manufacture and deliver its products
on a timely basis and result in the cancellation of orders which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the purchase of certain key components
involves long lead times and, in the event of unanticipated increases in demand
for the Company's products, the Company may be unable to obtain such components
in sufficient quantities to meet its customers' requirements. The Company has
established dual sources for transmit and receive hybrids with Hewlett-Packard
Company ("Hewlett-Packard"), among others, through blanket order arrangements
covering estimated requirements for 1997 and 1998. The Company does not have
guaranteed supply arrangements with many of its single or limited source
suppliers, does not maintain an extensive inventory of parts or components and
customarily purchases single or limited source parts and components pursuant to
purchase orders. Business disruptions, production shortfalls or financial
difficulties of a single or limited source supplier could materially and
adversely impact the Company by increasing product costs, or reducing or
eliminating the availability of such parts or components. In such event, the
inability of the Company to establish alternative sources of supply quickly and
on a cost-effective basis could materially impair the Company's ability to
manufacture and deliver its products on a timely basis and could have a material
adverse effect on its business, financial condition and results of operations.
SALES, MARKETING AND CUSTOMER SUPPORT
Innova's sales and marketing efforts are headquartered in the Company's
executive offices in Seattle, Washington. The Company has also established and
staffed small sales, service and customer support facilities in Shirley,
England. In addition, the Company has one sales and customer support
representative in Nashua, New Hampshire and Dallas, Texas. The Company has
recently opened a service and support facility in Mexico City, Mexico. The
Company may increase its overseas presence by opening sales and support offices
in countries not served by its distribution partners. The Company markets its
products directly to service providers in North America and certain other
countries. The Company believes that the contact it achieves with service
providers through such direct sales provides valuable feedback on product
performance and customer needs, which assists the Company in developing new and
enhanced products. The Company promotes its products through participation and
exhibition at trade shows in North America and through promotion of its products
by its system integrators in Europe and Asia.
The Company believes that the ability of its customer service personnel to
work with systems integrators in resolving any technical problems experienced by
service providers is fundamental to its success. Although system integrators are
responsible for providing customer support to the service providers, the
Company's technical support team must work closely with the systems integrator's
support personnel to promptly and efficiently identify and resolve technical
issues.
If the Company is selected to submit a proposal or bid by a new customer,
the Company may also be required to conduct system trials or provide units for
customer approval. If system trials or testing are required and successfully
completed, the Company then negotiates a contract with the customer to set
technical and commercial terms of sale. The Company generally targets systems
integrators that are involved in multiple projects including large quantities of
radios. Once a radio system has been tested by a systems integrator, determined
to meet its specification and designed into a service provider's network,
further testing or contract negotiations are generally not required for
successive orders from that systems integrator, substantially shortening the
sales cycle. The process for sales directly to service
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providers by the Company is similar to the sales process for the first sale to a
systems integrator, in that it may involve field trials, contract negotiation,
and take from three to six months to complete.
COMPETITION
The wireless communications market is intensely competitive. The Company's
millimeter wave radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media. The principal
competitive factors in this market include product performance and reliability,
ability to meet delivery requirements, price, and product features. The Company
believes that the relatively small size, light weight, low parts count and low
power consumption of its XP4 products, together with the embedded software
platform contained in those products, should allow the Company to compete
favorably with its principal competitors in terms of the reliability,
adaptability, upgradeability and ease of installation of its products. The
Company experiences intense competition worldwide from a number of leading
telecommunications companies that offer a variety of competitive products and
broader telecommunications product lines, including Alcatel Network Systems,
California Microwave, Inc., Digital Microwave Corporation, Ericsson Limited,
Harris Corporation -- Farinon Division, Nokia Telecommunications and P-COM,
Inc., most of which have substantially greater installed bases, financial
resources and production, marketing, manufacturing, engineering and other
capabilities than the Company. The Company may also face competition in the
future from new market entrants offering competing technologies. In addition,
the Company's current and prospective customers, including Nortel, and certain
others which have access to the Company's technology or under some circumstances
are granted the right to use the technology for purposes of manufacturing, could
develop or manufacture products competitive with those that have been or may be
developed by the Company. The Company's future results of operations may depend
in part upon the extent to which the Company's customers elect to purchase from
outside sources rather than develop and manufacture their own radio systems.
There can be no assurance that such customers will rely on or expand their
reliance on the Company as an external source of supply for their radio systems.
Recently, certain of the Company's competitors have announced the
introduction of competitive products, and the acquisition of other competitors
and competitive technologies. Within the near future, the Company expects its
competitors to continue to improve the performance and lower the price of their
current products, and to introduce new products or new technologies that provide
added functionality and other features that may or may not be comparable to the
Company's products, which could cause a significant decline in sales or loss of
market acceptance of the Company's systems, or render the Company's systems or
technologies obsolete or noncompetitive. The Company expects to continue to
experience significant price competition that may materially adversely affect
its gross margins and its business, financial condition and results of
operations. The Company believes that to be competitive, it will continue to be
required to expend significant resources on, among other items, new product
development, and product enhancement and cost reduction. There can be no
assurance that the Company will be able to compete successfully.
GOVERNMENT REGULATION
Radio communications are subject to extensive regulation by foreign and
U.S. laws and international treaties. The Company's systems must conform to a
variety of international and domestic requirements established to, among other
things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. In order for the Company's radios to be used in a
foreign jurisdiction, regulatory approval for its systems must be obtained and
end users must comply with such regulations. Regulatory bodies worldwide are
continuing the process of adopting new standards for wireless communication
products. The delays inherent in this governmental approval process may cause
the cancellation, postponement or rescheduling of the installation of
communications systems by the Company's customers, which in turn may have a
material adverse effect on the sale of systems by the Company to such customers.
The Company's arrangements with its distributors generally provide for the
distributor to obtain the regulatory approvals applicable to use of the
Company's products in the countries into which they are sold by the
distributors. The Company believes that its XP4 products currently comply with
all applicable U.S. and foreign regulations in countries in which its sales are
material, but changes in these regulations, the need to comply with regulations
in additional countries in the event of sales into those countries, or a failure
by the Company's distributors to obtain necessary approvals or permits in
connection with sales to service providers in a country could require the
Company to change the features of its radio systems and thereby incur
substantial costs and experience delays in radio system
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installation or operations by systems integrators or service providers in
countries in which its sales are material. Failure of the Company's radio
systems to comply with current or future regulations could result in delay,
suspension or cessation of radio systems installation or operations by systems
integrators or service providers. Such regulations could require the Company to
change the features of its radio systems and incur substantial costs and
experience delays to comply with such time-consuming regulations. Equipment to
support new services can be marketed only if permitted by suitable frequency
allocations, auctions and regulations, and the process of establishing new
regulations is complex and lengthy. To the extent systems integrators or service
providers are delayed in deploying these systems, the Company could experience
delays in orders. These delays could have a material adverse effect on the
Company's business, financial condition and results of operations.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting network deployment efforts by the Company's customers
or end users, making current systems obsolete or increasing the opportunity for
additional competition. Any such regulatory changes could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company might deem it necessary or advisable to modify its
products to operate in compliance with such regulations. Such modifications
could be extremely expensive and time-consuming.
INTELLECTUAL PROPERTY
The Company relies on technological innovations, trade secrets and
expertise to develop and maintain its competitive position, and upon
confidentiality procedures, common law remedies and contractual provisions to
protect its proprietary rights. The Company does not hold any patents regarding
the technology and expertise involved in the assembly, calibration and testing
of its XP4 products. The Company has applied for patents on various elements of
its radio systems. There can be no assurance, however, that such pending patent
applications will ultimately issue as patents or, if patents do issue, that the
claims allowed will be sufficiently broad to protect the Company's proprietary
rights or provide any competitive advantage. In addition, there can be no
assurance that issued patents or pending applications will not be challenged or
circumvented by competitors, or that rights granted will provide any competitive
advantage to the Company. The Company's agreements with its distributors
generally contain non-competition and non-disclosure provisions prohibiting the
distributor from manufacturing products based on the Company's designs for the
term of the agreement and for a short period thereafter. In general, the Company
has not entered into non-competition agreements with its management and other
employees or into confidentiality and non-disclosure agreements with system
integrators or service providers. Furthermore, it is likely that the Company's
competitors can obtain samples of the Company's products and, through reverse
engineering, obtain access to proprietary knowledge regarding the Company's
product designs.
The Company's success will depend in part on its ability to protect its
technology and preserve its trade secrets through common law and contractual
restrictions. There can be no assurance that the trade secrecy or other measures
taken by the Company will be adequate to prevent misappropriation of its
technology, or that competitors will not be able to independently develop
technologies having similar or better functions or performance characteristics.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the U.S. There can be no
assurance that the Company will have adequate legal remedy to prevent or seek
redress for future unauthorized misappropriation of the Company's technology.
The telecommunications industry is characterized by rapid technological
change, with frequent introductions of new products and technologies. As a
result, industry participants often find it necessary to develop products and
features similar to those introduced by others, increasing the risk that their
products and processes may give rise to claims that they infringe the patents of
others. Accordingly, the Company's current and future products and processes, or
uses thereof, may conflict with patents that have been granted or may be granted
to competitors or others. Such competitors or others could bring legal actions
against the Company or its customers, claiming damages and seeking to enjoin
manufacturing, marketing or use of the affected product or processes. Similarly,
the Company may in the future find it necessary to commence litigation in order
to enforce and protect its proprietary rights. If the Company becomes involved
in any such litigation, it could consume a substantial portion of the Company's
resources and result in a significant diversion of management attention. If the
outcome of any such litigation were adverse to the Company or its customers, its
business, financial condition and results of operations could be materially
adversely affected. In
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addition to any potential liability for damages, the Company or its customers
could be enjoined from continuing to manufacture, market or use the affected
product or process, and could be required to obtain a license in order to
continue such manufacture, marketing or use. There can be no assurance that the
Company or its customers would prevail in any such action or that any license
required under any such patent would be made available on acceptable terms, if
at all.
EMPLOYEES
As of June 30, 1997, the Company employed 138 full-time and temporary
employees. None of the Company's employees is represented by a collective
bargaining agreement. The Company's future performance will depend in large
measure on its ability to attract and retain highly skilled employees. The
Company has never experienced a work stoppage and believes its relationship with
its employees to be good.
FACILITIES
The Company's corporate offices and research, development and manufacturing
facilities are located in Seattle, Washington, in two leased buildings
aggregating approximately 60,000 square feet. The Company also leases 2,200
square feet of office space in Shirley, England. The Company believes its
facilities are adequate to meet its needs for the next 12 months.
BACKLOG
The Company's backlog was approximately $11.6 million as of June 30, 1997.
The Company includes in backlog only customer commitments for which it has
received signed purchase orders and assigned shipment dates within the following
180 days. The Company's experience has been that customers generally request
shipment within 60 days of their order date. Customer orders have exceeded the
Company's ability to manufacture radio systems. The Company intends to increase
its manufacturing capacity and believes that backlog will decrease, as a
percentage of sales, as the Company becomes able to fill orders on a more timely
basis. Moreover, substantially all of the product orders comprising the
Company's backlog scheduled for shipment in the next six months can be canceled
with limited or no penalties at any time before shipment. Thus, backlog may not
result in revenues or, as of any particular date, be a reliable indicator of
sales for any future period.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
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MANAGEMENT
The members of the Board of Directors, executive officers and other key
employees of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------- --- -------------------------------------------
<S> <C> <C>
President, Chief Executive Officer and
Jean-Francois Grenon.............. 41 Director
V. Frank Mendicino(1)............. 58 Chairman of the Board of Directors
Executive Vice President -- Sales and
Colin J.R. Pallemaerts............ 67 Marketing
Barbara J. Williams............... 53 Chief Operating Officer
John M. Hemingway................. 50 Secretary and Chief Financial Officer
Randy J. Karr..................... 40... Vice President -- Manufacturing
Paul H. Lemson.................... 50... Director of Engineering
Patric W. McDonald................ 59 Chief Technical Officer
William J. Meighan................ 50 Director of Quality Assurance
Paul S. Bachow(1)................. 46 Director
Frances N. Janis(2)............... 38 Director
Harold O. Shattuck(1)(2).......... 60 Director
Bernard D. Tarr, Jr.(2)........... 37 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
EXECUTIVE OFFICERS AND DIRECTORS
JEAN-FRANCOIS GRENON joined the Company in February 1996 as its President
and Chief Executive Officer, and has served as a Director of the Company since
June 1996. From March 1994 to December 1995, Mr. Grenon served as President of
Microwave Radio Corporation, Digital Radio Group, a division of California
Microwave Radio that he helped found, which develops and manufactures digital
millimeter wave radios. From April 1990 to March 1994, Mr. Grenon served as Vice
President and General Manager of Microwave Radio Corporation, a developer of
microwave radio transmission equipment. Mr. Grenon holds an MBA from Harvard
Business School and a BSEE from Ecole Polytechnique, Universite de Montreal.
V. FRANK MENDICINO has served as a Director of the Company since July 1989
and as its Chairman since February 1992. Since 1983, Mr. Mendicino has served as
a General Partner of Woodside Fund, Woodside Fund II and Woodside Fund III, each
of which is a private investment fund. He has also served as a director of over
15 private companies.
COLIN J.R. PALLEMAERTS joined the Company in 1992 and now serves as
Executive Vice President of Sales and Marketing. From November 1991 to April
1992, Mr. Pallemaerts served as Vice President of Marketing at P-Com, a
manufacturer of millimeter wave radio equipment. From January 1989 through
November 1991, he served as Vice President International Marketing for Digital
Microwave Corporation, a leading manufacturer of digital microwave systems. Mr.
Pallemaerts holds a Higher National Certificate in Electrical Engineering from
the Mid Essex Technical College and is a Graduate Member of the British
Institute of Electrical Engineers, a BSEE equivalent.
BARBARA J. WILLIAMS has served as the Company's Chief Operating Officer
since November 1995. From May 1995 to November 1995, she served as the XP4
Project Manager and from November 1994 to May 1995 as the Company's
Manufacturing Information Systems Manager. From June 1984 to November 1994, she
held various product manager positions at Hewlett-Packard, an electronics
manufacturer, including (i) Project Manager of Research and Development, (ii)
Manager of Customer Support, Surface Mount Technology Center and (iii)
Production Manager, Surface Mount Technology Center. Ms. Williams holds a Ph.D.
in Biostatistics from the University of Washington, an M.S. in Mathematics from
the University of Alaska and a B.A. in Microbiology from the University of
Missouri.
JOHN M. HEMINGWAY has served as the Company's Secretary and Chief Financial
Officer since joining the Company in June 1991. From September 1988 to December
1990, Mr. Hemingway served as a consultant to Disenos Industriales Plasticus, a
manufacturer of video cassettes and similar products located in Mexico and a
wholly-owned
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subsidiary of Grupo Televisa. From April 1978 to September 1988, Mr. Hemingway
served as Chief Financial Officer and a director of Shape, Inc., a manufacturer
of audio and video cassettes, computer tape and diskettes, compact disks and
automatic assembly equipment. Mr. Hemingway holds a B.A. degree from Yale
University in Latin American Studies and an M.B.A. from Dartmouth College. He is
a Certified Public Accountant.
RANDY J. KARR has served as Vice President-Manufacturing of the Company
since January 1997. He joined the Company as Director of Manufacturing in
December 1995. From December 1992 to December 1995, Mr. Karr served as Director
of Operations for MRC-Digital, a position he held since the inception of
MRC-Digital in 1992. From August 1982 to December 1992, Mr. Karr managed the
design and development of the Micro-Beam broad band microwave link business at
Channel Master, a division of AVNET Corporation, a distributor of electronic
components. Mr. Karr holds a BSEE from Missouri State University.
PAUL S. BACHOW has served as a Director of the Company since January 1993.
He has been President of Bachow & Associates, Inc. ("Bachow & Associates"),
since its formation in December 1989. Mr. Bachow also acts as President of the
General Partner of each of Paul S. Bachow Co-Investment Fund, L.P., and Bachow
Investment Partners III, L.P. Mr. Bachow serves as a director of Deb Shops,
Inc., a publicly traded company in the women's clothing business, Anadigics,
Inc., a publicly traded manufacturer of gallium arsenide chips for use in a
broad array of communications devices, and several private companies. He has a
B.A. from American University, a J.D. from Rutgers University and a Masters
Degree in tax law from New York University, and is a C.P.A.
FRANCES N. JANIS has served as a Director of the Company since April 1996.
Since February 1994, Ms. Janis has been the Executive Vice President of Pomona
Partners Inc., which is the General Partner of Pomona Capital II, L.P., where
she is responsible for making direct investments in private companies and
purchasing limited partnership interests in Venture Capital/Leveraged Buyout
funds. From 1983 to 1994 she served as General Partner in Hambro International
Venture Fund II, a private investment firm, where Ms. Janis' responsibilities
included investing in early-stage private companies.
HAROLD O. SHATTUCK has served as a Director of the Company since February
1992. Since May 1991, he has been President of MC Tecinvest Inc., a consulting
company specializing in operations, executive consulting and financial advising
to early- and growth-stage companies in the computer, software and
communications industries. In that capacity, he has advised such clients as
Xerox Venture Capital and MC Partners I and II, offshore funds investing in U.S.
venture capital funds.
BERNARD D. TARR, JR. has served as a Director of the Company since February
1995. Since April 1997, Mr. Tarr has served as a Managing Director of Arete
Ventures, Inc. and as a Managing Director of Arete Ventures, LLC. From September
1990 to April 1997 he served as a Vice President of Arete Ventures, Inc. Arete
Ventures, Inc. is the Managing Partner of the UVCC Funds. Arete Ventures, LLC is
the Managing Member of the Utility Competitive Advantage Fund, LLC, which
invests in private telecommunications, information technology and customer
service companies.
Directors of the Company serve one-year terms or until their successors
have been elected and qualified. Officers are elected annually and serve at the
discretion of the Board of Directors, subject to the terms of any employment
agreements with the Company.
The Board of Directors has a standing Audit Committee and Compensation
Committee. The Audit Committee, currently composed of Messrs. Tarr and Shattuck,
and Ms. Janis, reviews the Company's internal accounting procedures and consults
with and reviews the services provided by the Company's independent accountants.
The Compensation Committee, currently composed of Messrs. Bachow, Mendicino and
Shattuck, reviews and makes recommendations to the full Board of Directors with
respect to the compensation and benefits to be provided to the Company's
officers and directors and general policy matters relating to employee
compensation and benefits.
OTHER KEY EMPLOYEES
PAUL H. LEMSON joined the Company in January 1997 as Director of
Engineering. From March 1995 to October 1996, he served as Engineering Manager
and then Senior Scientist at AT&T Wireless Services, Inc. (formerly McCaw
Cellular), a provider of cellular telephone services, where he supervised RF and
digital hardware engineers, realtime embedded software engineers and
administrative staff. From January 1989 to March 1995, Mr. Lemson served as
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Senior Technologist and then as Principal Member of Technical Staff at
Southwestern Bell Technology Resources, Inc., a technology development
subsidiary of the Southwestern Bell family of companies, where he worked in
development of Southwestern Bell's technology for PCS and wireless local loop.
Mr. Lemson holds a BSEE from the University of Houston.
WILLIAM J. MEIGHAN joined the Company in May 1996 as Director of Quality
Assurance. From June 1995 to May 1996 he served as a consultant to the Company
while a Director at Rainday Professional Services, a consulting service
specializing in ISO 9000 implementation, continuous improvement training and
quality auditing services, which position he held from May 1993 to June 1995.
From September 1990 to May 1993, Mr. Meighan served as Operations/Program
Manager at BP Chemicals Advanced Materials Division, an aerospace composites
company. Mr. Meighan holds a B.S. in Physics from the University of Washington
and a M.S. in Applied Statistics from Utah State University.
PATRIC W. MCDONALD has served as Chief Technical Officer since joining the
Company in July 1991. From February 1988 to July 1991, Mr. McDonald served as
Chief Executive Officer of Sierra Digital Communications Incorporated, a
designer and manufacturer of digital and analog microwave communication systems,
a company he co-founded. From December 1985 to February 1988, Mr. McDonald
served as Engineering Manager at the Transmission Systems Division of Avantek,
Inc., a designer and manufacturer of millimeter-wave digital communications
equipment. He was also employed by General Electric in the Microwave Products
Department for over 20 years. Mr. McDonald holds a BSEE from the University of
Evansville.
DIRECTOR COMPENSATION
All directors of the Company are reimbursed for out-of-pocket expenses
incurred attending meetings of the Board of Directors.
The Board of Directors granted Mr. Shattuck, as compensation for his
service as a director during 1996, (i) $1,000 in cash for each regularly
scheduled Board meeting attended and (ii) options to purchase 1,420 shares of
Common Stock, with an exercise price of $1.968 per share and, as compensation
for his service as a director during 1997, $1,000 in cash for each regularly
scheduled Board meeting attended, and options to purchase 1,736 shares of Common
Stock, with an exercise price of $2.88 per share of Common Stock.
The Company's Director Stock Option Plan (the "Director Plan") was adopted
in June 1997. In connection with the adoption of the Director Plan, each
non-employee director received options to purchase 10,000 shares of Common Stock
(other than Mr. Shattuck, whose option was reduced to reflect the grant of an
option to purchase Common Stock for service in 1997) resulting in the grant of
options covering an aggregate of 48,263 shares of Common Stock. These options
vested on the date of grant and had an exercise price of $9.84 per share, which
was determined by the Board of Directors to be not less than the fair market
value of the Common Stock on the date of grant. The Director Plan provides for
additional grants to non-employee directors of options to purchase 4,000 shares
of Common Stock commencing on January 1, 1998 and thereafter at each annual
shareholder's meeting, commencing in 1999. Under the Director Plan, the exercise
price of options granted in the future under the Director Plan is to be
determined by a formula based on the trading price of the Common Stock for the
20 trading days preceding the grant. One quarter of the options granted in the
future vest after one year, with the remainder vesting in 36 equal monthly
increments. Unvested options under the Director Plan expire upon termination of
service other than by death, or disability, to the extent not exercised. Future
options are to be granted automatically without further action from the Board of
Directors, except to the extent necessary to determine the fair market value of
the Common Stock on the date of grant.
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<PAGE> 50
EXECUTIVE COMPENSATION
Compensation Summary. The following table sets forth information regarding
compensation earned during calendar 1996 by the Chief Executive Officer and the
four next most highly compensated executive officers during that year (the
"named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term Compensation
Awards
-------------------------------------------
ANNUAL
COMPENSATION(1)
-------------------- SECURITIES
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS
- ---------------------------------------------------- -------- ------- ------------------
<S> <C> <C> <C>
Jean-Francois Grenon................................ $131,539(2) $10,000 611,750
President, Chief Executive Officer, and Director
Colin J.R. Pallemaerts.............................. 137,198 -- 67,198
Executive Vice President -- Sales and Marketing
Barbara J. Williams................................. 119,246 -- 90,294
Chief Operating Officer
John M. Hemingway................................... 117,692 -- 62,318
Secretary and Chief Financial Officer
Randy J. Karr....................................... 88,561 20,000 89,702
Vice President -- Manufacturing
</TABLE>
- ---------------
(1) In 1996, the Board of Directors of the Company changed the Company's fiscal
year end from March 31 to December 31. Thus, fiscal year 1996 commenced on
April 1, 1996 and ended December 31, 1996. Amounts reported are for the
twelve months ended December 31, 1996.
(2) Mr. Grenon commenced service for the Company in February, 1996.
Option Grants. The following table shows information concerning stock
options granted to the named executive officers in calendar 1996.
OPTION GRANTS DURING THE CALENDAR YEAR 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE TERM(3)
OPTIONS TO EMPLOYEES IN PRICE(2) EXPIRATION ------------------------
NAME GRANTED(1) CALENDAR YEAR ($/SHARE) DATE 5% 10%
- --------------------------- ----------- ---------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jean-Francois Grenon....... 611,750 58.7 1.968 2/20/2016 $1,990,445 $6,895,475
Colin J.R. Pallemaerts..... 67,198 6.5 1.968 12/17/2016 218,641 757,437
John M. Hemingway.......... 62,318 6.0 1.968 12/17/2016 202,763 702,431
Barbara J. Williams........ 90,294 8.7 1.968 12/17/2016 293,789 1,017,767
Randy J. Karr.............. 89,702 8.6 1.968 12/17/2016 291,862 1,011,096
</TABLE>
- ---------------
(1) The options vest as to 25% of the shares on the first anniversary of the
date of grant, with the remaining shares vesting ratably over the next 36
months. One half of the options were subject to performance vesting criteria
when granted, but were amended in 1997 to provide for vesting over time.
(2) The exercise price of each option was determined by the Board of Directors
to be not less than the estimated fair value of the Common Stock on the date
of grant.
(3) Based upon the estimated fair value of the Common Stock on the date of grant
and assumed appreciation over the term of the options at the respective
annual rates of stock appreciation shown. Potential gains are net of the
exercise price but before taxes associated with the exercise. The 5% and 10%
assumed annual rates of compounded stock appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future price of the Common Stock.
Actual gains, if any, on stock option exercises are dependent on the future
financial performance of the Company and overall market conditions. The
actual value realized may be greater or less than the potential realizable
value set forth in the table.
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<PAGE> 51
Year-End Option Values. None of the named executive officers exercised any
stock options during calendar year 1996. The following table sets forth certain
information regarding the number and value of unexercised options held by the
named executive officers at December 31, 1996.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL YEAR-
YEAR-END(1) END(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jean-Francois Grenon........................ -- 611,750 -- $ 5,525,326
Colin J.R. Pallemaerts...................... 44,528 79,367 $ 422,841 593,283
John M. Hemingway........................... 35,000 65,115 316,120 588,119
Barbara J. Williams......................... 10,611 114,536 95,839 1,034,489
Randy J. Karr............................... 2,604 97,514 $ 23,519 $ 880,746
</TABLE>
- ---------------
(1) Does not include options granted in 1997.
(2) Represents the value of the shares of Common Stock subject to outstanding
options, based on an assumed initial public offering price of $11.00 per
share, less the aggregate option exercise price.
BENEFIT PLANS
Stock Options. The Company's 1990 Stock Option Plan permits options to
purchase up to an aggregate of 2,083,333 shares of Common Stock to be granted to
employees and nonemployees of the Company. The Plan is administered by the Board
of Directors, which has the authority to select individuals who are to receive
options and to specify the terms and conditions of each option so granted,
including the number of shares covered by the option, the type of option
(incentive stock option or nonqualified option), the exercise price (which, in
case of options granted after the effective date of the Offering, must be at
least 100% of the fair market value of the Common Stock), vesting provisions,
and the overall option term. At June 30, 1997, options to purchase an aggregate
of 1,655,298 shares of Common Stock were outstanding under the Plan.
401(k) Plan. The Company maintains a 401(k) plan that covers all employees
who satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Under the profit sharing portion of the plan, the
Company may make an annual contribution for the benefit of eligible employees in
an amount determined by the Board of Directors, but no such contributions have
been made to date. Under the 401(k) portion of the plan, eligible employees may
make pre-tax elective contributions of up to 10% of their compensation, subject
to maximum limits on contributions prescribed by law.
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<PAGE> 52
CERTAIN TRANSACTIONS
FINANCING TRANSACTIONS
Between 1989 and June 1997, the following officers, directors and
beneficial owners of 5% or more of the Company's capital stock participated in a
complex series of financing transactions pursuant to which the Company issued
seven series of convertible Preferred Stock (Series A, B, C, C1, D, E and F),
warrants to purchase shares of Series A Preferred Stock, warrants to purchase
shares of Common Stock, convertible notes, all of which were subsequently repaid
or converted into one or another series of Preferred Stock, and certain other
notes, all of which have been paid in full: Woodside Fund, Woodside Fund II and
Woodside Fund III (the "Woodside Funds"); UVCC Fund II and UVCC II Parallel
Fund, L.P. (collectively, "UVCC"); Tregor Electronique, S.A. ("Tregor"), a
holding company of SAT; Bachow Investment Partners III, L.P. ("Bachow Investment
Partners"), Paul S. Bachow Co-Investment Fund ("Bachow Co-Investment Fund") and
Paul S. Bachow ("Bachow") (collectively, the "Bachow Entities"); Pomona Capital
II, L.P. ("Pomona") and Baupost Limited Partnership 1983 C-1 ("Baupost"); V.
Frank Mendicino ("Medicino") and the V. Frank Mendicino Defined Benefit Pension
Plan (the "Benefit Plan") and Brian Flynn, former acting CEO. Under the
Company's Restated Articles of Incorporation, as amended, each share of
Preferred Stock outstanding at the closing of the Offering will be automatically
converted into one share of Common Stock. Set forth below are descriptions of
insider participation in these transactions over the past three years.
1994 Series A Financings and Related Bridge Financings. In April 1994, the
Company issued an aggregate of 338,188 shares of Series A Preferred Stock to
fulfill the antidilution rights of certain holders of Series A Preferred Stock
derived from the previous Series A financings, which were completed in 1989,
1990, 1992 and 1993. In this issuance, Woodside Fund and Woodside Fund II
together and UVCC were issued 96,100 and 23,936 shares of Series A Preferred
Stock, respectively. At approximately the same time, Woodside Fund II and
Woodside Fund III and one unaffiliated investor advanced the Company an
aggregate of $246,934 in exchange for non-interest bearing notes (the "1994
Woodside Notes") convertible into Series A Preferred Stock at a price of $7.9168
per share and rights to receive warrants to purchase Common Stock based on the
amount invested, at an exercise price of $0.84 per share. In this transaction,
Woodside Funds received $46,934 of these notes. In May 1994, the rights to
receive warrants to purchase Common Stock were amended to provide the investors
with the right to receive either warrants to purchase Common Stock at an
exercise price of $0.84 per share or warrants to purchase Series A Preferred
Stock at an exercise price of $0.84 per share. The 1994 Woodside Notes were
converted in May 1994 as described below. V. Frank Medicinio, the Chairman of
the Company's Board of Directors, is a General Partner of the Woodside Funds.
Bernard D. Tarr, Jr., a member of the Company's Board of Directors, is a
Managing Director of UVCC.
In May 1994, $1,700,000 of outstanding convertible non-interest bearing
notes issued in connection with the Series A Financings and the 1994 Woodside
Notes were converted into Series A Preferred Stock at a price of $7.9168 per
share, and warrants were issued to purchase a total of 462,639 shares of Series
A Preferred Stock with an exercise price of $0.84 per share, to 20 investors. In
this transaction, Woodside Funds and UVCC were issued shares of Series A
Preferred Stock with an aggregate purchase price of $757,853 and $131,386,
respectively, and warrants to purchase 177,429 and 37,540 shares of Series A
Preferred Stock, respectively. In December 1994, the remaining notes issued in
connection with the Series A Financings (all of which were held by unaffiliated
investors) were converted into shares of Series A Preferred Stock with an
aggregate purchase price of $500,000 at a price of $7.9168 per share, and
warrants to purchase a total of 19,338 shares of Series A Preferred Stock at an
exercise price of $0.84 per share were issued to these same unaffiliated
investors.
In May 1994, the Company issued Tregor a warrant to purchase 56,378 shares
of Series A Preferred Stock pursuant to the Company's contractual obligation to
adjust SAT's percentage ownership of the Company to 10% in connection with the
conversion of the Series A Notes. The Company no longer has such obligation.
Each share of Series A Preferred Stock will be automatically converted into
one share of Common Stock (or an aggregate of 1,574,143 shares of Common Stock)
upon consummation of the Offering and all material contractual covenants by the
Company in favor of the Series A Preferred Stock holders will automatically
terminate upon consummation of the Offering, other than the registration rights
described below. See "Shares Eligible for Future Sales -- Outstanding
Registration Rights."
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<PAGE> 53
Series B Financing. In April 1994, the Bachow Entities acquired a
$1,000,000 convertible note bearing interest at 15% per annum (the "Bachow
Note"). The Bachow Note, including accrued interest of $20,135, was converted
into Series B Preferred Stock at a price of $6.0850 per share in May 1994 in
connection with the closing of the Series B Financing. In May 1994, the Company
issued additional shares of Series B Preferred Stock with an aggregate purchase
price of $1,999,997 to the Bachow Entities at a price of $6.0850 per share along
with three options to purchase additional shares of Series B Preferred Stock. In
July and August of 1994, the first of the three options was fully exercised.
Pursuant to the exercise, the Bachow Entities purchased shares of Series B
Preferred Stock with an aggregate purchase price of $2,800,000 at a price of
$6.3680 per share. The second and third options expired unexercised.
Each of the 804,553 outstanding shares of Series B Preferred Stock will be
automatically converted into one share of Common Stock upon consummation of the
Offering and all material contractual covenants of the Company in favor of the
Series B Preferred Stockholders will automatically terminate upon consummation
of the Offering, other than the registration rights described below. See "Shares
Eligible for Future Sales -- Outstanding Registration Rights."
1994 Bridge Loan. In September 1994, Woodside Fund III lent the Company
$178,650 pursuant to a note bearing interest at 15% per annum, which has since
been repaid in full. In October 1994, the Bachow Entities lent the Company an
aggregate of $500,000 evidenced by notes, payable on or before October 31, 1994
and bearing interest at the rate of 10.75% per annum, with a default interest
rate of 15% per annum. These notes were exchanged for Series C Preferred Stock
at a price of $6.3672 per share at the time of the Series C financing described
below.
SAT Note. In October 1994, SAT lent the Company $300,000 at an interest
rate of 8% per annum, which was subsequently repaid in full.
Series C and C1 Financing. In February and April 1995, the Bachow Entities,
Tregor, UVCC and Woodside Funds, purchased Series C Preferred Stock with an
aggregate purchase price of $997,181, $1,495,771, $159,549 and $944,225,
respectively, at a purchase price of $6.3672 per share, Common Stock with an
aggregate purchase price of $2,819, $4,229, $458 and $3,669, respectively, at a
purchase price of $.024 per share and received warrants to purchase 283,859
shares, 425,789 shares, 45,416 shares, and 268,784 shares, of Common Stock,
respectively, at a price of $.024 per share in a financing transaction in which
the Company sold Series C Preferred Stock with an aggregate purchase price of
$4,229,792 at a price of $6.3672 per share, Common Stock with an aggregate
purchase price of $11,958 at a price of $.024 per share, and issued warrants to
purchase a total of 1,204,050 shares of Common Stock at an exercise price of
$.024 per share to these persons and 13 other unaffiliated investors.
In September and November 1995, the Company sold Series C1 Preferred Stock
with an aggregate purchase price of $2,890,428 at a price of $6.3672 per share,
Common Stock with an aggregate purchase price of $8,171 at a price of $.024 per
share and issued warrants to purchase a total of 680,917 shares of Common Stock
with an exercise price of $.024 per share to Bachow Investment Partners, Bachow,
UVCC, Woodside Funds, and 14 other unaffiliated investors. In this transaction,
Bachow Investment Partners and Bachow, UVCC and Woodside Funds acquired Series
C1 Preferred Stock with an aggregate purchase price of $1,520,661, $249,296, and
$648,168 respectively, shares of Common Stock with an aggregate purchase price
of $4,229, $705, and $1,832, respectively, and received warrants to purchase
358,239, 58,728, and 152,695 shares of Common Stock at an exercise price of
$.024 per share, respectively.
Each of the 1,120,592 outstanding shares of Series C and C1 Preferred Stock
will be automatically converted into one share of Common Stock upon consummation
of the Offering and all contractual covenants by the Company in favor of the
holders of Series C and C1 Preferred Stock will automatically terminate, other
than the registration rights described below. See "Shares Eligible for Future
Sales -- Outstanding Registration Rights."
1995 Bridge Loans. From November 1995 through January 1996 Bachow
Investment Partners, UVCC, Woodside Fund III, and nine other unaffiliated
investors lent the Company $1,000,000. Of this amount, Bachow Investment
Partners, UVCC and Woodside Fund III advanced $491,921, $87,828, and $291,922,
respectively. The notes (the "1995 Notes") received by the investors were
payable on demand on or after April 1, 1996, and bore interest at a rate of 16%
per annum for 90 days from the date of issuance and at the rate of 21% per annum
thereafter until paid in full. The investors to whom the 1995 Notes were issued
were also granted rights to receive warrants to purchase Common Stock, the
exercise price of which was to be the lower of $4.80 per share or 80% of the
average price at which the next $20,000,000 of equity was raised by the Company.
The number of warrants to be received was
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<PAGE> 54
determined by multiplying, for each of the 1995 Notes, the principal amount of
the note by 50% and dividing the result by the exercise price of the warrants as
determined above (the "1995 Bridge Warrants").
1996 Bridge Loans. In February, March and April 1996, Bachow Investment
Partners, Bachow, UVCC, Woodside Fund III, Brian Flynn and 13 other unaffiliated
persons lent the Company an aggregate of $6,069,869 as advances in respect of
possible purchases of Series D Preferred Stock. In this transaction, Bachow
Investment Partners and Bachow, UVCC, and Woodside Fund III and Brian Flynn were
issued notes bearing interest at a rate of 16% per annum for 90 days from the
date of issuance and at a rate of 21% per annum thereafter until paid in full
("Series D Notes") (all of which were subsequently converted into Series D
Preferred Stock except $69,869 which was paid in cash) in the principal amount
of $3,543,263, $350,000, and $1,258,078 and $135,000, respectively. Mr. Flynn
was Acting Chief Executive Officer of the Company in February 1997 when his
Series D Note was issued. In the event the Company closed a financing at a
pre-money valuation greater than $22.5 million, holders of the Series D Notes
were eligible to receive warrants to purchase Common Stock with an exercise
price of $.024 upon the consummation of such financing (the "1996 Bridge
Warrants"). The number of shares to be covered by the 1996 Bridge Warrants was
equal to the difference between the number of shares of Series D Preferred Stock
issuable upon conversion of the Series D Notes, if the Series D Notes were
converted at a pre-money valuation of $22.5 million, and the number of shares of
Series D Preferred Stock issuable upon conversion of the Series D Notes if the
Series D Financing occurred at a higher valuation.
Series D Financing. In April 1996, substantially all of the 1995 Notes and
Series D Notes were converted into shares of Series D Preferred Stock with an
aggregate purchase price of $7,000,000, at a price of $3.228 per share with the
balance being paid in cash. Bachow Investment Partners and Bachow, UVCC and
Woodside Fund III received shares of Series D Preferred Stock with an aggregate
purchase price of $4,035,184, $437,828 and $1,550,000, respectively. Upon the
closing of the Series D financing, the Company issued 1995 Bridge Warrants to
purchase an aggregate of 193,611 shares of Common Stock at an exercise price per
share of $2.5824. Bachow Investment Partners, UVCC, and Woodside Fund III
received 1995 Bridge Warrants to purchase 95,244, 17,004, and 56,521 shares of
Common Stock, respectively. The Company also issued 1996 Bridge Warrants to
purchase an aggregate of 367,082 shares of Common Stock, with Bachow Investment
Partners and Bachow, UVCC and Woodside Fund III receiving 1996 Bridge Warrants
to purchase 211,610, 22,960 and 81,284 shares of Common Stock, respectively.
In the Series D Financing, the Company also issued to Pomona and Baupost
Series D Preferred Stock with an aggregate purchase price of $5,000,000 at a
price of $3.228 per share.
Each of the 3,717,643 shares of Series D Preferred Stock will be
automatically converted into one share of Common Stock upon consummation of the
Offering, and all contractual covenants by the Company in favor of the holders
of Series D Preferred Stock will automatically terminate, other than the
registration rights described below. See "Shares Eligible for Future
Sales -- Outstanding Registration Rights."
November 1996 Through March 1997 Bridge Financing. In November 1996 and
December 1996, Bachow Investment Partners, Baupost and Pomona, Brian Flynn,
UVCC, Woodside Fund III and 11 other unaffiliated persons lent the Company an
aggregate of $1,500,000, and received notes in exchange (the "1996 Series D
Notes"). In this transaction, Bachow Investment Partners, Baupost and Pomona,
Brian Flynn, UVCC and Woodside Fund III lent the Company $572,513, $326,535,
$6,507, $71,114 and 282,450, respectively. The 1996 Series D Notes bore interest
at 12% per year and were payable on demand 90 days after issuance. The 1996
Series D Notes were convertible into Series D Preferred Stock at the option of
the holder 90 days from the date of issuance if not repaid by the Company prior
to 91 days from the date of issuance, at a conversion price of $3.228 per share.
In a second related bridge financing in January through March 1997, Bachow
Investment Partners and Bachow advanced $1,541,395, Baupost and Pomona advanced
$371,303, UVCC advanced $172,902, Woodside Fund III advanced $686,739, and 15
other unaffiliated persons advanced $227,661, or an aggregate of $3,000,000, for
additional notes (the "Series E Notes"). The Series E Notes bore interest at 12%
per year and were payable on demand 90 days after issuance. The Series E Notes
were convertible into Series E Preferred Stock at the option of the holder 90
days from the date of issuance if not repaid by the Company prior to 91 days
from the date of issuance, at a conversion price $5.19384 per share. The 1996
Series D Notes were retired with $1,500,000 of the amount received in connection
with the issuance of the Series E Notes. Series E Notes with an aggregate
principal amount of $3,000,000 were converted into Series E Preferred Stock at a
conversion price of $5.19384 per share in connection with the Series E financing
described below.
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<PAGE> 55
Series E Financing. In March 1997 Bachow Investment Partners and Bachow,
UVCC, Woodside Fund III and Pomona and Baupost converted all of their Series E
Notes into shares of Series E Preferred Stock with an aggregate purchase price
of $2,336,581, $287,314, $1,141,171 and $618,838, respectively, at a price of
$5.19384 per share. In this transaction, the Company issued Series E Preferred
Stock with an aggregate purchase price of $4,999,999.
