<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
Commission file number 0-20462
CHATCOM, INC.
(Exact name of small business issuer as specified in its charter)
California 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Topanga Canyon Boulevard, Chatsworth, California 91311
(Address of principal executive offices)
818/709-1778
(Issuer's telephone number)
Check whether the issuer (1) filed reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of August 6, 1996, there were 8,290,690 shares of the issuer's common
stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
Exhibit Index on Page 10
Page 1 of 17
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CHATCOM, INC.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
BALANCE SHEETS (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
June 30, March 31,
ASSETS Notes 1996 1996
----- ---------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $2,045,891 $1,067,397
Restricted cash 500,000
Accounts receivable, net of allowances
of $161,510 (June 30, 1996) and
$262,228 (March 31, 1996) 1,598,195 1,968,267
Inventories 2 3,376,658 3,481,195
Prepaid expenses and other current
assets 184,834 201,431
---------- ----------
Total current assets 7,205,578 7,218,290
EQUIPMENT AND FIXTURES, Net 3 560,881 539,449
DEPOSITS 22,383 20,693
---------- ----------
TOTAL $7,788,842 $7,778,432
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,367,468 $1,842,942
Accrued expenses 812,398 907,668
Short term borrowings 4 938,461
Current portion of capital lease
obligations 33,142 29,525
---------- ----------
Total current liabilities 2,213,008 3,718,596
CAPITAL LEASE OBLIGATIONS
-less current portion 26,789 18,583
SHAREHOLDERS' EQUITY 5
Preferred stock, no par value;
authorized 1,000,000 shares;
Series B Preferred Stock, $20,000
stated value per share, authorized
1,000 shares, issued and outstanding
45 and 75 shares at June 30, and
March 31, 1996, respectively 776,400 1,294,000
Series C Preferred Stock, $20,000
stated value per share, authorized
1,000 shares, issued and outstanding
75 shares at June 30, 1996 1,325,000
Common stock, no par value; authorized
25,000,000 shares; issued and outstanding
8,200,716 and 7,536,629 shares at June 30,
and March 31, 1996, respectively 7,227,760 5,859,660
Additional paid-in capital 1,435,711 1,435,711
Accumulated deficit (5,215,826) (4,548,118)
----------- -----------
Total shareholders' equity 5,549,045 4,041,253
----------- -----------
TOTAL $ 7,788,842 $ 7,778,432
=========== ===========
</TABLE>
See accompanying notes to financial statements
Page 2 of 17
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CHATCOM, INC.
STATEMENTS OF OPERATIONS (unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1996 1996
---------- -----------
<S> <C> <C>
SALES $2,684,316 $ 4,483,656
COSTS OF GOODS SOLD 1,814,450 2,727,183
---------- -----------
GROSS PROFIT 869,866 1,756,473
OPERATING EXPENSES
Selling 741,569 979,919
General and administrative 506,951 387,671
Research and development 197,152 229,828
Severance expense 61,484
---------- -----------
Total operating expenses 1,507,156 1,597,418
(LOSS) INCOME FROM OPERATIONS (637,290) 159,055
INTEREST INCOME 15,872
INTEREST EXPENSE 8,663 33,145
---------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (630,081) 125,910
PROVISION FOR INCOME TAXES -0- 2,000
---------- -----------
NET (LOSS) INCOME $ (630,081) $ 123,910
========== ===========
(LOSS) EARNINGS PER SHARE: (Note 6)
Primary and fully diluted (loss)
earnings per share $ (0.08) $ 0.01
========== ===========
Weighted average number of common
shares and common share equivalent
(primary and fully diluted) 7,721,889 10,104,403
========== ===========
</TABLE>
See accompanying notes to financial statements
Page 3 of 17
<PAGE>
CHATCOM, INC.
