<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
Commission file number 0-20462
CHATCOM, INC.
(Name of Small Business Issuer 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)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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______
-------
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year: $14,790,335.
Page 1 of 71
Exhibit Index on Page 21
<PAGE>
As of June 17, 1996, the aggregate market value of the voting stock held by
non-affiliates of the Registrant computed by reference to The Nasdaq Stock
Markets' closing price on June 17, 1996, was approximately $17,121,000.
The number of shares outstanding of the Registrant's only class of common
stock, as of June 17, 1996, was 8,133,583.
Documents incorporated by reference:
1. Notice of 1996 Annual Meeting and Proxy Statement (Part III of Form
10-KSB).
Page 2 of 71
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INDEX TO FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I
------
Item 1: Description of Business........................ 4
Item 2: Description of Property........................ 12
Item 3: Legal Proceedings.............................. 12
Item 4: Submission of Matters to a Vote of Security
Holders........................................ 12
Part II
-------
Item 5: Market for Common Equity and Related
Shareholder Matters............................ 14
Item 6: Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 15
Item 7: Financial Statements........................... 20
Item 8: Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure........................... 20
Part III
--------
Item 9: Directors, Executive Officers,
Promoters, and Control Persons;
Compliance with Section 16(a)
of the Exchange Act............................ 21
Item 10: Executive Compensation......................... 21
Item 11: Security Ownership of Certain
Beneficial Owners and Management............... 21
Item 12: Certain Relationships and Related
Transactions................................... 21
Item 13: Exhibits, List, and Reports on
Form 8-K....................................... 21
</TABLE>
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ChatCom, Inc. (the "Company") was incorporated under the laws of the State
of California in March 1982. The Company originally was named "Astro Systems and
Engineering, Inc." and changed to "Astro Sciences Corporation" in 1985. On
February 9, 1996, the Company changed its name to "ChatCom, Inc."
Originally an engineering and technical consulting services company, the
Company acquired the assets of J&L Information Systems, Inc., a California
corporation ("J&L") in 1988. From 1982 (prior to J&L's incorporation) through
late 1985, J&L's primary activity consisted of the manufacturing and marketing
of remote access products for TeleVideo Systems, Inc.'s multi-user systems. As
the use of personal computer-based local area networks ("LANs") increased in
1986, J&L expanded its line of remote user access products to include Novell
networks and networks of other emerging vendors. At the same time, J&L evolved
into a publisher of asynchronous communications software for LANs.
After the acquisition of J&L, the Company terminated its services business
and concentrated completely on the J&L product business. This is currently the
Company's only business activity.
The Company's primary product line is the ChatterBox(TM) family of server
consolidation and clustering systems, which support all the major network
operating systems including Microsoft's Windows NT, Novell's NetWare, IBM's
OS/2, etc..
The Company also offers a software product known as Network Communications
Server(TM), whose acronym is 'NCS/AX'. This product is used mainly by banks,
insurance companies, law offices and government agencies.
The Company currently employs approximately 74 people.
Description of Products
- -----------------------
ChatterBox: The current family includes two Series of multi-server systems
----------
evolved from earlier ChatterBox products. These systems are designed to meet the
majority of network server needs:
. CORPORATE SERIES 2000, for medium to large scale network applications.
. OFFICE SERIES 200, to satisfy the needs of the smaller department/branch
office.
Together, these two Series offer five ChatterBox models that utilize common
server modules - making the whole family both functionally compatible and fully
scaleable. Significant advantages of the product family over its competitors
include:
. Space Efficiency - high processor density in compact enclosures. At the
top end, systems can be configured with as many as 112 Intel Pentium(R)
processors in a single 19" rack enclosure.
. Power efficiency - servers are powered by shared 'N+1' redundant power
supplies.
. Low mean-time-to-repair (MTTR) - all server modules and power modules
are hot-swappable.
Page 4 of 71
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. High level of manageability - ChatCom's proprietary Intelli-
Management(TM) system provides monitoring and control over all
subsystems, and works in conjunction with ChatCom's ChatView(TM)
software. ChatView provides a user-friendly interface for local
management of a ChatterBox system, as well as a communications interface
for standards-based remote management (using SNMP).