Each of the 962,669 shares of Series E Preferred Stock will be
automatically converted into one share of Common Stock upon consummation of the
Offering, and all contractual covenants by the Company in favor of the holders
of Series E Preferred Stock will automatically terminate, other than the
registration rights described below. See "Shares Eligible for Future
Sales -- Outstanding Registration Rights."
1997 Bridge Loans. In May 1997, Bachow & Associates and Woodside Fund III
each advanced the Company $250,000 at an interest rate of 12% per annum in
anticipation of the Series F Financing described below. These amounts were
repaid in full at the closing of the Series F Financing.
Series F Financing. In June 1997, the Company sold Series F Preferred Stock
with an aggregate purchase price of $3,500,000 at a price per share of $6.96 to
Mendicino and the Benefit Plan and 10 other unaffiliated investors. Mr.
Mendicino and the Benefit Plan purchased $87,355 of Series F Preferred Stock at
a price per share of $6.96.
Each of the 502,867 shares of Series F Preferred Stock will be
automatically converted into one share of Common Stock upon consummation of the
Offering, and all contractual covenants by the Company in favor of the holders
of Series F Preferred Stock will automatically terminate, other than the
registration rights described below. See "Shares Eligible for Future
Sale -- Outstanding Registration Rights."
Additional Note Issuances. In October and November 1994, and November 1995,
the Company issued promissory notes (the October and November 1994 notes bearing
interest at 15% per annum and the November 1995 notes bearing interest at 21%
per annum) in an aggregate amount of $470,000 to Woodside Fund III. In November
and December 1994, the Company issued promissory notes (bearing interest at 8%
per annum) in an aggregate amount of $1,300,000 to SAT. All of these notes have
been repaid in full.
MANUFACTURING AND DISTRIBUTION ARRANGEMENTS; SALES OF XP3 AND XP4 PRODUCT
SAT. The Company has entered into several agreements with SAT concerning
technical cooperation in the development of the Company's products, and the
purchase, distribution and manufacture of such products by SAT, as follows:
XP3 Product Arrangements. In October 1992, the Company entered into a
Master Agreement which provided for cooperative development of certain products
based on the Company's XP3 architecture, payment by SAT of $800,000 to the
Company upon achievement of certain development milestones, and the granting to
SAT of certain marketing and manufacturing rights as to XP3 products. In June
1993, the Company and SAT entered into an OEM Distributor Agreement pertaining
to the XP3 product line (as modified by four subsequent amendments, the "XP3 OEM
Agreement"), which granted SAT a right to purchase XP3 products on most-favored
customer terms, and a right to distribute such products on an exclusive basis in
France and certain other European countries and on a non-exclusive basis
elsewhere; imposed certain limits on the Company's sales of XP3 products;
granted SAT a right to manufacture XP3 products in France subject to certain
conditions, limitations and royalty obligations; provided for cooperation in
product development and access to component suppliers; and granted SAT a right
of first refusal as to XP4 distribution and manufacturing rights in France and
certain other countries. In December 1994, following a decision by the Company
to concentrate development efforts on its new XP4 product architecture, the
Company and SAT executed a Processor For Hire Agreement (as modified by
subsequent amendments, the "Processing Agreement"), under which SAT acquired the
Company's inventory of XP3 parts and work in process for approximately $2.6
million (paid for in part by satisfying approximately $1.9 million of advances
made to the Company by SAT), and the Company agreed to continue manufacturing
XP3 products for SAT in return for a processing fee based on the Company's
actual costs of manufacturing.
The Company's sales of XP3 products to SAT constituted substantially all of
the Company's net product sales of $1,151,605 and $445,229 in the years ended
March 31, 1995 and 1996, respectively, and were $3,000 and $0 in the nine month
fiscal period ended December 31, 1996 and the six months ended June 30, 1997,
respectively. Processing fees received by the Company from SAT under the
Processing Agreement amounted to $1,206,894, $1,516,870, $53,257, and $0 in the
years ended March 31, 1995 and 1996, the nine month fiscal period ended December
31,
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<PAGE> 56
1996, and the six months ended June 30, 1997, respectively. The Processing
Agreement was terminated by mutual agreement of the parties in April 1997. On
June 20, 1997, the Company and SAT agreed to terminate the Master Agreement and
XP3 OEM Agreement, and SAT was granted a fully-paid, perpetual, worldwide
license to manufacture, modify and otherwise exploit the XP3 technology. Having
transitioned its product development, sales and marketing, and strategic focus
to the XP4 product line, the Company does not believe that SAT's continuing
rights as to XP3 products pose either a competitive threat or a significant
impediment to the Company's ability to distribute its XP4 products through SAT.
XP4 Product Arrangements. In November 1995, the Company and SAT entered
into a Memorandum of Understanding providing for joint development of a product
specification for the Company's XP4 product line, joint ownership of an XP4
interface specification subject to certain transfer limitations, efforts by both
parties to develop compatible and complementary product lines, and development
of a plan for purchases of products by each party from the other. This
Memorandum of Understanding was terminated in June 1997. On October 31, 1996,
the Company and SAT entered into a more detailed Cooperation Agreement, which
provides for cooperative development of XP4 products, and grants SAT certain
exclusive and nonexclusive distribution rights as to XP4 products, as well as
certain unconditional and conditional limited rights to manufacture certain XP4
products. See "Risk Factors -- Risks Associated with Grants of Limited
Manufacturing Rights" and "Business -- Distribution Relationships -- SAT
Arrangements." Simultaneously with the Cooperation Agreement, the Company and
SAT entered into a Master Purchase Agreement, which includes a confidential
conditional commitment by SAT to purchase a limited fixed number of XP4 products
in various frequencies and configurations from the Company for an initial
specified period, and thereafter a commitment to purchase a limited quantity of
XP4 products corresponding to a fixed dollar amount for a specific period. The
Master Purchase Agreement contains other provisions regarding product acceptance
testing procedures applicable to SAT's purchase commitment. Orders satisfying
SAT's purchase commitment have been placed and shipments are expected to have
been completed by the fourth quarter of 1997. On June 20, 1997, the Company and
SAT amended the Cooperation Agreement to expand certain of SAT's development and
manufacturing rights, to modify the terms of sale between the parties, and to
add a confidential conditional commitment by SAT to purchase a specified dollar
amount of XP4 products within a specified period. The Company's sales of XP4
products to SAT were $3,352,000 in the six months ended June 30, 1997.
Sales to Bachow Communications
During the fiscal period ended December 31, 1996, the Company sold XP4
radios and other equipment with an aggregate purchase price of $212,000 to
Bachow Communications, Inc. Paul S. Bachow, a director of the Company, is the
sole shareholder and President of Bachow Communications, Inc.
Compensation to Bachow & Associates for Acting CEO's Services.
In May 1996, Bachow & Associates received $217,500 for the services
provided by Brian Flynn, formerly a Managing Director of Bachow & Associates,
who served as the acting Chief Executive Officer of the Company from January
1995 to February 1996.
Policy Concerning Transactions with Related Parties
The Company has adopted a policy prohibiting transactions with its
directors, officers or controlling shareholders or their affiliates other than
those that result from competitive bidding or that a majority of the Company's
disinterested directors conclude are expected to benefit the Company and are on
terms no less favorable to the Company than could be obtained in arm's-length
transactions with unaffiliated third parties.
54
<PAGE> 57
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of July 8, 1997, and as adjusted to reflect the
sale of shares of Common Stock in the Offering for (i) each person known to the
Company to own beneficially more than 5% of the Common Stock, (ii) each of the
Company's directors, (iii) each of the Company's named executive officers and
(iv) all of the Company's executive officers and directors as a group. Except as
otherwise noted, the named beneficial owner has sole voting and investment power
with respect to the shares indicated as beneficially owned by such person.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT PERCENT
NAME AND ADDRESS(1) BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------- ------------------ --------------- --------------
<S> <C> <C> <C>
DIRECTORS, OFFICERS AND SHAREHOLDERS
Paul S. Bachow(2)............................. 4,155,450 39.2% 31.7%
c/o Bachow & Associates
3 Bala Plaza, Suite 502
Bala Cynwyd, PA 19004
V. Frank Mendicino(3)......................... 2,318,801 22.3 18.0
c/o Woodside Funds
4133 Mohr Avenue, Suite H
Pleasanton, CA 94566
Frances N. Janis(4)........................... 1,678,094 17.4 13.8
c/o Pomona Capital II, L.P.
780 Third Avenue, 28th Floor
New York, NY 10017-7076
Societe Anonyme de Telecommunications(5)...... 1,083,402 10.7 8.6
c/o Tregor Electronique S.A.
11 Rue Watt, B.P. 370
75626 Paris, CEDEX13
France
Bernard D. Tarr, Jr.(6)....................... 584,292 5.9 4.7
c/o Arete Ventures, Inc.
6110 Executive Blvd., Suite 1040
Rockville, MD 20852
Jean-Francois Grenon(7)(8).................... 229,404 2.3 1.9
Harold O. Shattuck(7)(9)...................... 19,278 * *
Colin J.R. Pallemaerts(7)(10)................. 63,533 * *
John M. Hemingway(7)(11)...................... 48,183 * *
Barbara J. Williams(7)(12).................... 31,514 * *
Randy J. Karr(7)(13).......................... 19,290 * *
All Directors and Executive Officers
as a Group (10 persons)(14)................. 9,147,839 76.6 63.3
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes shares over which the
indicated beneficial owner exercises voting and/or investment power. Shares
of Common Stock subject to options currently exercisable or exercisable
within 60 days are deemed outstanding for computing the percentage
ownership of the person holding the options but are not deemed outstanding
for computing the percentage ownership of any other person. Except as
indicated, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
(2) Includes 2,615,090 shares held by Bachow Investment Partners III, L.P., and
277,457 shares held by Paul S. Bachow Co. - Investment Fund, L.P., both
limited partnerships. Mr. Bachow is the President of the General Partner of
the General Partner of each of Bachow Investment Partners and Bachow
Co-Investment Fund. Also includes 89,013 shares issuable upon exercise of
warrants to purchase Common Stock held by Mr. Bachow, 786,887 shares
issuable upon exercise of warrants to purchase Common Shares held by Bachow
Investment Partners, and 73,052 shares issuable upon exercise of warrants
to purchase Common Shares held by Bachow Co-Investment Fund. Also includes
options held by Mr. Bachow under the Director Plan to purchase 10,000
shares of Common Stock exercisable within 60 days of July 8, 1997.
(3) Represents 9,000 shares held by V. Frank Mendicino Defined Benefit Pension
Plan, 243,212 shares held by Woodside Fund, 130,912 shares held by Woodside
Fund II, and 1,185,413 shares held by Woodside Fund III. Also represents
294,006 shares issuable upon exercise of warrants to purchase shares of
Common Stock held by Woodside Fund, 149,509 shares issuable upon exercise
of warrants to purchase shares of Common Stock held by Woodside Fund II,
and 293,198 shares issuable upon exercise of warrants to purchase shares of
Common Stock held by Woodside Fund III. Mr. Mendicino is a General Partner
of Woodside Funds and has shared investment power and shared voting power
over
55
<PAGE> 58
such shares with the two other General Partners, Vincent M. Occhipinti and
Robert E. Larson. Also includes options held by Mr. Mendicino under the
Director Plan to purchase 10,000 shares of Common Stock.
(4) Represents 1,202,529 shares held by Pomona Capital II, L.P. and 465,565
shares held by Baupost Limited Partnership 1983 C-1, both limited
partnerships. Ms. Janis is Executive Vice President of Pomona Partners,
Inc., the General Partner of Pomona Capital, and Executive Vice President
of Pomona Management Co., Inc., attorney-in-fact of Baupost. Ms. Janis has
shared investment power and shared voting power over such shares with each
of (i) Michael D. Granoff, President of Pomona Partners, Inc., and Pomona
Management Co., Inc., and (ii) Stephen Futrell, Treasurer of Pomona
Partners, Inc., and Pomona Management Co., Inc. Also includes options held
by Ms. Janis under the Director Plan to purchase 10,000 shares of Common
Stock.
(5) Tregor Electronique S.A. is a company organized under the laws of France,
and a holding company of Societe Anonyme de Telecommunications, a company
organized under the laws of France.
(6) Represents 196,322 shares held by UVCC Fund II and 196,322 shares held by
UVCC II Parallel Fund, L.P. Also includes 90,824 shares issuable upon
exercise of warrants to purchase shares of Common Stock held by UVCC Fund
II, and 90,824 shares issuable upon exercise of warrants to purchase shares
of Common Stock held by UVCC Parallel Fund. Mr. Tarr is Managing Director
of Arete Ventures, the General Partner of the UVCC funds. Also includes
options held by Mr. Tarr under the Director Plan to purchase 10,000 shares
of Common Stock.
(7) The address for each of these shareholders is that of the Company.
(8) Represents options to purchase 229,404 Common Stock. Excludes options to
purchase 382,346 Common Shares exercisable more than 60 days after July 8,
1997.
(9) Includes options held by Mr. Shattuck under the Director Plan to purchase
8,263 shares of Common Stock.
(10) Represents options to purchase 63,533 shares of Common Stock. Excludes
options to purchase 72,862 shares of Common Stock exercisable more than 60
days after July 8, 1997.
(11) Represents options to purchase 48,183 shares of Common Stock. Excludes
options to purchase 64,432 shares of Common Stock exercisable more than 60
days after July 8, 1997.
(12) Represents options to purchase 31,514 shares of Common Stock. Excludes
options to purchase 93,633 shares of Common Stock exercisable more than 60
days after July 8, 1997.
(13) Represents options to purchase 19,290 shares of Common Stock. Excludes
options to purchase 80,828 shares of Common Stock exercisable more than 60
days after July 8, 1997.
(14) Includes options to purchase an aggregate of 440,187 shares of Common
Stock, and an aggregate of 1,867,322 shares of Common Stock issuable upon
exercise of warrants to purchase shares of Common Stock.
56
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock and 5,000,000 shares
of Preferred Stock.
COMMON STOCK
As of July 8, 1997, 9,639,006 shares of Common Stock were outstanding and
were held of record by 84 shareholders. Holders of Common Stock are entitled to
one vote per share on all matters submitted to a vote of the shareholders and do
not have the right to cumulate votes with respect to elections of directors.
Accordingly, holders of a majority of the shares of Common Stock voting in any
election of directors will have the ability to elect all of the directors
standing for election. All directors hold office until the next annual meeting
of shareholders and until their successors have been duly elected and qualified.
Directors may be removed with or without cause by the holders of a majority of
the outstanding shares of Common Stock.
Holders of Common Stock are entitled to receive ratably any dividends as
may be declared by the Board of Directors out of legally available funds,
subject to any preferences that may be afforded to any outstanding preferred
stock. In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of any outstanding
preferred stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. All of the outstanding shares of Common Stock
are, and all shares of Common Stock to be outstanding upon consummation of the
Offering will be, when issued and paid for, fully paid and nonassessable. The
Company's Articles of Incorporation and Bylaws provide for release and
indemnification of the Company's directors and officers as to certain
liabilities arising from their actions in such capacities to the fullest extent
permitted by law.
PREFERRED STOCK
The Board of Directors has the authority to issue 5,000,000 shares of
preferred stock in one or more series and to fix the relative rights,
preferences and privileges thereof, including dividend rights, conversion
rights, voting rights, redemption terms, liquidation preferences and number of
shares constituting any series up to the maximum number of preferred stock. The
market price for the Common Stock, and the voting and other rights of the
holders thereof, may be adversely affected by the rights, preferences and
privileges accorded to any preferred stock issued by the Company. Issuances of
preferred stock in certain circumstances may also have the effect of delaying,
deferring or preventing a change in control of the Company, or discouraging bids
for the Company's Common Stock at a premium over the market price. Upon
consummation of the Offering, the Company will have no shares of preferred stock
outstanding. The Company has no present plans to issue any preferred stock.
WARRANTS TO PURCHASE COMMON STOCK
As of July 8, 1997, warrants to purchase 2,949,137 shares of Common Stock
were outstanding. Of these, (i) warrants to purchase 481,977 shares of Common
Stock at an exercise price of $.84 per share expire May 31, 1999, (ii) warrants
to purchase 1,204,050 shares of Common Stock at an exercise price of $.024 per
share expire February 13, 2000, (iii) warrants to purchase 680,917 shares of
Common Stock at an exercise price of $.024 per share expire September 5, 2000,
(iv) warrants to purchase 193,611 shares of Common Stock at an exercise price of
$2.5824 per share and warrants to purchase 367,082 shares of Common Stock at an
exercise price of $.024 per share expire April 26, 2001 and (v) a warrant to
purchase 21,500 shares of Common Stock at an exercise price of $6.96 per share
expires April 30, 2002. All warrants are currently exercisable. See "Shares
Eligible for Future Sale."
CERTAIN VOTING AND OTHER MATTERS
Under the Washington Business Corporation Act (the "Act"), shareholder
approval is required in order for the Company to participate in certain mergers
and share exchanges or to sell substantially all of its assets, and for certain
other actions. Within certain limits, the Act permits a corporation's articles
of incorporation to specify the level of shareholder approval required for such
transactions. The Company's Articles of Incorporation generally require any such
transaction to be approved by the holders of a majority of the outstanding
shares of Common Stock.
57
<PAGE> 60
Under the Company's Articles of Incorporation and Bylaws, special meetings
of the shareholders may be called only by the Board of Directors, the Chairman
of the Board, or the President, or the holders of at least 25% of all the votes
entitled to be cast on any issues proposed to be considered at such special
meeting. Amendments to the Articles of Incorporation must generally be approved
by the Board of Directors and the holders of a majority of the outstanding
shares of Common Stock.
The Company's Bylaws provide that shareholders seeking to bring business
before, or to nominate directors at, any meeting of shareholders must provide
timely notice thereof in writing. To be timely, a shareholder's notice must be
delivered to, or mailed and received at, the principal executive office of the
Company not less than 70 days prior to the date of the meeting, or the tenth day
after notice of the meeting is first given to shareholders, whichever is later
if the meeting is an annual meeting or a special meeting at which directors are
to be elected. The Bylaws also contain specific requirements for the form of a
shareholder's notice. These provisions may preclude or may make it difficult for
some shareholders from bringing matters before the shareholders or from making
nominations for directors. The Bylaws may be amended or repealed by the Board of
Directors or by the majority of the holders of the outstanding shares of Common
Stock.
Holders of shares of preferred or other capital stock hereafter issued by
the Company may also be entitled to vote in connection with the matters
described above, and separate approval may be required to the extent of any
class voting rights accorded to the holders of such other stock. It is possible
that the provisions of the Company's Articles of Incorporation and Bylaws
described above may have the effect of delaying, deterring or preventing a
takeover or change in control of the Company.
ANTITAKEOVER RESTRICTIONS
Washington law contains certain provisions that may have the effect of
delaying, deferring or preventing a takeover or change of control of the Company
which is not supported by the Board of Directors. Chapter 23B.19 of the
Washington Business Corporation Act prohibits the Company, with certain
exceptions, from engaging in certain significant business transactions with an
"acquiring person" (defined as a person who acquires 10% or more of the
Company's voting securities without the prior approval of the Company's Board of
Directors) for a period of five years after such acquisition. The prohibited
transactions include, among others, a merger with, disposition of assets to, or
issuance or redemption of stock to or from, the acquiring person, or otherwise
allowing the acquiring person to receive any disproportionate benefit as a
shareholder. The Company may not exempt itself from coverage of this statute.
These statutory provisions may have the effect of delaying, deferring or
preventing a takeover or change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
58
<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, 12,139,006 shares of Common Stock will
be outstanding, assuming no exercise of outstanding stock options or warrants to
purchase Common Stock (12,514,006 shares if the Underwriters' over-allotment
option is exercised in full), of which the 2,500,000 shares offered hereby
(2,875,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradable on the public market without restriction or
further registration under the Securities Act, except to the extent such shares
are held by an "affiliate" of the Company as such term is used under the
Securities Act. The remaining 9,639,006 shares were issued and sold by the
Company in private transactions, and public sale thereof is restricted except to
the extent they are registered under the Securities Act or sold in accordance
with an exemption from such registration. Shareholders who will hold an
aggregate of 9,549,177 shares of Common Stock after this offering have the right
to require the Company to register their shares for sale under the Securities
Act. Sales of substantial numbers of shares of Common Stock in the public market
following this offering could materially adversely affect the market price for
the Common Stock. See "Shares Eligible for Future Sale."
Of the remaining 9,639,006 outstanding shares, 444,629 shares will be
eligible for public sale immediately after this offering pursuant to Rule 144
and 9,175 shares will be eligible for public sale 90 days after the date of this
prospectus. Certain shareholders have executed Lock-Up Agreements restricting
resale of 9,168,728 shares of Common Stock owned by them for a period of 180
days after the effective date of the Offering without the prior written consent
of UBS Securities LLC, with some exceptions. See "Underwriting." Upon the
expiration of the Lock-Up Agreements, 7,719,666 of these shares will be eligible
for immediate sale to the public under Rule 144. As of July 21, 1997, options to
purchase 1,709,517 shares of Common Stock were outstanding. Of the 633,458
shares issuable upon exercise of outstanding vested stock options as of July 21,
1997, 456,188 will be subject to the Lock-Up Agreements. Upon expiration of the
Lock-Up Agreements, all such shares, plus any additional shares purchased
pursuant to options that have vested during the Lock-Up period, will be eligible
for immediate public sale. An additional 2,949,137 shares of Common Stock are
currently issuable upon exercise of warrants outstanding at June 30, 1997. Of
these shares, 2,907,233 shares are subject to Lock-Up Agreements.
In general, Rule 144 as currently in effect provides that any person who
has beneficially owned shares for at least one year, including an "affiliate"
(as defined in Rule 144), is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the shares of Common
Stock then outstanding or the reported average weekly trading volume of the
Common Stock during the four calendar weeks immediately preceding the date on
which notice of the sale is sent to the Securities and Exchange Commission (the
"SEC"). Sales under Rule 144 are subject to certain manner of sale restrictions,
notice requirements and availability of current public information concerning
the Company. A person who is not an affiliate of the Company, and who has not
been an affiliate within three months prior to the sale, generally may sell
shares without regard to the limitations of Rule 144 provided that the person
has held such shares for a period of at least two years.
Any employee, director or officer of, or consultant to, the Company holding
shares purchased pursuant to a written compensatory plan or contract (including
options) entered into prior to the Offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell such shares without
having to comply with the public information, holding period, volume limitation
or notice requirements of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case commencing 90 days after the date of this Prospectus.
Prior to the Offering, there has been no public market for the Common Stock
of Company and no prediction can be made of the effect, if any, that the sale or
availability for sale of shares of Common Stock will have on the market price of
the Common Stock. Nevertheless, sales of substantial amounts of such shares in
the public market could adversely affect the market price of the Common Stock.
OUTSTANDING REGISTRATION RIGHTS
Under a Registration Agreement dated as of May 26, 1994, as amended on
April 26, 1996, April 30, 1997, and June 13, 1997 (the "Registration Rights
Agreement"), the holders of an aggregate of 9,549,177 shares of Common Stock
issuable upon the conversion of the Preferred Stock at the closing of the
Offering ("Registrable Securities") have certain rights as to the registration
of their shares of Common Stock under the Securities Act of 1933. Holders of
Registrable Securities have the right at any time and from time to time after
the consummation of the Offering: (i) to
59
<PAGE> 62
demand registrations under the Securities Act of all or a part of the
Registrable Securities held by them on Form S-1 or any similar form; (ii) to an
unlimited number of demand registrations on Form S-2 or Form S-3 (or any
equivalent successor form) if the anticipated aggregate offering price of the
Registrable Securities covered by such form exceeds $1,000,000; (iii) in the
case of any demand registration, to select the investment bankers and managers
of the offering, subject to the Company's approval; and (iv) to have shares of
Common Stock constituting Registrable Securities held by them included in any
registration statement filed by the Company, subject to certain limitations, and
provided that such shares cannot be sold publicly without registration or
compliance with Rule 144 and to the pro rata exclusion of their shares from a
primary offering by the Company if the managing underwriters for the primary
offering advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering.
The Registration Rights Agreement requires the Company to pay all expenses
incident to its performance of or compliance with the Agreement other than
underwriting discounts and commissions allocable to the sale of a holder's
securities and the fees and expenses of the holder's own counsel, accountants
and other professional advisors.
Registrable Securities cease to be Registrable Securities when they have
been distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market maker in
compliance with Rule 144. No holders of registration rights under the
Registration Rights Agreement have exercised their registration rights with
respect to the Offering.
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<PAGE> 63
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Hambrecht & Quist, LLC and Wessels, Arnold & Henderson, L.L.C. are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
------------------------------------------------------------- -----------------
<S> <C>
UBS Securities LLC...........................................
Hambrecht & Quist, LLC.......................................
Wessels, Arnold & Henderson, L.L.C...........................
-----------------
Total.............................................. 2,500,000
=============
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to certain conditions precedent, including the absence of any material
adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligation is such that they are committed to purchase all
of the shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a commission not exceeding $ per share. The Underwriters may
allow and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the public offering of the shares of
Common Stock the offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell such shares to
the Underwriters to the extent the option is exercised.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
All officers, directors and significant shareholders and substantially all
other shareholders of the Company, have agreed not to sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase,
contract to require any other person to purchase, or otherwise transfer or
dispose of any interest in, any shares of capital stock of the Company, or any
securities convertible into or exercisable or exchangeable for capital stock of
the Company, for a period of 180 days after the date of this Prospectus without
the prior written consent of UBS Securities LLC, except for (i) securities
donated as charitable contributions which qualify as such under Section 170 of
the Internal Revenue Code of 1986, as amended, (ii) securities given by a
shareholder to members of such shareholder's "immediate family" (as such term is
defined under Item 404 of Regulation S-K under the Securities Act of 1933, as
amended), or transferred by such shareholder to one or more trusts established
for the benefit of members of such shareholder's immediate family, and (iii)
securities disposed of by the laws of testamentary or intestate descent or
pursuant to a final and non-appealable order of a court or other body of
competent jurisdiction; provided that, the shareholder may exercise presently
outstanding options, warrants or rights so long as he does not transfer the
shares obtained in violation of the Lock-Up Agreement. The Company has agreed
that it will not, until 180 days following the date of this Prospectus, without
the prior written consent of the UBS Securities LLC, sell, offer or agree to
sell, contract to sell, grant any option to purchase, make any short sale or
otherwise dispose of any shares of Common Stock, except that the Company
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<PAGE> 64
may grant additional options and issue stock under the 1990 Stock Option Plan
and the Director Plan or issue shares of Common Stock upon the exercise of
outstanding stock options and warrants.
The Representatives have informed the Company that the Underwriters do not
intend to make sales to any accounts over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to public will be determined by agreement between the
Company and the Representatives. In determining the initial price to public, the
Company and the Representatives will consider, among other things, the history
of and prospects for the industry in which the Company operates, past and
present operations and earnings of the Company and the trend of such earnings,
the qualifications of the Company's management, the general condition of the
securities markets at the time of the Offering and the market prices for other
publicly traded companies.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid or the purchase of the Common Stock on behalf of the Underwriters for the
purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Graham & James LLP, Seattle, Washington. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania.
EXPERTS
The consolidated balance sheets at December 31, 1996 and March 31, 1996 and
the consolidated statements of operations, stockholders' deficit and cash flows
for each of the years in the two-year period ended March 31, 1996 and the nine
month fiscal period ended December 31, 1996 included in this Prospectus and in
the Registration Statement have been included herein in reliance on the reports
of KPMG Peat Marwick LLP, independent auditors, given on the authority of that
firm as experts in accounting and auditing.
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<PAGE> 65
ADDITIONAL INFORMATION
The Company intends to furnish to its shareholders of record annual reports
containing financial statements audited and reported upon by independent public
accountants and quarterly reports containing unaudited financial information for
each of the first three quarters of each fiscal year.
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement (the "Registration Statement") on Form S-1 under
the Securities Act, with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, omits certain
of the information contained in the Registration Statement and the exhibits and
schedules thereto on file with the SEC pursuant to the Securities Act and the
rules and regulations of the SEC thereunder. Statements contained in this
Prospectus concerning the provisions or contents of any contract or other
document referred to in this Prospectus are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including exhibits and schedules thereto, may be inspected and copied at the
Public Reference Section maintained by the SEC at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549-1004, and at the SEC's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials may also be obtained at prescribed rates from the Public Reference
Section of the SEC at its principal office in Washington, D.C. The SEC maintains
a web site at http://www.sec.gov that contains registration statements, and
other information regarding registrants, like the Company, that file
electronically with the SEC. The quotation of the Common Stock on the Nasdaq
National Market has been approved, subject to official notice of issuance.
Reports and other information concerning the Company will be available for
inspection following the Offering at the National Association of Securities
Dealers, Inc. located at 9513 Key West Avenue, Rockville, Maryland 20850.
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<PAGE> 66
INNOVA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets as of March 31, 1996, December 31, 1996, and June 30,
1997 (unaudited)................................................................. F-3
Consolidated Statements of Operations for the Years Ended March 31, 1995 and 1996,
the
Nine Month Fiscal Period Ended December 31, 1996, and the Six Months Ended June
30, 1996 and 1997 (unaudited).................................................... F-4
Consolidated Statements of Stockholders' Deficit for the Years Ended March 31, 1995
and 1996, the Nine Month Fiscal Period Ended December 31, 1996 and the Six Months
Ended June 30, 1997 (unaudited).................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1995 and 1996,
the
Nine Month Fiscal Period Ended December 31, 1996, and the Six Months Ended June
30, 1996 and 1997 (unaudited).................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Innova Corporation:
We have audited the accompanying consolidated balance sheets of Innova
Corporation and subsidiary as of March 31, 1996 and December 31, 1996, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the years in the two-year period ended March 31, 1996 and for
the nine month fiscal period ended December 31, 1996. These consolidated
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 audit 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 Innova
Corporation and subsidiary as of March 31, 1996 and December 31, 1996, and the
results of their operations and their cash flows for each of the years in the
two-year period ended March 31, 1996 and for the nine month fiscal period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
April 30, 1997, except as to note 17,
which is as of June 17, 1997
F-2
<PAGE> 68
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, STOCKHOLDERS'
1997 EQUITY AT
MARCH 31, DECEMBER 31, ------------ JUNE 30, 1997
1996 1996 -------------
------------ ------------ (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 287,193 $ 172,764 $ 3,833,945
Accounts receivable.............................................. 78,027 1,740,383 5,117,207
Inventories...................................................... 608,165 2,533,970 5,934,429
Stock subscriptions receivable................................... 3,281,871 -- --
Other current assets............................................. 56,755 73,157 186,542
------------ ------------ ------------
Total current assets....................................... 4,312,011 4,520,274 15,072,123
Equipment and leasehold improvements, net.......................... 2,323,188 2,647,361 4,964,287
Other assets....................................................... 112,204 137,230 171,738
------------ ------------ ------------
$ 6,747,403 $ 7,304,865 $ 20,208,148
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable.................................................... $ -- $ 506,180 $ 5,618,236
Current installments of obligations under capital leases......... 487,180 503,827 1,561,532
Notes payable to stockholders.................................... 69,869 1,500,000 --
Accounts payable................................................. 1,258,741 1,944,073 3,006,882
Accrued liabilities.............................................. 340,129 355,282 514,486
------------ ------------ ------------
Total current liabilities.................................. 2,155,919 4,809,362 10,701,136
------------ ------------ ------------
Obligations under capital leases, excluding current installments... 330,338 542,259 1,035,274
Mandatorily convertible notes payable for preferred stock, subject
to stock subscriptions receivable................................ 6,984,090 -- --
Redeemable preferred stock, no par value. Authorized 13,379,164
shares -- issued and outstanding 3,496,939 shares at March 31,
1996, 7,216,751 shares at December 31, 1996 and 8,682,287 shares
at June 30, 1997 (none pro forma) (liquidation preference of
$28,007,312 at March 31, 1996, $40,022,239 at December 31, 1996
and $48,521,911 at June 30, 1997 and redemption value of
$24,459,274 at March 31, 1996, $36,474,201 at December 31, 1996
and $44,973,873 at June 30, 1997)................................ 27,361,894 39,312,836 47,768,859 --
Stockholders' equity (deficit):
Common stock, no par value. Authorized 16,666,666 shares; issued
and outstanding 882,842 shares at March 31, 1996, 941,334
shares at December 31, 1996 and 956,719 shares at June 30, 1997
(9,639,006 pro forma).......................................... 1,329,869 1,376,715 1,398,231 49,167,090
Additional paid-in capital....................................... 1,604,997 1,604,997 3,261,674 3,261,674
Deferred stock option compensation expense....................... -- -- (623,744) (623,744)
Cumulative translation adjustment................................ 26,363 33,599 54,168 54,168
Accumulated deficit.............................................. (33,046,067) (40,374,903) (43,387,450) (43,387,450)
------------ ------------ ------------ -----------
Total stockholders' deficit................................ (30,084,838) (37,359,592) (39,297,121) 8,471,738
------------ ------------ ------------ -----------
Commitments, contingency and subsequent events
$ 6,747,403 $ 7,304,865 $ 20,208,148
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 69
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH
FISCAL
YEARS PERIOD SIX MONTHS
ENDED MARCH 31, ENDED ENDED JUNE 30,
------------------------ DECEMBER 31, -------------------------
1995 1996 1996 1996 1997
----------- ----------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net product sales.................. $ 1,151,605 $ 445,229 $ 2,050,245 $ 32,982 $ 12,582,457
Manufacturing contract service
revenues......................... 1,206,894 1,516,870 53,257 166,546 --
----------- ---------- ---------- ---------- ----------
Total revenues........... 2,358,499 1,962,099 2,103,502 199,528 12,582,457
----------- ---------- ---------- ---------- ----------
Cost of products sold.............. 3,703,624 2,425,473 3,685,395 1,885,000 9,569,967
Manufacturing contract service
expenses......................... 811,621 1,516,870 53,257 166,546 --
----------- ---------- ---------- ---------- ----------
Total cost of products
sold and manufacturing
contract service
expenses............... 4,515,245 3,942,343 3,738,652 2,051,546 9,569,967
----------- ---------- ---------- ---------- ----------
Gross profit (loss)...... (2,156,746) (1,980,244) (1,635,150) (1,852,018) 3,012,490
----------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative.............. 2,067,077 2,316,302 2,584,423 1,533,004 3,471,444
Research and development...... 1,891,918 4,519,095 2,965,933 2,373,515 2,216,331
----------- ---------- ---------- ---------- ----------
Total operating
expenses............... 3,958,995 6,835,397 5,550,356 3,906,519 5,687,775
----------- ---------- ---------- ---------- ----------
Loss from operations..... (6,115,741) (8,815,641) (7,185,506) (5,758,537) (2,675,285)
Other income (expense):
Interest income............... 17,380 37,962 102,422 52,561 471
Interest expense.............. (211,048) (287,253) (249,294) (183,536) (337,733)
Other income (expense)........ (8,970) 3,754 3,542 7 --
----------- ---------- ---------- ---------- ----------
(202,638) (245,537) (143,330) (130,968) (337,262)
----------- ---------- ---------- ---------- ----------
Net loss................. $(6,318,379) $(9,061,178) $ (7,328,836) $(5,889,505) $ (3,012,547)
=========== ========== ========== ========== ==========
Pro forma net loss per share....... $ (0.73) $ (0.30)
========== ==========
Shares used in computing pro forma
net loss per share............... 10,039,634 10,061,989
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 70
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFERRED
COMMON STOCK ADDITIONAL STOCK OPTION CUMULATIVE
PRICE PER ------------------------- PAID-IN COMPENSATION TRANSLATION
DESCRIPTION SHARE SHARES AMOUNT CAPITAL EXPENSE ADJUSTMENT
- ----------------------------------- ------------- ----------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1994......... $ - 25,578 $1,290,062 $1,604,997 $ -- $ 18,119
Sale of common stock for cash...... 0.024 498,232 11,958 -- -- --
Net loss........................... - -- -- -- -- --
Translation adjustment............. - -- -- -- -- 7,417
------------- ----------- ---------- ---------- ------------ ----------
Balances at March 31, 1995......... - 523,810 1,302,020 1,604,997 -- 25,536
Sale of common stock for cash...... 0.024 340,467 8,171 -- -- --
Common stock issued upon exercise
of stock options................. 0.792- 2.880 18,565 19,678 -- -- --
Net loss........................... - -- -- -- -- --
Translation adjustment............. - -- -- -- -- 827
------------- ----------- ---------- ---------- ------------ ----------
Balances at March 31, 1996......... - 882,842 1,329,869 1,604,997 -- 26,363
Common stock issued upon exercise
of stock options................. 0.792- 2.880 10,684 11,900 -- -- --
Stock issued to vendors for
services......................... 0.731 47,808 34,946 -- -- --
Net loss........................... - -- -- -- -- --
Translation adjustment............. - -- -- -- -- 7,236
------------- ----------- ---------- ---------- ------------ ----------
Balances at December 31, 1996...... - 941,334 1,376,715 1,604,997 -- 33,599
Deferred compensation expense
related to common stock options
(unaudited)...................... - -- -- 1,589,277 (1,589,277) --
Amortization of deferred stock
option compensation
(unaudited)...................... - -- -- -- 965,533 --
Estimated fair value of warrant
issued in connection with note
payable (unaudited).............. - -- -- 67,400 -- --
Common stock issued upon exercise
of stock options (unaudited)..... 0.792 -2.880 15,385 21,516 -- -- --
Net loss for the six months ended
June 30, 1997 (unaudited)........ - -- -- -- -- --
Translation adjustment
(unaudited)...................... - -- -- -- -- 20,569
------------- ----------- ---------- ---------- ------------ ----------
Balances at June 30, 1997
(unaudited)...................... $ - 956,719 $1,398,231 $3,261,674 $ (623,744) $ 54,168
============= =========== ========== ========== ============ ========
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DESCRIPTION DEFICIT DEFICIT
- ----------------------------------- ------------ -------------
<S> <C> <C>
Balances at March 31, 1994......... $(17,666,510) $ (14,753,332)
Sale of common stock for cash...... -- 11,958
Net loss........................... (6,318,379) (6,318,379)
Translation adjustment............. -- 7,417
------------ -------------
Balances at March 31, 1995......... (23,984,889) (21,052,336)
Sale of common stock for cash...... -- 8,171
Common stock issued upon exercise
of stock options................. -- 19,678
Net loss........................... (9,061,178) (9,061,178)
Translation adjustment............. -- 827
------------ -------------
Balances at March 31, 1996......... (33,046,067) (30,084,838)
Common stock issued upon exercise
of stock options................. -- 11,900
Stock issued to vendors for
services......................... -- 34,946
Net loss........................... (7,328,836) (7,328,836)
Translation adjustment............. -- 7,236
------------ -------------
Balances at December 31, 1996...... (40,374,903) (37,359,592)
Deferred compensation expense
related to common stock options
(unaudited)...................... -- --
Amortization of deferred stock
option compensation
(unaudited)...................... -- 965,533
Estimated fair value of warrant
issued in connection with note
payable (unaudited).............. -- 67,400
Common stock issued upon exercise
of stock options (unaudited)..... -- 21,516
Net loss for the six months ended
June 30, 1997 (unaudited)........ (3,012,547) (3,012,547)
Translation adjustment
(unaudited)...................... -- 20,569
------------ -------------
Balances at June 30, 1997
(unaudited)...................... $(43,387,450) $ (39,297,121)
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 71
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH
YEARS FISCAL PERIOD SIX MONTHS
ENDED MARCH 31, ENDED ENDED JUNE 30,
------------------------- DECEMBER 31, -------------------------
1995 1996 1996 1996 1997
----------- ----------- ------------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(6,318,379) $(9,061,178) $(7,328,836) $(5,889,505) $(3,012,547)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 771,390 759,273 633,616 275,260 493,482
Stock issued to vendors for services.............. -- -- 48,677 48,677 --
Compensation expense recorded on stock options to
employees....................................... -- -- -- -- 965,533
Amortization of note payable discount............. -- -- -- -- 16,850
Change in certain assets and liabilities:
(Increase) decrease in accounts receivable...... (12,068) 159,999 (1,662,356) (17,407) (3,376,824)
Decrease (increase) in inventories.............. 606,533 (22,048) (1,925,805) (267,967) (3,400,459)
(Increase) decrease in other current assets..... (39,891) 3,173 (16,402) 3,430 (113,385)
Increase (decrease) in accounts payable and
accrued liabilities.......................... (1,393,515) 797,900 700,485 (96,903) 1,222,013
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities........ (6,385,930) (7,362,881) (9,550,621) (5,944,415) (7,205,337)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements.... (1,147,417) (549,426) (324,944) (204,536) (843,065)
Increase in other assets............................ (16,043) (42,694) (25,026) (14,809) (34,508)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities........ (1,163,460) (592,120) (349,970) (219,345) (877,573)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Repayments of obligations under capital leases...... -- (560,602) (404,277) (162,715) (416,623)
Net proceeds from notes payable..................... -- -- 506,180 -- 5,162,606
Net proceeds from notes payable to vendor........... -- 1,000,000 -- -- --
Net repayment of notes payable to vendor............ (205,900) (1,000,000) -- (994,937) --
Proceeds from (repayments of) notes payable to
stockholders...................................... -- 69,869 (69,869) -- --
Net proceeds from issuance of convertible notes
payable........................................... 246,934 3,702,219 4,781,871 6,984,090 --
Proceeds from sale of redeemable preferred stock.... 8,884,234 3,079,829 4,953,121 4,953,121 6,956,023
Proceeds from sale of common stock.................. 11,958 8,171 -- -- --
Proceeds from exercise of common stock options...... -- 19,678 11,900 28,213 21,516
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities.... 8,937,226 6,319,164 9,778,926 10,807,772 11,723,522
----------- ----------- ----------- ----------- -----------
Effect of translation and exchange rate changes on
cash flows.......................................... 7,417 827 7,236 8,326 20,569
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................ 1,395,253 (1,635,010) (114,429) 4,652,338 3,661,181
Cash and cash equivalents at beginning of period...... 526,950 1,922,203 287,193 127,659 172,764
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 1,922,203 $ 287,193 $ 172,764 $ 4,779,997 $ 3,833,945
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow
information -- cash paid during the period for
interest............................................ $ 191,594 $ 17,273 $ 364,227 $ 27,124 $ 311,641
=========== =========== =========== =========== ===========
Supplemental schedule of noncash financing activities:
Notes payable to stockholders converted into
redeemable preferred stock........................ $ 2,200,000 $ -- $ 6,984,090 $ 6,984,090 $ 1,500,000
Notes payable to stockholders converted into
mandatorily convertible notes payable............. -- 1,000,000 -- -- --
Estimated fair value of warrant in connection with
note payable...................................... -- -- -- -- 67,400
Capital lease obligations incurred to acquire
equipment......................................... 847,604 530,516 632,845 132,629 1,967,343
Stock subscriptions receivable...................... 214,506 3,281,871 -- -- --
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 72
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
Innova Corporation (Company) was formed to develop, manufacture and market
communication systems utilizing conical horn technology. In November 1993, the
Company shipped the first production units of the point-to-point radios. In
November 1994, the Company discontinued manufacture for its own account of the
original radio line; however, production of this product was continued under a
"Processor For Hire Agreement" for the account of one of Innova's stockholders
[see note 7(a), Related Party Transactions] until approximately March 31, 1996.