STATEMENTS OF CASH FLOWS (unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1996 1995
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (630,081) $ 123,910
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 55,845 56,349
Provision for losses on accounts receivable 18,739 19,000
Changes in operating assets and
liabilities:
Restricted cash 500,000
Accounts receivable 351,333 192,674
Inventories 104,537 (850,706)
Prepaid expenses and other
current assets 16,597 34,129
Deposits (1,690)
Accounts payable (475,474) (227,270)
Accrued expenses (125,303) (292,291)
---------- -----------
Net cash used in operating
activities (185,497) (944,205)
CASH FLOWS FROM INVESTING ACTIVITIES-
Capital expenditures (55,689) (82,166)
---------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings under notes payable 712,089
Principal payments of notes payable (938,461) (1,075,000)
Principal payments on capital leases (9,765) (7,812)
Proceeds from sale of preferred stock 1,325,000
Payment of dividends on preferred stock (7,594)
Issuance of convertible subordinated debt
Exercise of stock options and warrants 850,500 900
---------- -----------
Net cash (used) provided by financing
activities 1,219,680 (369,823)
---------- -----------
NET (DECREASE) INCREASE IN
CASH 978,494 (1,369,194)
CASH, BEGINNING OF PERIOD 1,067,397 1,457,260
---------- -----------
CASH, END OF PERIOD $2,045,891 $ 61,066
========== ===========
</TABLE>
(Continued)
Page 4 of 17
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CHATCOM, INC.
STATEMENTS OF CASH FLOWS (unaudited) Continued
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended June 30, 1996, the Company accrued dividends
payable on preferred stock of $30,033.
During the three months ended June 30, 1996 and 1995, the Company paid
interest of $8,634 and $55,277, respectively, and taxes of $425 and $250,
respectively.
During the three months ended June 30, 1996 the Company entered into a
capital lease agreement for equipment with costs of $21,588.
(Concluded)
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
1. ACCOUNTING POLICIES
The unaudited financial statements presented herein have been prepared by
ChatCom, Inc. (the "Company") in accordance with the accounting policies
described in its 1996 audited financial statements and should be read in
conjunction with the notes thereto. In the opinion of management, all
adjustments which are necessary to present fairly the Company's financial
position for the interim periods presented (consisting only of normal
recurring adjustments), have been made. Certain prior year amounts have
been reclassified to conform with current year classifications.
The results of operations for the three month period ended June 30, 1996,
are not necessarily indicative of the results that may be expected for
the full fiscal year ending March 31, 1997.
2. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
June 30,
1996
----------
<S> <C>
Raw materials $1,140,743
Work in process 940,605
Finished goods 1,295,310
----------
$3,376,658
==========
</TABLE>
Page 5 of 17
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CHATCOM, INC.
3. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
June 30,
1996
----------
<S> <C>
Equipment $ 787,223
Software 103,930
Furniture and fixtures 179,617
Leasehold improvements 39,806
----------
1,110,576
Less: accumulated depreciation 549,695
----------
Equipment and Fixtures, net $ 560,881
==========
</TABLE>
4. NOTES PAYABLE
On May 26, 1995, the Company entered into a $3,500,000 working capital
line-of-credit agreement with a commercial finance corporation that bore
interest at the prime rate (8.25% at March 31, 1996) plus 1.75%. The line-
of-credit facility was collateralized by substantially all of the assets
of the Company. The proceeds from the funding of this facility were used
to repay the amounts owed to a bank under a line-of-credit agreement which
had expired. On May 2, 1996, the Company repaid all amounts then
outstanding and all accrued interest owed under the line-of-credit
agreement and the agreement was terminated.
5. STOCK OPTIONS AND WARRANTS
During the fiscal quarter ended June 30, 1996, the Company granted
options to purchase 250,000 shares of common stock to key employees
pursuant to the Company's 1994 Stock Option Plan. The options vest over a
period of three years and are exercisable at the closing price of the
common stock on the date of grant.
6. (LOSS) EARNINGS PER SHARE
The computation of (loss) earnings per share is detailed as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1996 1995
---------- ---------
<S> <C> <C>
Net (loss) income used to
compute primary and fully
diluted (loss) earnings
per share:
Net (loss) income $ (630,081) $ 123,910
Adjustments of net income:
Interest reduction due to retirement of
debt with proceeds from assumed exercise
of options and warrants (net of taxes) 20,292
Estimated interest income on excess proceeds from
assumed exercise of options and warrants 6,344
(net of taxes) ----------- ---------
</TABLE>
Page 6 of 17
<PAGE>
CHATCOM, INC.