The open architecture of ChatterBox server subsystems supports the latest
in Pentium processor technology. Processor speeds up to 200 MHz and memory sizes
up to 256 MB are available, making these subsystems comparable to the most
advanced stand-alone servers on the market today. Furthermore, a user's
investment is protected because ChatterBox server modules are designed to be
upgradeable as new technology emerges.
ChatterBox servers support diverse applications, including Internet and Web
server functions, e-mail and fax services, remote access (both 'remote control'
and 'remote node'), database systems from Lotus Notes to Oracle environments,
file server functions, multi-protocol routing including Internet access, gateway
functions to IBM's SNA and SAA networks, and many more.
Other system options include a RAID level 7 disk subsystem offering up to
215GB of highly-reliable storage, an Uninterruptible Power Supply (UPS), and the
latest in software-based server clustering. All in all, ChatterBox systems are
designed to support mission-critical applications, in which system failure or
any unrecoverable loss of data are considered unacceptable.
ChatterBox Office Series configurations range in price from about $5,000 up
to about $35,000, while ChatterBox Corporate Series configurations range from
$7,500 to more than $300,000.
Network Communications Server (NCS/AX): The NCS/AX is a combined
--------------------------------------
Asynchronous and X.25 Communications Server. It consists of ChatCom's
proprietary software residing in a user's host workstation. In some instances a
plug-in multi-port serial card is included. This serial card permits up to sixty
four (64) simultaneous calls through a single host computer. NCS/AX permits LAN
users to share modems. NCS/AX can also support up to 128 simultaneous X.25
communications when used with an optional X.25 card.
NCS/AX is designed to handle a single outgoing call on each of its serial
ports. NCS/AX is available in 4, 8, and 16 port versions. Although the NCS/AX
primarily handles outgoing calls to other LANs, database services such as LEXIS,
and other systems, it can also be used to handle incoming calls.
Revenue Contributed by Classes of Products: While ChatterBox is a
------------------------------------------
combination of hardware and software, it is essentially a hardware product.
NCS/AX, on the other hand, is a software product with an add-in hardware card.
The following tabular presentation states for each of the last three fiscal
years the amount or percentage of the Company's total revenue contributed by
ChatterBox products and by NCS/AX products:
Page 5 of 71
<PAGE>
<TABLE>
<CAPTION>
Percentage of Total Percentage of Total
Fiscal Year Revenue Contributed by Revenue Contributed
Ending March 31 ChatterBox(TM)Products by NCS/AX Products
--------------- ---------------------- ------------------
<S> <C> <C>
1994 96% 4%
1995 98% 2%
1996 96% 4%
</TABLE>
Sources and Availability of Raw Materials: The "raw materials" that the
-----------------------------------------
Company purchases to build its products include computer chips, power supplies,
printed circuit boards, chassis, resistors, capacitors, and various electronic
components. The sources for these raw materials are electronics distributors,
including Arrow Electronics, Bell Industries, Hamilton/Avnet, and Intel. The
availability of these raw materials is plentiful.
The Company carries approximately 40% of its gross yearly sales in
inventory at any one time. The Company is required to carry significant amounts
of inventory to meet the rapid delivery requirements of its customers. In
certain cases, inventories held by the Company are subject to obsolescence and
the Company reports inventories net of a reserve for obsolescence.
Markets and Marketing
- ---------------------
The Networking Market: Products that serve as the building blocks for
---------------------
data/voice networks have traditionally fallen into two categories - those that
utilize the same underlying technology as standard desktop personal computers
(PCs), and those that require specialized hardware and software. Included in
the former group are Internet/Intranet servers, fileservers, database servers,
and e-mail gateways, while the latter group includes products such as routers,
bridges, remote access systems, and telephone switching systems. The reason for
this differentiation was that PC technology was just not sufficiently powerful
to support the high throughput requirements of the latter group.
Companies such as Compaq, HP, IBM, Sun, Dell and others have been the
traditional leaders in providing hardware for the server market, whereas
companies such as Cisco, 3Com, Bay Networks, and Ascend have grown to billion-
dollar corporations with products that address 'specialized' networking
functions.