Also in 1994, a program to redesign the original radios was launched. The
redesign program was undertaken due to changing market demands. For the period
from January 17, 1989 (inception) through March 31, 1996, the Company was
considered to be in the development stage as the Company had not generated
significant revenues from its research and development efforts and "Processor
For Hire Agreement" and operations had been financed primarily through the
issuance of equity securities. Subsequent to March 31, 1996, the Company
effected a change in its year-end to December 31. During the nine month fiscal
period ended December 31, 1996, the Company began manufacturing and selling
redesigned radios and emerged from the development stage.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its
wholly-owned subsidiary, Innova Europe Limited.
Innova Europe Limited was formed to sell products developed and
manufactured by the Company to customers in Europe. All significant intercompany
balances and transactions have been eliminated in consolidation.
(C) CASH EQUIVALENTS
The Company considers all short-term investments with a maturity of three
months or less at date of purchase to be cash equivalents.
(D) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
(E) DEPRECIATION AND AMORTIZATION
Depreciation of equipment and amortization of leasehold improvements is
provided on the straight-line method over the estimated useful lives of the
assets which range from two to five years, not to exceed lease terms for
leasehold improvements.
(F) PATENTS
The Company has filed several patent applications in the United States and
other countries. Costs associated with filing patent applications are expensed
as incurred.
(G) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
F-7
<PAGE> 73
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
Based on the Company's product development process, software development
costs incurred by the Company between the establishment of technological
feasibility and the point at which the product is ready for general release have
not been significant.
(H) REVENUE RECOGNITION
The Company recognizes revenue on product sales upon shipment. The Company
provides certain service and support for its products and accrues for the
estimated amount of these costs at the time of sale. These costs have not been
significant through December 31, 1996. Under the Processor For Hire
Agreement -- (PFHA) as discussed in note 7(a), manufacturing contract service
revenues were recognized as the services were performed.
(I) INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established for deferred tax
assets to the extent there is uncertainty regarding the Company's ability to
generate taxable income in the future and when it is more likely than not that
such deferred tax assets will not be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in net deferred tax assets and liabilities.
(J) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Innova Europe Limited have been translated to
U.S. dollars using rates of exchange in effect at the end of the fiscal year.
Income and expense accounts have been translated to U.S. dollars using annual
average rates of exchange. The net gain or loss resulting from translation is
shown as a cumulative translation adjustment in stockholders' equity.
(K) RECLASSIFICATIONS
Certain reclassification amounts have been made to the March 31, 1995 and
1996 balances to conform to the December 31, 1996 presentation.
(L) CONCENTRATION OF CREDIT RISK AND SUPPLIER CONCENTRATION
The Company currently purchases an important component of its products from
two principal suppliers. Although there are a limited number of potential
manufacturers of such component, management believes that other suppliers could
provide similar components on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing and a possible loss of sales, which could
have a material adverse effect on the manufacturing and delivery of the
Company's products. Purchases from these principal suppliers were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED MARCH ENDED JUNE
31, NINE MONTH FISCAL 30, 1997
------------------- PERIOD ENDED -------------
1995 1996 DECEMBER 31, 1996
------- ------- ----------------- (UNAUDITED)
<S> <C> <C> <C> <C>
Supplier A.............. $ -- $64,000 $ 945,000 $ 1,750,000
Supplier B.............. -- -- 131,000 854,000
</TABLE>
Credit is extended to customers based on an evaluation of their financial
condition and collateral is generally not required. The Company's customers
consist principally of telecommunications service providers and system integra-
F-8
<PAGE> 74
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
tors. The Company will maintain an allowance for doubtful accounts to reduce the
effects of credit losses. As of December 31, 1996, actual credit losses have not
been significant and, therefore, no allowance for doubtful accounts has been
recorded.
The Company actively markets its products in numerous geographical
locations, including North America, Europe, Asia, and South America. The
following customers individually account for more than 10% of accounts
receivable as shown below:
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, -------------
CUSTOMER 1996
-------- ----------------- (UNAUDITED)
<S> <C> <C> <C> <C>
A 60 % 31 %
B 15 16
C -- 35
</TABLE>
Also see related discussion for SAT in footnote 7(b)
(M) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, on April 1, 1996. This Statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not have
a material impact on the consolidated financial statements.
(N) PRODUCT WARRANTIES
The Company provides warranties which generally last for two years, on the
products that it sells. The provision for warranty expense is based on
historical industry and Company experience and is accrued when products are
sold.
(O) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangement in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense under fixed plans would be recorded on the date of
grant only if the fair value of the underlying stock at the date of grant
exceeded the exercise price. Statement of Financial Accounting Standard (SFAS)
No. 123, Accounting for Stock-Based Compensation, requires entities that
continue to apply the provisions of APB Opinion No. 25 for transactions with
employees to provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied to these
transactions.
(P) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the June 30, 1997 and 1996
unaudited interim financial statements include all adjustments consisting only
of normal recurring adjustments, necessary for a fair presentation.
F-9
<PAGE> 75
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(Q) PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock and common stock equivalents
outstanding during each period and the shares resulting from the conversion of
all outstanding shares of preferred stock at the closing of the IPO. Common
stock equivalents include all warrants and stock options which would have a
dilutive effect, applying the treasury stock method. Additionally, common and
common equivalent shares issued during the twelve months immediately preceding
the initial filing of the Company's initial public offering have been included
in the calculation of common and common equivalent shares as if they were
outstanding for all periods presented, including loss years where the impact of
the incremental shares is antidilutive, using the treasury stock method and an
assumed initial public offering price of $11 per share. Due to the significant
impact of the assumed conversion of the redeemable preferred stock upon closing
of the IPO, historical net loss per share is not meaningful and is therefore not
presented.
Supplementary net loss per share is $(0.72) and $(0.27) for the nine month
fiscal period ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
The calculation of supplementary net loss per share assumes that notes
payable outstanding at the beginning of the periods presented were retired with
proceeds from the issuance of common stock. The number of shares of common stock
the proceeds of which were used to retire the notes payable are included in the
calculation.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share, (Statement 128).
This statement establishes standards for the computation, presentation and
disclosure of earnings per share (EPS), replacing the presentation of currently
required Primary EPS with a presentation of Basic EPS. It also requires dual
presentation of Basic EPS and Diluted EPS on the face of the income statement
for entities with complex capital structures. Basic EPS is based on the
weighted-average number of common shares outstanding during the period. Diluted
EPS is based on the potential dilution that would occur, upon exercise or
conversion of securities into common stock using the treasury stock method.
Statement 128 is effective for financial statements for periods ending after
December 15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
(2) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
<PAGE> 76
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JUNE 30,
1996 1996 1997
--------- ------------ ----------
(unaudited)
<S> <C> <C> <C>
Raw materials......................... $ 608,165 $1,874,765 $4,600,819
Work-in-progress...................... -- 503,984 1,333,610
Finished goods........................ -- 155,221 --
---------- ---------- ----------
$ 608,165 $2,533,970 $5,934,429
========== ========== ==========
</TABLE>
(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JUNE 30,
1996 1996 1997
---------- ------------ ----------
(unaudited)
<S> <C> <C> <C>
Equipment and molds................. $4,221,195 $5,152,170 $7,943,163
Leasehold improvements.............. 114,026 140,840 160,255
---------- ---------- ----------
4,335,221 5,293,010 8,103,418
Less accumulated depreciation and
amortization...................... 2,012,033 2,645,649 3,139,131
---------- ---------- ----------
$2,323,188 $2,647,361 $4,964,287
========== ========== ==========
</TABLE>
Included in equipment and leasehold improvements are the gross amount of
equipment and related accumulated amortization recorded under capital leases as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JUNE 30,
1996 1996 1997
---------- ------------ ----------
(unaudited)
<S> <C> <C> <C>
Equipment............................. $2,054,332 $2,632,721 $4,600,054
Less accumulated amortization....... 829,852 1,181,895 1,446,938
---------- ---------- ----------
$1,224,480 $1,450,826 $3,153,116
========== ========== ==========
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
(5) NOTES PAYABLE
In October 1996, the Company entered into a $5 million revolving credit
agreement which bears interest at the LIBOR rate plus 4.875% with a minimum of
8% per annum (10.545% at December 31, 1996 and 10.595% at June 30, 1997).
Amounts outstanding were $0, $506,180, and $4,118,236 at March 31, 1996,
December 31, 1996 and June 30, 1997, respectively. Under the terms of the
agreement, advances under the credit facility are limited to 80% of billed trade
receivables outstanding. The agreement is subject to automatic renewals for
successive one-year
F-11
<PAGE> 77
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
terms. In April 1997, the Company amended the credit agreement to include an
additional term loan for $1,500,000 due on the earlier of:
(a) April 30, 1998;
(b) the date the initial October 1996 revolving credit agreement
terminates; or
(c) the date the Company first issues equity, debt or other
securities, other than the Series F financing discussed in note 17,
subsequent to April 1997.
Interest is payable monthly with interest at the LIBOR rate plus 4.875%
with a minimum of 8% per annum. In connection with the term loan, the Company
issued to the lender a warrant to purchase 21,500 shares of the Company's common
stock, at $6.96 per share. The warrant expires in April 2003. The estimated
value of the warrant $67,400, was recorded as debt discount and is being
amortized to interest expense over the period that the debt is outstanding.
(6) ACCRUED LIABILITIES
A summary of accrued liabilities is as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JUNE 30,
1996 1996 1997
--------- ------------ -----------
(unaudited)
<S> <C> <C> <C>
Accrued compensation expense............. $ 171,954 $288,965 $ 361,375
Provision for warranty................... -- 20,479 78,029
Other accruals........................... 168,175 45,838 75,082
-------- -------- --------
$ 340,129 $355,282 $ 514,486
======== ======== ========
</TABLE>
(7) RELATED PARTY TRANSACTIONS
(A) SALES, MANUFACTURING AND SERVICE REVENUES
Sales totaling approximately $212,000 were made to the Company's major
stockholder during the nine month fiscal period ended December 31, 1996.
Substantially all of the total revenues recorded in the year ended March
31, 1996 were to a stockholder of the Company, Societe Anonyme de
Telecommunications (SAT). In November 1994, the Company entered into an
agreement [Processor For Hire Agreement -- (PFHA)] with SAT whereby SAT
purchased substantially all of the Company's inventories as of November 1994 for
cash. The PFHA called for the Company to continue to manufacture radios for SAT;
however, SAT was responsible for supplying the materials used in the manufacture
of these radios. Under the PFHA, SAT reimbursed the Company for the costs
incurred by the Company in the assembly and testing of the radios. In addition,
SAT paid to the Company a fee to cover administrative costs plus a profit. This
fee was based on the volume of materials purchased for SAT for the production of
the radios. The Company managed all of the manufacturing and purchasing
functions associated with the manufacture of radios and the purchase of radio
components. The PFHA was substantially terminated as of March 31, 1996.
The reimbursement of the costs of manufacture along with the administration
fee during the fiscal year ended March 31, 1995 and 1996 and the nine month
fiscal period ended December 31, 1996 have been recorded as manufacturing
contract service revenues in the consolidated statements of operations. The
identifiable costs associated with the manufacture of the radios covered by the
PFHA have been summarized in the consolidated statements of operations as
manufacturing contract service expenses.
F-12
<PAGE> 78
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
Product sales made to SAT for the nine month fiscal period ended December
31, 1996 were approximately $3,000 and for the six months ended June 30, 1997
were approximately $3,532,000.
(B) ACCOUNTS RECEIVABLE
Accounts receivable due from SAT were $76,523, $58,283 and $2,641,717 at
March 31, 1996, December 31, 1996 and June 30, 1997, respectively.
(C) MANDATORILY CONVERTIBLE NOTES PAYABLE FOR PREFERRED STOCK, STOCK
SUBSCRIPTIONS RECEIVABLE AND RELATED EQUITY TRANSACTIONS
On March 27, 1996, the Company entered into stock subscription agreements
with certain existing stockholders for the purpose of selling Series D preferred
stock for an aggregate price of $7,000,000. The $7,000,000 includes $1,000,000
in unsecured notes payable to stockholders issued in November and December 1995
as discussed in the following paragraph. As of March 31, 1996, proceeds of
$3,702,219 net of offering costs of $15,910, had been received by the Company
related to the stock subscription agreements. The remaining $3,281,871 was
received during the nine month fiscal period ended December 31, 1996.
Mandatorily convertible notes payable were issued as the cash was received by
the Company. Mandatorily convertible notes payable accrued interest at 16%
annually and were convertible into Series D preferred shares at the earlier of a
"qualified financing" event or April 26, 1996. A "qualified financing" event, as
defined in the stock subscription agreements, was consummated on April 26, 1996
when the Company issued 1,548,940 shares of Series D preferred stock, at $3.228
per share to a new stockholder for proceeds of $4,953,121. The mandatorily
convertible notes payable outstanding at April 26, 1996 were then converted into
2,168,523 shares of Series D preferred stock at $3.228 per share, and contingent
common stock purchase warrants (contingent upon the pricing of the "qualified
financing" event) totaling 367,082 with an exercise price of $0.024 per share,
were issued to the former holders of the mandatorily convertible notes payable.
No separate value has been assigned to the warrants as the value was not
significant at the date of issuance.
Unsecured notes payable to stockholders were issued in November and
December 1995 totaling $1,000,000, bearing interest at rates ranging from
16%-21%. In connection with these notes, 193,611 warrants were issued to
purchase common stock for $2.5824 per share which expire April 26, 2001. No
separate value has been assigned to the warrants as the value was not
significant at the date of issuance. On March 27, 1996, these unsecured notes
payable were exchanged for mandatorily convertible notes payable as part of the
stock subscription agreements described above.
Interest expense on unsecured borrowings from stockholders amounted to
$79,357, $107,648, $70,101 and $62,934 for the years ended March 31, 1995 and
1996, the nine month fiscal period ended December 31, 1996 and the six months
ended June 30, 1997, respectively.
In November 1996, the Company issued $1,500,000 in unsecured 12%
convertible promissory notes payable to stockholders, which were subsequently
repaid by notes which in turn were converted into Series E preferred stock in
March 1997.
(D) COMPENSATION EXPENSE
In May 1996, the Company paid a representative of a stockholder $217,500
for services rendered from January 1995 to February 1996, who served as the
acting Chief Operating Officer of the Company.
F-13
<PAGE> 79
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(8) COMMON AND REDEEMABLE PREFERRED STOCK
The Company has authorized issuance of common and redeemable preferred
stock as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING LIQUIDATION
SHARES --------------------------------- PREFERENCE
TYPE SERIES AUTHORIZED 3/31/96 12/31/96 6/30/97 PER SHARE
- ------------------------------------ ------- ---------- ------- --------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Common.............................. 16,666,666 882,841 941,333 956,719 None
A Preferred......................... A.1 833,333 667,120 667,120 667,120 $ 13.2360
A Preferred......................... A.2 833,333 -- -- -- 0.8400
A Preferred......................... A.3 2,500,000 907,023 907,023 907,023 7.9176
B Preferred......................... B 2,083,333 804,553 804,553 804,553 6.0600
C Senior Preferred.................. C 833,333 664,298 664,298 664,298 6.3672
C Senior Preferred.................. C1 625,000 453,946 456,294 456,294 6.3672
D Preferred......................... D 4,166,666 -- 3,717,463 3,717,463 3.2280
E Preferred......................... E 1,000,000 -- -- 962,669 5.1936
F Preferred......................... F 504,166 -- -- 502,867 6.9600
</TABLE>
F-14
<PAGE> 80
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
The following table summarizes activity of the Company's preferred stock
for the years ended March 31, 1995 and 1996, the nine month fiscal period ended
December 31, 1996 and the six months ended June 30, 1997:
<TABLE>
<CAPTION>
PREFERRED STOCK
PRICE --------------------------
DESCRIPTION PER SHARE SHARES AMOUNT
- ------------------------------------------------------ --------- ------------ -----------
<S> <C> <C> <C>
Balances at March 31, 1994............................ $ -- 958,075 $13,197,831
Issuance of Series A.1 preferred stock pursuant to
antidilution agreements............................. -- 324,143 --
Issuance of Series A.3 preferred stock pursuant to
antidilution agreements............................. -- 14,045 --
Conversion of notes payable to Series A.3 preferred
stock............................................... 7.916808 214,724 1,700,000
Sale of B preferred stock for cash, net of issuance
costs of $120,430................................... 6.084984 364,855 2,099,707
Sale of B preferred stock for cash.................... 6.367992 439,698 2,800,000
Conversion of notes payable to Series A.3 preferred
stock............................................... 7.916808 63,156 500,000
Sale of Series C senior preferred stock for cash, net
of issuance costs of $30,759........................ 6.3672 664,298 4,199,033
--------- ---------- -----------
Balances at March 31, 1995............................ -- 3,042,994 24,496,571
Sale of Series C1 senior preferred stock, net of
issuance
costs of $21,633.................................... 6.3672 422,625 2,669,359
Sale of Series C1 senior preferred stock, net of
issuance
costs of $3,472..................................... 6.3672 31,320 195,964
--------- ---------- -----------
Balances at March 31, 1996............................ -- 3,496,939 27,361,894
Sale of Series D preferred stock for cash, net of
issuance
costs of $46,879.................................... 3.228 1,548,940 4,953,121
Conversion of convertible notes for Series D preferred
stock............................................... 3.228 2,168,523 6,984,090
Series C1 preferred stock issued to vendors for
services............................................ -- 2,349 13,731
--------- ---------- -----------
Balances at December 31, 1996......................... -- 7,216,751 39,312,836
Conversion of notes payable to Series E preferred
stock
(unaudited)......................................... 5.19384 288,799 1,500,000
Sale of Series E preferred stock for cash, net of
issuance
costs of $13,530 (unaudited)........................ 5.19384 673,870 3,486,465
Sale of Series F preferred stock for cash, net of
issuance
costs of $30.425 (unaudited)........................ 6.96000 502,867 3,469,558
--------- ---------- -----------
Balances at June 30, 1997 (unaudited)................. $ -- 8,682,287 $47,768,859
========= ========== ===========
</TABLE>
The shares of preferred stock are convertible into an equal number of
common shares at any time, are automatically convertible upon the consummation
of an initial public offering (IPO), have certain liquidation and dividend
preferences over common shares, and also have certain antidilution rights. The
preferred shares are redeemable, at the holder's option (subject to approval by
50% of all preferred shares then outstanding), at any time after October 1,
1997. The redemption value is $7.9176 per share for the A preferred shares. The
redemption value is equal to the liquidation preference for all other preferred
shares (appropriately adjusted for stock splits, stock dividends, combinations,
recapitalizations, reclassification and similar corporate rearrangements) plus
the amount of all declared and unpaid dividends thereon. All C Senior Preferred
and D Preferred shares have preference to other preferred shares with regard to
liquidation. Holders of all preferred shares have the right as a group to elect
three members of the Company's Board of Directors. The remaining directors are
elected by the holders of all outstanding preferred and common shares. The
voting rights are the same for all preferred and common shares. Pursuant to the
rules of the
F-15
<PAGE> 81
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
Securities and Exchange Commission, the Company has classified redeemable
preferred stock outside stockholders' equity (deficit).
In March 1997, the Company revised its Articles of Incorporation,
increasing the authorized number of preferred shares to 12,874,998 of which
1,000,000 shares are designated as Series E Preferred stock which have identical
preferences as the Series C Senior Preferred and D Preferred, except that the
liquidation preference is $5.1936 per share.
In conjunction with various financing rounds, warrants have been issued. No
separate value has been assigned to the warrants as the values were not
significant at the date of issuance, other than the 21,500 warrants with an
exercise price of $6.96 per share issued in connection with the debt financing
in April 1997. Outstanding warrants at March 31, 1996 and December 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
-------------------------------------
6/30/97 EXERCISE PRICE
ISSUED IN CONJUNCTION WITH: 3/31/96 12/31/96 ----------- OF WARRANT EXPIRE
- ------------------------------ ----------- ----------- (UNAUDITED) -------------- ------------------
<S> <C> <C> <C> <C> <C>
Series A.2 preferred stock.... 481,977 481,977 481,977 $ 0.8400 May 31, 1999
Series C and D preferred
stock....................... 2,252,049 2,252,049 2,252,049 0.0240 February 13, 2000
through
April 26, 2001
Series D preferred stock...... 193,611 193,611 193,611 2.5824 April 26, 2001
Term loan..................... 21,500 6.9600 April 30, 2002
----------- ----------- ---------
Total.................. 2,927,637 2,927,637 2,949,137
=========== =========== =========
</TABLE>
As of June 30, 1997, there are 2,949,137 warrants exercisable to purchase
common stock.
(9) STOCK OPTION PLAN
The Company has a stock option plan (Plan) to compensate key employees,
consultants and vendors for past and future services and has authorized a total
of 1,458,333 shares of common stock to be reserved for grants. In the first
quarter of 1997, a plan amendment was approved increasing shares available for
grant by 125,000 bringing the total authorized to 1,583,333. Options may be
granted under the Plan as either incentive stock options or as nonqualified
stock options.
Incentive stock options may be granted at prices not less than fair market
value of the stock, generally are exercisable based on continued employment over
a five-year period in equal increments each year beginning one year from the
date of grant, and expire ten years from the date of grant. The Company has
granted no incentive stock options to date.
Nonqualified options may be granted at prices determined by the Company and
generally expire twenty years from the date of grant. The options vest and
become exercisable over one to four years in cumulative increments beginning one
year from the date of grant. A distinction is made between nonqualified time
vesting and nonqualified time and performance vesting options. Nonqualified time
and performance vesting options require the attainment of certain performance
goals in addition to the passage of time prior to vesting.
In accounting for the options requiring the attainment of certain
performance goals, the Company must include a determination of compensation cost
at the end of each period if the market value of the shares of the Company's
stock exceeds the exercise price. Any compensation cost shall be charged to
expense over the periods the employee performs the related service. During the
first quarter in 1997, the Company amended the terms of 460,633 stock options by
eliminating the performance criteria. The table below reflects these performance
options as being amended to time
F-16
<PAGE> 82
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
vesting. The Company has recorded deferred stock option compensation totaling
$1,279,900 and $309,377 during the first and second quarters in 1997,
respectively. The first quarter of 1997 deferred stock option compensation
relates principally to the 460,633 options with performance goals outstanding
prior to the elimination of the performance criteria. In addition, the deferred
stock option compensation includes some amounts recorded for nonqualified time
vesting grants where the estimated market value of the shares of the Company's
stock exceeded the exercise price at the date of the grant. The estimated market
value of the Company's common stock used in calculating the majority of the
deferred stock option compensation was approximately $4.32 per share. The second
quarter of 1997 deferred stock option compensation relates principally to the
authorization by the Board of Directors for the future grant of 56,250 options
to employees that vest upon the attainment of certain performance goals. The
estimated fair market value of the Company's Common Stock used in calculating
deferred stock compensation related to the 56,250 future option grants was
approximately $10.00 per share. In June 1997, the Company amended the terms of
these future stock option grants by eliminating the performance criteria. The
56,250 options are not reflected in the table below. The exercise price of these
options range from $3.60 to $6.00 per share.
A summary of nonqualified time vesting and time and performance vesting
stock options is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------
NUMBER OF SHARES
SHARES --------------------------
AVAILABLE TIME AND WEIGHTED
FOR FUTURE TIME PERFORMANCE AVERAGE
GRANT VESTING VESTING EXERCISE PRICE
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Balances at March 31, 1995.............. 64,006 347,033 -- $ 1.0584
Options granted......................... (1,235,293) 602,780 632,513 1.5840
Options expired......................... 299,657 (136,338) (163,319) 0.8736
Options exercised....................... -- (18,565) -- 1.0608
Plan amendment.......................... 1,041,667 -- -- --
----------- ---------- -----------
Balances at March 31, 1996.............. 170,037 794,910 469,194 1.5120
Options granted......................... (409,896) 255,138 154,758 1.7280
Options expired......................... 238,753 (75,434) (163,319) 0.7560
Options exercised....................... -- (10,684) -- 1.1136
----------- ---------- -----------
Balances at December 31, 1996........... (1,106) 963,930 460,633 1.6128
Options granted (unaudited)............. (275,353) 275,353 -- 5.4700
Options canceled (unaudited)............ 29,233 (29,233) -- 0.9816
Options exercised (unaudited)........... -- (15,385) -- 1.3982
Options amended (unaudited)............. -- 460,633 (460,633) 1.9680
Plan amendment (unaudited).............. 625,000 -- -- --
----------- ---------- -----------
Balances at June 30, 1997 (unaudited)... 377,774 1,655,298 -- $ 2.1910
=========== ========== ===========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plans, and
accordingly compensation cost is recognized only for those options in which the
fair value of the underlying common stock exceeds the exercise price at the date
of grant. No compensation cost for the years ended March 31, 1995 and 1996 and
the nine month fiscal period ended December 31, 1996 has been recognized for its
employee stock options in the consolidated financial statements. For the six
months ended June 30, 1997 the Company recognized deferred stock compensation
expense of $1,589,277. Had the Company determined compensation cost of employee
stock options based on the fair value at the grant date for its stock options
under SFAS No. 123, the Company's pro forma net loss would not have been
significantly different than the reported net loss.
F-17
<PAGE> 83
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
The weighted-average fair value per share of the grants made during the
year ended March 31, 1996 and the nine month fiscal period ended December 31,
1996 was approximately $0.02 and $0.054 respectively. The fair value of the
stock options granted was estimated on the date of grant using the minimum-value
method with the following weighted-average assumptions: for the year ended March
31, 1996 -- expected dividend yield 0%, risk-free interest rate averaging
approximately 6.1%, and an expected life ranging from two to six years; for the
nine month fiscal period ended December 31, 1996 -- expected dividend yield 0%,
risk-free interest rate averaging approximately 6.3%, and an expected life
ranging from two to six years.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING --------------------------------
--------------------------------------------------------------- WEIGHTED-
EXERCISE NUMBER WEIGHTED-AVERAGE REMAINING WEIGHTED- AVERAGE NUMBER AVERAGE EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- -------------- ----------- -------------------------- ---------------- ----------- ----------------
<C> <S> <C> <C> <C> <C> <C>
$ 0.024 -0.144 4,224 1.5 years $ 0.096 4,224 $ 0.096
0.240 -0.288 10,832 1 year 0.240 10,832 0.240
0.792 452,640 1.5 years 0.792 225,158 0.792
1.968 921,265 2 years 1.968 -- --
2.880 -6.360 35,602 1.5 years 2.976 34,876 2.976
---------- ----------
1,424,563 1.75 years $ 1.613 275,090 $ 1.037
========== ==========
</TABLE>
(10) EMPLOYEE BENEFIT PLAN
In January 1996, the Company implemented a 401(k) plan that covers all
employees who satisfy certain eligibility requirements relating to minimum age,
length of service and hours worked. Under the profit sharing portion of the
plan, the Company may make an annual contribution for the benefit of eligible
employees in an amount determined by the Board of Directors. As of June 30,
1997, the Company had not made any contributions to the plan. Under the 401(k)
portion of the plan, eligible employees may make pretax elective contributions
of up to 10% of their compensation, subject to maximum limits on contributions
prescribed by law.
(11) INCOME TAXES
The Company has not recorded an income tax benefit for the years ending
March 31, 1995 and 1996, and the nine month fiscal period ended December 31,
1996 due to the recording of a valuation allowance as an offset to net deferred
tax assets. A valuation allowance is provided due to uncertainties relating to
the realization of deferred tax assets.
F-18
<PAGE> 84
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 31, JUNE 30,
1996 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Writedown of inventories, deductible in different
years for tax purposes............................ $ 203,000 $ 158,500 $ 140,500
Equipment and leasehold improvements, principally
due to differences in depreciation and
amortization...................................... 230,000 236,700 168,000
Accrued liabilities deductible in different years
for tax purposes.................................. 219,000 199,600 136,300
Amortization of stock option expense deductible in
different years for tax purposes.................. 292,600 292,600 621,000
Net operating loss carryforwards.................... 10,147,000 12,544,900 13,390,800
----------- ----------- -----------
Total gross deferred tax assets........... 11,091,600 13,432,300 14,456,600
Less valuation allowance.......................... 11,091,600 13,432,300 14,456,600
----------- ----------- -----------
Net deferred tax assets................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The valuation allowance for deferred tax assets increased $1,826,500 for
the year ended March 31, 1995, $3,616,600 for the year ended March 31, 1996,
$2,340,700 for the nine month fiscal period ended December 31, 1996 and
$1,024,300 for the six months ended June 30, 1997.
At December 31, 1996, the Company had tax net operating loss carryforwards
available to offset future Federal taxable income, if any, of approximately $35
million expiring in 2005 through 2012. At December 31, 1996, the Company also
has net operating tax loss carryforwards available to offset future United
Kingdom taxable income, if any, of approximately $1.8 million expiring in 2006
through 2011.
The utilization of the tax net operating loss carryforwards may be limited
due to ownership changes that have occurred as a result of the sale of common
and preferred stock.
(12) LEASE COMMITMENTS
The Company is obligated under various capital leases for certain equipment
that expire at various dates during the next three years. The Company also has
certain noncancelable operating leases that expire over the next two years and
require the Company to pay certain executory costs such as maintenance and
taxes. Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1996 are:
F-19
<PAGE> 85
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -------
<S> <C> <C>
Years ending December 31:
1997................................................ $ 611,455 $63,335
1998................................................ 356,654 21,934
1999................................................ 178,575 --
---------- -------
Total minimum lease payments................ 1,146,684 $85,269
=======
Less amount representing interest (at rates averaging
15%)................................................ 100,598
----------
Present value of net minimum capital lease
payments.................................. 1,046,086
Less current installments of obligations under capital
leases.............................................. 503,827
----------
Obligations under capital leases, excluding
current installments...................... $ 542,259
==========
</TABLE>
Rental expense for these operating leases totaled $292,600 for the year
ended March 31, 1995, $235,003 for the year ended March 31, 1996, $240,917 for
the nine month fiscal period ended December 31, 1996 and $263,523 for the six
months ended June 30, 1997.
Subsequent to December 31, 1996, the Company entered into certain capital
leases with terms of three years for manufacturing and test equipment. Lease
payments over the next three years for this equipment will total approximately
$548,000 per year.
(13) MAJOR CUSTOMERS AND SEGMENT INFORMATION
The Company currently operates in a single segment selling millimeter wave
radio systems. Product sales during the nine month fiscal period ended December
31, 1996 and the six months ended June 30, 1997 to individual customers and by
geographic region accounting for more than 10% of total revenues are shown
below:
<TABLE>
<CAPTION>
SIX MONTHS
NINE MONTH ENDED
FISCAL PERIOD JUNE 30, 1997
GEOGRAPHIC ENDED -------------
CUSTOMER REGION DECEMBER 31, 1996
--------------------------------- ---------- ----------------- (UNAUDITED)
<C> <S> <C> <C>
A................................ Canada 50% 50%
B................................ U.S. 13 12
C................................ U.S. 10 --
D................................ France -- 28
</TABLE>
Product sales by geographic region were as follows:
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD SIX MONTHS
ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(UNAUDITED)
<S> <C> <C>
Canada...................................... $ 1,035,002 6,341,358
U.S......................................... 656,248 1,548,708
France...................................... -- 3,532,134
Mexico...................................... 279,567 729,783
Other....................................... 79,428 430,274
--------- ----------
$ 2,050,245 $ 12,582,452
========= ==========
</TABLE>
F-20
<PAGE> 86
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
Manufacturing contract service revenues for all periods presented were to a
single customer, located in France.
(14) OPERATIONS AND FINANCING
The Company's consolidated financial statements have been prepared on a
going concern basis.
The Company incurred a net loss of $7,328,836, had negative cash flows from
operations of $9,550,621, and an accumulated deficit of $40,374,903 as of and
for the nine month fiscal period ended December 31, 1996. The Company has
expended a significant amount of cash in developing its technology and
redesigned radios and during the nine month fiscal period ended December 31,
1996, the Company commenced principal operations. The Company expects to expand
its manufacturing and sales efforts during 1997 and to reach profitable levels
during 1997. Although, as of June 1997, the Company has a significant sales
order backlog, and is successfully manufacturing its redesigned radios,
management recognizes that to sustain the rate of growth projected and to meet
working capital requirements, additional resources may be necessary.
Accordingly, in March 1997, the Company closed a Series E preferred stock
financing transaction totaling $5 million. Included in the $5 million financing
was the conversion of unsecured convertible promissory notes payable to
stockholders. Additional financing is discussed in note 17. In addition, the
Company has retained investment banking counsel to advise it on the possible
sale of additional equity securities in connection with a proposed IPO. The
Company intends to offer for sale, as part of the IPO, 2,500,000 shares of
common stock at a price ranging from $10 to $12 per share.
Management expects that these efforts will result in adequate near term
financing. No assurances can be given that the Company will achieve
profitability or positive cash flow.
(15) CONTINGENCIES
The Company is subject to various legal proceedings and claims which have
arisen in the ordinary course of its business. These actions when ultimately
concluded and determined will not, in the opinion of management, have a material
effect on results of operations or the financial condition of the Company.
(16) FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities,
obligations under capital leases, notes payable and notes payable to
stockholders. The fair value of obligations under capital leases, notes payable
and notes payable to stockholders estimates their recorded values based on
current rates available to the Company. The remaining financial instruments have
a short-term until maturity or settlement in cash and, therefore, the carrying
value approximates fair value.
(17) SUBSEQUENT EVENTS
In June 1997:
- - The Board of Directors authorized the increase in the number of common shares
to 16,666,666 and preferred shares to 13,379,164 of which 504,166 shares are
designated as Series F Preferred Stock which have identical preferences as the
Series C Senior Preferred, D and E Preferred, except that the liquidation
preference is $6.96 per share. Also in June 1997, the Company issued 502,867
shares of Series F Preferred Stock at $6.96 per share, for total cash
consideration of $3,500,000, before issuance costs.
- - The Board of Directors authorized a 24:1 reverse stock split on its common and
preferred stock and eliminated the par values related thereto. In addition,
the Board subsequently approved changes in the authorized number of
F-21
<PAGE> 87
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
preferred shares to 5,000,000 and common shares to 30,000,000, to be effective
upon closing of the IPO. These consolidated financial statements and notes
thereto have been restated for these actions.
- - A plan amendment to the Company's Stock Option Plan was approved increasing
shares available for grant by 500,000 bringing the total authorized to
2,083,333.
- - The Board of Directors authorized a Stock Option Plan for Nonemployee
Directors for which 120,000 shares of common stock were reserved for sale and
issuance under the plan. Under the provisions of the plan, 48,263 options were
granted with an exercise price of $9.84 per share and a vesting period of 4
years.
- - The Board of Directors amended the terms of 56,250 future stock option grants,
discussed in footnote (9), by eliminating the performance criteria.
- - The Board of Directors authorized management to file a registration statement
with the Securities and Exchange Commission to permit the Company to sell
shares of its common stock to the public. Upon completion of the Company's
initial public offering, each outstanding share of redeemable preferred stock
will convert into one share of common stock. Unaudited pro forma stockholders'
equity reflects the assumed conversion of the redeemable preferred stock into
common stock as of June 30, 1997.
- - Prior to June 1997, certain warrants to purchase 481,977 of Series A.2
preferred stock were outstanding. In June, 1997, the Company amended the
warrants to provide that if the outstanding preferred shares of the Company is
converted into common shares, the warrants will be for the purchase of 481,977
shares of common stock.
F-22
<PAGE> 88
[PHOTOGRAPH OF COMPANY'S LOGO AND MISSION STATEMENT]
The artwork for the inside back cover of the Prospectus is a color photograph of
the Company's logo (which is the word Innova with an inverted triangle over the
"I" in "Innova"), and the Company's mission statement ("Dramatically Changing
the Economics of Wireless Networks").
<PAGE> 89
======================================================
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained herein and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the Common Shares offered hereby, nor does it constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
to any person in any jurisdiction in which it is unlawful to make such an offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
The Company............................ 18
Use of Proceeds........................ 18
Dividend Policy........................ 18
Capitalization......................... 19
Dilution............................... 20
Selected Financial Data................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 22
Business............................... 31
Management............................. 45
Certain Transactions................... 50
Principal Shareholders................. 55
Description of Capital Stock........... 57
Shares Eligible for Future Sale........ 59
Underwriting........................... 61
Legal Matters.......................... 62
Experts................................ 62
Additional Information................. 63
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
------------------------------
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
Offering, may be required to deliver a Prospectus. This is in addition to the
obligation of dealers to deliver a Prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
======================================================
======================================================
2,500,000 SHARES
[INNOVA LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
, 1997
---------------------------
UBS SECURITIES
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
======================================================
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission.................... $ 10,345
NASD Filing Fee........................................................... 3,500
Nasdaq National Market Listing Fee........................................ 47,848
Accountants' Fees and Expenses............................................ 105,000
Blue Sky Filing and Counsel Fees and Expenses............................. 15,000
Printing and Engraving Expenses........................................... 125,000
Legal Fees and Expenses................................................... 200,000
Transfer Agent and Registration Fees...................................... 5,000
Miscellaneous Expenses.................................................... 288,307
--------
TOTAL........................................................... $800,000
========
</TABLE>
- ---------------
* All expenses other than the Securities and Exchange Commission Registration
Fee, the NASD Filing Fee and the Nasdaq National Market Fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article V, Section 5.1, of the Registrant's Second Restated
Articles of Incorporation (Exhibit 3.1 hereto) and Article X of the Registrant's
Amended and Restated Bylaws (Exhibit 3.2 hereto) provide for mandatory
indemnification of the Registrant's directors, officers, employees and agents to
the maximum extent permitted by law. (The directors and officers of the
Registrant also may be indemnified against liability they may incur for serving
in that capacity pursuant to a liability insurance policy maintained by the
Company for such purpose.)
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's liability to the corporation or its
shareholders for monetary damages for acts or omissions as a director, except in
certain circumstances involving intentional misconduct, self-dealing or illegal
corporate loans or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article V, Section 5.2, of the Registrant's
Amended and Restated Articles of Incorporation contains provisions implementing,
to the fullest extent permitted by Washington law, such limitations on a
director's liability to the Registrant and its shareholders.
Reference is made to the Registrant's Second Restated Articles of
Incorporation, filed as Exhibit 3.1 to this Registration Statement, and the
Registrant's Amended and Restated Bylaws, filed as Exhibit 3.2 to this
Registration Statement. The provisions of the Registrant's Second Restated
Articles of Incorporation regarding indemnification of officers and directors
are substantially the same as those of Article V of the Registrant's Restated
Articles of Incorporation, to be filed as Exhibit 3.2 to this Registration
Statement.
Reference is also made to the form of Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement for certain provisions regarding the
indemnification of officers and directors of the Registrant by the Underwriters.
II-1
<PAGE> 91
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 31, 1994, the Registrant has issued the following unregistered
securities (all share amounts have been adjusted as necessary to reflect a 24:1
reverse stock split to be effected prior to the offering):
(1) An aggregate of 214,724 shares of Series A Preferred Stock were
issued in May 1994 at $7.9168 per share to 20 investors, all of whom were
venture funds and other accredited investors, for an aggregate
consideration of $1,700,000 in outstanding promissory notes. In addition,
warrants for 462,639 shares of Series A Preferred Stock, exercisable at
$0.84 per share were issued in May 1994.
(2) An aggregate of 364,855 shares of Series B Preferred Stock were
issued in May 1994 upon (i) the conversion of a $1,000,000 promissory note
plus $20,135 in accrued interest and (ii) the payment of $1,999,997 in
cash, at a price per share of $6.0850 to three investors, all of whom were
venture funds and other accredited investors. In addition, the Company sold
three options exercisable for an aggregate of 882,286 shares at various
exercise prices. Only the first of these options was exercised, for 439,698
shares at an exercise price of $6.3679 per share, in July and August 1996.
(3) An aggregate of 63,156 shares of Series A Preferred Stock issued
in December 1994 at $7.9168 per share to a venture fund and another
accredited investor, pursuant to the conversion of promissory notes. In
addition, warrants for 19,338 shares of Series A Preferred Stock,
exercisable at $0.84 per share, were issued in December 1994.