Net (loss) income used to
compute primary and fully
diluted (loss) earnings
per share: $ (630,081) $ 150,546
---------- ---------
Number of shares used to
compute primary and fully
diluted (loss) earnings per share:
Weighted average number of common
shares outstanding 7,721,889 7,536,629
Dilutive effect of options
and warrants 2,567,774
---------- ----------
Number of shares used to compute
primary and fully diluted (loss)
earnings per share 7,721,889 10,104,403
========== ==========
7. RELATED PARTIES
One of the officers of the Company is also a shareholder of a law
firm that provides legal consultation to the Company. At June 30, 1996 and 1995,
the Company owed this law firm $6,588 and $14,245, respectively. During the
three months ended June 30, 1996 and 1995, fees relating to services provided by
this law firm in the amounts of $19,476 and $54,836, respectively, were included
in operating expenses.
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Page 7 of 17
<PAGE>
CHATCOM, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations for the Three Months Ended June 30, 1996 Compared to the
Three Months Ended June 30, 1995.
The Company's sales revenue decreased $1,800,000, or 40% from
$4,484,000 to $2,684,000 primarily due to a decrease in unit sales. The Company
believes that the decrease in revenues is attributable, at least in part, to
decreased sales and marketing efforts during the quarters ended December 31,
1995 and March 31, 1996. The sales and marketing efforts were limited during
those periods due to liquidity constraints that have subsequently been
alleviated. Although the Company anticipates increased sales and marketing
efforts during the quarter ending September 30, 1996, the Company expects the
prior marketing hiatus to continue to have some adverse impact on revenues until
around August 1996 due to the protracted sales cycle of the Company's products.
The Company's ability to thereafter increase revenues will be dependent upon a
number of factors, including but not limited to the market's acceptance of the
Company's future products, the ability of the Company to penetrate new markets
and the strength of the Company's competition.
The costs of goods sold decreased $912,000, or 33%, from $2,727,000 to
$1,815,000. The decrease was primarily due to the reduction in material costs
related to the decrease in revenues. The decrease in cost of goods sold was of
a lesser percentage than the decrease in unit sales volume due to an increase
in inventory obsolescence reserve of $90,000 during the fiscal quarter ended
June 30, 1996 and manufacturing labor and overhead costs that remained
substantially constant.
Selling expenses decreased $238,000, or 24%, from $980,000 to $742,000.
This reduction was the result of a $48,000 decrease in salary and related costs
due to consolidation of sales territories and certain positions that were vacant
during the quarter ended June 30, 1996, a $28,000 decrease in sales commission
expense due to lower sales volumes and a $164,000 decrease in advertising costs.
General and administrative expense increased $119,000, or 31%, from
$388,000 to $507,000. Approximately $60,000 of the increase related to the
restructuring of the management of the Company, whereby two vice presidents were
transfered from operational cost centers to the administrative cost center.
An increase of $24,000 relates to premiums on an officers' and directors'
liability policy which was initiated in July 1995, and an increase of $12,000
was attributable to an increase in director's fees.
Research and development expense decreased $33,000, or 14%, primarily
due to the transfer of the Senior Vice President of Technology to the
administrative cost center.
In June 1996, the Company recorded severance expense of $61,000
related to the implementation of a plan that was completed in July 1996 to
reduce the workforce by approximately 20% in connection with a restructuring of
the manufacturing operation to allow for an increase in outsourced manufacturing
and an overall streamlining of the management structure. The workforce reduction
was part of the Company's continuing efforts to reduce operating expenses and
involved eliminating 13 positions and terminating the employees who were then
occupying those positions. The annual cost to the Company related to those
employees was estimated at $480,000. The Company believes that the staffing
level subsequent to the planned workforce reduction should result in a
measurable decrease in overall personnel costs and should support any potential
increase in revenues of up to approximately 25% from those generated in fiscal
year 1996. Although the Company may, from time to time, determine that the
elimination of a certain position or positions is in the Company's best
interests, the Company does not anticipate that a workforce reduction of a
similar magnitude to the one that was recently effected will be warranted in the
foreseeable future.
Interest expense decreased $24,000, or 73%, from $33,000 to $9,000. The
decrease was caused by a retirement of the line-of-credit financing agreement
during the quarter ended June 30, 1996.
Page 8 of 17
<PAGE>
CHATCOM, INC.
Financial Condition and Changes in Financial Condition during the Three Months
Ended June 30, 1996
The Company recorded a net loss of approximately $630,000 for the
three months ended June 30, 1996. Cash increased $978,000 primarily due to
proceeds from the sale of preferred stock of $1,325,000 and proceeds from the
exercise of stock options and warrants of approximately $850,000. These
increases in cash were partially offset by cash used by operations in the amount
of $185,000 and repayment of short term borrowings of $938,000. Working capital
increased approximately $1,493,000 also due to the proceeds from the sale of
preferred stock and the exercise of stock options and warrants.
Accounts receivable decreased $370,000, or 19%, from $1,968,000 to
$1,598,000. The decrease was primarily attributable to revenues for the month of
June 1996 being approximately 10% lower than those for March 1996 and the
collection of certain older receivable amounts during the quarter ended June
30, 1996.
Inventories decreased $104,000, or 3%, from $3,481,000 to $3,377,000. The
decrease was primarily the result of "turn-key" purchasing of subassemblies,
which has been implemented by the Company on certain of its products. The
Company has traditionally purchased the individual components required to
manufacture an electronic assembly, sent the components to a subcontractor to
be soldered onto the circuit board, and performed final assembly and test upon
its return from the subcontractor. The Company has begun to institute "turn-key"
purchasing for some of its products, whereby the subassembly is purchased
already soldered and ready for final assembly and testing. The Company intends
to implement "turn-key" purchasing for all assemblies that meet volume
thresholds required by the vendor in order to significantly reduce the
requirement to stock individual components.
Prepaid expenses decreased $16,000, or 8%, from $201,000 to $185,000. The
decrease was primarily the result of normal amortization of prepaid expenses.
Equipment and fixtures increased $22,000, or 4%, due to the acquisition of
equipment with cost of $77,000, which was partially offset by depreciation of
$56,000. The purchased equipment primarily consisted of office equipment and
workstations.
Accounts payable decreased $476,000, or 26%, from $1,843,000 to
$1,367,000, due to a shortening of the payables cycle that the Company was able
to effectuate with the proceeds from the sale of preferred stock and the
exercise of options and warrants during the fiscal quarters ended March 31, 1996
and June 30, 1996.
Accrued expenses decreased $96,000, or 11%, from $908,000 to $812,000. The
decrease was primarily due to the payment of a lawsuit settlement and a portion
of the accrued severance pay to two former officers.
Short term borrowings decreased by $938,000 due to the repayment and
termination of the line-of-credit financing agreement with Deutsche Financial
Services.
Capital lease obligations increased approximately $12,000, or 20%, from
$48,000 to $60,000. The increase was the result of the addition of an office
equipment lease in the amount of $22,000, which was mitigated by approximately
$10,000 of principal payments on capital leases in accordance with the terms of
the lease agreements.
The accumulated deficit increased by approximately $668,000 due to the net
loss of $630,000 recorded for the three months ended June 30, 1996 and the
accrual of approximately $38,000 of dividends on preferred stock.
Page 9 of 17
<PAGE>
CHATCOM, INC.
Liquidity
- ---------
As of June 30, 1996, the Company had working capital of $4,992,570. The
Company currently relies on liquid assets to fund operations. In July 1996, the
Company reduced its workforce in connection with a restructuring to allow for
greater conservation of liquid resources and the outsourcing of a greater
portion of the manufacturing activities. The Company believes that the
outsourcing of manufacturing will allow the Company to respond more rapidly to
changes in sales volume, reduce the amount of inventory on hand and realize cost
savings by utilizing the purchasing power of the Company's subcontractors for
component purchases.