(4) In February 1995, 253,081 shares of Series C Senior Preferred
Stock were issued at $6.3672 per share and 189,810 shares of Common Stock
were issued at $0.024 per share to twelve investors, all of whom were
venture funds and other accredited investors. In April 1995, 411,217 shares
of Series C Senior Preferred Stock were issued at $6.3672 per share and
308,410 shares of Common Stock were issued at $0.024 per share, to fifteen
investors, all of whom were venture funds and other accredited investors.
In addition, warrants for 1,204,050 shares of Common Stock, exercisable at
$0.024 per share, were issued in connection with these financings.
(5) In September 1995, 422,625 shares of Series C1 Senior Preferred
Stock were issued at $6.3672 per share, and 316,965 shares of Common Stock
were issued at $0.024 per share, to seventeen investors, all of whom were
venture funds and other accredited investors. In November 1995, 31,320
shares of Series C1 Senior Preferred Stock were issued at $6.3672 per
share, and 23,488 shares of Common Stock were issued at $0.024 per share,
to seven investors, all of whom were venture funds and other accredited
investors. In addition, warrants for 680,917 shares of Common Stock,
exercisable at $0.024 per share, were issued in connection with the Series
C1 Senior Preferred Stock financing.
(6) In April 1996, an aggregate of 3,717,463 shares of Series D
Preferred Stock were issued at $3.228 per share to 21 investors, all of
whom were venture funds and other accredited investors. In addition,
warrants for 193,611 shares of Common Stock, exercisable at $2.5824 per
share, and warrants for 367,082 shares of Common Stock, exercisable at
$0.024 per share, were issued.
(7) In May 1996, 2,349 shares of Series C1 Senior Preferred Stock, and
5,285 shares of Common Stock, were issued to William C. Eatherly, a
consultant to the Company, in consideration for his services.
(8) In June 1996, 42,521 shares of Common Stock were issued to Berson
& Associates and the Berson & Associates Employee Retirement Trust in
consideration for consulting services rendered to the Company by Berson &
Associates.
(9) In March 1997, 962,669 shares of Series E Preferred Stock were
issued at $5.1938 per share to 21 investors, all of whom were venture funds
and other accredited investors, for cash and upon conversion of various
promissory notes issued in the period of November 1996 through March 1997.
(10) In April 1997, the Company issued a warrant to purchase 21,500
shares of Common Stock to Greyrock Capital, a commercial lending
institution, in connection with the execution of a credit facility made
available to the Company.
II-2
<PAGE> 92
(11) In June 1997, 502,867 shares of Series F Preferred Stock were
issued at a price of $6.96 per share to eleven investors, all of whom were
venture funds and other accredited investors.
(12) Employees, directors and consultants exercised compensatory stock
options received pursuant to Innova Corporation 1990 Stock Option Plan
(Amended and Restated 1992) stand alone stock options and warrants for an
aggregate of approximately 44,634 shares of Common Stock issued at prices
ranging from $0.024 to $6.36 per share.
No underwriters were engaged in connection with the sale of securities
described above. The issuance of stock to Mr. Eatherly and Berson & Associates
in compensation for services rendered to the Company were made in reliance upon
the exemption from registration set forth in Section 3(b) of the Securities Act
of 1933 (the "Securities Act") and Rule 701 promulgated thereunder. All other
sales of securities described above were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving a public offering. Upon consummation of the
Offering, all shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Senior Preferred Stock, Series C1 Senior Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock will
automatically convert into an equal number of shares of Common Stock. Each of
the investors in such financings represented that the shares were being
purchased with investment intent and that they were accredited investors, and
agreed to placement of a legend on the securities restricting transfer.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------
<S> <C>
1.1 Proposed Form of Underwriting Agreement
3.1 Proposed Second Restated Articles of Incorporation (As will be effective on
closing of the Offering)*
3.2 Restated Articles of Incorporation, as amended
3.3 Amended and Restated Bylaws*
4.1 Specimen Stock Certificate*
5.1 Opinion of Graham & James LLP
10.1 Innova Corporation 1990 Stock Option Plan (Amended and Restated July 31,
1992), as amended*
10.2 Director Stock Option Plan*
10.3 Form of Stock Option Agreement*
10.4 Form of Warrant to Purchase Common Stock*
10.5 Form of Warrant to Purchase Series A Preferred Stock*
10.6 Warrant to Purchase 516,000 shares of the Company's Common Stock issued to
Greyrock (including Antidilution Agreement)*
10.7 Registration Rights Agreement dated as of May 26, 1994, by and among the
Registrant, Bachow Investment Partners III, L.P., Paul S. Bachow
Co-Investment Fund, L.P., and Paul S. Bachow, as amended April 26, 1996,
April 30, 1997 and June 13, 1997 (All holders of the Company's Preferred
Stock and Greyrock were granted the same registration rights as in the
Registration Rights Agreement as if deemed parties to the such agreement)*
10.8 Business Park Net Lease, dated April 16, 1996, between Gateway Corporate
Properties, L.L.C., a Delaware limited liability corporation, as lessor, and
Innova Corporation, as lessee (amended by Exhibit 10.9)*
10.9 Lease Amendment No. 1, dated January 28, 1997, between Gateway North
Properties, L.L.C., a Delaware limited liability corporation, as lessor, and
Innova Corporation, as lessee*
10.10 Sublease Agreement, dated January 21, 1997, between Yamato Transport USA,
Inc., a New York corporation, as sublessor, and Innova Corporation, as
sublessee*
</TABLE>
II-3
<PAGE> 93
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------
<S> <C>
10.11 Cooperation Agreement, dated October 31, 1996, between SAT (Societe Anonyme
de Telecomunications) Networks and Telecommunications Division and Innova
Corporation (amended by Exhibits 10.16 and 10.17)***/*
10.12 Master Purchase Agreement, dated October 31, 1996, between SAT (Societe
Anonyme de Telecomunications) Networks and Telecommunications Division and
Innova Corporation (amended by Exhibit 10.18)***/*
10.13 OEM Purchase and Limited Licensing Agreement, dated May 30, 1997, between
NERA ASA and Innova Corporation***/*
10.14 Memorandum of Understanding, dated November 17, 1995 between SAT
Telecommunications Division and Innova Corporation (terminated by Exhibit
10.19)*
10.15 Heads of Agreement, Slovtel OEM Purchase Agreement, dated November 29, 1996,
between Northern Telecom Limited and Innova Corporation (as amended on
February 27, 1997, and further amended on April 24, 1997 and by Exhibit
10.20)***/*
10.16 First Amendment to Cooperation Agreement, dated June 20, 1997, between SAT
(Societe Anonyme de Telecommunications) and Innova Corporation***/*
10.17 Second Amendment to Cooperation Agreement, dated June 20, 1997, between SAT
(Societe Anonyme de Telecommunications) and Innova Corporation***/*
10.18 First Amendment to Master Purchase Agreement, dated June 20, 1997, between
SAT (Societe Anonyme de Telecommunications) and Innova Corporation***/*
10.19 Agreement, dated June 20, 1997, between SAT (Societe Anonyme de
Telecommunications) and Innova Corporation*
10.20 Extension, dated June 30, 1997, of Heads of Agreement, between Northern
Telecom Limited and Innova Corporation*
10.21 Loan and Security Agreement, dated October 15, 1996, between Greyrock
Business Credit, a division of NationsCredit Commercial Corporation and
Innova Corporation, as amended by Amendment to Loan Documents, dated April
29, 1997 (together with Secured Promissory Note, dated April 29, 1997)
11.1 Statement re Computation of Per Share Earnings*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Graham & James LLP (included in its opinion filed as Exhibit 5.1
hereto)
23.2 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney (included on page II-[5])
27.1 Financial Data Schedule*
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
*** Confidential treatment requested (confidential portions filed separately
with the Securities and Exchange Commission)
II-4
<PAGE> 94
(B) FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange 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 Registrant of expenses incurred or paid by a director, officer or
controlling person of the 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 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.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) 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 Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
II-5
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on August 5, 1997.
INNOVA CORPORATION
By JOHN M. HEMINGWAY
------------------------------------
John M. Hemingway
Secretary and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ---------------------------- ---------------
<S> <C> <C>
JEAN-FRANCOIS GRENON President and Chief August 5, 1997
- ----------------------------------------------- Executive Officer (Principal
Jean-Francois Grenon Executive Officer)
and Director
JOHN M. HEMINGWAY Chief Financial Officer August 5, 1997
- ----------------------------------------------- (Principal Financial and
John M. Hemingway Accounting Officer)
V. FRANK MENDICINO Chairman of the Board August 5, 1997
- -----------------------------------------------
V. Frank Mendicino*
PAUL S. BACHOW Director August 5, 1997
- -----------------------------------------------
Paul S. Bachow*
FRANCES N. JANIS Director August 5, 1997
- -----------------------------------------------
Frances N. Janis*
HAROLD O. SHATTUCK Director August 5, 1997
- -----------------------------------------------
Harold O. Shattuck*
BERNARD D. TARR, JR. Director August 5, 1997
- -----------------------------------------------
Bernard D. Tarr, Jr.*
*By JOHN M. HEMINGWAY
- -----------------------------------------------
John M. Hemingway
Attorney-in-fact
</TABLE>
II-6
<PAGE> 96
INNOVA CORPORATION AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
NINE MONTH FISCAL PERIOD ENDED DECEMBER 31, 1996 AND
YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------------------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nine month fiscal period ended December 31, 1996:
Valuation accounts deducted from assets:
Lower of cost or market reserve on
inventories................................. $ 596,256 -- -- $(130,077) $ 466,179
======== ======== ======== ========= ========
Year ended March 31, 1996:
Valuation accounts deducted from assets:
Lower of cost or market reserve on
inventories................................. $ 426,631 $169,625 -- -- $ 596,256
======== ======== ======== ========= ========
Year ended March 31, 1995:
Valuation accounts deducted from assets:
Lower of cost or market reserve on
inventories................................. $ 149,344 $277,287 -- -- $ 426,631
======== ======== ======== ========= ========
</TABLE>
S-1
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ---------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Proposed Form of Underwriting Agreement.........................
3.1 Proposed Second Restated Articles of Incorporation (As will be
effective on closing of the Offering)*..........................
3.2 Restated Articles of Incorporation, as amended..................
3.3 Amended and Restated Bylaws*....................................
4.1 Specimen Stock Certificate*.....................................
5.1 Opinion of Graham & James LLP...................................
10.1 Innova Corporation 1990 Stock Option Plan (Amended and Restated
July 31, 1992), as amended*.....................................
10.2 Director Stock Option Plan*.....................................
10.3 Form of Stock Option Agreement*.................................
10.4 Form of Warrant to Purchase Common Stock*.......................
10.5 Form of Warrant to Purchase Series A Preferred Stock*...........
10.6 Warrant to Purchase 516,000 shares of the Company's Common Stock
issued to Greyrock (including Antidilution Agreement)*..........
10.7 Registration Rights Agreement dated as of May 26, 1994, by and
among the Registrant, Bachow Investment Partners III, L.P., Paul
S. Bachow Co-Investment Fund, L.P., and Paul S. Bachow, as
amended April 26, 1996, April 30, 1997 and June 13, 1997 (All
holders of the Company's Preferred Stock and Greyrock were
granted the same registration rights as in the Registration
Rights Agreement as if deemed parties to the such agreement)*...
10.8 Business Park Net Lease, dated April 16, 1996, between Gateway
Corporate Properties, L.L.C., a Delaware limited liability
corporation, as lessor, and Innova Corporation, as lessee
(amended by Exhibit 10.9)*......................................
10.9 Lease Amendment No. 1, dated January 28, 1997, between Gateway
North Properties, L.L.C., a Delaware limited liability
corporation, as lessor, and Innova Corporation, as lessee*......
10.10 Sublease Agreement, dated January 21, 1997, between Yamato
Transport USA, Inc., a New York corporation, as sublessor, and
Innova Corporation, as sublessee*...............................
10.11 Cooperation Agreement, dated October 31, 1996, between SAT
(Societe Anonyme de Telecomunications) Networks and
Telecommunications Division and Innova Corporation (amended by
Exhibits 10.16 and 10.17)***/*..................................
10.12 Master Purchase Agreement, dated October 31, 1996, between SAT
(Societe Anonyme de Telecomunications) Networks and
Telecommunications Division and Innova Corporation (amended by
Exhibit 10.18)***/*.............................................
10.13 OEM Purchase and Limited Licensing Agreement, dated May 30,
1997, between NERA ASA and Innova Corporation***/*..............
10.14 Memorandum of Understanding, dated November 17, 1995 between SAT
Telecommunications Division and Innova Corporation (terminated
by Exhibit 10.19)*..............................................
10.15 Heads of Agreement, Slovtel OEM Purchase Agreement, dated
November 29, 1996, between Northern Telecom Limited and Innova
Corporation (as amended on February 27, 1997, and further
amended on April 24, 1997 and by Exhibit 10.20)***/*............
10.16 First Amendment to Cooperation Agreement, dated June 20, 1997,
between SAT (Societe Anonyme de Telecommunications) and Innova
Corporation***/*................................................
</TABLE>
<PAGE> 98
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ---------------------------------------------------------------- ------------
<S> <C> <C>
10.17 Second Amendment to Cooperation Agreement, dated June 20, 1997,
between SAT (Societe Anonyme de Telecommunications) and Innova
Corporation***/*................................................
10.18 First Amendment to Master Purchase Agreement, dated June 20,
1997, between SAT (Societe Anonyme de Telecommunications) and
Innova Corporation***/*.........................................
10.19 Agreement, dated June 20, 1997, between SAT (Societe Anonyme de
Telecommunications) and Innova Corporation*.....................
10.20 Extension, dated June 30, 1997, of Heads of Agreement, between
Northern Telecom Limited and Innova Corporation*................
10.21 Loan and Security Agreement, dated October 15, 1996, between
Greyrock Business Credit, a division of NationsCredit Commercial
Corporation and Innova Corporation, as amended by Amendment to
Loan Documents, dated April 29, 1997 (together with Secured
Promissory Note, dated April 29, 1997)..........................
11.1 Statement re Computation of Per Share Earnings*.................
21.1 Subsidiaries of the Registrant*.................................
23.1 Consent of Graham & James LLP (included in its opinion filed as
Exhibit 5.1 hereto).............................................
23.2 Consent of KPMG Peat Marwick LLP................................
24.1 Power of Attorney (included on page II-[5]).....................
27.1 Financial Data Schedule*........................................
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
*** Confidential treatment requested (confidential portions filed separately
with the Securities and Exchange Commission)
<PAGE> 1
Exhibit 1.1
2,500,000 Shares
INNOVA CORPORATION
Common Stock
UNDERWRITING AGREEMENT
August __, 1997
UBS Securities LLC
Hambrecht & Quist, LLC
Wessels, Arnold & Henderson, L.L.C
As Representatives of the Several Underwriters
c/o UBS Securities LLC
299 Park Avenue
New York, NY 10171
Ladies and Gentlemen:
INNOVA CORPORATION, a Washington corporation (the "Company"),
proposes to issue and sell 2,500,000 shares (the "Firm Shares") of its
authorized but unissued Common Stock, without par value (the "Common Stock"), to
the several underwriters listed on Schedule A to this Agreement (collectively,
the "Underwriters"). The Company also proposes to grant to the Underwriters an
option to purchase up to 375,000 additional shares (the "Option Shares") of
Common Stock on the terms and for the purposes set forth in Section 3(c). The
Firm Shares and the Option Shares are hereinafter collectively referred to as
the "Shares".
The Company wishes to confirm as follows its agreements with
you (the "Representatives") and the other Underwriters on whose behalf you are
acting in connection with the several purchases by the Underwriters of the
Shares.
<PAGE> 2
1. Registration Statement. A registration statement on Form S-1
(File No. 333-29547) including a prospectus relating to the Shares and each
amendment thereto has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. There have been, or by the closing hereunder will have been,
delivered to you three signed copies of such registration statement and
amendments, together with three copies of each exhibit filed therewith. Copies
of such registration statement and amendments (but without exhibits) and of the
related preliminary prospectus, dated July 21, 1997, have been delivered to you
in such reasonable quantities as you have requested for each of the
Underwriters. If such registration statement has not become effective, a
further amendment to such registration statement, including a form of final
prospectus, necessary to permit such registration statement to become effective
will be filed promptly by the Company with the Commission. If such registration
statement has become effective, a final prospectus containing all Rule 430A
Information (as hereinafter defined) will be filed by the Company with the
Commission in accordance with Rule 424(b) of the Rules and Regulations on or
before the second business day after the date hereof (or such earlier time as
may be required by the Rules and Regulations).
The term "Registration Statement" as used in this Agreement
shall mean such registration statement (including all exhibits and financial
statements at the time such registration statement becomes or became effective
and, in the event any post-effective amendment thereto becomes effective prior
to the Closing Date (as hereinafter defined), shall also mean such registration
statement as so amended; provided, however, that such term shall include all
Rule 430A Information deemed to be included in such registration statement at
the time such registration statement becomes effective as provided by Rule 430A
of the Rules and Regulations and shall also mean any registration statement
filed pursuant to Rule 462(b) of the Rules and Regulations with respect to the
Shares. The term "Preliminary Prospectus" shall mean the preliminary
prospectus referred to in the preceding paragraph and any preliminary
prospectus included in the Registration Statement at the time it becomes
effective that omits Rule 430A Information. The term "Prospectus" as used in
this Agreement shall mean the prospectus relating to the Shares in the form in
which it is first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations or, if no filing pursuant to Rule 424(b) of the Rules and
Regulations is required, shall mean the form of final
2
<PAGE> 3
prospectus included in the Registration Statement at the time such Registration
Statement becomes effective. The term "Rule 430A Information" means
information with respect to the Shares and the offering thereof permitted to be
omitted from the Registration Statement when it becomes effective pursuant to
Rule 430A of the Rules and Regulations. The term "Offering Memorandum" as used
in this Agreement shall mean the Offering Memorandum consisting of the
Prospectus and a Canadian wrap-around used in connection with the offering of
the Shares in Canada.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants as follows:
(a) The Company has not received, and has no notice of,
any order of the Commission preventing or suspending the use of any Preliminary
Prospectus, or instituted proceedings for that purpose, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects
to the requirements of the Act and the Rules and Regulations. When the
Registration Statement became or becomes, as the case may be, effective (the
"Effective Date") and at all times subsequent thereto up to and at the Closing
Date (as hereinafter defined), any later date on which Option Shares are to be
purchased (the "Option Closing Date") and when any post-effective amendment to
the Registration Statement becomes effective or any amendment or supplement to
the Prospectus is filed with the Commission, (i) the Registration Statement and
Prospectus, and any amendments or supplements thereto, will contain all
statements which are required to be stated therein by, and will comply with the
requirements of, the Act and the Rules and Regulations, and (ii) neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The foregoing representations and
warranties in this section 2(a) do not apply to any statements or omissions
made in reliance on and in conformity with the information contained in the
section of the Prospectus entitled "Underwriting" (except for the _____
paragraph thereof) and the information in the last paragraph on the front cover
page of the Prospectus. The Company has not distributed any offering material
in connection with the offering or sale of the Shares other than the
Registration Statement, the Preliminary Prospectus, the Prospectus, the
Offering Memorandum or any other materials, if any, permitted by the Act.
(b) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Washington, with full corporate power and authority to own, lease and operate
its properties and conduct its
3
<PAGE> 4
business as described in the Registration Statement. The Company is duly
qualified to do business as a foreign corporation in good standing in each
jurisdiction where the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to so qualify
would not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its Subsidiaries (as
hereinafter defined) taken as a whole (a "Material Adverse Effect"). The
Company has no subsidiaries (as defined in the Rules and Regulations) other than
Innova Europe Limited and Techinnova S.A. de C.V. (collectively, the
"Subsidiaries"). The Company owns 99% of the outstanding common stock of each
subsidiary. Other than the Subsidiaries, the Company does not own, directly or
indirectly, any shares of stock or any other equity or long-term debt securities
of any corporation or have any equity interest in any firm, partnership, joint
venture, association or other entity. Complete and correct copies of the
certificates of incorporation and of the bylaws of the Company and the
Subsidiaries and all amendments thereto have been delivered to the
Representatives, and except as set forth in the exhibits to the Registration
Statement no changes therein will be made subsequent to the date hereof and
prior to the Closing Date or, if later, the Option Closing Date. Each Subsidiary
has been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement. Each
Subsidiary is duly qualified to do business as a foreign corporation in good
standing in each jurisdiction where the ownership or leasing of the properties
or the conduct of its business requires such qualification, except where the
failure to so qualify would not have a Material Adverse Effect. All of the
outstanding shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable and are owned
by the Company subject to no security interest, other encumbrance or adverse
claims. No options, warrants or other rights to purchase, agreements or other
obligation to issue or other rights to convert any obligation into shares of
capital stock or ownership interests in the Subsidiaries are outstanding.
Techinnova S.A. de C.V. does not own any assets or properties, has no
liabilities, and no employees, and the Company conducts no business through such
subsidiary. INNOVA Europe Limited employs seven customer service representatives
of the Company, but does not own any material assets, and did not generate
material revenues for the Company during the nine months ended December 31, 1996
or the six months ended June 30, 1997. Neither Subsidiary is material within the
meaning of the Rules and Regulations and neither Subsidiary is required to be
listed on Exhibit 21 to Registration Statement.\
(c) The Company has full power and authority (corporate
and otherwise) to enter into this Agreement and to perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is
4
<PAGE> 5
a valid and binding agreement on the part of the Company, enforceable against
the Company in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by applicable laws or equitable
principles and except as enforcement hereof may be limited by applicable
bankruptcy, insolvency, reorganization or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles. The
performance of this Agreement by the Company and the consummation by the
Company of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any indenture, mortgage, deed of trust, loan agreement, bond, debenture,
note agreement or other evidence of indebtedness, or any lease, contract or
other agreement or instrument to which the Company or any Subsidiary is a party
or by which its properties are bound, or (ii) the certificate of incorporation
or bylaws of the Company or any Subsidiary or (iii) any law, order, rule,
regulation, writ, injunction or decree of any court or governmental agency or
body to which the Company or any Subsidiary is subject. The Company is not
required to obtain or make (as the case may be) any consent, approval,
authorization, order, designation or filing by or with any court or regulatory,
administrative or other governmental agency or body as a requirement for the
consummation by the Company of the transactions herein contemplated, except
such as may be required under the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or under state securities or blue sky ("Blue Sky")
laws or under the rules and regulations of the National Association of
Securities Dealers, Inc. ("NASD"), or under applicable Canadian securities law.
(d) There is not pending or, to the Company's knowledge,
threatened, any action, suit, claim, proceeding or investigation against the
Company or its Subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court or governmental agency
or body or otherwise which, if determined adversely to the Company, could result
in a Material Adverse Effect. There are no statutes, rules, regulations,
agreements, contracts, leases or documents that are required to be described in
the Prospectus, or to be filed as exhibits to the Registration Statement by the
Act or by the Rules and Regulations that have not been accurately and completely
described in the Prospectus or filed as exhibits to the Registration Statement.
(e) All outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of
5
<PAGE> 6
any preemptive right, resale right, right of first refusal or similar right.
The authorized and outstanding capital stock of the Company conforms to the
description thereof contained in the Registration Statement, the Offering
Memorandum and the Prospectus (and such description correctly states the
substance of the provisions of the instruments defining the capital stock of the
Company). The Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this Agreement,
will be duly and validly issued and fully paid and nonassessable. Except as set
forth in the Prospectus, no preemptive right, co-sale right, right of first
refusal or other similar rights of securityholders exists with respect to any of
the Shares or the issue and sale thereof other than those that have been
expressly waived prior to the date hereof. No holder of securities of the
Company has the right to cause the Company to include such holder's securities
in the Registration Statement. No further approval or authorization of any
security holder, the Board of Directors or any duly appointed committee thereof
or others is required for the issuance and sale or transfer of the Shares,
except as may be required under the Act, the Exchange Act or under state
securities or Blue Sky laws. Except as disclosed in or contemplated by the
Prospectus, the Offering Memorandum and the financial statements of the
Company, and the related notes thereto included in the Prospectus and the
Offering Memorandum, the Company does not have outstanding any options or
warrants to purchase, or any preemptive rights or other rights to subscribe for
or to purchase, any securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The description of the
Company's stock option and other plans or arrangements, and the options or other
rights granted and exercised thereunder, set forth in the Prospectus and the
Offering Memorandum accurately and fairly presents the information required to
be shown with respect to such plans, arrangements, options and rights.
(f) KPMG Peat Marwick LLP (the "Accountants") who have
examined the financial statements, together with the related schedules and
notes, of the Company filed with the Commission as a part of the Registration
Statement, which are included in the Prospectus, are independent public
accountants within the meaning of the Act and the Rules and Regulations. The
financial statements of the Company, together with the related schedules and
notes, forming part of the Registration Statement, the Offering Memorandum and
the Prospectus, fairly present the financial position and the results of
operations of the Company at the respective dates and for the respective periods
6
<PAGE> 7
to which they apply. All financial statements, together with the related
schedules and notes, filed with the Commission as part of the Registration
Statement have been prepared in accordance with generally accepted accounting
principles as in effect in the United States consistently applied throughout
the periods involved except as may be otherwise stated in the Registration
Statement. The selected and summary financial and statistical data included in
the Registration Statement present fairly the information shown therein and
have been compiled on a basis consistent with the financial statements
presented therein. No other financial statements or schedules are required by
the Act or the Rules and Regulations to be included in the Registration
Statement.
(g) Subsequent to the respective dates as of which
information is given in the Registration Statement, the Offering Memorandum
and the Prospectus, there has not been (i) any material adverse change in the
business, operations, properties, assets, conditions (financial or otherwise),
results of operations or prospects of the Company and its Subsidiaries taken as
a whole, whether or not occurring in the ordinary course of business (a
"Material Adverse Change"), or any development involving, or which is likely to
cause, a Material Adverse Change, (ii) any transaction which is material to the
Company or its Subsidiaries, other than in the ordinary course of business,
(iii) any obligation, direct or contingent, which is material to the Company and
its Subsidiaries taken as a whole, incurred by the Company or its Subsidiaries,
except obligations incurred in the ordinary course of business, (iv) any
material change in the capital stock or outstanding indebtedness of the Company
or its Subsidiaries other than changes resulting from (i) the exercise of
employee stock options outstanding on the date hereof, (ii) the amendment and
restatement of the Company's Articles of Incorporation and Bylaws, (iii) the
conversion of all of the Company's outstanding Preferred Stock into Common Stock
and (iv) the effectiveness of the Company's 24 to 1 reverse stock split, in the
case of items (ii) through (iv) as set forth in and contemplated by the
Registration Statement, or (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company. Neither the Company
nor its Subsidiaries has any material contingent obligation or liability which
is not disclosed in the Registration Statement.
(h) (i) the Company and each Subsidiary have good and
marketable title to all material properties and assets described in the
Prospectus and the Offering Memorandum as owned by them, free and clear of any
pledge, lien, security interest, charge, encumbrance, claim, equitable interest
or restriction, except those reflected in the financial statements or Prospectus
or which are not material in amount, (ii) the agreements to which the Company or
any Subsidiary is a party described in the Prospectus and the Offering
Memorandum are valid
7
<PAGE> 8
agreements, and, to the Company's knowledge after due inquiry, are enforceable
against the other contracting party or parties thereto in accordance with their
terms except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and neither the
Company nor any subsidiary nor any other party thereto is in material breach or
default under any of such agreements and (iii) the Company and each Subsidiary
have valid and enforceable leases for the properties described in the Prospectus
and the Offering Memorandum as leased by it, and such leases conform in all
material respects to the description thereof, if any, set forth in the
Registration Statement.
(i) The Company and each Subsidiary now hold and at the
Closing Date and any later Option Closing Date, as the case may be, will hold,
all licenses, certificates, approvals and permits from all state, United States,
foreign and other regulatory authorities, including but not limited to the
United States Federal Communications Commission (the "FCC") and any foreign
regulatory authorities performing functions similar to those performed by the
FCC, that are material to the conduct of the business of the Company (as such
business is currently conducted), all of which are valid and in full force and
effect (and there is no proceeding pending or, to the knowledge of the Company,
threatened which may cause any such license, certificate, approval or permit to
be withdrawn, cancelled, suspended or not renewed). Neither the Company nor any
Subsidiary is in violation of its certificate of incorporation or bylaws or in
default in the performance or observance of any obligation, agreement, covenant
or condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan agreement, joint
venture or other agreement or instrument to which it is a party or by which it
or any of its properties are bound, or in violation of any law, order, rule,
regulation, writ, injunction or decree of any court or governmental agency or
body, including, but not limited to, the FCC. Neither the Company nor any
subsidiary is a party to any legal and governmental proceedings by or before the
FCC or any foreign, state or local government body exercising comparable
authority or to any material litigation. The descriptions contained in the
Registration Statement and the Prospectus of the laws, rules and regulations
applicable to the Company's products and their use as presently used are true,
complete and accurate in all material respects.
(j) The Company and each Subsidiary have filed all
necessary federal, state and foreign income,
8
<PAGE> 9
franchise and other tax returns and has paid all taxes shown thereon as due,
and the Company has no knowledge of any tax deficiency which has been or might
be asserted against the Company or any Subsidiary. All material tax
liabilities are adequately provided for within the financial statements of the
Company.
(k) The Company and its Subsidiaries maintain insurance
of the types and in the amounts adequate for their business and consistent with
insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering product liability and real
and personal property owned or leased against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(l) Neither the Company nor its Subsidiaries are involved
in any labor dispute or disturbance nor, to the knowledge of the Company, is
any such dispute or disturbance threatened.
(m) Except as described in the Prospectus and the
Offering Memorandum, the Company and each Subsidiary own or possess adequate
licenses or other rights to use all patents, patent applications, trademarks,
trademark applications, service marks, service mark applications, tradenames,
copyrights, manufacturing processes, formulae, trade secrets, know-how,
franchises, and other material intangible property and assets (collectively,
"Intellectual Property") necessary to the conduct of their businesses as
conducted and as proposed to be conducted as described in the Prospectus and the
Offering Memorandum. The Company has no knowledge of any facts which would
preclude it from having rights to its patent applications referenced in the
Prospectus and the Offering Memorandum. The Company has no knowledge that it or
any Subsidiary lacks or will be unable to obtain any rights or licenses to use
any of the Intellectual Property necessary to conduct the business now conducted
or proposed to be conducted by it as described in the Prospectus and the
Offering Memorandum, except as described in the Prospectus and the Offering
Memorandum. The Prospectus and the Offering Memorandum fairly and accurately
describe the Company's rights with respect to the Intellectual Property. The
Company has not received any notice of infringement or of conflict with rights
or claims of others with respect to any Intellectual Property. The Company is
not aware of any patents of others which are infringed upon by potential
products or processes referred to in the Prospectus and the Offering Memorandum
in such a manner as to materially and adversely affect the Company and its
Subsidiaries taken as a whole, except as described in the Prospectus and the
Offering Memorandum.
9
<PAGE> 10
(n) The Company and each Subsidiary are conducting their
businesses in compliance with all of the laws, rules and regulations of the
jurisdictions in which it is conducting business, including, but not limited
to, the laws, rules and regulations administered or promulgated by the FCC.
(o) The Company is not an "investment company," or a
"promoter" or "principal underwriter" for a registered investment company, as
such terms are defined in the Investment Company Act of 1940, as amended.
(p) Neither the Company nor any of its Subsidiaries has
incurred any liability for a fee, commission, or other compensation on account
of the employment of a broker or finder in connection with the transactions
contemplated by this Agreement other than the underwriting discounts and
commissions contemplated hereby.
(q) The Company, each of its Subsidiaries and each of its
products, is (i) in compliance with any and all applicable United States and
foreign, state and local environmental laws, rules, regulations, treaties,
statutes and codes promulgated by any and all governmental authorities relating
to the protection of human health and safety, the environment or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
has received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its business as currently conducted,
and (iii) is in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance would not have a Material
Adverse Effect. No action, proceeding, revocation proceeding, writ, injunction
or claim is pending or threatened relating to the Environmental Laws or to the
Company's or its Subsidiaries' activities involving Hazardous Materials.
"Hazardous Materials" means any material or substance (i) that is prohibited or
regulated by any environmental law, rule, regulation, order, treaty, statute or
code promulgated by any governmental authority, or any amendment or modification
thereto, or (ii) that has been designated or regulated by any governmental
authority as radioactive, toxic, hazardous or otherwise a danger to health,
reproduction or the environment.
(r) Neither the Company nor any of its Subsidiaries has
engaged in the generation, use, manufacture, transportation or storage of any
Hazardous Materials on any of the Company's or its Subsidiaries' properties or
former properties, except where such use, manufacture, transportation or
storage is in compliance with Environmental Laws. No Hazardous Materials have
been treated or
10
<PAGE> 11
disposed of on any of the Company's or its Subsidiaries properties or on
properties formerly owned or leased by the Company or any Subsidiary during the
time of such ownership or lease, except in compliance with Environmental Laws.
No spills, discharges, releases, deposits, emplacements, leaks or disposal of
any Hazardous Materials have occurred on or under or have emanated from any of
the Company's or its Subsidiaries' properties or former properties.
(s) Neither the Company nor any of its Subsidiaries has
at any time during the last five years (i) made any unlawful contribution to
any candidate for foreign office, or failed to disclose fully any contribution
in violation of law, or (ii) made any payment to any foreign, United States or
state governmental officer or official, or other person charged with similar
public of quasi-public duties, other than payments required or permitted by the
laws of the United States.
(t) The Common Stock is registered pursuant to Section
12(g) of the Exchange Act. The Shares have been duly authorized for quotation
on the National Association of Securities Dealers, Inc. Automated Quotation
System National Market System ("NASDAQ National Market"), subject to notice of
official issuance. The Company has taken no action designed to, or likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act or delisting the Common Stock from the NASDAQ National Market, nor
has the Company received any notification that the Commission or the NASDAQ
National Market is contemplating terminating such registration or listing.
(u) Neither the Company nor, to its knowledge, any of its
officers, directors or affiliates has taken, and at the Closing Date and at any
later Option Closing Date, neither the Company nor, to its knowledge, any of
its officers, directors or affiliates will have taken, directly or indirectly,
any action which has constituted, or might reasonably be expected to
constitute, the stabilization or manipulation of the price of sale or resale of
the Shares.
11
<PAGE> 12
(v) The merger of Microbeam Corporation, a Delaware
corporation, into the Company on May 29, 1991, was legally effective under the
laws of the State of Delaware and the State of Washington. The merger
transferred all assets and liabilities of Microbeam Corporation to the Company.
(w) No transfer tax, stamp duty or other similar taxes are
payable by or on behalf of the Underwriters in connection with the issuance by
the Company or the purchase by the Underwriters of the Shares to be sold by the
Company or any resales of such Shares by the Underwriters. To the best
knowledge of the Company, after due investigation, none of the officers,
directors or shareholders of the Company has any affiliation with the NASD.
(x) Simultaneously with the purchase of the Firm Shares by
the Underwriters hereunder, the Company's Articles of Incorporation and By-Laws
will be amended and restated to be in the form attached to the Registration
Statement as Exhibits and , respectively; the Company's Common Stock will
be split 1:24; each outstanding share of the Company's Preferred Stock will be
converted automatically into one share of Common Stock (after giving effect to
the reverse split); each outstanding warrant to purchase Preferred Stock of the
Company will be converted into a warrant to purchase an equal number of shares
of Common Stock; and with the result that the Company's capitalization before
giving effect to the issuance of the Firm Shares will be as set forth on Exhibit
__ hereto. All necessary corporate and other proceedings, including, without
limitation, all necessary approvals by the Company's shareholders and Board of
Directors and all other action and consents and approvals requisite to
effectuate the foregoing have been duly taken and completed other than the
filing of the Company's amended and restated Articles of Incorporation with the
Secretary of State of the State of Washington, which shall be filed prior to the
Closing and be effective simultaneously with the purchase of the Firm Shares by
the Underwriters hereunder.
3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties
and subject to the terms and conditions herein set forth, the Company agrees to
issue and sell the Firm Shares to the several Underwriters, and each of the
Underwriters agrees to purchase from the Company the respective aggregate
number of Firm Shares set forth opposite its name on Schedule A, plus such
additional number of Firm Shares which such Underwriter may become obligated to
purchase pursuant to Section 3(b) hereof. The price at which such Firm Shares
shall be sold by the Company and purchased by the several Underwriters shall be
$_____ per share. In making this Agreement, each Underwriter is contracting
severally and not jointly; except as provided in paragraphs (b) and (c) of this
Section 3, the agreement of each Underwriter is to purchase only the respective
number of Firm Shares specified on Schedule A.
(b) If for any reason one or more of the Underwriters
shall fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 10 hereof) to
purchase and pay for the number of Shares agreed to be purchased by such
Underwriter or Underwriters, the non-defaulting Underwriters shall have the
right within twenty-four (24) hours after such default to purchase, or procure
one or more other Underwriters to purchase, in such proportions as may be
agreed upon between you and such purchasing Underwriter or Underwriters and
upon the terms herein set forth, all or any part of the Shares which such
defaulting Underwriter or Underwriters agreed to purchase. If the
non-defaulting Underwriters fail so to make such arrangements with respect to
all such Shares and portion, the number of Shares which each non-defaulting
Underwriter is otherwise obligated to purchase under this
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Agreement shall be automatically increased on a pro rata basis (as adjusted by
you in such manner as you deem advisable to avoid fractional shares) to absorb
the remaining Shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the Shares and portion which
the defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such Shares exceeds 10% of the total number of Shares which all
Underwriters agreed to purchase hereunder. If the total number of Shares which
the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within twenty-four (24) hours next succeeding the
24-hour period referred to above, to make arrangements with other underwriters
or purchasers reasonably satisfactory to you for purchase of such Shares and
portion on the terms herein set forth. In any such case, either you or the
Company shall have the right to postpone the Closing Date determined as
provided in Section 5 hereof for not more than seven business days after the
date originally fixed as the Closing Date pursuant to said Section 5 in order
that any necessary changes in the Registration Statement, the Offering
Memorandum, the Prospectus or any other documents or arrangements may be made.
If the aggregate number of Shares which the defaulting Underwriter or
Underwriters agreed to purchase exceeds 10% of the total number of Shares which
all Underwriters agreed to purchase hereunder, and if neither the non-defaulting
Underwriters nor the Company shall make arrangements within the 24-hour periods
stated above for the purchase of all the Shares which the defaulting Underwriter
or Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
to any non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and
no action taken hereunder, shall relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions herein set
forth, the Company grants an option to the several Underwriters to purchase all
or any portion of the Option Shares from the Company at the same price per
share as the Underwriters shall pay for the Firm Shares. Said option may be
exercised only to cover over- allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in
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<PAGE> 14
part at any time (but not more than once) on or before the 30th day after the
date of this Agreement upon written or telegraphic notice by you to the Company
setting forth the aggregate number of shares of the Option Shares as to which
the several Underwriters are exercising the option. Delivery of certificates
for the shares of Option Shares, and payment therefor, shall be made as
provided in Section 5 hereof. Each Underwriter will purchase such percentage
of the Option Shares as is equal to the percentage of Firm Shares that such
Underwriter is purchasing, the exact number of shares to be adjusted by you in
such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering of the Shares
in the United States by the Underwriters shall be as set forth in the
Prospectus. The terms of the private placement of the Shares in Canada by the
Underwriters shall be as set forth in the Offering Memorandum. The Underwriters
may from time to time change the public offering and private placement prices
after the closing of the initial public offering and the private placement,
respectively, and increase or decrease the concessions and discounts to dealers
as they may determine.
(b) You, on behalf of the Underwriters, represent and
warrant that (i) the information set forth in the last paragraph on the front
cover page and paragraph __ under the caption "Underwriting" in the Registration
Statement, the Offering Memorandum, any Preliminary Prospectus and the
Prospectus relating to the Shares (insofar as such information relates to the
Underwriters) constitutes the only information furnished by the Underwriters to
the Company for inclusion in the Registration Statement, the Offering
Memorandum, any Preliminary Prospectus, and the Prospectus, and that the
statements made therein are correct and do not omit to state any material fact
required to be stated therein or necessary to make the statements made therein
in light of the circumstances under which they were made not misleading, and
(ii) the Underwriters have not distributed and will not distribute prior to the
Closing Date or on any Option Closing Date, as the case may be, any offering
material in connection with the offering and sale of the shares other than the
Preliminary Prospectus, the Prospectus, the Registration Statement, the Offering
Memorandum, and other materials permitted by the Act and applicable Canadian
securities law.
5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the Firm Shares and the
Option Shares (if the option granted pursuant to Section 3(c) hereof shall have
been exercised not later than 1:00 p.m., New York time, on the date at least
two business days preceding the
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<PAGE> 15
Closing Date), and payment therefor, shall be made at the offices of UBS
Securities LLC, 299 Park Avenue, New York, New York 10171 at 9:00 a.m. New
York time, on the fourth business day after the date of this Agreement, or at
such time on such other day, not later than seven full business days after such
fourth business day, as shall be agreed upon in writing by the Company and you
(the "Closing Date").
(b) If the option granted pursuant to Section 3(c) hereof
shall be exercised after 1:00 p.m., New York time, on the date two business
days preceding the Closing Date, and on or before the 30th day after the date
of this Agreement, delivery of certificates for the Option Shares, and payment
therefor, shall be made at the offices of UBS Securities LLC, 299 Park Avenue,
New York, New York 10171 at 9:00 a.m., New York time, on the third business day
after the exercise of such option.