The Company believes that, after giving effect to the recent reduction in
the Company's workforce, the capital resources that it currently possesses
should be sufficient to sustain operations at current levels through the end of
the fiscal year even without a significant increase in revenues during the
balance of the fiscal year. Additional capital resources might be obtained
through the calling or the voluntary exercise of warrants that were issued in
conjunction with the Company's 1995 private placement. The exercise of these
warrants could yield proceeds of up to $4,819,500. The Company may call these
warrants for redemption at $3.00 per warrant if the market value of the
Company's common stock has been greater than $3.60 per share for ten consecutive
trading days. As of the date of this report, the conditions necessary for the
Company to call the warrants have not been satisfied. The Company may also seek
additional public or private financing to meet its capital needs if market
conditions permit.
The Company has incurred operating losses in each of its last three fiscal
years. Should the Company continue to experience operating losses in the future
which result in a significant utilization of liquid resources, the Company's
liquidity and its ability to sustain operations at current levels could be
materially, adversely affected. Should the Company experience significant growth
in revenues that requires the utilization of significant liquid resources for
the financing of increased accounts receivable and inventory balances, the
Company may seek a new line-of-credit financing agreement to assist in meeting
such cash requirements. The Company does not currently have a commitment from
any third party to provide short-term financing.
The Company had no material commitments for capital expenditures as of
June 30, 1996.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters
discussed in this quarterly report are forward-looking statements which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products and prices, and other factors discussed in the Company's
various filings with the Securities and Exchange Commission, including without
limitation the Registration Statement on Form S-3 (Registration No. 333-3792),
which was declared effective by the Securities and Exchange Commission on
June 7, 1996.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits. The following exhibits are filed with this Form 10-QSB or are
incorporated by reference to the document described:
10.1 Form of Stock Purchase Agreement for Series C Preferred Stock,
entered into by the Company and Legong Investments N.V. and David
Freund, is incorporated by reference to Exhibit 10.14 to the
Company's annual report on
Page 10 of 17
<PAGE>
CHATCOM, INC.
Form-KSB for the fiscal year ended March 31, 1996, filed with the
Commission on July 1, 1996.
10.2 Form of Stock Purchase Warrant Agreement, entered into by the
Company and Maximum Partners, Ltd.
27 Financial Data Schedule
b. Reports on Form 8-K.
A current report on Form 8-K was filed on May 28, 1996, under Item 5,
to disclose the Company's completion of private placements of
preferred stock, the repayment of amounts owed under a line-of-credit
financing agreement and the expected loss for the fiscal quarter
ended March 31, 1996.
A current report on Form 8-K was filed on June 14, 1996, under Item
5, to disclose that the registration statement on Form S-3 that was
filed by the Company to register the common stock that is issuable
upon the conversion or redemption of the preferred stock and any
unpaid dividends thereon that may be paid in common stock had been
declared effective by the Securities and Exchange Commission on June
7, 1996.
No other information is required to be filed under Part II of this Form 10-QSB.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHATCOM, INC.,
a California corporation
Date: August 12, 1996 By: /s/ James B. Mariner
---------------------------
James B. Mariner, President
and Chief Executive Officer
By: /s/ John R. Grady
----------------------------
John R. Grady,
Chief Financial Officer
Page 11 of 17
<PAGE>
Exhibit 10.2
CHATCOM, INC.
Void after 5:00 p.m. Pacific Standard Time, on May 31, 2000
Warrant to Purchase Thirty Thousand (30,000) Shares of Common Stock
WARRANT TO PURCHASE COMMON STOCK
OF
CHATCOM, INC.
a California corporation
This is to certify that, for value received, Maximum Partners, Ltd.
("Holder"), is entitled to purchase, subject to the provisions of this Warrant,
from ChatCom, Inc., a California corporation ("Company"), thirty thousand
(30,000) fully paid, validly issued and nonassessable shares of common stock, no
par value, of the Company ("Common Stock"), at a price of $3.00 per share at any
time or from time to time during the period from June 1, 1996, to May 31, 2000.