(c) Payment for the Shares purchased from the Company
shall be made to the Company or its order, by [either a same day funds check or
Federal Funds wire transfer] [New York Clearing House Funds]. Such payment
shall be made upon delivery of certificates for the Shares to you for the
respective accounts of the several Underwriters against receipt therefor signed
by you. Certificates for the Shares to be delivered to you shall be registered
in such name or names and shall be in such denominations as you may request at
least three business days before the Closing Date, in the case of Firm Shares,
and at least two business days prior to the Option Closing Date, in the case of
the Option Shares. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at a location in New York,
New York, designated by the Underwriters not less than one full business day
prior to the Closing Date or, in the case of the Option Shares, by 3:00 p.m.,
New York time, on the business day preceding the Option Closing Date.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later Option Closing Date. Any such
payment by you shall not relieve such Underwriter from any of its obligations
hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and
agrees as follows:
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<PAGE> 16
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto,
to become effective as promptly as possible; it will notify you, promptly after
it shall receive notice thereof, of the time when the Registration Statement or
any subsequent amendment to the Registration Statement has become effective or
any supplement to the Prospectus has been filed. If the Company omitted
information from the Registration Statement at the time it was originally
declared effective in reliance upon Rule 430A(a), the Company will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed, within the time period prescribed, with the Commission pursuant
to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as
part of a post-effective amendment to such Registration Statement as originally
declared effective which is declared effective by the Commission. If for any
reason the filing of the final form of Prospectus is required under Rule
424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory
to you that the Prospectus contains such information and has been filed with
the Commission within the time period prescribed. The Company will notify you
promptly of any request by the Commission for the amending or supplementing of
the Registration Statement or the Prospectus or for additional information.
Promptly upon your request, it will prepare and file with the Commission any
amendments or supplements to the Registration Statement or Prospectus which, in
the reasonable opinion of counsel to the several Underwriters ("Underwriters'
Counsel"), may be necessary or advisable in connection with the distribution of
the Shares by the Underwriters. The Company will promptly prepare and file
with the Commission, and promptly notify you of the filing of, any amendments
or supplements to the Registration Statement or Prospectus which may be
necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act,
any event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. In case any Underwriter is required to deliver a
prospectus within the nine-month period referred to in Section 10(a)(3) of the
Act in connection with the sale of the Shares, the Company will prepare
promptly upon request, but at the expense of such Underwriter, such amendment
or amendments to the Registration Statement and such prospectus or prospectuses
as may
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<PAGE> 17
be necessary to permit compliance with the requirements of Section 10(a)(3) of
the Act. The Company will file no amendment or supplement to the Registration
Statement or Prospectus that shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing or which is not in compliance with the Act and
Rules and Regulations or the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge thereof of the issuance of any stop order by
the Commission suspending the effectiveness of the Registration Statement or
the use of the Prospectus or of the initiation or threat of any proceeding for
that purpose; and it will promptly use its best efforts to prevent the issuance
of any such stop order or to obtain its withdrawal at the earliest possible
moment if such stop order should be issued.
(c) The Company will cooperate with you in endeavoring to
qualify the Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications in
effect for so long as may be required for purposes of the distribution of the
Shares, except that the Company shall not be required in connection therewith
or as a condition thereof to qualify as a foreign corporation, or to execute a
general consent to service of process in any jurisdiction, or to make any
undertaking with respect to the conduct of its business. In each jurisdiction
in which the Shares shall have been qualified, the Company will make and file
such statements, reports and other documents in each year as are or may be
reasonably required by the laws of such jurisdictions so as to continue such
qualifications in effect for so long a period as you may reasonably request for
distribution of the Shares, or as otherwise may be required by law.
(d) The Company will furnish to you, as soon as
available, copies of the Registration Statement (three of which will be signed
and which will include all exhibits), each Preliminary Prospectus, the
Prospectus, the Offering Memorandum and any amendments or supplements to such
documents, including any prospectus prepared to permit compliance with Section
10(a)(3) of the Act, all in such quantities as you may from time to time
reasonably request.
(e) The Company will make generally available to its
stockholders as soon as practicable, but in any event not later than the 45th
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the
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<PAGE> 18
Registration Statement, an earnings statement (which will be in reasonable
detail but need not be audited) complying with the provisions of Section 11(a)
of the Act and Rule 158 of the Rules and Regulations and covering a
twelve-month period beginning after the effective date of the Registration
Statement, and will advise you in writing when such statement has been made
available.
(f) During a period of five years after the date hereof,
the Company, as soon as practicable after the end of each respective period,
will furnish to its stockholders annual reports (including financial statements
audited by independent certified public accountants) and will furnish to its
stockholders unaudited quarterly reports of operations for each of the first
three quarters of the fiscal year, and will, upon request, furnish to you and
the other several Underwriters hereunder (i) concurrently with making such
reports available to its stockholders, statements of operations of the Company
for each of the first three quarters in the form made available to the
Company's stockholders; (ii) concurrently with the furnishing thereof to its
stockholders, a balance sheet of the Company as of the end of such fiscal year,
together with statements of operations, of stockholders' equity and of cash
flow of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of nationally recognized independent certified
public accountants; (iii) concurrently with the furnishing of such reports to
its stockholders, copies of all reports (financial or other) mailed to
stockholders; (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the NASDAQ National Market by the Company (except for documents for
which confidential treatment is requested); and (v) every material press
release and every material news item or article in respect of the Company or
its affairs which was generally released to stockholders or prepared for
general release by the Company. During such five-year period, if the Company
shall have any active subsidiaries, the foregoing financial statements shall be
on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so
consolidated.
(g) Prior to or simultaneously with the execution and
delivery of this Agreement, the Company will obtain agreement from each
beneficial owner of the Company's Common Stock listed on Schedule B to this
Agreement providing that such person will not, for a period of 180 days after
the date of the Prospectus, without
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<PAGE> 19
the prior written consent of UBS Securities LLC, directly or indirectly, offer
to sell, sell, hypothecate, contract to sell, grant any option to purchase, or
otherwise dispose of, any shares of Common Stock beneficially owned as of the
date such lockup agreement is executed (including, without limitation, shares
of Common Stock which may be deemed to be beneficially owned in accordance with
the Rules and Regulations and shares of Common Stock which may be issued upon
exercise of a stock option or warrant) or any securities convertible into or
exercisable or exchangeable for such Common Stock except as otherwise provided
in the pertinent executed Lock-Up Agreement. Each such person or entity shall
also agree and consent to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of shares of Common Stock held by
such person or entity, except in compliance with the foregoing restriction.
(h) The Company shall not, during the 180 days following
the effective date of the Registration Statement, except with your prior
written consent as Representatives, file a registration statement covering any
of its shares of capital stock, except that one or more registration statements
on Form S-8 may be filed at any time following the effective date of the
Registration Statement.
(i) The Company shall not, during the 180 days following
the effective date of the Registration Statement, except with your prior
written consent as Representatives, issue, sell, offer or agree to sell, grant,
distribute or otherwise dispose of, directly or indirectly, any shares of
Common Stock, or any options, rights or warrants with respect to shares of
Common Stock, or any securities convertible into or exchangeable for Common
Stock, other than (i) the sale of Shares hereunder, (ii) the grant of options
or the issuance of shares of Common Stock under the Company's stock option
plans or stock purchase plan, as the case may be, existing on the date hereof,
or (iii) the issuance of shares of Common Stock upon exercise of the currently
outstanding options or warrants described in the Registration Statement.
(j) The Company will apply the net proceeds from the sale
of the Shares being sold by it in the manner set forth under the caption "Use
of Proceeds" in the Prospectus.
(k) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company,
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<PAGE> 20
a Registrar (which may be the same entity as the Transfer Agent) for its Common
Stock.
(l) The Company will use its best efforts to maintain
listing of its shares of Common Stock on the NASDAQ National Market.
(m) The Company is familiar with the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder, and has in
the past conducted its affairs, and will in the future conduct its affairs, in
such a manner so as to ensure that the Company was not and will not be an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder.
(n) If at any time during the 180-day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
reasonable opinion the market price of the Common Stock has been or is likely
to be materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above consult with you in good faith regarding the necessity of
disseminating a press release or other public statement responding to or
commenting on such rumor, publication or event and, if the Company in its
reasonable judgment determines that such a press release or other public
statement is appropriate, the substance of any press release or other public
statement.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to Underwriters' Counsel in connection with the
execution and delivery of this Agreement, the Closing and the Option Closing
hereunder shall be deemed a representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
7. EXPENSES.
The Company agrees with each Underwriter that:
(a) The Company will pay and bear all costs, fees and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and
exhibits), the Offering Memorandum (including fees relating to the filing of
reports in Canada), Preliminary Prospectuses and the
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<PAGE> 21
Prospectus and any amendments or supplements thereto; the reproduction of this
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the
Preliminary Blue Sky Memoranda and any Supplemental Blue Sky Memoranda and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any;
the cost of all stock certificates representing the Shares and Transfer Agents'
and Registrars' fees; the fees and disbursements of corporate, patent and
regulatory counsel for the Company; all fees and other charges of the Company's
independent public accountants; the cost of furnishing to the several
Underwriters copies of the Registration Statement (including appropriate
exhibits), the Offering Memorandum, Preliminary Prospectuses and the Prospectus,
and any amendments or supplements to any of the foregoing; NASD filing fees and
expenses incident to securing any required review and the cost of qualifying the
Shares under the laws of such jurisdictions within the United States as you may
designate (including filing fees and fees and disbursements of Underwriters'
Counsel in connection with such NASD filings and Blue Sky qualifications);
listing application fees of the NASDAQ National Market; and all other expenses
directly incurred by the Company in connection with the performance of its
obligations hereunder.
(b) If the transactions contemplated hereby are not
consummated by reason of any failure, or refusal on the part of the Company to
perform any agreement on its part to be performed hereunder or the breach by the
Company of any of its representations, warranties, covenants or agreements
hereunder, the Company will, in addition to paying the expenses described in
clause (a) above, reimburse the several Underwriters for all out-of-pocket
expenses (including reasonable fees and disbursements of Underwriters' Counsel)
incurred by the Underwriters in reviewing the Registration Statement and the
Prospectus, in preparing the Offering Memorandum and in otherwise investigating,
preparing to market or marketing the Shares. The Company will in no event be
liable to any of the several Underwriters for any loss of anticipated profits
from the sale by them of the Shares.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the several Underwriters to purchase and pay for
the Shares, as provided herein, shall be subject to the accuracy, as of the
date hereof and the Closing Date and any later Option Closing Date, as the case
may be, of the representations and warranties of the Company herein, to the
performance by the
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<PAGE> 22
Company of its obligations hereunder and to the following additional
conditions:
(a) (i) The Registration Statement shall have become
effective not later than 9:00 a.m., New York time, on the date following the
date of this Agreement, or such later time or date as shall be consented to in
writing by you. If the filing of the Prospectus, or any supplement thereto, is
required pursuant to Rule 424(b) and Rule 430A of the Rules and Regulations,
the Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) and Rule 430A of the Rules and Regulations. No stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceeding for that purpose shall have been initiated or, to
the knowledge of the Company or any Underwriter, threatened by the Commission,
and any request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise) shall have been
complied with to the reasonable satisfaction of Underwriters' Counsel; and
(ii) The Company's amended and restated Articles of
Incorporation shall have been filed with the Secretary of State of the State of
Washington to be effective simultaneously with the Closing of the Purchase of
Firm Shares by the Underwriters.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement, the
Offering Memorandum and the Prospectus, and the registration, authorization,
issue, sale and delivery of the Shares shall have been reasonably satisfactory
to Underwriters' Counsel, and such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable them to
pass upon the matters referred to in this subsection.
(c) You shall have received, at no cost to you, on the
Closing Date and on any later Option Closing Date, as the case may be, the
opinions of (i) Graham & James LLP/Riddell Williams P.S., corporate counsel to
the Company, dated the Closing Date or such later Option Closing Date, as to the
matters set forth on the attached Appendix A, (ii) __________, counsel to Innova
Europe Limited, dated the Closing Date or such later Option Closing Date, as
applicable, as to the matters set forth on the attached Appendix B, (iii) and of
_________, special FCC counsel to the Company, dated the Closing Date or such
later Option Closing Date, as applicable, as to the matters set forth on the
attached Appendix C, in each case addressed to the Underwriters and with
reproduced copies of signed counterparts thereof for each of the
Representatives.
(d) You shall have received from Drinker Biddle & Reath
LLP, Underwriters' Counsel, an opinion or opinions, dated the Closing Date or
on any later Option Closing Date, as the case may be, in form and substance
reasonably satisfactory to you, with respect to the sufficiency of all
corporate proceedings undertaken by the Company and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
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<PAGE> 23
documents as it may have reasonably requested for the purpose of enabling it to
pass upon such matters.
(e) You shall have received on the Closing Date and on
any later Option Closing Date, as the case may be, a letter from the
Accountants addressed to the Company and the Underwriters, dated the Closing
Date or such later Option Closing Date, as the case may be, confirming that it
is an independent certified public accountant with respect to the Company
within the meaning of the Act and the Rules and Regulations thereunder and
based upon the procedures described in its letter delivered to you concurrently
with the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than three days prior to the Closing Date or any
such later Option Closing Date, as the case may be, (i) confirming that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later Option Closing Date, as the case may be; and
(ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter that are necessary to reflect any
changes in the facts described in the Original Letter since the date of such
letter, or to reflect the availability of more recent financial statements,
data or information. The letter shall not disclose any change, or any
development involving a prospective change, in or affecting the business or
properties of the Company which, in your reasonable judgment, makes it
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. In addition, you shall have received from
the Accountants a letter addressed to the Company and made available to you for
the use of the Underwriters stating that its review of the Company's system of
internal accounting controls, to the extent it deemed necessary in establishing
the scope of its latest examination of the Company's financial statements, did
not disclose any weaknesses in internal controls that it considered to be
material weaknesses. All such letters shall be in a form satisfactory to the
Representatives and their counsel in their reasonable opinion.
(f) You shall have received on the Closing Date and on
any later Option Closing Date, as the case may be, a certificate of the
President and the Chief Financial Officer of the Company, dated the Closing
Date or such later date, to the effect that as of such date (and you shall be
satisfied that as of such date):
(i) The representations and warranties of the
Company in this Agreement are true and correct, as if made on
and as of the Closing Date or any later Option
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<PAGE> 24
Closing Date, as the case may be; and the Company has complied
with all of the agreements and satisfied all of the conditions
on its part to be performed or satisfied at or prior to the
Closing Date or any later Option Closing Date, as the case may
be in all material respects;
(ii) The Registration Statement has become
effective under the Act and no stop order suspending the
effectiveness of the Registration Statement or preventing or
suspending the use of the Prospectus has been issued, and no
proceedings for that purpose have been instituted or are
pending or, to the best of their knowledge, threatened under
the Act;
(iii) They have carefully reviewed the Registration
Statement, the Offering Memorandum, and the Prospectus; and,
when the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus and
any amendments or supplements thereto contained all statements
and information required to be included therein or necessary to
make the statements therein not misleading; and when the
Registration Statement became effective, and at all times
subsequent thereto up to the delivery of such certificate, none
of the Registration Statement, the Prospectus or the Offering
Memorandum, or any amendment or supplement thereto included any
untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading; and, since the
effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus or Offering Memorandum that has not
been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement, the
Offering Memorandum and the Prospectus, there has not been
(A) any Material Adverse Change or any prospective Material
Adverse Change, (B) any transaction which is material to the
Company and its Subsidiaries taken as a whole, not in the
ordinary course of business, (C) any obligation, direct or
contingent, incurred by the Company or its Subsidiaries, which
is material to the Company and its Subsidiaries taken as a
whole, (D) any change in the capital stock or outstanding
indebtedness of the Company or its Subsidiaries or in
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<PAGE> 25
the outstanding indebtedness of the Company which is material
to the Company and its Subsidiaries taken as a whole or (E)
any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company.
(g) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request as to the accuracy
of the representations and warranties of the Company herein, as to the
performance by the Company of its obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) below, the
Company agrees to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter within
the meaning of Section 15 of the Act from and against any and all losses,
claims, damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Act, the Exchange Act, or
the common law or otherwise, and the Company agrees to reimburse each such
Underwriter and controlling person for any legal or other out-of-pocket
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any 462(b) registration
statement) or in the Offering Memorandum or any post-effective amendment
thereto (including any
25
<PAGE> 26
462(b) registration statement), or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto), or in the
Offering Memorandum or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company contained in this paragraph (a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission is contained in the section of the Prospectus
entitled "Underwriting" (except for the ____ paragraph thereof) or the last
paragraph of text on the cover page of the Prospectus, and (2) the indemnity
agreement contained in this paragraph (a) with respect to any Preliminary
Prospectus or Offering Memorandum shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Shares which are the subject thereof (or
to the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented or in the case of purchasers resident in
Ontario, Canada, the revised Offering Memorandum) was not sent or delivered to
such person and the untrue statement or omission of a material fact contained in
such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus
as amended or supplemented or in the case of purchasers resident in Ontario,
Canada, the revised Offering Memorandum) unless the failure is the result of
noncompliance by the Company with paragraph (a) of Section 6 hereof. The
indemnity agreements of the Company contained in this paragraph (a) and the
representations and warranties of the Company contained in Section 2 hereof
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of any payment for the Shares.
(b) Each Underwriter severally agrees to indemnify and
hold harmless the Company, each of its executive officers, each of its
directors, each other Underwriter and each person (including each partner or
officer thereof) who controls the Company or any such other Underwriter within
the meaning of Section 15 of the Act, from and against any and all losses,
claims, damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Act, the Exchange Act, or
the common law or otherwise and to reimburse each of them for any legal or
other expenses including, except as otherwise
26
<PAGE> 27
hereinafter provided, reasonable fees and disbursements of counsel) incurred by
the respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement), or in the Offering Memorandum, or any
post-effective amendment thereto (including any 462(b) registration statement)
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto), or in the Offering Memorandum, or the omission
or alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that in the cases of clauses (i) and
(ii) above, such statement or omission is contained in the Section of the
Prospectus entitled "Underwriting" (except for the ____ paragraph thereof) or
the last paragraph on the cover page of the Prospectus. The indemnity agreement
of each Underwriter contained in this paragraph (b) shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Shares.
(c) Each party indemnified under the provision of
paragraphs (a) and (b) of this Section 9 agrees that, upon the service of a
summons or other initial legal process upon it in any action or suit instituted
against it or upon its receipt of written notification of the commencement of
any investigation or inquiry of, or proceeding against it, in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (a "Notice") of such service
or notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be
available to any party who shall fail so to give the Notice if the party to
whom such Notice was not given was unaware of the action, suit, investigation,
inquiry or proceeding to which the Notice would have related and was prejudiced
by the failure to give the Notice, but the omission so to notify such
indemnifying party or parties
27
<PAGE> 28
of any such service or notification shall not relieve such indemnifying party
or parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of such indemnity
agreement. Any indemnifying party shall be entitled at its own expense to
participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of
the Notice by giving written notice (the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties and (ii) in any event, the indemnified party or
parties shall be entitled, at its or their own expense to have counsel chosen
by such indemnified party or parties participate in, but not conduct, the
defense. It is understood that the indemnifying parties shall not, in respect
of the legal defenses of any indemnified party in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for (a)
the fees and expenses of more than one separate firm (in addition to any local
counsel) for all of the Underwriters and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act, and (b) the fees and
expenses of more than one separate firm (in addition to any local counsel) for
the Company, its directors, its officers who sign the Registration Statement
and each person, if any, who controls the Company within the meaning of Section
15 of the Act. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
paragraphs (a) through
28
<PAGE> 29
(c) of this Section 9 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear
such other expenses as it or they have authorized to be incurred by the
indemnified party or parties. If, within a reasonable time after receipt of
the Notice, no Notice of Defense has been given, the indemnifying party or
parties shall be responsible for any legal or other expenses incurred by the
indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding. The indemnifying party or parties
shall not be liable for any settlement of any proceeding effected without its
or their written consent, provided such consent has not been unreasonably
withheld.
(d) If the indemnification provided for in this Section 9
is unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 9, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 9 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party
in connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Underwriters, on the other, shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the Shares received by the Company and the total underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Shares. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by each indemnifying
29
<PAGE> 30
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this
paragraph (d). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities, or actions in respect thereof, referred
to in the first sentence of this paragraph (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigation, preparation to defend or defense against any
action or claim which is the subject of this paragraph (d). Notwithstanding
the provisions of this paragraph (d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to the
Shares purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the
service of a summons or other initial legal process upon it in any action
instituted against it in respect of which contribution may be sought, it will
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought from any obligation it may have hereunder or otherwise (except as
specifically provided in paragraph (c) of this Section 9).
(e) The Company will not, without the prior written
consent of each Underwriter, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to such
30
<PAGE> 31
claim, action, suit or proceeding) unless such settlement, compromise or
consent includes an unconditional release of such Underwriter and each such
controlling person from all liability arising out of such claim, action, suit
or proceeding.
(f) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof, including without limitation
the provisions of this Section 9 and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 9
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is
made in the Registration Statement and Prospectus as required by the Act and
the Exchange Act or in the Offering Memorandum as required by Canadian
securities law.
10. TERMINATION. This Agreement may be terminated by you at any
time on or prior to the Closing Date or on or prior to any later Option Closing
Date, as the case may be, (i) if the Company shall have failed, refused or been
unable, at or prior to the Closing Date, or on or prior to any later Option
Closing Date, as the case may be, to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company is not fulfilled, or (ii) if
trading on the New York Stock Exchange, the American Stock Exchange or the
NASDAQ National Market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been required on the New York Stock Exchange, the American Stock
Exchange or the NASDAQ National Market, by such trading exchanges or by order
of the Commission or any other governmental authority having jurisdiction, or
if a banking moratorium shall have been declared by federal or New York
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, accident or other calamity of such character as to have a Material
Adverse Effect regardless of whether or not such loss shall have been insured,
or (iv) if there shall have been a material adverse change in the general
political or economic conditions or financial markets in the United States as
in the judgment of the Representatives makes it inadvisable or impracticable
to proceed with the offering, sale and delivery of the Shares, or (v) if there
shall have occurred an outbreak or escalation of hostilities between the United
States and any foreign power or of any other insurrection or armed conflict
involving the United States or other national or international calamity,
hostilities or crisis or the declaration by the United
31
<PAGE> 32
States of a national emergency which, in the judgment of the Representatives,
adversely affects the marketability of the Shares, or (vi) if since the
respective dates as of which information is given in the Registration Statement,
the Offering Memorandum and the Prospectus, there shall have occurred any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company or the business affairs, management, or business prospects of the
Company, whether or not arising in the ordinary course of business, or (vii) if
any foreign, federal or state statute, regulation, rule or order of any court or
other governmental authority shall have been enacted, published, decreed or
otherwise promulgated which in the judgment of the Representatives materially
and adversely affects or will materially and adversely affect the business or
operations of the Company, or trading in the Common Stock shall have been
suspended, or (viii) there shall have occurred a material adverse decline in the
value of securities generally on the New York Stock Exchange, the American Stock
Exchange or the NASDAQ National Market or (ix) action shall be taken by any
foreign, federal, state or local government or agency in respect of its monetary
or fiscal affairs which, in the judgment of the Representatives, has a material
adverse effect on the securities markets in the United States. If this
Agreement shall be terminated in accordance with this Section 10, there shall be
no liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
Section 7.
If you elect to terminate this Agreement as provided in this Section
10, the Company shall be notified promptly by you by telephone, telecopy or
telegram, confirmed by letter.
11. REIMBURSEMENT OF CERTAIN EXPENSES.
(a) In addition to their other obligations under Section
9 of this Agreement, the Company hereby agrees to reimburse on a quarterly
basis the Underwriters for all reasonable legal and other expenses incurred in
connection with investigating or defending any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in paragraph (a) of
Section 9 of this Agreement, notwithstanding the absence of a
32
<PAGE> 33
judicial determination as to the propriety and enforceability of the
obligations under this Section 11 and the possibility that such payments might
later be held to be improper; provided, however, that (i) to the extent any
such payment is ultimately held to be improper, the persons receiving such
payments shall promptly refund them and (ii) such persons shall provide to the
Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due.
(b) In addition to their other obligations under Section
9 of this Agreement, the Underwriters hereby agree to reimburse on a quarterly
basis the Company for all reasonable legal and other expenses incurred in
connection with investigating or defending any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in paragraph (b) of
Section 9 of this Agreement, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 11 and the possibility that such payments might later be held to
be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the Company shall promptly refund it and (ii)
the Company shall provide to the Underwriter, upon request, reasonable
assurances of its ability to effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of the Company and the several Underwriters and,
with respect to the provisions of Section 9 hereof, the several parties (in
addition to the Company and the several Underwriters) indemnified under the
provisions of said Section 9, and their respective personal representatives,
successors and assigns. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any
provision herein contained. The term "successors and assigns" as herein used
shall not include any purchaser, as such purchaser, of any of the Shares from
any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to UBS Securities LLC, 299 Park
Avenue, New York, New York 10171, Attention: Mr. Richard Messina; and if to
the Company, shall be mailed, telegraphed or delivered to it at its office,
Gateway
33
<PAGE> 34
North, Building 2, 3325 South 116th Street, Seattle, Washington 98168-1974,
Attention: John M. Hemingway, Secretary and Chief Financial Officer. All
notices given by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and
effect regardless of (i) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its respective directors of officers, and (ii) delivery of and payment for the
Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
You will act as Representatives of the several Underwriters in all
dealings with the Company under this Agreement, and any action under or in
respect of this Agreement taken by you jointly or by UBS Securities LLC, as
Representatives, will be binding upon all of the Underwriters.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York.
[INTENTIONALLY LEFT BLANK]
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<PAGE> 35
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company
and the several Underwriters in accordance with its terms.
Very truly yours,
INNOVA CORPORATION
By: __________________________________
Jean-Francois Grenon
President and Chief
Executive Officer
The foregoing Agreement
is hereby confirmed and
accepted as of the date
first above written.
UBS SECURITIES LLC
HAMBRECHT & QUIST, LLC
WESSELS, ARNOLD & HENDERSON, L.L.C.
By: UBS SECURITIES LLC
By: __________________________________
Title:____________________________
Acting on behalf of the several
Underwriters, including themselves,
named on Schedule A hereto.
35
<PAGE> 36
SCHEDULE A
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Shares
to be
Underwriters Purchased
------------ ---------
<S> <C>
UBS Securities LLC. . . . . . . . . . . . . . . .
Hambrecht & Quist, LLC . . . . . . . . . . . . .
Wessels, Arnold & Henderson, L.L.C . . . . . . .
Total [ ]
==========
</TABLE>
<PAGE> 37
SCHEDULE B
Lock-Up Agreements
[TO BE SUPPLIED]
<PAGE> 38
APPENDIX A
[TO BE SUPPLIED]
<PAGE> 1
EXHIBIT 3.2
RESTATED
ARTICLES OF INCORPORATION
OF
INNOVA CORPORATION
ARTICLE I.
Name.
The name of the corporation is Innova Corporation.
ARTICLE II.
Authorized Shares.
A. The corporation is authorized to issue five classes of
shares. The first three classes shall be designated "Series A Preferred
Stock," "Series B Preferred Stock," and "Common Stock," respectively. The
corporation is also authorized to issue a fourth class of stock, the "Series C
Senior Preferred Stock," the preferences, limitations and relative rights of
which class (or the preferences, limitations, and relative rights of any series
into which such class may be divided), the Board of Directors is hereby
expressly authorized to determine prior to issuance of shares of such class or
series; provided, however, that prior to the issuance of any series into which
such class of Preferred Stock may be divided, the terms of such issuance must
be approved by a majority of the outstanding shares of each class of Preferred
Stock of the corporation (which approval may be given by written consent
executed by such shareholders). The corporation is also authorized to issue a
fifth class of preferred stock, the "Series D Preferred Stock," the
preferences, limitations and relative rights of which class (or the
preferences, limitations, and relative rights of any series into which such
class may be divided), the Board of Directors is hereby expressly authorized to
determine prior to issuance of shares of such class or series; provided,
however, that prior to the issuance of any series into which such class of
Preferred Stock may be divided, the terms of such issuance must be approved by
a majority of the outstanding shares of each class of Preferred Stock of the
corporation (which approval may be given by written consent executed by such
shareholders). The aggregate number of shares of Series A Preferred Stock
authorized to be issued is 100,000,000, with a par value of $0.01 per share;
the aggregate number of shares of Series B Preferred Stock authorized to be
issued is 50,000,000 with a par value of $0.01 per share; the aggregate number
of Series C Senior Preferred Stock authorized to be issued is 35,000,000, with
a par value of $0.01 per share; the aggregate number of shares
1
<PAGE> 2
of Series D Preferred Stock authorized to be issued is 100,000,000, with a par
value of $0.01 per share; and the aggregate number of shares of Common Stock
authorized to be issued is 375,000,000, with a par value of $0.01 per share.
The Series A Preferred Stock shall consist of three series, having the
designations and relative preferences as follows: (a) 20,000,000 shares of
Series A.1. Preferred Stock, having a liquidation preference of $0.5515 per
share, and consisting of all Series A Preferred Stock issued and outstanding as
of August 1, 1993 or issued with respect to such shares pursuant to paragraph 5
hereof on or before April 26, 1994; (b) 20,000,000 shares of Series A.2.
Preferred Stock, having a liquidation preference of $0.035 per share, and
consisting of all shares of Series A Preferred Stock issuable upon exercise of
warrants to purchase Series A Preferred Stock, at an initial exercise price of
$0.035 per share; and (c) 60,000,000 shares of Series A.3. Preferred Stock,
having a liquidation preference of $0.3299 per share, and consisting of all
shares of Series A Preferred Stock other than Series A.1. Preferred Stock or
Series A.2. Preferred Stock. The liquidation preference for the Series B
Preferred Stock shall be $.2525 per share.
The relative rights, preferences, privileges and restrictions with
respect to each series of Series A Preferred Stock shall be identical in all
respects, except as specifically identified herein.
B. The rights, preferences, privileges, restrictions and other
matters relating to the Series A Preferred Stock shall be identical to those
relating to the Series B Preferred Stock, except as specifically identified
herein. Subject to the rights of approval of the holders of a majority of the
outstanding shares of each class of Preferred Stock, as set forth in paragraph
A above, the Board of Directors is hereby expressly authorized, at any time and
from time to time, to divide the shares of Series C Senior Preferred Stock and
the shares of Series D Preferred Stock into one or more series, and in the
resolution or resolutions establishing a particular series, before issuance of
any of the shares thereof, to fix and determine the number of shares and the
designation of such series, so as to distinguish it from the shares of all
other series and classes, and to fix and determine the preferences, voting
rights, qualifications, privileges, limitations, options, conversion rights,
restrictions and other special or relative rights of such series of the
preferred stock to the fullest extent now or hereafter permitted by the laws
of the State of Washington, including, but not limited to, the variations
between different series in the following respects:
(i) The distinctive designations of such
series and the number of shares which shall
constitute such series, which number may be
increased or decreased (but not below the number of
shares of such series thereof then outstanding) from
time to time by the Board of Directors;
2
<PAGE> 3
(ii) The annual dividend rate for such
series, and the date or dates from which dividends
shall commence to accrue;
(iii) The price or prices at which, and
the terms and conditions on which, the shares of
such series may be made redeemable;
(iv) The purchase or sinking fund
provisions, if any, for the purchase or redemption
of shares of such series;
(v) The preferential amount or amounts
payable on shares of such series in the event of the
liquidation, dissolution, or winding up of the
corporation;
(vi) The voting rights, if any, of shares
of such series;
(vii) The terms and conditions, if any,
upon which shares of such series may be converted
and the class or classes of series of shares of the
corporation or other securities into which such
shares may be converted;
(viii) The relative seniority, parity or
junior rank of such series as to dividends or assets
with respect to any other classes or series of stock
then or thereafter to be issued; and
(ix) Such other terms, qualifications,
privileges, limitations, options, restrictions and
special or relative rights and preferences, if any,
of shares of such series as the Board of Directors
may, at the time of such resolution or resolution,
lawfully fix and determine under the laws of the
State of Washington.
C. The rights, preferences, privileges, restrictions and other
matters relating to the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Senior Preferred Stock and the Series D Preferred Stock (together
referred to herein as "Preferred Stock") are as follows:
1. Dividends. The holders of Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors, and out of funds of
the corporation legally available for the payment of dividends, prior and in
preference to any declaration and payment of any dividend on the Common Stock
of the corporation, non-cumulative dividends as determined from time to time by
the Board of Directors. Upon the declaration and payment of any dividend on
the Common Stock of the corporation, the holders of Preferred Stock shall be
entitled
3
<PAGE> 4
to receive a per share dividend (based on the number of shares of Common Stock
into which the Preferred Stock could be converted on the date such Common Stock
dividends are declared) equal to the per share dividend paid to the holders of
Common Stock. No dividend will be declared and paid on any class of Preferred
Stock unless an equal dividend is at the same time declared and paid on each
class of Preferred Stock.
2. Liquidation Preferences.
a. In the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary, each holder of
Preferred Stock shall be entitled to receive, out of the assets or surplus
funds of the corporation, an amount for each share of Preferred Stock then held
by such holder equal to the liquidation preference for such shares of Preferred
Stock, as set forth in Article II., (appropriately adjusted for stock splits,
stock dividends, combinations, recapitalizations, reclassification, and similar
corporate rearrangements, including additional shares of Preferred Stock issued
pursuant to paragraph 5 hereof, such that the aggregate liquidation preference
of the outstanding shares of Preferred Stock held by such holder subsequent to
such action shall equal the aggregate liquidation preference of the shares of
Preferred Stock held by such holder prior to such event), and, in addition, an
amount equal to all declared but unpaid dividends on the Preferred Stock (the
"Liquidation Value"), before any payment shall be made or any assets
distributed to the holders of the Common Stock, provided, however, that the
right of holders of any class or series of Preferred Stock to receive the
Liquidation Value shall be subject to payment of the full Liquidation Value of
any class or series of Preferred Stock ranking senior thereto with respect to
such distribution. If upon the occurrence of such event, the assets and funds
thus distributed among the holders of Preferred Stock shall be insufficient to
permit the payment to such holders of the full preferential amount aforesaid,
then the entire assets and funds of the corporation legally available for
distribution shall be allocated among the holders of the Preferred Stock
ranking on a parity with respect to such distribution such that the amount
received by each such holder bears the same relationship to the total assets
and funds available for distribution as the aggregate Liquidation Value of all
shares held by such holder bears to the aggregate Liquidation Value of all
shares of Preferred Stock outstanding and entitled to participate in such
distribution.
b. After the payment or distribution to the holders of
Preferred Stock of the full preferential amount aforesaid, the holders of the
Preferred Stock and the holders of the Common Stock shall be entitled to
receive the remaining assets of the corporation in proportion to the shares of
Common Stock then held by them and the shares of Common Stock which they then
have the right to acquire upon conversion of the Preferred Stock.
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c. For the purposes of this paragraph 2, (i) any
acquisition of the corporation by means of merger, consolidation,
reorganization, or other transaction in which greater than 50% of the
corporation's shares (including shares of Common Stock and shares of Preferred
Stock on an as-converted basis) are transferred or (ii) the sale of all or
substantially all of the assets of the corporation, shall be treated as a
liquidation, dissolution or winding up of the corporation and shall entitle the
Holders of Preferred Stock to receive at the Closing in cash, securities or
other property (valued as provided in subparagraph 2(d) below) amounts as
specified in subparagraphs 2(a) and 2(b) above.
d. Whenever the distribution provided for in this
paragraph 2 shall be payable in securities or property other than cash, the
value of such distribution shall be the fair market value of such securities or
other property as determined in good faith by the Board of Directors.
3. Redemption.
a. At or at any time after October 1, 1997, the
corporation shall at any time it may lawfully do so, upon not less than thirty
(30) days' written notice from holders of shares of Preferred Stock (each a
"Requesting Holder") representing greater than fifty percent of the then issued
and outstanding Preferred Stock, redeem the number of shares of Preferred Stock
requested by each such Requesting Holder by paying thereafter $.3299 for each
share of Series A Preferred Stock and $.2525 for each share of Series B
Preferred Stock redeemed (appropriately adjusted for stock splits, stock
dividends, combinations, recapitalizations, reclassification, and similar
corporate rearrangements, including additional shares of Series A Preferred
Stock or Series B Preferred Stock issued pursuant to paragraph 5 hereof) plus
the amount of all declared and unpaid dividends thereon (such total amount per
share is hereinafter referred to as the "Redemption Price" of the Preferred
Stock). The Redemption Price shall be paid to each such Requesting Holder in
cash in three equal installments, without interest, with the first such
installment paid on the Redemption Date (as hereinafter defined) and subsequent
installments paid on each of the next two anniversaries of the Redemption Date.
b. Upon receipt of such written notice from Requesting
Holders representing greater than fifty percent of the then issued and
outstanding shares of Preferred Stock, the corporation shall fix a date (the
"Redemption Date") for redemption of each such Requesting Holder's shares of
Preferred Stock, or any lesser amount requested for redemption by any such
Requesting Holder. Not less than thirty (30) nor more than sixty (60) days
prior to the Redemption Date, written notice shall be mailed, postage prepaid,
to each Requesting Holder of record, at the post office address last shown on
the records of the corporation, to redeem such shares, specifying the
Redemption Price and the date on which such Requesting
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Holder's Conversion Rights (as hereinafter defined) as to such shares terminate
and asking each such Requesting Holder to surrender to the corporation, in the
manner and at the place designated, the certificate or certificates
representing the shares to be redeemed (such notice is-hereinafter referred to
as the "Redemption Notice"). On or before the Redemption Date, each Requesting
Holder of shares of Preferred Stock to be redeemed, unless such Requesting
Holder has exercised his right to convert the shares as provided in paragraph 5
hereof, shall surrender the certificate or certificates representing such
shares to the corporation, in the manner and at the place designated in the
Redemption Notice, and thereupon the first installment of the Redemption Price
of such shares shall be payable to the order of the person whose name appears
on such certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled. In the event less than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares. If the Redemption Notice shall have
been duly given, from and after the Redemption Date, unless there shall have
been a default in payment of the Redemption Price, all rights of the Requesting
Holders of such shares as holders of Preferred Stock of the corporation (except
the right to receive the Redemption Price) shall cease and terminate with
respect to such shares, and such shares shall not thereafter be transferred on
the books of the corporation or be deemed to be outstanding for any purpose
whatsoever.
c. If on or prior to the Redemption Date, the
corporation deposits the Redemption Price of all shares of Preferred Stock
designated for redemption in the Redemption Notice and not yet redeemed with a
bank or trust company in the State of Washington having a capital and surplus
of at least $25,000,000 as a trust fund for the benefit of the respective
Requesting Holders of the shares designated for redemption and not yet redeemed
with irrevocable instructions and authority to such bank or trust company to
pay the Redemption Price of the Preferred Stock to their respective Requesting
Holders in installments in accordance with subparagraph 3(a) above upon
surrender of their certificates, then after the date of deposit (although prior
to the Redemption Date), the shares so called shall be redeemed. The deposit
shall constitute full payment of the shares to their Requesting Holders and
from and after the date of deposit the shares shall no longer be outstanding
and the Requesting Holders thereof shall cease to be shareholders with respect
to such shares, and shall have no rights with respect thereto, except the right
to receive from the bank or trust company payment of the Redemption Price of
the shares in installments in accordance with subparagraph 3(a) upon the
surrender of their certificates therefor, and any conversion rights which may
exist pursuant to paragraph 5 hereof. Any monies deposited by the corporation
pursuant to this paragraph 3(c) for the redemption of shares thereafter
converted into shares of Common Stock pursuant to paragraph 5 hereof no later
than the fifth (5th) day preceding the Redemption Date shall be returned to the
corporation forthwith upon such conversion. The balance of any monies
deposited by the corporation pursuant to this paragraph 3(c) remaining
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unclaimed at the expiration of one (1) year following the Redemption Date shall
thereafter be returned to the corporation upon its request expressed in a
resolution of its Board of Directors, after which the Requesting Holders of
shares called for redemption shall be entitled to receive payment of the
Redemption Price only from the corporation.
d. The redemption rights hereinabove set forth shall
terminate upon: (i) the closing by the corporation of a firmly underwritten
public offering involving the sale of at least 25% of the issued and
outstanding shares of Common Stock, on a fully diluted basis, pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
or any successor law thereto generating net proceeds of not less than
$10,000,000 and the commencement of trading of such shares on a national
securities exchange or the National Association of Securities Dealers Automated
Quotation System (such public offering and commencement of trading being
referred to hereinafter as a "Liquidity Event"), (ii) the closing of a sale of
substantially all of the assets of the corporation or other transaction in
which the control of the corporation is transferred, or (iii) if the holders of
a majority of each class of Preferred Stock, voting separately as voting
groups, vote at a meeting duly noticed and called for this purpose to terminate
such redemption rights.
4. Voting Rights; Directors.
a. Except as otherwise expressly provided herein or as
required by law, the holder of each share of Preferred Stock shall be entitled
to one vote for each share held on the record date for the vote or consent of
shareholders and shall have voting rights and powers equal to the voting rights
and powers of the Common Stock. The holder of each share of Preferred Stock
shall be entitled to notice of any shareholders' meeting in accordance with the
Bylaws of the corporation and shall vote for the election of directors as set
forth below, and upon any other matter submitted to a vote of the shareholders
with the holders of the Common Stock, except those matters required by law to
be submitted to a separate vote by voting groups. Fractional votes shall not,
however, be permitted, and any fractional shares held shall be disregarded in
computing voting rights.
b. The holders of the Series A Preferred Stock shall be
entitled to elect three (3) members of the Board of Directors, the holders of
the Series B Preferred Stock shall be entitled to elect one (1) members of the
Board of Directors, and the holders of Preferred Stock and Common Stock shall
together be entitled to elect remaining members of the Board of Directors.
This subparagraph 4(b) shall expire and be of no further force or effect upon
the occurrence of a Liquidity Event.