The number of shares of Common Stock to be received upon the exercise of
this Warrant and the price to be paid for each share of Common Stock may be
adjusted from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Shares" and the exercise price of
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "Exercise Price."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time from time to time on or after June 1, 1996, and until May 31, 2000;
provided however, that if either such day is a day on which banking institutions
in the State of California are authorized by law to close, then on the next
succeeding day which shall not be such a day. This Warrant may be exercised by
presentation and surrender hereof to the Company at its principal office, with
the Purchase Form annexed hereto duly executed, with signature guaranteed, and
accompanied by payment of the Exercise Price for the number of Warrant Shares
specified in such form. As soon as practicable after each exercise of the
Warrants, but not later than twenty (20) days from the date of such exercise,
the Company shall issue and deliver to the Holder a certificate or certificates
for the Warrant Shares issuable upon such exercise, registered in the name of
the Holder or its designee.
If this Warrant should be exercised in part only, the Company shall, upon
surrender of this Warrant for cancellation, execute and deliver a new Warrant
evidencing the rights of the Holder hereof to purchase the balance of the
Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant at its office, in proper form for exercise, the Holder shall be deemed
to be the holder of record of the shares of Common Stock issuable upon such
exercise, notwithstanding that the stock transfer books of the
Page 12 of 17
<PAGE>
CHATCOM, INC.
Company shall then be closed or that certificates representing such shares of
Common Stock shall not then by physically delivered to the Holder.
2. Reservation of Shares. The Company shall at all time reserve for
---------------------
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrants.
3. Fractional Shares. No fractional shares or script representing
-----------------
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of a share, determined as follows:
3.1. If the Common Stock is listed on a National Securities Exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on the NASDAQ system, the current market value shall be the last reported sale
price of the Common Stock on such exchange or system on the last business day
prior to the date of exercise of the Warrant or if no such sale is made on such
day, the average closing bid and asked prices for such day on such exchange or
system; or
3.2. If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau, Inc.,
on the last business day prior to the date of the exercise of this Warrant; or
3.3. If the Common Stock is not so listed or admitted to unlisted
trading privileges and did and asked prices are not so reported, the current
market value shall be an amount, not less than book value thereof as at the end
of the most recent fiscal year of the Company ending prior to the date of the
exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
4. Loss of Warrant. Upon receipt by the Company of evidence satisfactory to
---------------
it of the loss, theft, destruction or mutilation of this Warrant, and (in the
case of loss, theft or destruction) of reasonably satisfactory indemnification,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
6. Anti-Dilution Provisions. The Exercise Price in effect at any time and
------------------------
the number and kind of securities purchasable upon the exercise of the Warrants
shall be subject to adjustment from time to time upon the happening of certain
events, as follow:
Page 13 of 17
<PAGE>
CHATCOM, INC.
6.1. In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock; (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares; or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the Holder of this Warrant exercised after such
date shall be entitled to receive the aggregate number and kind of shares which,
if this Warrant had been exercised by such Holder immediately prior to such
date, he would have owned upon such exercise and been entitled to receive upon
such dividend, subdivision, combination or reclassification.
6.2. In case the Company shall hereafter distribute to the holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and dividends or distributions referred to in
Subsection 6.1 above) or subscription rights or warrants, then in each such case
the Exercise Price in effect thereafter shall be determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock (as defined in
Subsection 6.7 below), less the fair market value (as determined by the
Company's Board of Directors) of said assets or evidences of indebtedness so
distributed or of such rights or warrants, and the denominator or which shall be
the total number of shares of Common Stock outstanding multiplied by such
current market price per share of Common Stock. Such adjustment shall be made
whenever any such distribution is made and shall become effective immediately
after the record date for the determination of shareholders entitled to receive
such distribution.
6.3. In case the Company shall issue shares of its Common Stock
[excluding (i) shares issued in any of the transactions described in Subsection
6.1 above; (ii) shares issued upon exercise of options granted to the Company's
Officers, Directors or employes, if such shares would otherwise be included in
this Subsection 6.3; (iii) shares issued upon exercise of any options and
warrants outstanding on the date this Warrant is issued; (iv) shares issued to
shareholders of any corporation which merges into the Company in proportion
to their stock holdings of such corporation immediately prior to such merger,
upon such merger; and (v) issued in a bona fide public offering pursuant to a
firm commitment underwriting, but only if no adjustment is required pursuant to
any other specific subsection of this Section 6 with respect to the transaction
giving rise to such rights] for a consideration per share less than the current
market price per share [as defined in Section 6.7 below] on the date the Company
fixes the offering price of such additional shares, the Exercise Price shall be
adjusted immediately thereafter so that it shall equal the price determined by
multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares and the number of shares of Common Stock which the aggregate
consideration received
Page 14 of 17
<PAGE>
CHATCOM, INC.
[determined as provided in Section 6.6 below] for the issuance of such
additional shares would purchase at such current market price per share of
Common Stock, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately after the issuance of such additional
shares.
6.4 In case the Company shall issue any securities convertible into or
exchangeable for its Common Stock [excluding securities issued in transactions
described in Subsection 6.2 above] for a consideration per share of Common Stock
initially deliverable upon conversion or exchange of such securities [determined
as provided in Subsection 6.6 below] less than the current market price per
share [as defined in Subsection 6.7 below] in effect immediately prior to the
issuance of such securities, the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding immediately prior to the issuance of such securities and the number
of shares of Common Stock which the aggregate consideration received [determined
as provided in Section 6.6 below] for such securities would purchase at such
current market price per share of Common Stock, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
prior to such issuance and the maximum number of shares of Common Stock of the
Company deliverable upon conversion of or in exchange for such securities at the
initial conversion or exchange price or rate.
6.5 Whenever the Exercise Price payable upon exercise of each Warrant is
adjusted pursuant to Subsections 6.1, 6.2, 6.3 and 6.4 above, the number of
shares purchasable upon exercise of this Warrant shall simultaneously be
adjusted by multiplying the number of shares initially issuable upon exercise of
this Warrant by the Exercise Price in effect on the date hereof and dividing the
product so obtained by the Exercise Price, as adjusted.
6.6 For purposes of any computation respecting consideration received
pursuant to Subsections 6.3 and 6.4 above, the following shall apply:
(a) in the case of the issuance of shares of Common Stock for cash,
the consideration shall be the amount of such cash; provided that in no case
shall any deduction be made for any commissions, discounts or other expenses
incurred by the Company for any underwriting of the issue or otherwise in
connection therewith; and
(b) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair market value thereof as determined in good
faith by the Board of Directors of the Company (irrespective of the accounting
treatment thereof), whose determination shall be conclusive.
Page 15 of 17
<PAGE>
CHATCOM, INC.
6.7 For the purposes of any computation under Subsections 6.2, 6.3 and
6.4 above, the current market price per share of Common Stock at any date shall
be deemed to be the average of the daily closing prices for ten (10) consecutive
business days before such date. The closing price for each day shall be the last
sale price regular way or, in case no such reported sale takes place on such
day, the average of the last reported bid and asked prices regular way, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lower reported
asked prices as reported by NASDAQ, or other similar organization, if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Board of Directors.
6.8 No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($0.05)
in such price. All calculations under this Section 6 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
7. Reclassification, Reorganization or Merger. In case of any
------------------------------------------
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation, or in case of any sale, lease or
conveyance to another corporation of the property of the Company as an entirety,
the Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter by
exercising this Warrant at anytime prior to the expiration of the Warrant, to
purchase the kind and amount of shares of stock and other securities and
property receivable upon such reclassification, capital reorganization and other
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased upon the exercise of this
Warrant, immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance.
Page 16 of 17
<PAGE>
CHATCOM, INC.
Dated: May 31, 1996 CHATCOM, INC.,
a California corporation
By:
-------------------------------
James B. Mariner, President and
Chief Executive Officer
Page 17 of 17
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<PERIOD-START> APR-01-1996
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0
2,101,400
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