5. Conversion. Shares of Preferred Stock shall be convertible
into shares of Common Stock as described in this paragraph 5 (the "Conversion
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<PAGE> 8
Rights"). The term "Common Stock Equivalents" as used herein shall mean
securities or rights convertible into or entitling the holder thereof to
receive additional shares of Common Stock. The term "Conversion Price" as used
herein shall mean $0.2525 per share of Series A Preferred Stock and $0.2525 per
share of Series B Preferred Stock, as appropriately adjusted for stock splits,
stock dividends, combinations, recapitalizations, reclassifications, and
similar corporate rearrangements relating to the Preferred Stock, including
additional shares of Preferred Stock issued pursuant to this paragraph 5.
a. Optional Conversion. Each share of Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after
the date of issuance of such share and on or prior to the fifth (5th) day prior
to the Redemption Date, if any, as may have been fixed in any Redemption
Notice, at the office of the corporation or any transfer agent for the
Preferred Stock, into one fully paid and nonassessable share of Common Stock.
In the event of a call for redemption pursuant to paragraph 3 hereof of any
shares of Preferred Stock which are convertible into Common Stock, the
Conversion Rights shall terminate as to the shares designated for redemption at
the close of business on the fifth (5th) day preceding the Redemption Date,
unless default is made in payment of the Redemption Price.
b. Mandatory Conversion. Each share of Preferred Stock
then outstanding shall automatically be converted into one fully paid and
nonassessable share of Common Stock immediately upon the occurrence of a
Liquidity Event involving an anticipated offering price to the public of not
less than four times the price per share received by the corporation with
respect to the most recent sale of shares of either Series A Preferred Stock or
Series B Preferred Stock preceding the public offering (appropriately adjusted
for stock splits, stock dividends, combinations, recapitalizations,
reclassification, and similar corporate rearrangements). Such conversion shall
be conditioned upon the corporation paying all declared and unpaid dividends on
the Preferred Stock, to and including the date of such conversion; provided,
that the corporation may, at its option, in lieu of making full cash payment of
all such declared and unpaid dividends, make payment thereof in whole shares of
Common Stock, valued at the fair market value of the shares of Common Stock as
determined in good faith by the Board of Directors, plus cash in lieu of
fractional shares, so that the cash plus such value of such Common Stock equals
the amount of such declared and unpaid dividends. Upon the occurrence of such
event, the outstanding shares of Preferred Stock to be converted shall be
converted automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the corporation or its transfer agent, provided, however, that
the corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless certificates
evidencing such
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<PAGE> 9
shares of Preferred Stock being converted are delivered to the corporation or
any transfer agent, as provided in subparagraph 5(c).
c. Mechanics of Conversion. No fractional shares of
Common Stock shall be issued upon conversion of shares of Preferred Stock, and
any shares of Preferred Stock surrendered for conversion which would otherwise
result in a fractional share of Common Stock shall be redeemed for the fair
market value of the fractional shares of Common Stock as determined in good
faith by the Board of Directors at the time of conversion, payable as promptly
as possible whenever funds are legally available therefor. Subject to the
provisions of subparagraph 5(b), in order to convert shares of Preferred Stock
into shares of Common Stock, the holder thereof shall surrender the certificate
or certificates therefor, duly endorsed, at the principal office of the
corporation or of any transfer agent for the Preferred Stock, and shall give
written notice to the corporation at such office that the holder elects to
convert the same and shall state therein the name or names in which the holder
wishes the certificate or certificates for shares of Common Stock to be issued;
said conversion notice shall contain such representations as may reasonably be
required by the corporation, to the effect that the shares to be received upon
conversion are not being acquired and will not be transferred in any way which
might violate then applicable laws. The corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
shares of Preferred Stock, or to its nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which it shall be
entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Preferred Stock to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
d. Combinations or Consolidations of Common Stock. In
the event the corporation at any time or from time to time effects a
subdivision or combination of its outstanding Common Stock into a greater or
lesser number of shares, then it shall simultaneously effect a proportionate
and corresponding subdivision or combination of its outstanding Preferred
Stock.
e. Stock Dividends. In the event the corporation shall
make or issue dividends or other distributions paid in additional shares of
Common Stock, or Common Stock Equivalents that are convertible or exchangeable
for Common Stock without consideration, (collectively, "Stock Dividends") then
and in each such event the corporation shall issue to each holder of shares of
Preferred Stock on the effective date of the Stock Dividend additional shares
of the same class of Preferred Stock equal to the number of shares of Common
Stock such holder would have received as a result of such Stock Dividend if
such holder's Preferred Stock had been converted to Common Stock immediately
prior to the record date
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for such Stock Dividend. In the case of the issuance of Common Stock
Equivalents, each holder of shares of Preferred Stock shall receive additional
shares of the same class of Preferred Stock equal to the number of shares of
Common Stock into which the Common Stock Equivalents resulting from such Stock
Dividend would be convertible (as if such holder's Preferred Stock had been
converted to Common Stock immediately prior to the record date for the Stock
Dividend); provided however, that additional shares issued in respect of Common
Stock Equivalents, which Common Stock Equivalents provide, with the passage of
time or otherwise, for any decrease in the number of shares of Common Stock
issuable upon conversion or exercise thereof, or which Common Stock Equivalents
expire with the passage of time or otherwise, shall be deposited on behalf of
the holder in escrow with the corporation's independent legal counsel or other
person acceptable to both the corporation and the holder until the conversion
or exercise of such Common Stock Equivalents, at which time the corporation
shall make an appropriate adjustment, if any, to the number of additional
shares issued and the adjusted number of such shares shall be delivered to the
holder. The holder's interest in additional shares deposited in escrow may be
transferred subject to the foregoing restriction and any other restrictions
applicable to the holder's shares generally.
f. Reclassification and Reorganization. If the Common
Stock issuable upon the conversion of the shares of Preferred Stock shall be
changed into the same or different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above, or a merger, or other reorganization referred to in subparagraph 2(c)
above), then and in each such event, the holder of each share of Preferred
Stock shall have the right thereafter to convert such share into the kind and
amount of shares of stock and other securities and property receivable upon
such reorganization, reclassification or other change, by holders of the number
of shares of Common Stock into which such shares of Preferred Stock might have
been converted immediately prior to such reorganization, reclassification or
change.
g. Diluting Issues. Except as otherwise provided in
this subparagraph 5(g), if the corporation sells or issues any Common Stock or
Common Stock Equivalents at a per share consideration less than the Conversion
Price for shares of the Series A Preferred Stock and/or shares of the Series B
Preferred Stock, then the corporation shall protect the Conversion Rights from
dilution by issuing to each holder of shares of Preferred Stock with a
Conversion Price greater than the per share consideration received by the
corporation on such sale or issuance ("Affected Preferred Shares") additional
shares of the same class of Preferred Stock as the Affected Preferred Shares,
as set forth below. For the purposes of the foregoing, the per share
consideration with respect to the sale or issuance of Common Stock or Preferred
Stock shall be the price per share received
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by the corporation, prior to the payment of any expenses, commissions,
discounts and other applicable costs with respect thereto, and with respect to
Preferred Stock issued upon the conversion of a debt security and accompanied
by a warrant to purchase additional shares of Preferred Stock, shall be
calculated by treating both the issued shares of Preferred Stock and the shares
of Preferred Stock to be issued upon the exercise of such warrant as the shares
received for such consideration. With respect to the issuance of other Common
Stock Equivalents, the per share consideration shall be determined by dividing
the maximum number of shares of Common Stock issuable with respect to such
Common Stock Equivalents (as set forth in the instrument relating thereto
without regard to any provisions contained therein for subsequent adjustment of
such number) into the aggregate consideration received by the corporation upon
the sale or issuance of such Common Stock Equivalents plus the minimum
aggregate amount of additional consideration receivable by the corporation, if
any, upon the conversion or exercise of such Common Stock Equivalents. The
issuance of Common Stock or Common Stock Equivalents for no consideration shall
be deemed to be an issuance at a per share consideration of $.01. In
connection with the sale or issuance of Common Stock or Common Stock
Equivalents for non-cash consideration, the amount of consideration shall be
determined on a reasonable basis by the Board of Directors of the corporation.
(i) Upon each issuance of Common Stock or
Common Stock Equivalents for a per share consideration less than the Conversion
Price, the corporation shall issue to each holder of Affected Preferred Stock
additional shares of the same class of Preferred Stock such that the aggregate
number of shares of Preferred Stock held by such holder after such issuance is
equal to the number of shares of Affected Preferred Stock held by such holder
immediately prior to such issuance multiplied by a fraction:
(y) the numerator of which shall be
(1) the total number of shares of Common Stock issued
and outstanding immediately prior to such issuance (including for this
purpose the number of shares of Common Stock to be issued upon
conversion of outstanding Common Stock Equivalents), plus
(2) the number of additional shares of Common Stock so
issued (including shares of Common Stock to be issued upon conversion
of Common Stock Equivalents so issued).
(X) the denominator of which shall be
(1) the total number of shares of Common Stock issued
and outstanding immediately prior to such issuance (including for this
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purpose the number of shares of Common Stock to be issued upon
conversion of outstanding Common Stock Equivalents), plus
(2) the number of shares of Common Stock that the
aggregate consideration received by the corporation for the Common
Stock and Common Stock Equivalents so issued would purchase at the
Conversion Price.
provided, however, that additional shares issued in respect of Common Stock
Equivalents, which Common Stock Equivalents provide, with the passage of time
or otherwise, for any decrease in the number of shares of Common Stock issuable
upon conversion or exercise thereof, or which Common Stock Equivalents expire
with the passage of time or otherwise, shall be deposited on behalf of the
holder in escrow with the corporation's independent legal counsel or other
person acceptable to both the corporation and the holder until the conversion
or exercise of such Common Stock Equivalents, at which time the corporation
shall make an appropriate adjustment, if any, to the number of additional
shares issued and the adjusted number of such shares shall be delivered to the
holder. The holder's interest in additional shares deposited in escrow may be
transferred subject to the foregoing restriction and any other restrictions
applicable to the holder's shares generally.
(ii) The foregoing notwithstanding, no
additional shares of Preferred Stock shall be issued under this subparagraph
5(g) (X) with respect to an issuance of Common Stock or Common Stock
Equivalents if, at any time prior to the delivery of the certificates
representing such additional shares of Preferred Stock, holders of a majority
of the issued and outstanding shares of each class of Preferred Stock agree,
either in writing or at a duly called meeting of the corporation's
shareholders, to the waiver (either retroactively or prospectively) of the
right to receive additional shares, or (Y) as a result of:
(aa) the issuance of up to 37,780,095 shares of
Common Stock issuable upon conversion of shares of the
corporation's Series A Preferred Stock;
(bb) The issuance of up to 11,567,734 shares
of Common Stock or Series A Preferred Stock issuable upon the
exercise of warrants issued in connection with that certain
Preferred Stock Purchase Agreement by and among the
corporation and the Investors (as defined therein) dated as
of October 26, 1993, as amended from time to time, and the
issuance of Common Stock issuable upon conversion of any of
such shares of Series A Preferred Stock; or
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(cc) the issuance of up to 19,309,288 shares of
Common Stock issuable upon conversion of shares of the
corporation's Series B Preferred Stock;
(dd) the issuance of up to 26,838,371 shares of
Common Stock issuable upon conversion of shares of the
corporation's Series C Senior Preferred Stock consisting of
Series C and Series C1 Senior Preferred Stock;
(ee) The issuance of up to 45,239,886 shares of
Common Stock or Common Stock Equivalents issuable upon the
exercise of warrants to purchase Common Stock or Common Stock
Equivalents;
(ff) the issuance of shares of Common Stock or
Common Stock Equivalents or options to purchase shares of
Common Stock or Common Stock Equivalents issued or issuable
to employees, consultants, vendors, directors, or to other
persons or entities approved by the Board of Directors,
pursuant to any stock incentive, stock bonus, or stock
purchase plan, or any other arrangement approved by the Board
of Directors (or the exercise of any such options);
h. No Impairment. The corporation will at all times in
good faith assist in the carrying out of all the provisions of this paragraph 5
and in the taking of all such action as may be necessary or appropriate in
order to protect the Conversion Rights of the holders of the Preferred Stock
against impairment. If any event occurs having a substantive effect similar to
a transaction described in subparagraphs (d), (e), (f) or (g) but not expressly
provided for therein (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity
features), the corporation shall issue additional shares of Preferred Stock to
the holders thereof so as to protect their rights from dilution as if a
transaction described in the foregoing subparagraphs had occurred.
i. Issuance of Shares. Upon the occurrence of an event
requiring the issuance of additional shares of Preferred Stock pursuant to this
paragraph 5, the corporation shall record on its books, as of the date of such
event, the additional shares of Preferred Stock so issued. As soon as
practicable after such event, the corporation shall prepare and deliver to each
holder of Preferred Stock entitled thereto, at the address appearing on the
books of the corporation, a stock certificate representing such additional
shares of Preferred Stock.
j. Notices of Record Date. In the event of (i) any
taking by the corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend or other
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distribution, or (ii) any reclassification or recapitalization of the capital
stock of the corporation, any merger or consolidation of the corporation, or
any transfer of all or substantially all of the assets of the corporation to
any other corporation, entity, or person, or any voluntary or involuntary
dissolution, liquidation, or winding up of the corporation, the corporation
shall mail to each holder of Preferred Stock at least thirty (30) days prior to
the record date specified therein, a notice specifying (A) the date on which
any such record is to be taken for the purpose of such dividend or distribution
and a description of such dividend or distribution, (B) the date on which any
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation, or winding up is expected to become effective, and
(C) the time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares
of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation, or winding up.
k. Reservation of Stock Issuable Upon Conversion. The
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of Preferred Stock such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of Preferred Stock, the
corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
l. Notices. Any notice required by the provisions of
this paragraph 5 to be given to a holder of record of shares of Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to such holder of record at the address appearing on the books of
the corporation, or if sent by telephone facsimile transmission to the
attention of such holder at a facsimile number provided to the corporation by
such holder.
m. Payment of Taxes. The corporation will pay all
taxes and other governmental charges that may be imposed in respect of the
issue or delivery of shares of Common Stock upon conversion of shares of
Preferred Stock, including, without limitation, any tax or other charge imposed
in connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Preferred Stock
so converted were registered.
6. Covenants.
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a. So long as at least ten percent (10%) of the
authorized shares (appropriately adjusted for stock splits, stock dividends,
combinations, recapitalizations, reclassification, and similar corporate
rearrangements) of any class of Preferred Stock remain outstanding, the
corporation shall not, and shall not permit any Subsidiary to, without approval
by the holders of a majority of the then outstanding shares of Preferred Stock
voting as a single voting group or, if otherwise required by law or if the
proposed corporate action would violate the terms of purchase agreement(s),
option agreement(s) or other transaction documents between the corporation and
Bachow Investment Partners III, L.P., Paul S. Bachow Co-Investment Fund, L.P.
and/or Paul S. Bachow, or nominee(s), (collectively "Bachow Agreements"),
without approval by the holders of a majority of shares of each class of
Preferred Stock voting as a separate voting group:
(i) Purchase, redeem, or otherwise acquire (or
pay into or set aside for a sinking fund for such purpose) any of the Common
Stock (except repurchases of shares from former employees pursuant to
repurchase rights of the corporation granted in connection with the issuance of
such shares) or pay any dividend, or make any distribution, on any of the
Common Stock (other than a dividend payable solely in Common Stock);
(ii) Authorize or issue, or obligate itself to
issue, any other equity security (including any security convertible into or
exercisable for any equity security);
(iii) Effect any sale, lease, assignment, transfer,
or other conveyance of all or a substantial portion of the assets of the
corporation (or any Subsidiary if such conveyance would involve a substantial
portion of the assets of the corporation and its Subsidiaries considered as one
enterprise), or any consolidation or merger involving the corporation or any of
its Subsidiaries (except that a Subsidiary may be consolidated or merged with
another Subsidiary or with the corporation), or any reclassification or other
change of any stock, or any recapitalization or any dissolution, liquidation,
or winding up, of the corporation or, unless the obligations of the corporation
under the agreement are expressly conditioned upon the requisite approval of
the holders of the Preferred Stock, make any agreement or become obligated so
to do;
(iv) Permit any subsidiary to issue or sell, or
obligate itself to issue or sell, except to the corporation, or any wholly
owned Subsidiary, any stock of such Subsidiary;
(v) Increase or decrease (other than by
permitted redemption or conversion) the total number of authorized shares of
Preferred Stock or Common Stock; or
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(vi) Take any action which would be deemed to be
a dividend payment pursuant to the United States Internal Revenue Code, as
amended.
b. Amendment of Bylaws. The corporation shall not
amend its Bylaws to change any provision thereof which implements the terms of
the Bachow Agreements, including but not limited to provisions regarding the
minimum number or percentage of directors required to approve certain actions,
without the unanimous approval of such amendments by all directors then serving
on the Board of Directors and the approval of such amendments by the holders of
a majority of shares of each class of Preferred Stock voting as a separate
voting group.
7. Reissuance. No shares of Preferred Stock acquired by the
corporation by reason of redemption, purchase, conversion, or otherwise, shall
be reissued, and all such shares shall be canceled, retired, and eliminated
from the shares which the corporation shall be authorized to issue.
D. The relative rights, preferences, powers, qualifications,
limitations and restrictions granted to or imposed upon the Series C Senior
Preferred Stock or the holders thereof are as follows:
1. Designation; Number of Shares. The designation of the
Preferred Stock authorized by this resolution shall be "Series C Senior
Preferred Stock," and the number of shares of Series C Senior Preferred Stock
authorized hereby shall be 17,000,000.
2. Dividends. The holders of Series C Senior Preferred Stock
shall have identical dividend rights to those relating to the Series A and
Series B Preferred Stock.
3. Liquidation Preferences. (a) In the event of any
liquidation, dissolution or winding up of the corporation, either voluntary or
involuntary, each holder of Series C Senior Preferred Stock shall be entitled
to receive, out of the assets or surplus funds of the corporation, an amount
for each share of Series C Senior Preferred Stock then held by such holder
equal to $.2653 per share (appropriately adjusted for stock splits, stock
dividends, combinations, recapitalization, reclassification, and similar
corporate rearrangements, including additional shares of Series C Senior
Preferred Stock issued pursuant to paragraph 6 hereof), and in addition, an
amount equal to all declared but unpaid dividends on the Series C Senior
Preferred Stock (the "Series C Liquidation Value"), before any payment shall be
made or any assets distributed to the holders of Series A Preferred Stock,
Series B Preferred Stock or Common Stock. If upon the occurrence of such event,
the assets and funds thus distributed among the holders of Series C Senior
Preferred Stock shall be insufficient to permit the payment to such holders
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<PAGE> 17
of the full preferential amount aforesaid, then the entire assets and funds of
the corporation legally available for distribution shall be allocated among the
holders of the Series C Senior Preferred Stock such that the amount received by
each such holder bears the same relationship to the total assets and funds
available for distribution as the aggregate Series C Liquidation Value of all
shares held by such holder bears to the aggregate Series C Liquidation Value of
all shares of Series C Senior Preferred Stock outstanding.
(b) After the payment or distribution to the holders of
Series C Senior Preferred Stock of the full preferential amount aforesaid, and
any amount required to be paid holders of Series A and B Preferred Stock
pursuant to the Articles of Incorporation, the holders of preferred stock and
the holders of the Common Stock shall be entitled to receive the remaining
assets of the Company in proportion to the shares of Common Stock then held by
them and the shares of Common Stock which they then have the right to acquire
upon conversion of the preferred stock.
(c) For the purposes of this Paragraph 3, (i) any
acquisition of the corporation by means of merger, consolidation,
reorganization, or other transaction in which greater than 50% of the
corporation's shares (including shares of Common Stock and shares of preferred
stock on an as-converted basis) are transferred or (ii) the sale of all or
substantially all of the assets of the corporation, shall be treated as a
liquidation, dissolution or winding up of the corporation and shall entitle the
holders of preferred stock to receive at the Closing in cash, securities or
other property (valued as provided in subparagraph 3(d) below), amounts as
specified in subparagraphs 3(a) and (b) above.
(d) Whenever the distribution provided for in this paragraph
3 shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other
property as determined in good faith by the Board of Directors.
4. Redemption. The holders of Series C Senior Preferred Stock
shall have identical redemption rights to those relating to the Series A and
Series B Preferred Stock, except that the "Redemption Price" for each share of
Series C Senior Preferred
Stock shall be $.2653 for each share redeemed (appropriately adjusted for stock
splits, stock dividends, combinations, recapitalizations, reclassification, and
similar corporate rearrangements, including additional shares of Series C
Senior Preferred Stock issued pursuant to paragraph 6 hereof) plus the amount
of all declared and unpaid dividends thereon.
5. Voting Rights. Except as required by law, the holder of each
share of Series C Senior Preferred Stock shall be entitled to one vote for each
share held on
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<PAGE> 18
the record date for the vote or consent of shareholders and shall have voting
rights and powers equal to the voting rights and powers of the Common Stock.
The holder of each share of Series C Senior Preferred Stock shall be entitled
to notice of any shareholders' meeting in accordance with the Bylaws of the
corporation, and shall vote on all matters submitted to a vote of the
shareholders with the holders of the Common Stock, except those matters
required by law to be submitted to a separate vote by voting groups.
Fractional votes shall not, however, be permitted, and any fractional shares
held shall be disregarded in computing voting rights.
6. Conversion. The holders of Series C Senior Preferred Stock
shall have identical rights to those relating to the Series A and Series B
Preferred Stock as set forth in Article II, paragraph C, section 5 of the
corporation's Articles of Incorporation, except that the "Conversion Price" of
the Series C Senior Preferred Stock shall mean $.2653 per share, as
appropriately adjusted for stock splits, stock dividends, combinations,
recapitalizations, reclassification, and similar corporate rearrangements
relating to the Series C Senior Preferred Stock, including additional shares of
Series C Senior Preferred Stock issued pursuant to this paragraph 6.
7. Covenants. The holders of Series C Senior Preferred Stock
shall have identical rights to those relating to the Series A and B Preferred
Stock as are set forth in Article II, paragraph C, section 6 of the
corporation's Articles.
E. The relative rights, preferences, powers, qualifications,
limitations and restrictions granted to or imposed upon the Series C1 Senior
Preferred Stock or the holders thereof are as follows:
1. Designation; Number of Shares. The designation of the
Preferred Stock authorized by this resolution shall be "Series C1 Senior
Preferred Stock," and the number of shares of Series C1 Senior Preferred Stock
authorized hereby shall be 15,000,000.
2. Dividends. The holders of Series C1 Senior Preferred Stock
shall have identical dividend rights to those relating to the Series A and
Series B Preferred Stock and Series C Senior Preferred Stock.
3. Liquidation Preferences. (a) The holders of Series C1
Senior Preferred Stock shall have identical liquidation preferences to those
relating to the Series C Senior Preferred Stock and shall share in the assets
and funds of the corporation on a pro rata basis with the holders of Series C
Senior Preferred Stock if the assets and funds of the corporation following the
event of liquidation, dissolution or winding up of the corporation are
insufficient to permit the payment to such holders of the full preferential
amount due each pursuant to the aforesaid preferences.
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<PAGE> 19
(b) After the payment or distribution to the holders of
Series C and Series C1 Senior Preferred Stock of the full preferential amount
aforesaid, and any amount required to be paid holders of Series A and B
Preferred Stock pursuant to the Articles of Incorporation, the holders of
preferred stock and the holders of the Common Stock shall be entitled to
receive the remaining assets of the Company in proportion to the shares of
Common Stock then held by them and the shares of Common Stock which they then
have the right to acquire upon conversion of the preferred stock.
(c) For the purposes of this Paragraph 3, (i) any
acquisition of the corporation by means of merger, consolidation,
reorganization, or other transaction in which greater than 50% of the
corporation's shares (including shares of Common Stock and shares of preferred
stock on an as-converted basis) are transferred or (ii) the sale of all or
substantially all of the assets of the corporation, shall be treated as a
liquidation, dissolution or winding up of the corporation and shall entitle the
holders of preferred stock to receive at the Closing in cash, securities or
other property (valued as provided in subparagraph 3(d) below), amounts as
specified in subparagraphs 3(a) and (b) above.
(d) Whenever the distribution provided for in this paragraph
3 shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other
property as determined in good faith by the Board of Directors.
4. Redemption. The holders of Series C1 Senior Preferred Stock
shall have identical redemption rights to those relating to the Series C
Preferred Stock. The "Redemption Price" for each share of Series C1 Senior
Preferred Stock shall be $.2653 for each share redeemed (appropriately adjusted
for stock splits, stock dividends, combinations, recapitalizations,
reclassification, and similar corporate rearrangements, including additional
shares of Series C1 Senior Preferred Stock issued pursuant to paragraph 6
hereof) plus the amount of all declared and unpaid dividends thereon.
5. Voting Rights. Except as required by law, the holder of each
share of Series C1 Senior Preferred Stock shall be entitled to one vote for
each share held on the record date for the vote or consent of shareholders and
shall have voting rights and powers equal to the voting rights and powers of
the Common Stock. The holder of each share of Series C1 Senior Preferred Stock
shall be entitled to notice of any shareholders' meeting in accordance with the
Bylaws of the corporation, and shall vote on all matters submitted to a vote of
the shareholders with the holders of the Common Stock, except those matters
required by law to be submitted to a separate vote by voting groups.
Fractional votes shall not, however, be permitted, and any fractional shares
held shall be disregarded in computing voting rights.
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<PAGE> 20
6. Conversion. The holders of Series C1 Senior Preferred Stock
shall have identical rights to those relating to the Series C Senior Preferred
Stock as set forth in the Certificate of Designation for such Series C Senior
Preferred Stock. The "Conversion Price" of the Series C1 Senior Preferred
Stock shall mean $.2653 per share, as appropriately adjusted for stock splits,
stock dividends, combinations, recapitalizations, reclassification, and similar
corporate rearrangements relating to the Series C1 Senior Preferred Stock,
including additional shares of Series C1 Senior Preferred Stock issued pursuant
to this paragraph 6.
7. Covenants. The holders of Series C1 Senior Preferred Stock
shall have identical rights to those relating to the Series C Senior Preferred
Stock as are set forth in the Certificate of Designation for such Series C
Senior Preferred Stock.
ARTICLE III.
Directors.
Subject to the provisions of Article II hereof, the number of
directors of the corporation and the manner in which such directors are to be
elected shall be as set forth in the Bylaws.
ARTICLE IV.
Shareholder Rights.
A. No Preemptive Rights. Shareholders of the corporation shall
have no statutory or contractual preemptive rights to acquire additional shares
issued by the corporation except as set forth in the Bachow Agreements or as
otherwise approved by the holders of a majority of shares of each class of
Preferred Stock voting as a separate voting group.
B. No Cumulative Voting. In any election for directors of the
corporation, a holder of shares of any class or series of stock then entitled
to vote has the right to vote in person or by proxy the number of shares of
stock held thereby for as many persons as there are directors to be elected.
No cumulative voting for directors shall be permitted.
C. Vote Required for Merger, Share Exchange, Sale of Assets and
Dissolution. The approval of any plan of merger, plan of share exchange, sale,
lease, exchange or other disposition of all, or substantially all, of the
corporation's property otherwise than in the usual and regular course of
business, or proposal to dissolve, shall require the affirmative vote of the
holders of not less than a majority of all outstanding shares of capital stock
of the corporation entitled to vote generally in the election of directors of
the corporation.
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<PAGE> 21
D. Purchase Offers. If an offer is made by a person or entity
to purchase stock, directly or indirectly, from one or more shareholders of the
corporation, after which the offeror and its affiliates would directly or
indirectly hold or control (including by proxy) 49% or more of the value or
voting rights of the corporation, the offer can only be accepted if (i) it is
for 100% of the value or voting rights of the corporation and is made to all
shareholders of the corporation or (ii) it is approved by the holders of a
majority of shares of each class of Preferred Stock voting as a separate voting
group.
E. Rights of First Refusal.
1. If a shareholder (a "Selling Shareholder") desires to sell
any of his or her shares of stock of the corporation, regardless of class or
series, to a non-shareholder or to a shareholder who directly or indirectly
would, as a result of such purchase, hold more than 15% of the value or voting
rights of the corporation, no sale of such shares shall be made without such
Selling Shareholder first giving written notice (a "Notice") to the corporation
that such Selling Shareholder plans to sell or has received and proposes to
accept a bona fide offer to transfer, sell, or assign a designated number of
such shares, stating the name and the address of the proposed buyer or
transferee and the proposed purchase price per share and terms of payment. The
corporation shall send one copy of such Notice to each shareholder within five
(5) days of receiving such Notice. The corporation and the other shareholders
shall have the first right to purchase collectively all, but not less than all,
of the shares that such Selling Shareholder intends to sell, at the price per
share, upon the payment terms designated in the Notice, within 90 days of
receipt of the Notice, provided that the corporation and/or such shareholders
electing to exercise their first right of refusal notify such Selling
Shareholder of their intention to purchase such shares within 45 days after
receipt of the Notice from such Selling Shareholder. In the event that the
shares designated in the Notice are not elected to be purchased, then such
Selling Shareholder may sell the shares referred to in the Notice not purchased
by.the corporation or the other shareholders to the proposed buyer, providing
such sale (i) shall be completed within ninety (90) days after the expiration
of the right to elect to purchase such shares, and (ii) shall be made at a
price not less than the proposed price designated in the Notice and upon terms
no more favorable to the buyer than the terms designated in the Notice. If
such shares are not so sold, the Selling Shareholder must give notice in
accordance with this paragraph prior to any other or subsequent sale of such
shares. If both the corporation and the other shareholders desire to purchase
such shares, the other shareholders may purchase the number of shares they
desire to purchase and the corporation may purchase the remaining shares, if
any. If the total number of shares which the other shareholders wish to
purchase exceeds the available number of shares, each shareholder shall have
the right to purchase up to that fraction of the available shares the numerator
of which is the number of shares owned by the particular
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<PAGE> 22
shareholder and the denominator of which is the number of shares owned by all
shareholders who wish to purchase.
2. Notwithstanding the foregoing: an individual shareholder may
transfer shares to a member of his or her Immediate Family by gift or to a
trust established for the benefit of a member or members of his or her
Immediate Family; an entity shareholder may transfer shares to any entity
directly or indirectly controlling, controlled by or under common control with
such shareholder; and a partnership shareholder may transfer shares to any
partner in such shareholder. "Immediate Family" means any spouse, child,
grandchild, brother or sister of an individual shareholder.
3. The corporation shall place an appropriate legend on the
certificates for shares held by shareholders advising of the terms of this
Right of First Refusal.
4. The restrictions on transfer of shares set forth herein shall
terminate upon (i) the occurrence of a Liquidity Event, (ii) the dissolution or
bankruptcy of the corporation, (iii) the closing of a sale of all or
substantially all of the assets of the corporation in which control of the
corporation is transferred or (iv) approval of such termination by the holders
of a majority of shares of each class of Preferred Stock voting as a separate
voting group.
ARTICLE V.
Indemnification and Liability of Officers,
Directors, Employees and Agents.
A. Indemnification. The corporation shall indemnify, in the
manner and to the full extent permitted by law, any person (or the estate of
any person) who was or is a party to, or is threatened to be made a party to
any threatened, pending or complete action, suit or proceeding, whether or not
by or in the right of the corporation, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person 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. The corporation may, to the full extent permitted by law,
purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against such person. To the full extent
permitted by law, the indemnification provided herein shall include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
and, in the manner provided by law, any such expenses may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding. The indemnification provided herein shall not be deemed to limit
the right of the corporation to indemnify any other person for any such
expenses to the
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<PAGE> 23
full extent permitted by law, nor shall it be deemed exclusive of any other
rights to which any person seeking indemnification from the corporation may be
entitled under any agreement, vote of shareholders or disinterested directors
or otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
B. Limitation on Liability of Directors. No director of the
corporation shall be personally liable to the corporation or its shareholders
for monetary damages for his conduct as a director, except for (i) acts or
omissions that involve intentional misconduct or a knowing violation of law by
the director, (ii) approval of distributions or loans in violation of RCW
23B.08.310, or (iii) any transaction from which the director will personally
receive a benefit in money, property or services to which the director is not
legally entitled. If the Washington Business Corporation Act is hereafter
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
corporation shall be eliminated or limited to the fullest extent permitted by
the Washington Business Corporation Act, as so amended. Any amendment to or
repeal of this Article shall not adversely affect any right or protection of a
director of the corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment or repeal.
ARTICLE VI.
Executive Committee
If no Liquidity Event has occurred by May 20, 1998, an executive
committee (the "Executive Committee") shall be formed comprised of then members
of the Board of Directors, excluding (a) management, (b) management designees
and (c) family members or individuals having a business or professional
relationship with the corporation, management or any management designees. The
Executive Committee shall, by majority vote of its members have all he right
and authority of the Board of Directors to manage the sale process of the
corporation, whether by merger, sale of assets or otherwise. The Executive
Committee is not being created as a committee of the Board of Directors but
rather as an independent body pursuant to Section 23B.08.010 of the Washington
Business Corporation Act; accordingly, the Executive Committee shall have
exclusive authority for the matters described in the preceding sentence and the
Board of Directors shall have no authority for such matters.
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<PAGE> 24
ARTICLE VII.
Amendment of Articles.
These Articles of Incorporation may be amended with the approval of
each voting group entitled to vote separately thereon by a majority of all
votes entitled to be cast by that voting group. The holders of the outstanding
shares of a class are entitled to vote as a separate voting group on a proposed
amendment to these Articles of Incorporation if the amendment would:
A. Increase of decrease the aggregate number of authorized
shares of the class;
B. Effect an exchange or reclassification of all or part of the
shares of the class into shares of another class;
C. Effect an exchange or reclassification, or crease the right
of exchange, of all or part of the shares of another class into shares of the
class;
D. Change the designation, rights, preferences, or limitations
of all or part of the shares of the class;
E. Change the shares of all or part of the class into a
different number of shares of the same class;
F. Create a new class of shares having rights or preferences
with respect to distributions or to dissolution that are prior, superior, or
substantially equal to the shares of the class;
G. Increase the rights, preferences, or number of authorized
shares of any class that, after giving effect to the amendment, have rights or
preferences with respect to distributions or to dissolution that are prior,
superior, or substantially equal to the shares of the class;
H. Limit or deny an existing preemptive right of all or part of
the shares of the class; or
I. Cancel or otherwise affect rights to distributions or
dividends that have accumulated but not yet been declared on all or part of the
shares of the class.
To the fullest extent permitted by law, the corporation additionally
shall not amend these Articles of Incorporation to change Article V, this
Article VII or any provision hereof which implements the terms of any of the
Bachow Agreements
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without the approval of such amendments by the holders of a majority of shares
of each class of Preferred Stock voting as a separate voting group.
DATED: April 9, 1996.
/s/ JOHN HEMINGWAY
---------------------------------
John M. Hemingway, Chief Financial
Officer and Secretary
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INNOVA CORPORATION
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
Pursuant to Section 23B.06.020 of the Business Corporation Act of the State of
Washington
INNOVA CORPORATION (the "corporation"), a corporation organized and existing
under the Business Corporation Act of the State of Washington, hereby certifies
that, pursuant to the provisions of Section 23B.06.020 of the Business
Corporation Act of the State of Washington, its Board of Directors, at a
meeting duly called and held on April 25, 1996, adopted the following
resolution, which resolution remains in full force and effect as of the date
hereof:
WHEREAS, the Board of Directors of the corporation is authorized, within the
limitations and restrictions stated in the Restated Articles of Incorporation
to fix by resolution or resolutions the designation of one or more series of
preferred stock and the powers, preferences and relative participating,
optional or other special rights and qualifications, limitations or
restrictions thereof, including, without limiting the generality of the
foregoing, such provisions as may be desired concerning voting, redemption,
dividends, dissolution or the distribution of assets, conversion or exchange,
and such other subjects or matters as may be fixed by resolution or resolutions
of the Board of Directors under the Business Corporation Act of Washington; and
WHEREAS, it is the desire of the Board of Directors of the corporation,
pursuant to its authority as aforesaid, to authorize and fix the terms of a
series of preferred stock to be designated the Series D Senior Preferred Stock
of the corporation and the number of shares constituting such series;
NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized such series of
Series D Senior Preferred Stock on the terms and with the provisions herein set
forth:
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<PAGE> 27
TERMS, PREFERENCES AND LIMITATIONS
of
SERIES D SENIOR PREFERRED STOCK
of
INNOVA CORPORATION
The relative rights, preferences, powers, qualifications, limitations and
restrictions granted to or imposed upon the Series D Senior Preferred Stock or
the holders thereof are as follows:
1. Designation; Number of Shares. The designation of the Preferred
Stock authorized by this resolution shall be "Series D Senior Preferred Stock,"
and the number of shares of Series D Senior Preferred Stock authorized hereby
shall be 100,000,000.
2. Dividends. The holders of Series D Senior Preferred Stock shall
have identical dividend rights to those relating to the Series A and Series B
Preferred Stock and Series C Senior Preferred Stock.
3. Liquidation Preferences.
(a) The holders of Series D Senior Preferred Stock shall
have identical liquidation preferences to those relating to the Series C and
Series C1 Senior Preferred Stock and shall share in the assets and funds of the
corporation on a pro rata basis with the holders of Series C and Series C1
Senior Preferred Stock if the assets and funds of the corporation following the
event of liquidation, dissolution or winding up of the corporation are
insufficient to permit the payment to such holders of the full preferential
amount due each pursuant to the aforesaid preferences.
(b) After the payment or distribution to the holders of
Series D, Series C and Series C1 Senior Preferred Stock of the full
preferential amount aforesaid, and any amount required to be paid holders of
Series A and B Preferred Stock pursuant to the Articles of Incorporation, the
holders of preferred stock and the holders of the Common Stock shall be
entitled to receive the remaining assets of the Company in proportion to the
shares of Common Stock then held by them and the shares of Common Stock which
they then have the right to acquire upon conversion of the preferred stock.
(c) For the purposes of this Paragraph 3, (i) any acquisition
of the corporation by means of merger, consolidation, reorganization, or other
transaction
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<PAGE> 28
in which greater than 50% of the corporation's shares (including shares of
Common Stock and shares of preferred stock on an as-converted basis) are
transferred or (ii) the sale of all or substantially all of the assets of the
corporation, shall be treated as a liquidation, dissolution or winding up of
the corporation and shall entitle the holders of preferred stock to receive at
the Closing in cash, securities or other property (valued as provided in
subparagraph 3(d) below), amounts as specified in subparagraphs 3(a) and (b)
above.
(d) Whenever the distribution provided for in this paragraph
3 shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other
property as determined in good faith by the Board of Directors.
4. Redemption. The holders of Series D Senior Preferred Stock shall
have identical redemption rights to those relating to the Series C and C1
Preferred Stock. The "Redemption Price" for each share of Series D Senior
Preferred Stock shall be $.1345 for each share redeemed (appropriately adjusted
for stock splits, stock dividends, combinations, recapitalizations,
reclassification, and similar corporate rearrangements, including additional
shares of Series D Senior Preferred Stock issued pursuant to paragraph 6
hereof) plus the amount of all declared and unpaid dividends thereon.
5. Voting Rights. Except as required by law, the holder of each
share of Series D Senior Preferred Stock shall be entitled to one vote for each
share held on the record date for the vote or consent of shareholders and shall
have voting rights and powers equal to the voting rights and powers of the
Common Stock. The holder of each share of Series D Senior Preferred Stock
shall be entitled to notice of any shareholders' meeting in accordance with the
Bylaws of the corporation, and shall vote on all matters submitted to a vote of
the shareholders with the holders of the Common Stock, except those matters
required by law to be submitted to a separate vote by voting groups.
Fractional votes shall not, however, be permitted, and any fractional shares
held shall be disregarded in computing voting rights.
6. Conversion. The holders of Series D Senior Preferred Stock shall
have identical rights to those relating to the Series C Senior Preferred Stock
as set forth in the Certificate of Designation for such Series C Senior
Preferred Stock. The "Conversion Price" of the Series D Senior Preferred Stock
shall mean $.1345 per share, as appropriately adjusted for stock splits, stock
dividends, combinations, recapitalizations, reclassification, and similar
corporate rearrangements relating to the Series D Senior Preferred Stock,
including additional shares of Series D Senior Preferred Stock issued pursuant
to this paragraph 6.
7. Covenants. The holders of Series D Senior Preferred Stock shall
have identical rights to those relating to the Series C Senior Preferred Stock
as are set forth in the Certificate of Designation for such Series C Senior
Preferred Stock.
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<PAGE> 29
IN WITNESS WHEREOF, Innova Corporation caused this Certificate to be signed by
its Secretary on this 25th day of April, 1996.
/s/ JOHN M. HEMINGWAY
----------------------------------
John M. Hemingway, Secretary
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<PAGE> 30
ARTICLES OF AMENDMENT
OF
INNOVA CORPORATION
Pursuant to RCW 23B.10.060, the undersigned corporation adopts the
following Articles of Amendment to its Restated Articles of Incorporation:
1. The name of the corporation is Innova Corporation
2. Article II, Paragraph A., of the Restated Articles of
Incorporation of the corporation is amended to read in its entirety as follows:
A. The corporation is authorized to issue six classes of
shares. The first three classes shall be designated "Series A
Preferred Stock," "Series B Preferred Stock," and "Common Stock,"
respectively. The corporation is also authorized to issue a fourth
class of stock, the "Series C Senior Preferred Stock," the
preferences, limitations and relative rights of which class (or the
preferences, limitations, and relative rights of any series into which
such class may be divided), the Board of Directors is hereby expressly
authorized to determine prior to issuance of shares of such class or
series; provided, however, that prior to the issuance of any series
into which such class of Preferred Stock may be divided, the terms of
such issuance must be approved by a majority of the outstanding shares
of each class of Preferred Stock of the corporation (which approval
may be given by written consent executed by such shareholders). The
corporation is also authorized to issue a fifth class of stock, the
"Series D Preferred Stock," the preferences, limitations and relative
rights of which class (or the preferences, limitations, and relative
rights of any series into which such class may be divided), the Board
of Directors is hereby expressly authorized to determine prior to
issuance of shares of such class or series; provided, however, that
prior to the issuance of any series into which such class of Preferred
Stock may be divided, the terms of such issuance must be approved by a
majority of the outstanding shares of each class of Preferred Stock of
the corporation (which approval may be given by written consent
executed by such shareholders). The corporation is also authorized to
issue a sixth class of stock, the "Series E Preferred Stock," the
preferences, limitations and relative rights of which class (or the
preferences, limitations, and relative rights of any series into which
such class may be divided), the Board of Directors is hereby expressly
authorized to determine prior to issuance of shares of such class or
series; provided, however, that prior to the issuance of any series
into which such class of Preferred Stock may be divided, the terms of
such issuance must be approved by a majority of the outstanding shares
of each class of Preferred Stock of the corporation (which approval
may be given by written consent executed by such shareholders). The
aggregate number of shares of Series A Preferred Stock authorized to
be issued is 100,000,000,
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with a par value of $0.01 per share; the aggregate number of shares of
Series B Preferred Stock authorized to be issued is 50,000,000 with a
par value of $0.01 per share; the aggregate number of Series C Senior
Preferred Stock authorized to be issued is 35,000,000, with a par
value of $0.01 per share; the aggregate number of shares of Series D
Preferred Stock authorized to be issued is 100,000,000, with a par
value of $0.01 per share; the aggregate number of shares of Series E
Preferred Stock authorized to be issued is 24,000,000, with a par
value of $0.01 per share; and the aggregate number of shares of Common
Stock authorized to be issued is 375,000,000, with a par value of
$0.01 per share. The Series A Preferred Stock shall consist of three
series, having the designations and relative preferences as follows:
(a) 20,000,000 shares of Series A.1. Preferred Stock, having a
liquidation preference of $0.5515 per share, and consisting of all
Series A Preferred Stock issued and outstanding as of August 1, 1993
or issued with respect to such shares pursuant to paragraph 5 hereof
on or before April 26, 1994; (b) 20,000,000 shares of Series A.2.
Preferred Stock, having a liquidation preference of $0.035 per share,
and consisting of all shares of Series A Preferred Stock issuable upon
exercise of warrants to purchase Series A Preferred Stock, at an
initial exercise price of $0.035 per share; and (c) 60,000,000 shares
of Series A.3. Preferred Stock, having a liquidation preference of
$0.3299 per share, and consisting of all shares of Series A Preferred
Stock other than Series A.1. Preferred Stock or Series A.2. Preferred
Stock. The liquidation preference for the Series B Preferred Stock
shall be $.2525 per share.
The relative rights, preferences, privileges and restrictions
with respect to each series of Series A Preferred Stock shall be
identical in all respects, except as specifically identified herein.
3. The clauses prior to the colon of the second sentence of
Article II, Paragraph B., are amended to read in their entirety as follows:
B. Subject to the rights of approval of the holders of a
majority of the outstanding shares of each class of Preferred Stock,
as set forth in paragraph A above, the Board of Directors is hereby
expressly authorized, at any time and from time to time, to divide the
shares of Series C Senior Preferred Stock, the shares of Series D
Preferred Stock and the shares of Series E Preferred Stock into one or
more series, and in the resolution or resolutions establishing a
particular series, before issuance of any of the shares thereof, to
fix and determine the number of shares and the designation of such
series, so as to distinguish it from the shares of all other series
and classes, and to fix and determine the preferences, voting rights,
qualifications, privileges, limitations, options, conversion rights,
restrictions and other special or relative rights of such series of
the preferred stock to the fullest extent now or hereafter permitted
by the laws of the State of Washington, including, but not limited to,
the variations between different series in the following respects:
4. The first clause of Article II, Paragraph C., is amended to
read as follows:
<PAGE> 32
The rights, preferences, privileges, restrictions and other matters
relating to the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Senior Preferred Stock, the Series D Preferred
Stock and the Series E Preferred Stock (together referred to herein as
"Preferred Stock") are as follows:
5. Article II, Paragraph C.5(g)(ii) of the Restated Articles of
Incorporation is amended to add the following at the end thereof:
(gg) the issuance of shares of Common
Stock issuable upon conversion of shares of the
corporation's Series D Preferred Stock or Series E
Preferred Stock.
6. Article II, Paragraph D.3(a), is amended to read in its
entirety as follows:
3. Liquidation Preferences. (a) In the event of any
liquidation, dissolution or winding up of the corporation, either
voluntary or involuntary, each holder of Series C Senior Preferred
Stock shall be entitled to receive, out of the assets or surplus funds
of the corporation, an amount for each share of Series C Senior
Preferred Stock then held by such holder equal to $.2653 per share
(appropriately adjusted for stock splits, stock dividends,
combinations, recapitalization, reclassification, and similar
corporate rearrangements, including additional shares of Series C
Senior Preferred Stock issued pursuant to paragraph 6 hereof), and in
addition, an amount equal to all declared but unpaid dividends on the
Series C Senior Preferred Stock (the "Series C Liquidation Value"),
before any payment shall be made or any assets distributed to the
holders of Series A Preferred Stock, Series B Preferred Stock or
Common Stock. If upon the occurrence of such event, the assets and
funds thus distributed among the holders of Series C Senior Preferred
Stock shall be insufficient to permit the payment to such holders of
the full preferential amount aforesaid, then the entire assets and
funds of the corporation legally available for distribution shall be
allocated among the holders of the Series C Senior Preferred Stock and
any other Preferred Stock which ranks on parity with the Series C
Senior Preferred Stock such that the amount received by each such
holder bears the same relationship to the total assets and funds
available for distribution as the aggregate Series C Liquidation Value
of all shares held by such holder bears to the aggregate Series C
Liquidation Value of all shares of Series C Senior Preferred Stock
outstanding.
7. Article II, Paragraph E.3(a), is amended to read in its
entirety as follows:
3. Liquidation Preferences. (a) The holders of Series C1
Senior Preferred Stock shall have identical liquidation preferences to
those relating to the Series C Senior Preferred Stock and shall share
in the assets and funds of the corporation on a pro rata basis with
the holders of Series C Senior Preferred Stock and any other Preferred
Stock that ranks on parity with the Series C Senior Preferred Stock if
the assets and funds of the corporation following the event of
liquidation, dissolution or winding up of the corporation are
insufficient
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<PAGE> 33
to permit the payment to such holders of the full preferential amount
due each pursuant to the aforesaid preferences.
8. Section 3(a) of the Terms, Preferences and Limitations of
Series D Senior Preferred Stock is amended to read in its entirety as follows:
(a) The holders of Series D Senior
Preferred Stock shall have identical liquidation
preferences to those relating to the Series C and
Series C1 Senior Preferred Stock and shall share in
the assets and funds of the corporation on a pro rata
basis with the holders of Series C and Series C1
Senior Preferred Stock and any other Preferred Stock
that ranks on parity with the Series C and Series C1
Senior Preferred Stock if the assets and funds of the
corporation following the event of liquidation,
dissolution or winding up of the corporation are
insufficient to permit the payment to such holders of
the full preferential amount due each pursuant to the
aforesaid preferences, provided that the Series D
Senior Preferred Stock Liquidation Value shall be the
"Series D Liquidation Value" as defined herein. The
"Series D Liquidation Value" shall mean $0.1345 per
share of Series D Senior Preferred Stock
(appropriately adjusted for stock splits, stock
dividends, combinations, recapitalization,
reclassification, and similar corporate
rearrangements, including additional shares of Series
D Senior Preferred Stock issued pursuant to paragraph
6 hereof), and in addition, an amount equal to all
declared but unpaid dividends on the Series D Senior
Preferred Stock.
9. The amendments to the Restated Articles of Incorporation do
not provide for an exchange, reclassification, or cancellation of issued
shares.
10. The foregoing amendments to the Restated Articles of
Incorporation were duly adopted by the Board of Directors of the corporation on
January 27, 1997, and the amendments were duly approved by the shareholders of
the corporation on February 17, 1997, in accordance with RCW 23B.10.030 and RCW
23B.10.040.
I certify that I am the duly-elected secretary of the above-named
corporation and am authorized to execute the foregoing Articles of Amendment on
behalf of the corporation.
Dated: February 28, 1997.
/s/ JOHN HEMINGWAY
----------------------------------
John M. Hemingway, Chief Financial
Officer and Secretary
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<PAGE> 34
ARTICLES OF AMENDMENT
OF
INNOVA CORPORATION
Pursuant to RCW 23B.10.060 and RCW 23B.06.020 of the Washington
Business Corporation Act, the undersigned corporation hereby submits the
amendment to the corporation's Articles of Incorporation.
I. The name of the corporation is Innova Corporation.
II. Article II of the Restated Articles of Incorporation of Innova
Corporation is amended by adding the following to the end thereof:
F. The relative rights, preferences, powers, qualifications,
limitations and restrictions granted to or imposed upon the
Series E Preferred Stock or the holders thereof are as
follows:
1. Designation; Number of Shares. The designation
of the Preferred Stock authorized by this resolution shall be
"Series E Preferred Stock," and the number of shares of Series
E Preferred Stock authorized hereby shall be 24,000,000.
2. Dividends. The holders of Series E Preferred
Stock shall have identical dividend rights to those relating
to the Series A and Series B Preferred Stock, Series C Senior
Preferred Stock and the Series D Senior Preferred Stock.
3. Liquidation Preferences.
(a) The holders of Series E Preferred
Stock shall have identical liquidation preferences to those
relating to the Series C, Series C1 and Series D Senior
Preferred Stock and shall share in the assets and funds of the
corporation on a pro rata basis with the holders of Series C,
Series C1 and Series D Senior Preferred Stock and any other
Preferred Stock that ranks on parity with the Series C, Series
C1 and Series D Senior Preferred Stock if the assets and funds
of the corporation following the event of liquidation,
dissolution or winding up of the corporation are insufficient
to permit the payment to such holders of the full preferential
amount due each pursuant to the aforesaid preferences,
provided that the Series E Preferred Stock Liquidation Value
shall be the "Series E Liquidation Value" as defined herein.
The "Series E Liquidation Value" shall mean $0.21641 per share
of Series E Preferred Stock (appropriately adjusted for stock
splits, stock dividends, combinations, recapitalization,
reclassification, and similar corporate rearrangements,
including additional shares of Series E Preferred Stock issued
pursuant
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<PAGE> 35
to paragraph 6 hereof), and in addition, an amount equal to
all declared but unpaid dividends on the Series E Preferred
Stock.
(b) After the payment or distribution to the
holders of Series E Preferred Stock and Series D, Series C and
Series C1 Senior Preferred Stock of the full preferential
amount aforesaid, and any amount required to be paid holders
of Series A and B Preferred Stock pursuant to the Articles of
Incorporation, the holders of preferred stock and the holders
of the Common Stock shall be entitled to receive the remaining
assets of the Company in proportion to the shares of Common
Stock then held by them and the shares of Common Stock which
they then have the right to acquire upon conversion of the
preferred stock.
(c) For the purposes of this Paragraph 3,
(i) any acquisition of the corporation by means of merger,
consolidation, reorganization, or other transaction in which
greater than 50% of the corporation's shares (including shares
of Common Stock and shares of preferred stock on an
as-converted basis) are transferred or (ii) the sale of all or
substantially all of the assets of the corporation, shall be
treated as a liquidation, dissolution or winding up of the
corporation and shall entitle the holders of preferred stock
to receive at the Closing in cash, securities or other
property (valued as provided in subparagraph 3(d) below),
amounts as specified in subparagraphs 3(a) and (b) above.
(d) Whenever the distribution provided for
in this paragraph 3 shall be payable in securities or property
other than cash, the value of such distribution shall be the
fair market value of such securities or other property as
determined in good faith by the Board of Directors.
4. Redemption. The holders of Series E Preferred
Stock shall have identical redemption rights to those relating
to the Series C, C1 and D Senior Preferred Stock. The
"Redemption Price" for each share of Series E Preferred Stock
shall be $0.21641 for each share redeemed (appropriately
adjusted for stock splits, stock dividends, combinations,
recapitalizations, reclassification, and similar corporate
rearrangements, including additional shares of Series E
Preferred Stock issued pursuant to paragraph 6 hereof) plus
the amount of all declared and unpaid dividends thereon.
5. Voting Rights. Except as required by law, the
holder of each share of Series E Preferred Stock shall be
entitled to one vote for each share held on the record date
for the vote or consent of shareholders and shall have voting
rights and powers equal to the voting rights and powers of the
Common Stock. The holder of each share of Series E Preferred
Stock shall be entitled to notice of any shareholders' meeting
in accordance with the Bylaws of the corporation, and shall
vote on all matters submitted to a vote of the shareholders
with the holders of the
<PAGE> 36
Common Stock, except those matters required by law to be
submitted to a separate vote by voting groups. Fractional
votes shall not, however, be permitted, and any fractional
shares held shall be disregarded in computing voting rights.
6. Conversion. The holders of Series E Preferred
Stock shall have identical rights to those relating to the
Series C Senior Preferred Stock as set forth in the
Certificate of Designation for such Series C Senior Preferred
Stock. The "Conversion Price" of the Series E Preferred Stock
shall mean $0.21641 per share, as appropriately adjusted for
stock splits, stock dividends, combinations,
recapitalizations, reclassification, and similar corporate
rearrangements relating to the Series E Preferred Stock,
including additional shares of Series E Preferred Stock issued
pursuant to this paragraph 6.
7. Covenants. The holders of Series E Preferred
Stock shall have identical rights to those relating to the
Series C Senior Preferred Stock as are set forth in the
Certificate of Designation for such Series C Senior Preferred
Stock.
3. The date of adoption of such amendment was March 6, 1997.
4. The amendment was adopted by the Board of Directors; shareholder
action was not required.
DATED: 3/17, 1997.
INNOVA CORPORATION
By: /s/ JOHN HEMINGWAY
---------------------------
John Hemingway
---------------------------
Its Secretary
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<PAGE> 37
ARTICLES OF AMENDMENT
OF
INNOVA CORPORATION
Pursuant to RCW 23B.10.060, the undersigned corporation adopts the
following Articles of Amendment to its Restated Articles of Incorporation:
1. The name of the corporation is Innova Corporation.
2. Article II, Paragraph A., of the Restated Articles of
Incorporation of the corporation is amended to read in its entirety as follows:
A. The corporation is authorized to issue seven
classes of shares. The first three classes shall be
designated "Series A Preferred Stock," "Series B Preferred
Stock," and "Common Stock," respectively. The corporation is
also authorized to issue a fourth class of stock, the "Series
C Senior Preferred Stock," the preferences, limitations and
relative rights of which class (or the preferences,
limitations, and relative rights of any series into which such
class may be divided), the Board of Directors is hereby
expressly authorized to determine prior to issuance of shares
of such class or series; provided, however, that prior to the
issuance of any series into which such class of Preferred
Stock may be divided, the terms of such issuance must be
approved by a majority of the outstanding shares of each class
of Preferred Stock of the corporation (which approval may be
given by written consent executed by such shareholders). The
corporation is also authorized to issue a fifth class of
stock, the "Series D Preferred Stock," the preferences,
limitations and relative rights of which class (or the
preferences, limitations, and relative rights of any series
into which such class may be divided), the Board of Directors
is hereby expressly authorized to determine prior to issuance
of shares of such class or series; provided, however, that
prior to the issuance of any series into which such class of
Preferred Stock may be divided, the terms of such issuance
must be approved by a majority of the outstanding shares of
each class of Preferred Stock of the corporation (which
approval may be given by written consent executed by such
shareholders). The corporation is also authorized to issue a
sixth class of stock, the "Series E Preferred Stock," the
preferences, limitations and relative rights of which class
(or the preferences, limitations, and relative rights of any
series into which such class may be divided), the Board of
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<PAGE> 38
Directors is hereby expressly authorized to determine prior to
issuance of shares of such class or series; provided, however,
that prior to the issuance of any series into which such class
of Preferred Stock may be divided, the terms of such issuance
must be approved by a majority of the outstanding shares of
each class of Preferred Stock of the corporation (which
approval may be given by written consent executed by such
shareholders). The corporation is also authorized to issue a
seventh class of stock designated "Series F Preferred Stock."
The aggregate number of shares of Series A Preferred Stock
authorized to be issued is 100,000,000, with a par value of
$0.01 per share; the aggregate number of shares of Series B
Preferred Stock authorized to be issued is 50,000,000 with a
par value of $0.01 per share; the aggregate number of Series C
Senior Preferred Stock authorized to be issued is 35,000,000,
with a par value of $0.01 per share; the aggregate number of
shares of Series D Preferred Stock authorized to be issued is
100,000,000, with a par value of $0.01 per share; the
aggregate number of shares of Series E Preferred Stock
authorized to be issued is 24,000,000, with a par value of
$0.01 per share; the aggregate number of shares of Series F
Preferred Stock authorized to be issued is 12,100,000, with a
par value of $0.01 per share; and the aggregate number of
shares of Common Stock authorized to be issued is 400,000,000,
with a par value of $0.01 per share. The Series A Preferred
Stock shall consist of three series, having the designations
and relative preferences as follows: (a) 20,000,000 shares of
Series A.1. Preferred Stock, having a liquidation preference
of $0.5515 per share, and consisting of all Series A Preferred
Stock issued and outstanding as of August 1, 1993 or issued
with respect to such shares pursuant to paragraph 5 hereof on
or before April 26, 1994; (b) 20,000,000 shares of Series A.2.
Preferred Stock, having a liquidation preference of $0.035 per
share, and consisting of all shares of Series A Preferred
Stock issuable upon exercise of warrants to purchase Series A
Preferred Stock, at an initial exercise price of $0.035 per
share; and (c) 60,000,000 shares of Series A.3. Preferred
Stock, having a liquidation preference of $0.3299 per share,
and consisting of all shares of Series A Preferred Stock other
than Series A.1. Preferred Stock or Series A.2. Preferred
Stock. The liquidation preference for the Series B Preferred
Stock shall be $.2525 per share.
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<PAGE> 39
The relative rights, preferences, privileges and
restrictions with respect to each series of Series A Preferred
Stock shall be identical in all respects, except as
specifically identified herein.
3. The first clause of Article II, Paragraph C., is amended to
read as follows:
The rights, preferences, privileges, restrictions and other
matters relating to the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Senior Preferred Stock, the
Series D Preferred Stock, the Series E Preferred Stock and the
Series F Preferred Stock (together referred to herein as
"Preferred Stock") are as follows:
4. Article II, Paragraph C.3.d., is amended to read as follows:
d. The redemption rights
hereinabove set forth shall terminate upon: (i) the closing by
the corporation of a firmly underwritten public offering
involving the sale of at least 25% of the issued and
outstanding shares of Common Stock, on a fully diluted basis,
pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or any successor law
thereto generating net proceeds of not less than $10,000,000
and the commencement of trading of such shares on a national
securities exchange or the National Association of Securities
Dealers Automated Quotation System (such public offering and
commencement of trading being referred to hereinafter as a
"Liquidity Event;" provided that, with respect to the Series F
Preferred Stock, the net proceeds generated by such public
offering shall not be less than $15,000,000 and at a price per
share of not less than the price per share received by the
corporation with respect to the most recent sale of shares of
Series F Preferred Stock), (ii) the closing of a sale of
substantially all of the assets of the corporation or other
transaction in which the control of the corporation is
transferred, or (iii) if the holders of a majority of each
class of Preferred Stock, voting separately as voting groups,
vote at a meeting duly noticed and called for this purpose to
terminate such redemption rights.
5. Article II, Paragraph C.5(g)(ii) of the Restated Articles of
Incorporation is amended to add the following at the end thereof:
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<PAGE> 40
(gg) the issuance of shares of
Common Stock issuable upon conversion of shares of the
corporation's Preferred Stock
6. Article II of the Restated Articles of Incorporation of Innova
Corporation is amended by adding the following as a new paragraph:
G. The relative rights, preferences, powers,
qualifications, limitations and restrictions granted to or
imposed upon the Series F Preferred Stock or the holders
thereof are as follows:
1. Designation; Number of Shares. The
designation of the Preferred Stock authorized by this
resolution shall be "Series F Preferred Stock," and the number
of shares of Series F Preferred Stock authorized hereby shall
be 12,100,000.
2. Dividends. The holders of Series F
Preferred Stock shall have identical dividend rights to those
relating to the Series E Preferred Stock.
3. Liquidation Preferences.
(a) The holders of Series F
Preferred Stock shall have identical liquidation preferences
to those relating to the Series C, Series C1, Series D Senior
Preferred Stock and Series E Preferred Stock and shall share
in the assets and funds of the corporation on a pro rata basis
with the holders of Series C, Series C1 and Series D Senior
Preferred Stock and any other Preferred Stock that ranks on
parity with the Series C, Series C1 and Series D Senior
Preferred Stock if the assets and funds of the corporation
following the event of liquidation, dissolution or winding up
of the corporation are insufficient to permit the payment to
such holders of the full preferential amount due each pursuant
to the aforesaid preferences, provided that the Series F
Preferred Stock Liquidation Value shall be the "Series F
Liquidation Value" as defined herein. The "Series F
Liquidation Value" shall mean $0.29 per share of Series F
Preferred Stock (appropriately adjusted for stock splits,
stock dividends, combinations, recapitalization,
reclassification, and similar corporate rearrangements,
including additional shares of series F Preferred Stock issued
pursuant to paragraph 6 hereof), and in addition, an amount
equal to all declared but unpaid dividends on the Series F
Preferred Stock.
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<PAGE> 41
(b) After the payment or
distribution to the holders of Series F Preferred Stock and
Series E, Series D, Series C and Series C1 Senior Preferred
Stock of the full preferential amount aforesaid, and any
amount required to be paid holders of Series A and B Preferred
Stock pursuant to the Articles of Incorporation, the holders
of preferred stock and the holders of the Common Stock shall
be entitled to receive the remaining assets of the Company in
proportion to the shares of Common Stock then held by them and
the shares of Common Stock which they then have the right to
acquire upon conversion of the preferred stock.
(c) For the purposes of this
Paragraph 3, (i) any acquisition of the corporation by means
of merger, consolidation, reorganization, or other transaction
in which greater than 50% of the corporation's shares
(including shares of Common Stock and shares of preferred
stock on an as- converted basis) are transferred or (ii) the
sale of all or substantially all of the assets of the
corporation, shall be treated as a liquidation, dissolution or
winding up of the corporation and shall entitle the holders of
preferred stock to receive at the Closing in cash, securities
or other property (valued as provided in subparagraph 3(d)
below), amounts as specified in subparagraphs 3(a) and (b)
above.
(d) Whenever the distribution
provided for in this paragraph 3 shall be payable in
securities or property other than cash, the value of such
distribution shall be the fair market value of such securities
or other property as determined in good faith by the Board of
Directors.
4. Redemption. The holders of Series F
Preferred Stock shall have identical redemption rights to
those relating to the Series C, C1 and D Senior Preferred
Stock and Series E Preferred Stock. The "Redemption Price"
for each share of Series F Preferred Stock shall be $0.29 for
each share redeemed (appropriately adjusted for stock splits,
stock dividends, combinations, recapitalizations,
reclassification, and similar corporate rearrangements,
including additional shares of Series F Preferred Stock issued
pursuant to paragraph 6 hereof) plus the amount of all
declared and unpaid dividends thereon.
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<PAGE> 42
5. Voting Rights. Except as required
by law, the holder of each share of Series F Preferred Stock
shall be entitled to one vote for each share held on the
record date for the vote or consent of shareholders and shall
have voting rights and powers equal to the voting rights and
powers of the Common Stock. The holder of each share of
Series F Preferred Stock shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of the
corporation, and shall vote on all matters submitted to a vote
of the shareholders with the holders of the Common Stock,
except those matters required by law to be submitted to a
separate vote by voting groups. Fractional votes shall not,
however, be permitted, and any fractional shares held shall be
disregarded in computing voting rights.
6. Conversion. The holders of Series F
Preferred Stock shall have identical rights to those relating
to the Series C Senior Preferred Stock as set forth in the
Certificate of Designation for such Series C Senior Preferred
Stock, except that mandatory conversion of the Series F
Preferred Stock upon a Liquidity Event shall only occur if the
Liquidity Event generates net proceeds of not less than
$15,000,000 and at a price per share of not less than the
price per share received by the corporation with respect to
the most recent sale of shares of Series F Preferred Stock.
The "Conversion Price" of the Series F Preferred Stock shall
mean $0.29 per share, as appropriately adjusted for stock
splits, stock dividends, combinations, recapitalizations,
reclassification, and similar corporate rearrangements
relating to the Series F Preferred Stock, including additional
shares of Series F Preferred Stock issued pursuant to this
paragraph 6.
7. Covenants. The holders of Series F
Preferred Stock shall have identical rights to those relating
to the Series C Senior Preferred Stock as are set forth in the
Certificate of Designation for such Series C Senior Preferred
Stock.
7. The amendments to the Restated Articles of Incorporation do
not provide for an exchange, reclassification, or cancellation of issued
shares.
8. The foregoing amendments to the Restated Articles of
Incorporation were duly adopted by the Board of Directors of the corporation on
May 14, 1997, and the amendments were duly approved by the shareholders of the
corporation on June 4, 1997, in accordance with RCW 23B.10.030 and RCW
23B.10.040.
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<PAGE> 43
I certify that I am the duly-elected secretary of the above-named
corporation and am authorized to execute the foregoing Articles of Amendment on
behalf of the corporation.
Dated: June 12, 1997.
/s/ JOHN M. HEMINGWAY
-------------------------------
John M. Hemingway, Chief Financial
Officer and Secretary
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<PAGE> 44
ARTICLES OF AMENDMENT
OF
INNOVA CORPORATION
Pursuant to RCW 23B.10.060 of the Washington Business Corporation Act,
the undersigned corporation hereby submits the following amendment to the
corporation's Articles of Incorporation.
1. The name of the corporation is Innova Corporation.
2. The first sentence of paragraph C.3.a. of Article II is amended
to read in its entirety as follows:
At or at any time after October 1, 1998, the corporation shall at any
time it may lawfully do so, upon not less than thirty (30) days' written
notice from holders of shares of preferred Stock (each a "Requesting
Holder") representing greater than fifty percent of the then issued and
outstanding Preferred Stock, redeem the number of shares of Preferred
Stock requested by each such requesting Holder by paying thereafter
$.3299 for each share of Series A Preferred Stock and $.2525 for each
share of Series B Preferred Stock redeemed (appropriately adjusted for
stock splits, stock dividends, combinations, recapitalizations,
reclassification, and similar corporate rearrangements, including
additional shares of Series A Preferred Stock or Series B Preferred
Stock issued pursuant to paragraph 5 hereof) plus the amount of all
declared and unpaid dividends thereon (such total amount per share is
hereinafter referred to as the "Redemption Price" of the Preferred
Stock).
3. Paragraph C.3.d. of Article II is amended to read in its
entirety as follows:
d. The redemption rights hereinabove set forth
shall terminate upon: (i) the closing by the corporation of a firmly
underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, or any successor
law thereto generating net proceeds of not less than $10,000,000 and the
commencement of trading of such shares on a national securities exchange
or the National Association of Securities Dealers Automated Quotation
System (such public offering and commencement of trading being referred
to hereinafter as a "Liquidity Event;" provided that, with respect to
the Series F Preferred Stock, the net proceeds generated by such public
offering shall not be less $15,000,000 and at a price per share of not
be less than the price per share received by the corporation with
respect to the most recent sale of shares of Series F Preferred Stock),
(ii) the closing of a sale of
44
<PAGE> 45
substantially all of the assets of the corporation or other transaction in which
the control of the corporation is transferred, or (iii) if the holders of a
majority of each class of Preferred Stock, voting separately as voting groups,
vote at a meeting duly noticed and called for this purpose to terminate such
redemption rights.
4. The first sentence of paragraph C.5.b. of Article II is amended to read
in its entirety as follows:
Each share of Preferred Stock then outstanding shall automatically be converted
into one fully paid and nonassessable share of Common Stock immediately upon the
occurrence of a Liquidity Event.
5. The first sentence of paragraph C.5.g. of Article II is amended to read
in its entirety as follows:
Except as otherwise provided in this subparagraph 5(g), if the corporation sells
or issues any Common Stock or Common Stock Equivalents at a per share
consideration less than the Conversion Price for shares of any series of
Preferred Stock, then the corporation shall protect the Conversion Rights from
dilution by issuing to each holder of shares of Preferred Stock with a
Conversion Price greater than the per share consideration received by the
corporation on such sale or issuance ("Affected Preferred Shares") additional
shares of the same class of Preferred Stock as the Affected Preferred Shares, as
set forth below.
6. Paragraph C.5.g.(ii) of Article II is amended to read in its entirety
as follows:
(ii) The foregoing notwithstanding, no additional shares of
Preferred Stock shall be issued under this subparagraph 5(g) (X) with respect
to an issuance of Common Stock or Common Stock Equivalents if, at any time
prior to the delivery of the certificates representing such additional shares of
Preferred Stock, holders of a majority of the issued and outstanding shares of
each class of Preferred Stock agree, either in writing or at a duly called
meeting of the corporation's shareholders, to the waiver (either retroactively
or prospectively) of the right to receive additional shares, or (Y) as a result
of:
(aa) the issuance of Common Stock issuable upon conversion
of shares of the corporation's Series A Preferred Stock;
(bb) the issuance of Common Stock or Series A Preferred Stock
issuable upon the exercise of warrants issued in connection with
that certain Preferred Stock Purchase Agreement by and among
45
<PAGE> 46
the corporation and the Investors (as defined therein) dated as of
October 26, 1993, as amended from time to time, and the issuance of
Common Stock issuable upon conversion of any of such shares of Series A
Preferred Stock; or
(cc) the issuance of Common Stock issuable upon conversion of
shares of the corporation's Series B Preferred Stock;
(dd) the issuance of Common Stock issuable upon conversion of
shares of the corporation's Series C Senior Preferred Stock consisting
of Series C and Series C1 Senior Preferred Stock;
(ee) The issuance of Common Stock or Common Stock Equivalents
issuable upon the exercise of warrants, rights or options to purchase,
or conversion of promissory notes into, Common Stock or Common Stock
Equivalents outstanding as of the effective date of the last amendment
to this paragraph (ee), and Common Stock issued upon exercise or
conversion of such Common Stock Equivalents;
(ff) the issuance of shares of Common Stock or Common Stock
Equivalents or options to purchase shares of Common Stock or Common
Stock Equivalents issued or issuable to employees, consultants, vendors,
directors, or to other persons or entities approved by the Board of
Directors, pursuant to any stock incentive, stock bonus, or stock
purchase plan, or any other arrangement approved by the Board of
Directors (or the exercise of any such options);
(gg) the issuance of shares of shares of Common Stock issuable
upon conversion of shares of the corporation's Preferred Stock.
7. Paragraph C.6.b. of Article II is amended to read in its entirety as
follows:
The corporation shall not amend Article III, Sections 3.3, 3.4, 3.5 or the
second sentence of Section 3.7, Article IV, Section 4.3, 4.5, 4.7, 4.12, 4.13
or 4.14, Article V, Section 5.1 or 5.2, any section of Article VII that would
result in the indemnification of directors of the corporation being less than
the maximum provided by Washington law, Article XII, Section 12.1 or 12.2, or
Article X of its Bylaws without the unanimous approval of such amendments by
all directors then serving on the Board of Directors and the approval of such
amendments by the holders of a majority of shares of each class of Preferred
Stock voting as a separate voting group.
46
<PAGE> 47
The foregoing amendments to the Articles of Incorporation were duly
adopted by the Board of Directors on June 17, 1997, and the amendments were duly
approved by the shareholders of the corporation on July 15, 1997, in accordance
with RCW 23B.10.030 and RCW 23B.10.040.
I certify that I am the duly-elected secretary of the above-named
corporation and am authorized to execute the foregoing Articles of Amendment on
behalf of the corporation.
DATED: August 2, 1997
INNVOA CORPORATION
By: /s/ JOHN M. HEMINGWAY
--------------------------------
John M. Hemingway
Chief Financial Officer and
Secretary
47
<PAGE> 1
Exhibit 5.1
[GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S. LETTERHEAD]
August 4, 1997
Innova Corporation
Gateway North, Building 2
3325 South 116th Street
Seattle, WA 98168-1974
RE: 2,875,000 SHARES OF COMMON STOCK OF INNOVA CORPORATION
Ladies and Gentlemen:
This opinion is furnished in connection with a Registration Statement on Form
S-1 (Registration No. 333-29547), as amended (the "Registration Statement"), of
Innova Corporation, a Washington corporation (the "Company"), under which
2,500,000 shares of Common Stock of the Company (the "Common Stock"), together
with up to an additional 375,000 shares of Common Stock to cover
over-allotments, are being registered by the Company for sale under the
Securities Act of 1933, as amended (all of such shares will be referred to as
the "Shares").
As counsel for the Company, we are familiar with the Company's Restated Articles
of Incorporation, as amended, the Company's Amended and Restated Bylaws, as
amended, and the records of the corporate proceedings of the Company, and we
have assisted in the preparation of the Registration Statement, including the
Prospectus contained therein.
Based on the foregoing, we are of the opinion that, when (a) the Registration
Statement shall have been declared effective by order of the Securities and
Exchange Commission, (b) the Shares shall have been offered and sold in the
manner referred to in the Registration Statement, (c) certificates for the
Shares shall have been duly issued by the Company and registered by its
registrar, and (d) the Company shall have received the consideration required
for the Shares as contemplated by the Registration Statement, the Shares will be
validly issued, fully paid and nonassessable.
<PAGE> 2
Innova Corporation
August 4, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the inclusion in the Prospectus contained therein
of the reference to our firm under the heading "Legal Matters." In giving such
consent, we do not admit that we are in the category of the persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ BENJAMIN F. STEPHENS
Benjamin F. Stephens
of
Graham & James LLP/Riddell Williams P.S.
BFS:ml
<PAGE> 1
EXHIBIT 10.21
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
[LOGO]
LOAN AND SECURITY AGREEMENT
BORROWER: INNOVA CORPORATION
ADDRESS: 3325 SOUTH 116TH STREET
SEATTLE, WASHINGTON 98168
DATE: OCTOBER 15, 1996
This Loan and Security Agreement is entered into on the above date between
GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation
("GBC"), whose address is 10880 Wilshire Blvd., Suite 950, Los Angeles, CA 90024
and the borrower named above ("Borrower"), whose chief executive office is
located at the above address ("Borrower's Address"). The Schedule to this
Agreement (the "Schedule") being signed concurrently is an integral part of this
Agreement. (Definitions of certain terms used in this Agreement are set forth in
Section 8 below.)
1. LOANS.
1.1 LOANS. GBC will make loans to Borrower (the "Loans"), in amounts
determined by GBC in its sole discretion, up to the amounts (the "Credit Limit")
shown on the Schedule, provided no Default or Event of Default has occurred and
is continuing. If at any time or for any reason the total of all outstanding
Loans and all other Obligations exceeds the Credit Limit, Borrower shall
immediately pay the amount of the excess to GBC, without notice or demand.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement or in another written agreement signed by GBC and
Borrower. Interest shall be payable monthly, on the last day of the month.
Interest may, in GBC's discretion, be charged to Borrower's loan account, and
the same shall thereafter bear interest at the same rate as the other Loans.
1.3 FEES. Borrower shall pay GBC the fee(s) shown on the Schedule, which are
in addition to all interest and other sums payable to GBC and are not
refundable.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to GBC a security interest in all
of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, all money, all collateral in which GBC is
granted a security interest pursuant to any other present or future agreement,
all property now or at any time in the future in GBC's possession, and all
proceeds (including proceeds of any insurance policies, proceeds of proceeds and
claims against third parties), all products of the foregoing, and all books and
records related to any of the foregoing.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce GBC to enter into this Agreement and to make Loans,
Borrower represents and warrants to GBC as follows, and Borrower covenants that
the following representations will continue to be true, and that Borrower will
at all times comply with all of the following covenants:
<PAGE> 2
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), (iii) do not violate Borrower's articles or certificate of
incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give GBC 30 days' prior written notice before changing its name
or doing business under any other name. Borrower has complied, and will in the
future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give GBC at least 30 days prior written
notice before opening any additional place of business, changing its chief
executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. GBC now has, and will continue
to have, a first-priority perfected and enforceable security interest in all of
the Collateral, subject only to the Permitted Liens, and Borrower will at all
times defend GBC and the Collateral against all claims of others. So long as any
Loan is outstanding which is a term loan, none of the Collateral now is or will
be affixed to any real property in such a manner, or with such intent, as to
become a fixture. Borrower is not and will not become a lessee under any real
property lease pursuant to which the lessor may obtain any rights in any of the
COLLATERAL* and no such lease now prohibits, restrains, impairs or will
prohibit, restrain or impair Borrower's right to remove any Collateral from the
leased premises. Whenever any Collateral is located upon premises in which any
third party has an interest (whether as owner, mortgagee, beneficiary under a
deed of trust, lien or otherwise), Borrower shall, whenever requested by GBC,
use its best efforts to cause such third party to execute and deliver to GBC, in
form acceptable to GBC, such waivers and subordinations as GBC shall specify, so
as to ensure that GBC's rights in the Collateral are, and will continue to be,
superior to the rights of any such third party. Borrower will keep in full force
and effect, and will comply with allthe terms of, any lease of real property
where any of the Collateral now or in the future may be located.
*(EXCEPT A WASHINGTON STATE STATUTORY LIEN FOR UP TO 2 MONTHS UNPAID RENT;
BORROWER WILL ADVISE GBC IN WRITING IN ADVANCE OF ENTERING INTO ANY SUCH LEASE
AND WILL COOPERATE WITH GBC IN SEEKING A WAIVER OR SUBORDINATION OF SUCH LIEN
FROM THE LESSOR)
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good
working condition, ordinary wear and tear excepted, and Borrower will not use
the Collateral for any unlawful purpose. Borrower will immediately advise GBC in
writing of any material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained
<PAGE> 3
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
and will maintain at Borrower's Address complete and accurate books and records,
comprising an accounting system in accordance with generally accepted accounting
principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now
or in the future delivered to GBC have been, and will be, prepared in conformity
with generally accepted accounting principles and now and in the future will
completely and fairly reflect the financial condition of Borrower, at the times
and for the periods therein stated. Between the last date covered by any such
statement provided to GBC and the date hereof, there has been no material
adverse change in the financial condition or business of Borrower. Borrower is
now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by applicable
law, and Borrower has timely paid, and will timely pay, all applicable taxes,
assessments, deposits and contributions now or in the future owed by Borrower.
Borrower may, however, defer payment of any contested taxes, provided that
Borrower (i) in good faith contests Borrower's obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted, (ii)
notifies GBC in writing of the commencement of, and any material development in,
the proceedings, and (iii) posts bonds or takes any other steps required to keep
the contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or any other governmental agency. Borrower shall, at all
times, utilize the services of an outside payroll service providing for the
automatic deposit of all payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all applicable laws and regulations,
including, but not limited to, those relating to Borrower's ownership of real or
personal property, the conduct and licensing of Borrower's business, and all
environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform GBC in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes.
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants
to GBC as follows: Each Receivable with respect to which Loans are requested by
Borrower shall, on the date each Loan is requested and made, represent an
undisputed, bona fide, existing, unconditional obligation of the Account Debtor
created by the sale, delivery, and acceptance of goods or the rendition of
services, in the ordinary course of Borrower's business.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to GBC as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all
<PAGE> 4
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
respects what they purport to be, and all signatories and endorsers have the
capacity to contract. All sales and other transactions underlying or giving rise
to each Receivable shall comply with all applicable laws and governmental rules
and regulations. All signatures and indorsements on all documents, instruments,
and agreements relating to all Receivables are and shall be genuine, and all
such documents, instruments and agreements are and shall be legally enforceable
in accordance with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver
to GBC transaction reports and loan requests, schedules and assignments of all
Receivables, and schedules of collections, all on GBC's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit GBC's security interest and other rights in all of
Borrower's Receivables, nor shall GBC's failure to advance or lend against a
specific Receivable affect or limit GBC's security interest and other rights
therein. Together with each such schedule and assignment, or later if requested
by GBC, Borrower shall furnish GBC with copies (or, at GBC's request, originals)
of all contracts, orders, invoices, and other similar documents, and all
original shipping instructions, delivery receipts, bills of lading, and other
evidence of delivery, for any goods the sale or disposition of which gave rise
to such Receivables, and Borrower warrants the genuineness of all of the
foregoing. Borrower shall also furnish to GBC an aged accounts receivable trial
balance in such form and at such intervals as GBC shall request. In addition,
Borrower shall deliver to GBC the originals of all instruments, chattel paper,
security agreements, guarantees and other documents and property evidencing or
securing any Receivables, immediately upon receipt thereof and in the same form
as received, with all necessary indorsements.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
GBC, and Borrower shall deliver all such payments and proceeds to GBC, within
one business day after receipt of the same, in their original form, duly
endorsed, to be applied to the Obligations in such order as GBC shall determine.
4.5 DISPUTES. Borrower shall notify GBC promptly of all disputes or claims
relating to Receivables on the regular reports to GBC. Borrower shall not
forgive, or settle any Receivable for less than payment in full, or agree to do
any of the foregoing, except that Borrower may do so, provided that: (i)
Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to GBC on the regular reports provided to GBC; (ii) no Default or Event
of Default has occurred and is continuing; and (iii) taking into account all
such settlements and forgiveness, the total outstanding Loans and other
Obligations will not exceed the Credit Limit.
4.6 RETURNS. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to GBC). In the event any attempted return occurs after
the occurrence of any Event of Default, Borrower shall (i) not accept any return
without GBC's prior written consent, (ii) hold the returned Inventory in trust
for GBC, (iii) segregate all returned Inventory from all of Borrower's other
property, (iv) conspicuously label the returned Inventory as GBC's property, and
(v) immediately notify GBC of the return of any Inventory, specifying the reason
for such return, the location and condition of the returned Inventory, and on
GBC's request deliver such returned Inventory to GBC.
4.7 VERIFICATION. GBC may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or GBC or such other name as GBC may choose, and GBC or its designee
may, at any time, notify Account Debtors that it has a security interest in the
Receivables.
4.8 NO LIABILITY. GBC shall not under any circumstances be responsible or
liable for any shortage
<PAGE> 5
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
or discrepancy in, damage to, or loss or destruction of, any goods, the sale or
other disposition of which gives rise to a Receivable, or for any error, act,
omission, or delay of any kind occurring in the settlement, failure to settle,
collection or failure to collect any Receivable, or for settling any Receivable
in good faith for less than the full amount thereof, nor shall GBC be deemed to
be responsible for any of Borrower's obligations under any contract or agreement
giving rise to a Receivable. Nothing herein shall, however, relieve GBC from
liability for its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 INSURANCE. Borrower shall, at all times, insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to GBC, in such form and amounts as GBC may
reasonably require, and Borrower shall provide evidence of such insurance to
GBC, so that GBC is satisfied that such insurance is, at all times, in full
force and effect. All such insurance policies shall name GBC as an additional
loss payee, and shall contain a lenders loss payee endorsement in form
reasonably acceptable to GBC. Upon receipt of the proceeds of any such
insurance, GBC shall apply such proceeds in reduction of the Obligations as GBC
shall determine in its sole discretion, except that, provided no Default or
Event of Default has occurred and is continuing, GBC shall release to Borrower
insurance proceeds with respect to Equipment totaling less than $100,000, which
shall be utilized by Borrower for the replacement of the Equipment with respect
to which the insurance proceeds were paid. GBC may require reasonable assurance
that the insurance proceeds so released will be so used. If Borrower fails to
provide or pay for any insurance, GBC may, but is not obligated to, obtain the
same at Borrower's expense. Borrower shall promptly deliver to GBC copies of all
reports made to insurance companies.
5.2 REPORTS. Borrower, at its expense, shall provide GBC with the written
reports set forth in the Schedule, and such other written reports with respect
to Borrower (including budgets, sales projections, operating plans and other
financial documentation), as GBC shall from time to time reasonably specify.
5.3 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one
business day's notice, GBC, or its agents, shall have the right to inspect the
Collateral, and the right to audit and copy Borrower's books and records. GBC
shall take reasonable steps to keep confidential all information obtained in any
such inspection or audit, but GBC shall have the right to disclose any such
information to its auditors, regulatory agencies, and attorneys, and pursuant to
any subpoena or other legal process. The foregoing inspections and audits shall
be at Borrower's expense and the charge therefor shall be $600 per person per
day (or such higher amount as shall represent GBC's then current standard charge
for the same), plus reasonable out-of-pockets expenses. Borrower shall not be
charged more than $3,000 per audit (plus reasonable out-of-pockets expenses),
nor shall audits be done more frequently than four times per calendar year,
provided that the foregoing limits shall not apply after the occurrence of a
Default or Event of Default, nor shall they restrict GBC's right to conduct
audits at its own expense (whether or not a Default or Event of Default has
occurred). Borrower will not enter into any agreement with any accounting firm,
service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining GBC's written
consent, which may be conditioned upon such accounting firm, service bureau or
other third party agreeing to give GBC the same rights with respect to access to
books and records and related rights as GBC has under this Agreement.
5.4 REMITTANCE OF PROCEEDS. All proceeds arising from the sale or other
disposition of any Collateral shall be delivered, in kind, by Borrower to GBC in
the original form in which received by Borrower not later than the following
business day after receipt by Borrower, to be applied to the Obligations in such
order as GBC shall determine; provided that, if no Default or Event of Default
has occurred and is continuing, and if no term loan is outstanding hereunder,
then Borrower shall not be obligated to remit to GBC the proceeds of the sale of
Equipment which is sold in the ordinary course of business, in a good-faith
arm's length transaction. Except for the proceeds of the sale of Equipment as
set forth above, Borrower shall not
<PAGE> 6
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
commingle proceeds of Collateral with any of Borrower's other funds or property,
and shall hold such proceeds separate and apart from such other funds and
property and in an express trust for GBC. Nothing in this Section limits the
restrictions on disposition of Collateral set forth elsewhere in this Agreement.
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower
shall not, without GBC's prior written consent, do any of the following: (i)
merge or consolidate with another corporation or entity*; (ii) acquire any
assets, except in the ordinary course of business; (iii) enter into any other
transaction outside the ordinary course of business; (iv) sell or transfer any
Collateral, except that, provided no Default or Event of Default has occurred
and is continuing, Borrower may (a) sell finished Inventory in the ordinary
course of Borrower's business, and (b) if no term loan is outstanding hereunder,
sell Equipment in the ordinary course of business, in good-faith arm's length
transactions; (v) store any Inventory or other Collateral with any warehouseman
or other third party; (vi) sell any Inventory on a sale-or-return, guaranteed
sale, consignment**, or other contingent basis*** ; (vii) make any loans of any
money or other assets; (viii) incur any debts, outside the ordinary course of
business, which would have a material, adverse effect on Borrower or on the
prospect of repayment of the Obligations; (ix) guarantee or otherwise become
liable with respect to the obligations of another party or entity; (x) pay or
declare any dividends on Borrower's stock (except for dividends payable solely
in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire,
directly or indirectly, any of Borrower's stock; (xii) make any change in
Borrower's capital structure which would have a material adverse effect on
Borrower or on the prospect of repayment of the Obligations; or (xiii) dissolve
or elect to dissolve; or (xiv) agree to do any of the foregoing.
* PROVIDED THAT GBC SHALL NOT UNREASONABLY WITHHOLD ITS CONSENT WITH RESPECT
TO ANY SUCH MERGER OR CONSOLIDATION
** TRIAL BASIS
*** PROVIDED, HOWEVER, THAT AFTER OBTAINING GBC'S PRIOR WRITTEN CONSENT,
BORROWER MAY MAKE LIMITED SALES ON A TRIAL BASIS, BUT BORROWER WILL NOT REQUEST
OR ACCEPT ANY LOANS OR ADVANCES BASED UPON SUCH TRIAL BASIS ACCOUNTS
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against GBC with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to GBC, make available
Borrower and its officers, employees and agents, and Borrower's books and
records, without charge, to the extent that GBC may deem them reasonably
necessary in order to prosecute or defend any such suit or proceeding.
5.7 NOTIFICATION OF CHANGES. Borrower will promptly notify GBC in writing of
any change in its officers or directors, the opening of any new bank account or
other deposit account, and any material adverse change in the business or
financial affairs of Borrower.
5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by GBC,
to execute all documents and take all actions, as GBC may deem reasonably
necessary or useful in order to perfect and maintain GBC's perfected security
interest in the Collateral, and in order to fully consummate the transactions
contemplated by this Agreement.
5.9 INDEMNITY. Borrower hereby agrees to indemnify GBC and hold GBC harmless
from and against any and all claims, debts, liabilities, demands, obligations,
actions, causes of action, penalties, costs and expenses (including attorneys'
fees), of every nature, character and description, which GBC may sustain or
incur based upon or arising out of any of the Obligations, any actual or alleged
failure to collect and pay over any withholding or other tax relating to
Borrower or its employees, any relationship or agreement between GBC and
Borrower, any actual or alleged failure of GBC to comply with any writ of
attachment or other legal process relating to Borrower or any of its property,
or any other matter, cause or thing whatsoever occurred, done, omitted or
suffered to be done by GBC relating to Borrower or the Obligations (except any
such amounts sustained or incurred as the result of the gross negligence or
willful misconduct of GBC or any of its directors, officers, employees, agents,
attorneys, or any other person
<PAGE> 7
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
affiliated with or representing GBC). Notwithstanding any provision in this
Agreement to the contrary, the indemnity agreement set forth in this Section
shall survive any termination of this Agreement and shall for all purposes
continue in full force and effect.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity
date set forth on the Schedule (the "Maturity Date"); provided that the Maturity
Date shall automatically be extended, and this Agreement shall automatically and
continuously renew, for successive additional terms of one year each, unless one
party gives written notice to the other, not less than sixty days prior to the
next Maturity Date, that such party elects to terminate this Agreement effective
on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity
Date as follows: (i) by Borrower, effective three business days after written
notice of termination is given to GBC; or (ii) by GBC at any time after the
occurrence of an Event of Default, without notice, effective immediately. If
this Agreement is terminated by Borrower or by GBC under this Section 6.2,
Borrower shall pay to GBC a termination fee (the "Termination Fee") in the
amount shown on the Schedule. The Termination Fee shall be due and payable on
the effective date of termination and thereafter shall bear interest at a rate
equal to the highest rate applicable to any of the Obligations.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if on the Maturity Date, or on any
earlier effective date of termination, there are any outstanding letters of
credit issued based upon an application, guarantee, indemnity or similar
agreement on the part of GBC, then on such date Borrower shall provide to GBC
cash collateral in an amount equal to 110% of the face amount of all such
letters of credit plus all interest, fees and costs due or (in GBC's estimation)
likely to become due in connection therewith, to secure all of the Obligations
relating to said letters of credit, pursuant to GBC's then standard form cash
pledge agreement. Notwithstanding any termination of this Agreement, all of
GBC's security interests in all of the Collateral and all of the terms and
provisions of this Agreement shall continue in full force and effect until all
Obligations have been paid and performed in full; provided that, without
limiting the fact that Loans are subject to the discretion of GBC, GBC may, in
its sole discretion, refuse to make any further Loans after termination. No
termination shall in any way affect or impair any right or remedy of GBC, nor
shall any such termination relieve Borrower of any Obligation to GBC, until all
of the Obligations have been paid and performed in full. Upon payment and
performance in full of all the Obligations and termination of this Agreement,
GBC shall promptly deliver to Borrower termination statements, requests for
reconveyances and such other documents as may be reasonably required to
terminate GBC's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
GBC immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to GBC by Borrower or any of
Borrower's officers, employees or agents, now or in the future, shall be untrue
or misleading in a material respect; or (b) Borrower shall fail to pay when due
any Loan or any interest thereon or any other monetary Obligation; or (c) the
total Loans and other Obligations outstanding at any time shall exceed the
Credit Limit; or (d) Borrower shall fail to perform any non-monetary Obligation
which by its nature cannot be cured; or (e) Borrower shall fail to perform any
other non-monetary Obligation, which failure is not cured within 10 business
days after the date performance is due; or (f) any levy, assessment, attachment,
seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any
part of the Collateral which is not cured within 10 days after the occurrence of
the same; or (g) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in
<PAGE> 8
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
writing by the holder of the Permitted Lien; or (h) Borrower breaches any
material contract or obligation, which has or may reasonably be expected to have
a material adverse effect on Borrower's business or financial condition; or (i)
dissolution, termination of existence, insolvency or business failure of
Borrower or any Guarantor; or appointment of a receiver, trustee or custodian,
for all or any part of the property of, assignment for the benefit of creditors
by, or the commencement of any proceeding by Borrower or any Guarantor under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (j) the commencement of any proceeding against Borrower or
any Guarantor under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect, which is not cured by the
dismissal thereof within 45 days after the date commenced; or (k) revocation or
termination of, or limitation or denial of liability upon, any guaranty of the
Obligations or any attempt to do any of the foregoing; or (l) revocation or
termination of, or limitation or denial of liability upon, any pledge of any
certificate of deposit, securities or other property or asset pledged by any
third party to secure any or all of the Obligations, or any attempt to do any of
the foregoing, or commencement of proceedings by or against any such third party
under any bankruptcy or insolvency law; or (m) Borrower makes any payment on
account of any indebtedness or obligation which has been subordinated to the
Obligations other than as permitted in the applicable subordination agreement,
or if any Person who has subordinated such indebtedness or obligations
terminates or in any way limits or terminates its subordination agreement; or
(n) there shall be a change in the record or beneficial ownership of an
aggregate of more than 20% of the outstanding shares of stock of Borrower, in
one or more transactions, compared to the ownership of outstanding shares of
stock of Borrower in effect on the date hereof, without the prior written
consent of GBC, which cannot be unreasonably withheld; or (o) Borrower shall
generally not pay its debts as they become due, or Borrower shall conceal,
remove or transfer any part of its property, with intent to hinder, delay or
defraud its creditors, or make or suffer any transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or (p) there shall be a material adverse change in Borrower's business or
financial condition. GBC may cease making any Loans hereunder during any of the
above cure periods, and thereafter if an Event of Default has occurred.
7.2 REMEDIES. Upon the occurrence and during the continuance of any Event of
Default, and at any time thereafter, GBC, at its option, and without notice or
demand of any kind (all of which are hereby expressly waived by Borrower), may
do any one or more of the following: (a) Cease making Loans or otherwise
extending credit to Borrower under this Agreement or any other document or
agreement; (b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable, and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation; (c) Take possession of any or all of the Collateral wherever it may
be found, and for that purpose Borrower hereby authorizes GBC without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store, or remove any of the Collateral, and
remain on the premises or cause a custodian to remain on the premises in
exclusive control thereof, without charge for so long as GBC deems it reasonably
necessary in order to complete the enforcement of its rights under this
Agreement or any other agreement; provided, however, that should GBC seek to
take possession of any of the Collateral by Court process, Borrower hereby
irrevocably waives: (i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession; (ii) any demand for possession prior to the commencement of any suit
or action to recover possession thereof; and (iii) any requirement that GBC
retain possession of, and not dispose of, any such Collateral until after trial
or final judgment; (d) Require Borrower to assemble any or all of the Collateral
and make it available to GBC at places
<PAGE> 9
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
designated by GBC which are reasonably convenient to GBC and Borrower, and to
remove the Collateral to such locations as GBC may deem advisable; (e) Complete
the processing, manufacturing or repair of any Collateral prior to a disposition
thereof and, for such purpose and for the purpose of removal, GBC shall have the
right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and
all other property without charge; (f) Sell, lease or otherwise dispose of any
of the Collateral, in its condition at the time GBC obtains possession of it or
after further manufacturing, processing or repair, at one or more public and/or
private sales, in lots or in bulk, for cash, exchange or other property, or on
credit, and to adjourn any such sale from time to time without notice other than
oral announcement at the time scheduled for sale. GBC shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as GBC deems reasonable, or on GBC's premises, or elsewhere and the
Collateral need not be located at the place of disposition. GBC may directly or
through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale; (g) Demand payment
of, and collect any Receivables and General Intangibles comprising Collateral
and, in connection therewith, Borrower irrevocably authorizes GBC to endorse or
sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and remove
therefrom payments made with respect to any item of the Collateral or proceeds
thereof, and, in GBC's sole discretion, to grant extensions of time to pay,
compromise claims and settle Receivables, General Intangibles and the like for
less than face value; and (h) Demand and receive possession of any of Borrower's
federal and state income tax returns and the books and records utilized in the
preparation thereof or referring thereto. All reasonable attorneys' fees,
expenses, costs, liabilities and obligations incurred by GBC with respect to the
foregoing shall be added to and become part of the Obligations, shall be due on
demand, and shall bear interest at a rate equal to the highest interest rate
applicable to any of the Obligations. Without limiting any of GBC's rights and
remedies, from and after the occurrence of any Event of Default, the interest
rate applicable to the Obligations shall be increased by an additional four
percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and GBC
agree that a sale or other disposition (collectively, "sale") of any Collateral
which complies with the following standards will conclusively be deemed to be
commercially reasonable: (i) Notice of the sale is given to Borrower at least
seven days prior to the sale, and, in the case of a public sale, notice of the
sale is published at least seven days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted; (ii) Notice of the
sale describes the collateral in general, non-specific terms; (iii) The sale is
conducted at a place designated by GBC, with or without the Collateral being
present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v)
Payment of the purchase price in cash or by cashier's check or wire transfer is
required; (vi) With respect to any sale of any of the Collateral, GBC may (but
is not obligated to) direct any prospective purchaser to ascertain directly from
Borrower any and all information concerning the same. GBC shall be free to
employ other methods of noticing and selling the Collateral, in its discretion,
if they are commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence and during the continuance of any
Event of Default, without limiting GBC's other rights and remedies, Borrower
grants to GBC an irrevocable power of attorney coupled with an interest,
authorizing and permitting GBC (acting through any of its employees, attorneys
or agents) at any time, at its option, but without obligation, with or without
notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise, but GBC agrees to exercise the
following powers in a commercially reasonable manner: (a) Execute on behalf of
Borrower any documents that GBC may, in its sole discretion, deem advisable in
<PAGE> 10
order to perfect and maintain GBC's security interest in the Collateral, or in
order to exercise a right of Borrower or GBC, or in order to fully consummate
all the transactions contemplated under this Agreement, and all other present
and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of GBC's Collateral or in which GBC has an interest; (c) Execute on
behalf of Borrower, any invoices relating to any Receivable, any draft against
any Account Debtor and any notice to any Account Debtor, any proof of claim in
bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other
lien, or assignment or satisfaction of mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into GBC's
possession; (e) Endorse all checks and other forms of remittances received by
GBC; (f) Pay, contest or settle any lien, charge, encumbrance, security interest
and adverse claim in or to any of the Collateral, or any judgment based thereon,
or otherwise take any action to terminate or discharge the same; (g) Grant
extensions of time to pay, compromise claims and settle Receivables and General
Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give GBC the same rights of access and other rights with respect
thereto as GBC has under this Agreement; and (k) Take any action or pay any sum
required of Borrower pursuant to this Agreement and any other present or future
agreements. Any and all reasonable sums paid and any and all reasonable costs,
expenses, liabilities, obligations and reasonable attorneys' fees incurred by
GBC with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations. In no event
shall GBC's rights under the foregoing power of attorney or any of GBC's other
rights under this Agreement be deemed to indicate that GBC is in control of the
business, management or properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale
or other disposition of the Collateral shall be applied by GBC first to the
reasonable costs, expenses, liabilities, obligations and attorneys' fees
incurred by GBC in the exercise of its rights under this Agreement, second to
the interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as GBC shall determine in its sole discretion. Any
surplus shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to GBC for any deficiency. If GBC, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, GBC shall have
the option, exercisable at any time, in its sole discretion, of either reducing
the Obligations by the principal amount of purchase price or deferring the
reduction of the Obligations until the actual receipt by GBC of the cash
therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Agreement, GBC shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between GBC and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
GBC of one or more of its rights or remedies shall not be deemed an election,
nor bar GBC from subsequent exercise or partial exercise of any other rights or
remedies. The failure or delay of GBC to exercise any rights or remedies shall
not operate as a waiver thereof, but all rights and remedies shall continue in
full force and effect until all of the Obligations have been fully paid and
performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
<PAGE> 11
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
"Account Debtor" means the obligor on a Receivable.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Agreement" and "this Agreement" means this Loan and Security Agreement and
all modifications and amendments thereto, extensions thereof, and replacements
therefor.
"Business Day" means a day on which GBC is open for business.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both, would
constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Eligible Receivables" means unconditional Receivables arising in the
ordinary course of Borrower's business from the completed sale of goods or
rendition of services, which GBC, in its sole judgment, shall deem eligible for
borrowing, based on such considerations as GBC may from time to time deem
appropriate.
"Equipment" means all of Borrower's present and hereafter acquired machinery,
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 7.1 of this
Agreement.
"General Intangibles" means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against GBC, rights to purchase or sell real
or personal property, rights as a licensor or licensee of any kind, royalties,
telephone numbers, proprietary information, purchase orders, and all insurance
policies and claims (including life insurance, key man insurance, credit
insurance, liability insurance, property insurance and other insurance), tax
refunds and claims, computer programs, discs, tapes and tape files, claims under
guaranties, security interests or other security held by or granted to Borrower,
all rights to indemnification and all other intangible property of every kind
and nature (other than Receivables).
"Guarantor" means any Person who has guaranteed any of the Obligations.
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including all raw materials,
work in process, finished goods and goods in transit), and all materials and
supplies of every
<PAGE> 12
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
kind, nature and description which are or might be used or consumed in
Borrower's business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods, merchandise or other
personal property, and all warehouse receipts, documents of title and other
documents representing any of the foregoing.
"LIBOR Rate" means (i) the one-month London Interbank Offered Rate for
deposits in U.S. dollars, as shown each day in The Wall Street Journal (Eastern
Edition) under the caption "Money Rates - London Interbank Offered Rates
(LIBOR)"; or (ii) if the Wall Street Journal does not publish such rate, the
offered one-month rate for deposits in U.S. dollars which appears on the Reuters
Screen LIBO Page as of 10:00 a.m., New York time, each day, provided that if at
least two rates appear on the Reuters Screen LIBO Page on any day, the "LIBOR
Rate" for such day shall be the arithmetic mean of such rates; or (iii) if the
Wall Street Journal does not publish such rate on a particular day and no such
rate appears on the Reuters Screen LIBO Page on such day, the rate per annum at
which deposits in U.S. dollars are offered to the principal London office of The
Chase Manhattan Bank, N.A. in the London interbank market at approximately 11:00
A.M., London time, on such day in an amount approximately equal to the
outstanding principal amount of the Loans, for a period of one month, in each of
the foregoing cases as determined in good faith by GBC, which determination
shall be conclusive absent manifest error.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to GBC, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by GBC in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, loan fees,
termination fees, minimum interest charges and any other sums chargeable to
Borrower under this Agreement or under any other present or future instrument or
agreement between Borrower and GBC.
"Permitted Liens" means the following: (i) purchase money security interests
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens which are subordinate to the security interest in favor of GBC and are
consented to in writing by GBC (which consent shall not be unreasonably
withheld); (v) security interests being terminated substantially concurrently
with this Agreement; (vi) liens of materialmen, mechanics, warehousemen,
carriers, or other similar liens arising in the ordinary course of business and
securing obligations which are not delinquent; (vii) liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. GBC will have the
right to require, as a condition to its consent under subparagraph (iv) above,
that the holder of the additional security interest or lien sign an
intercreditor agreement on GBC's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of GBC, and
agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned
<PAGE> 13
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
and hereafter acquired accounts (whether or not earned by performance), letters
of credit, contract rights, chattel paper, instruments, securities, documents
and all other forms of obligations at any time owing to Borrower, all guaranties
and other security therefor, all merchandise returned to or repossessed by
Borrower, and all rights of stoppage in transit and all other rights or remedies
of an unpaid vendor, lienor or secured party.
Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by GBC (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by GBC on account of the Obligations three Business Days after receipt
by GBC of immediately available funds. GBC shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to GBC in its discretion, and GBC may charge Borrower's Loan
account for the amount of any item of payment which is returned to GBC unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may
be applied, and in GBC's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as GBC shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNT. GBC may, in its discretion, require that Borrower pay
monetary Obligations in cash to GBC, or charge them to Borrower's Loan account,
in which event they will bear interest at the same rate applicable to the Loans.
9.4 MONTHLY ACCOUNTINGS. GBC shall provide Borrower monthly with an account
of advances, charges, expenses and payments made pursuant to this Agreement.
Such account shall be deemed correct, accurate and binding on Borrower and an
account stated (except for reverses and reapplications of payments made and
corrections of errors discovered by GBC), unless Borrower notifies GBC in
writing to the contrary within sixty days after each account is rendered,
describing the nature of any alleged errors or admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in writing
and shall be given either personally or by reputable private delivery service or
by regular first-class mail, or certified mail return receipt requested,
addressed to GBC or Borrower at the addresses shown in the heading to this
Agreement, or at any other address designated in writing by one party to the
other party. All notices shall be deemed to have been given upon delivery in the
case of notices personally delivered, or at the expiration of one business day
following delivery to the private delivery service, or two business days
following the deposit thereof in the United States mail, with postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any court
of competent jurisdiction to be void or unenforceable, such defect shall not
affect the remainder of this Agreement, which shall continue in full force and
effect.
9.7 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and GBC and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
understandings, representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the parties
in connection herewith.
9.8 WAIVERS. The failure of GBC at any time or times to require Borrower to
strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and GBC shall not waive or diminish
any right of GBC later to demand and receive strict compliance therewith. Any
waiver of any default shall not waive or affect any other default, whether prior
or subsequent, and whether or not similar. None of the provisions of this
Agreement or
<PAGE> 14
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
any other agreement now or in the future executed by Borrower and delivered to
GBC shall be deemed to have been waived by any act or knowledge of GBC or its
agents or employees, but only by a specific written waiver signed by an
authorized officer of GBC and delivered to Borrower. Borrower waives demand,
protest, notice of protest and notice of default or dishonor, notice of payment
and nonpayment, release, compromise, settlement, extension or renewal of any
commercial paper, instrument, account, General Intangible, document or guaranty
at any time held by GBC on which Borrower is or may in any way be liable, and
notice of any action taken by GBC, unless expressly required by this Agreement.
9.9 AMENDMENT. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of GBC.
9.10 TIME OF ESSENCE. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.11 ATTORNEYS FEES AND COSTS. Borrower shall reimburse GBC for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by GBC, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any reasonable attorneys' fees and costs
GBC incurs in order to do the following: prepare and negotiate this Agreement
and the documents relating to this Agreement; obtain legal advice in connection
with this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce GBC's
security interest in, the Collateral; and otherwise represent GBC in any
litigation relating to Borrower. If either GBC or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its reasonable costs and attorneys'
fees, including (but not limited to) reasonable attorneys' fees and costs
incurred in the enforcement of, execution upon or defense of any order, decree,
award or judgment. All attorneys' fees and costs to which GBC may be entitled
pursuant to this Paragraph shall immediately become part of Borrower's
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations.
9.12 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and GBC; provided, however, that
Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of GBC, and any prohibited assignment shall be
void. No consent by GBC to any assignment shall release Borrower from its
liability for the Obligations.
9.13 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.14 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against
GBC, its directors, officers, employees, agents, accountants or attorneys, based
upon, arising from, or relating to this Loan Agreement, or any other present or
future document or agreement, or any other transaction contemplated hereby or
thereby or relating hereto or thereto, or any other matter, cause or thing
whatsoever, occurred, done, omitted or suffered to be done by GBC, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of GBC, or on any other person authorized to
accept service on behalf
<PAGE> 15
GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
of GBC, within thirty (30) days thereafter. Borrower agrees that such one-year
period is a reasonable and sufficient time for Borrower to investigate and act
upon any such claim or cause of action. The one-year period provided herein
shall not be waived, tolled, or extended except by the written consent of GBC in
its sole discretion. This provision shall survive any termination of this Loan
Agreement or any other present or future agreement.
9.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and GBC acknowledge that the headings
may not describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. The term "including",
whenever used in this Agreement, shall mean "including (but not limited to)".
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against GBC or Borrower under any rule of construction or
otherwise.
9.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of GBC and Borrower shall
be governed by the laws of the State of California. As a material part of the
consideration to GBC to enter into this Agreement, Borrower (i) agrees that all
actions and proceedings relating directly or indirectly to this Agreement shall,
at GBC's option, be litigated in courts located within California, and that the
exclusive venue therefor shall be Los Angeles County; (ii) consents to the
jurisdiction and venue of any such court and consents to service of process in
any such action or proceeding by personal delivery or any other method permitted
by law; and (iii) waives any and all rights Borrower may have to object to the
jurisdiction of any such court, or to transfer or change the venue of any such
action or proceeding.
9.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND GBC EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN GBC AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF GBC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GBC OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
INNOVA CORPORATION
BY /s/ J. F. GRENON
-------------------------------
PRESIDENT OR VICE PRESIDENT
BY /s/ JOHN HEMINGWAY
-------------------------------
SECRETARY OR ASS'T SECRETARY
GBC:
GREYROCK BUSINESS CREDIT,
A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION
BY /s/ SIGNATURE ILLEGIBLE
-------------------------------
TITLE COO
------------------------------
44,542-1
<PAGE> 16
GREYROCK BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
[LOGO]
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: INNOVA CORPORATION
ADDRESS: 3325 SOUTH 116TH STREET
SEATTLE, WASHINGTON 98168
DATE: OCTOBER __, 1996
This Schedule is an integral part of the Loan and Security Agreement between
GREYROCK BUSINESS CREDIT, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION
("GBC") and the above-borrower ("Borrower") of even date.
1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of:
(i) $5,000,000 at any one time
outstanding; or (ii) 80% of the amount
of Borrower's Eligible Receivables (as
defined in Section 8 above).
ADD RE DILUTION REDUCING ADVANCE RATE.
2. INTEREST.
INTEREST RATE (Section 1.2):
The interest rate in effect throughout
each calendar month during the term of
this Agreement shall be the highest
"LIBOR Rate" in effect during such
month, plus 4.875% per annum, provided
that the interest rate in effect in each
month shall not be less than 8% per
annum, and provided that, commencing the
fourth full calendar month after the
initial Loan hereunder, the interest
charged for each month shall be a
minimum of $10,000 regardless of the
amount of the Obligations outstanding
(except that, if there are no Loans
outstanding throughout any calendar
month, then no minimum interest shall be
charged for such calendar month).
Interest shall be calculated on the
basis of a 360-day year for the actual
number of days elapsed. "LIBOR Rate" has
the meaning set forth in Section 8
above.
<PAGE> 17
GREYROCK BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
3. FEES (Section 1.3/Section 6.2):
Loan Fee: $50,000, payable concurrently herewith.
Termination Fee: $10,000 per month for each month (or
portion thereof) from the effective date
of termination to the Maturity Date
NSF Check Charge: $15.00 per item.
Wire Transfers: $15.00 per transfer.
4. MATURITY DATE
(Section 6.1): OCTOBER 31, 1997, subject to automatic
renewal as provided in Section 6.1
above, and early termination as provided
in Section 6.2 above.
5. REPORTING.
(Section 5.2):
Borrower shall provide GBC with the
following:
1. Annual financial statements, as soon as
available, and in any event within 90
days following the end of Borrower's
fiscal year, certified by independent
certified public accountants acceptable
to GBC.
2. Quarterly unaudited financial
statements, as soon as available, and in
any event within 30 days after the end
of each fiscal quarter of Borrower.
3. Monthly unaudited financial statements,
as soon as available, and in any event
within 30 days after the end of each
month.
4. Monthly Receivable agings, aged by
invoice date, within 10 days after the
end of each month.
5. Monthly accounts payable agings, aged by
invoice date, and outstanding or held
check registers within 10 days after the
end of each month.
6. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
<PAGE> 18
GREYROCK BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
(Section 3.2): Microbeam Corporation
PRIOR TRADE
NAMES OF BORROWER
(Section 3.2): None
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): None
OTHER LOCATIONS AND
ADDRESSES (Section 3.3): See Exhibit A hereto
MATERIAL ADVERSE
LITIGATION (Section 3.10): None
Borrower: GBC:
INNOVA CORPORATION GREYROCK BUSINESS CREDIT,
a Division of NationsCredit
Commercial Corporation
By /s/ J.F. GRENON By /s/ SIGNATURE ILLEGIBLE
------------------------------- -------------------------------
President or Vice President Title COO
----------------------------
By /s/ JOHN HEMINGWAY
-------------------------------
Secretary or Ass't Secretary
44,542-1
<PAGE> 19
LEVY, SMALL & LALLAS
815 Moraga Drive
Los Angeles, California 90049
Telephone (310) 471-3000
Telecopier (310) 471-7990
TRANSMITTAL NOTE
<PAGE> 20
GREYROCK BUSINESS CREDIT AMENDMENT TO LOAN DOCUMENTS
[LOGO]
AMENDMENT TO LOAN DOCUMENTS
BORROWER: INNOVA CORPORATION
ADDRESS: 3325 SOUTH 116TH STREET
SEATTLE, WASHINGTON 98168
DATE: APRIL 29, 1997
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between GREYROCK
BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation ("GBC"),
whose address is 10880 Wilshire Blvd., Suite 950, Los Angeles, CA 90024 and the
borrower named above ("Borrower").
The Parties agree to amend the Loan and Security Agreement between
them, dated October 15, 1996 (as amended, the "Loan Agreement"), as follows,
effective on the date hereof. (This Amendment, the Loan Agreement, any prior
written amendments to said agreements signed by GBC and the Borrower, and all
other written documents and agreements between GBC and the Borrower are referred
to herein collectively as the "Loan Documents". Capitalized terms used but not
defined in this Amendment, shall have the meanings set forth in the Loan
Agreement.)
1. CREDIT LIMIT. Section 1 of the Schedule to the Loan Agreement is
amended to read as follows:
"1. CREDIT LIMIT (Section 1.1): An amount not to exceed:
"(a) The unpaid principal balance of the Term Loan in the
original principal amount of $1,500,000 being made
concurrently herewith by GBC to Borrower (the "Term Loan") and
evidenced by the Secured Promissory Note ("Term Note") of even
date herewith made by Borrower to the order of GBC; plus
(b) The lesser of (i) $5,000,000 at any one time outstanding,
or 80% of the amount of Borrower's Eligible Receivables (as
defined in Section 8 above)
<PAGE> 21
GREYROCK BUSINESS CREDIT AMENDMENT TO LOAN DOCUMENTS
"The Term Loan shall bear interest and be repayable on the terms set
forth in the Term Note."
2. FEE. Borrower shall concurrently pay GBC a term loan fee in
the amount of $15,000, which shall be in addition to all interest and other
charges and shall be non-refundable.
3. WARRANTS. The Borrower shall concurrently provide GBC with five-year
warrants to purchase 516,000 shares of common stock of the Borrower, on the
terms set forth in the Warrant to Purchase Stock and related documents being
executed concurrently with this Agreement, at $0.29 per share. Such warrants
shall contain such terms and provisions as Borrower and GBC shall agree. In
addition, concurrently, Borrower and GBC shall enter into an Anti-Dilution
Agreement and Registration Rights Agreement in such form as Borrower and GBC
shall agree. Said warrants shall be deemed fully earned on the date hereof,
shall be in addition to all interest and other fees, and shall be
non-refundable.
4. REPRESENTATIONS TRUE. Borrower represents and warrants to GBC that
all representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct.
5. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the
other Loan Documents set forth in full all of the representations and agreements
of the parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the parties
with respect to the subject hereof. Except as herein expressly amended, all of
the terms and provisions of the Loan Agreement and the other Loan Documents
shall continue in full force and effect and the same are hereby ratified and
confirmed.
BORROWER: GBC:
INNOVA CORPORATION GREYROCK BUSINESS CREDIT,
A DIVISION OF NATIONSCREDIT COMMERCIAL
CORPORATION
BY /s/ JEAN-FRANCOIS GRENON
-------------------------------
PRESIDENT OR VICE PRESIDENT BY /s/ SIGNATURE ILLEGIBLE
-------------------------------
TITLE President
BY /s/ JOHN HEMINGWAY ----------------------------
-------------------------------
SECRETARY OR ASS'T SECRETARY
<PAGE> 22
GREYROCK BUSINESS CREDIT SECURITY PROMISSORY NOTE
[LOGO]
SECURED PROMISSORY NOTE
$1,500,000 Los Angeles, California
APRIL 29, 1997
FOR VALUE RECEIVED, the undersigned (the "Borrower") promises to pay to
the order of GREYROCK BUSINESS CREDIT ("GBC"), at 10880 Wilshire Blvd. Suite
950, Los Angeles, CA 90024, or at such other address as the holder of this Note
shall direct, the principal sum of $1,500,000, payable on the earlier of the
following dates (the "Maturity Date"): (i) APRIL 30, 1998, or (ii) the date the
Loan and Security Agreement between the Borrower and GBC dated OCTOBER 15, 1996
(the "Loan Agreement") terminates by its terms or is terminated by either party
in accordance with its terms, or (iii) the date the Borrower first issues
equity, debt or other securities after the date hereof*, or sells any of its
assets outside the ordinary course of business (which sale shall require the
consent of GBC as provided in the Loan Agreement).
*(EXCEPT TO THE EXTENT SUCH ISSUANCE CONSISTS OF THE ISSUANCE OF SERIES
F PREFERRED STOCK ON OR BEFORE AUGUST 31, 1997, FOR NET PROCEEDS TO THE BORROWER
NOT TO EXCEED $3,500,000)
On the Maturity Date the entire remaining unpaid principal balance of
this Note, plus any and all accrued and unpaid interest, shall be due and
payable.
This Note shall bear interest on the unpaid principal balance hereof
from time to time outstanding at a rate equal to the following: The interest
rate in effect throughout each calendar month during the term of this Note shall
be the highest "LIBOR Rate" in effect during such month, plus 4.875% per annum,
provided that the interest rate in effect in each month shall not be less than
8% per annum. Interest shall be calculated on the basis of a 360-day year for
the actual number of days elapsed. "LIBOR Rate" has the meaning set forth in the
Loan Agreement.
Accrued interest on this Note shall be payable monthly, in addition to
the principal payments provided above, commencing on APRIL 30, 1997, and
continuing on the last day of each succeeding month. Any accrued interest not
paid when due shall bear interest at the same rate as the principal hereunder.
Principal of and interest on this Note shall be payable in lawful money
of the United States of America. If a payment hereunder becomes due and payable
on a Saturday, Sunday or legal holiday, the due date thereof shall be extended
to the next succeeding business day, and interest shall be payable thereon
during such extension.
In the event any payment of principal or interest on this Note is not
paid in full when due, or if any other default or event of default occurs
hereunder, under the Loan Agreement or
<PAGE> 23
GREYROCK BUSINESS CREDIT SECURITY PROMISSORY NOTE
under any other present or future instrument, document, or agreement between the
Borrower and GBC (collectively, "Events of Default"), GBC may, at its option, at
any time thereafter, declare the entire unpaid principal balance of this Note
plus all accrued interest to be immediately due and payable, without notice or
demand. Without limiting the foregoing, and without limiting GBC's other rights
and remedies, in the event any installment of principal or interest is not paid
in full on, or within five days after, the date due, the Borrower agrees that it
would be impracticable or extremely difficult to fix the actual damages
resulting therefrom to GBC, and therefore the Borrower agrees immediately to pay
to GBC an amount equal to 5% of the installment (or portion thereof) not paid,
as liquidated damages, to compensate GBC for the internal administrative
expenses in administering the default. The acceptance of any installment of
principal or interest by GBC after the time when it becomes due, as herein
specified, shall not be held to establish a custom, or to waive any rights of
GBC to enforce payment when due of any further installments or any other rights,
nor shall any failure or delay to exercise any rights be held to waive the same.
Without limiting GBC's other rights and remedies, upon an occurrence of an Event
of Default, the interest rate hereunder shall increase by an additional 5% per
annum until such Event of Default has been cured.
All payments hereunder are to be applied first to costs and fees
referred to hereunder, second to the payment of accrued interest and the
remaining balance to the payment of principal. Any principal prepayment
hereunder shall be applied against principal payments in the inverse order of
maturity. GBC shall have the continuing and exclusive right to apply or reverse
and reapply any and all payments hereunder.
The Borrower agrees to pay all costs and expenses (including without
limitation attorney's fees) incurred by GBC in connection with or related to
this Note, or its enforcement, whether or not suit be brought. The Borrower
hereby waives presentment, demand for payment, notice of dishonor, notice of
nonpayment, protest, notice of protest, and any and all other notices and
demands in connection with the delivery, acceptance, performance, default, or
enforcement of this Note, and the Borrower hereby waives the benefits of any
statute of limitations with respect to any action to enforce, or otherwise
related to, this Note.
This Note is secured by the Loan Agreement and all other present and
future security agreements between the Borrower and GBC. Nothing herein shall be
deemed to limit any of the terms or provisions of the Loan Agreement or any
other present or future document, instrument or agreement, between the Borrower
and GBC, and all of GBC's rights and remedies hereunder and thereunder are
cumulative.
In the event any one or more of the provisions of this Note shall for
any reason be held to be invalid, illegal or unenforceable, the same shall not
affect any other provision of this Note and the remaining provisions of this
Note shall remain in full force and effect.
No waiver or modification of any of the terms or provisions of this
Note shall be valid or binding unless set forth in a writing signed by a duly
authorized officer of GBC, and then
<PAGE> 24
GREYROCK BUSINESS CREDIT SECURITY PROMISSORY NOTE
only to the extent therein specifically set forth. If more than one person
executes this Note, their obligations hereunder shall be joint and several.
GBC AND BORROWER EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS NOTE;
OR (II) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN GBC AND
BORROWER; OR (III) ANY CONDUCT, ACTS OR OMISSIONS OF GBC OR BORROWER OR ANY OF
THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH GBC OR BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
This Note is payable in, and shall be governed by the laws of, the
State of California.
INNOVA CORPORATION
By /s/ JEAN-FRANCOIS GRENON
---------------------------------
President
By /s/ JOHN HEMINGWAY
---------------------------------
Secretary
<PAGE> 25
LEVY, SMALL & LALLAS
TRANSMITTAL NOTE
Page
<PAGE> 1
Exhibit 23.2
REPORT ON SCHEDULE AND CONSENT OF INDEPENDENT AUDITOR
The Board of Directors
Innova Corporation
The audits referred to in our report dated April 30, 1997, except as to Note
17, which is as of June 17, 1997, included the related financial statement
schedule as of December 31, 1996, and for each of years in the two-year period
ended March 31, 1996 and or the nine months ended December 31, 1996, included
in the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Experts" and "Selected Financial Data" in the
prospectus.
/s/ KPMG Peat Marwick LLP
- -------------------------
Seattle, Washington
August 4, 1997