The Marketing Approach: Today, with the extraordinary power of
----------------------
technologies utilizing Intel's Pentium processors and DEC's Alpha processors,
virtually all networking functions can be performed on PC-based hardware. Since
ChatterBox integrates multiple server modules that are based on such PC-based
technology into compact, power efficient, highly reliable and highly manageable
systems, it is well-positioned to become an ideal platform for network server
consolidation. The advantages of having a common, low-cost 'engine' for all
networking applications are only now becoming apparent, and ChatCom is poised to
make significant inroads into this emerging market.
The Company will continue to pursue its objective of providing the most
powerful, reliable and feature-rich products in the market. Whilst not the
lowest priced products of their kind, the Company believes that ChatterBox
systems will nonetheless rank among the best price/performance available, when
the ChatterBox's numerous value-added capabilities are considered.
Page 6 of 71
<PAGE>
The Marketing Organization: The Company recently added two senior
--------------------------
marketing personnel in the positions of Marketing Director and Director of
Marketing Communications. Their responsibilities encompass developing the
Corporate image and the product promotional strategies, as well as managing the
implementation of these strategies in the form of trade shows, advertising,
press releases, application stories, meeting industry analysts, etc.. The
Marketing group is also responsible for establishing and implementing policy
regarding the channels through which the Company's products are sold, and
interfacing with the product development teams during various stages of product
planning and development.
Trade Shows and Advertising: The Company plans to exhibit at the following
---------------------------
national trade shows during fiscal year 1997:
. NetWorld+InterOp, Las Vegas - April
. PC Expo, New York - June
. NetWorld+InterOp, Atlanta - September
. Comnet, Washington D.C. - January
These shows offer the opportunity for broad exposure of the Company's
products to both end-users and resellers, and are among the best-attended among
the numerous shows that now serve the networking industry. At these four large
shows, the Company will present its updated ChatterBox product line, in booths
of at least 20' x 20' in size. In addition, the Company will maintain some
presence at certain regional trade shows which address focused aspects of the
industry, such as those put on by Novell and Microsoft user groups.
In June, the Company launched a new advertising campaign, expanding its
demographic coverage to address Information Technology (IT) executives as well
as the LAN management personnel covered in previous campaigns. Studies and
negotiations were conducted to determine the most cost-effective manner of
reaching the target audiences, and four trade journals were selected to carry
the new advertising campaign initially, namely LAN Times, Network World,
InfoWorld and Government Computer News.
The Company also intends to continue to advertise in selected card decks,
due to the low cost and quality sales lead generation experienced in the past.
Public Relations: Both the new Marketing Directors are highly experienced
----------------
in maintaining an ongoing presence in the trade and business press. The Company
will strive to generate a steady stream of industry-pertinent press releases,
application stories, customer success stories and other public relations
activities, to assist in developing an industry awareness of ChatCom and the
ChatterBox family.
Sales Channel Development: The Company has traditionally sold its
-------------------------
products through value-added resellers (VARs), and will continue to do so for a
significant portion of its sales. However, the Company intends to continue to
evaluate its VAR network, attract larger and technically skilled VARs, and train
existing VARs to ensure high quality service and response to end-users. The
Company perceives its VAR channel as a family of partners, and as such expects
to work in close cooperation with them.
Product Management and Customer Service
- ---------------------------------------
This new department has recently been created to help the Company pursue
its stated objective of providing superior quality in both its products and
service. A VP position has been
Page 7 of 71
<PAGE>
created and filled to head-up the department.
Product Management: Under this new organizational structure, cross-
------------------
functional project teams are assigned to develop products and features according
to well-defined Marketing Requirements Documents (MRDs). Each project team will
be under the direction of a Product Manager, who will be responsible for
ensuring that the project is completed according to specification, on time and
within budget. All appropriate departments will be represented in each team,
during relevant phases of a project, to ensure that important steps in the
overall product development cycle are addressed in an appropriate manner and at
an appropriate time (e.g. training Customer Service and Sales personnel about
new products). This methodology will provide a more clear and measurable view to
management of the status of all active projects.
Customer Service: The Customer Service organization is responsible for
----------------
processing all incoming service calls, managing in-warranty and out-of-warranty
repair returns/shipments, and tracking all reported product problems. The
Company intends to build its Customer Service group into a premier organization,
capable of ensuring either immediate response to a call for service, or a return
call within two hours.
Sales and Distribution
- ----------------------
The Sales Organization: The Sales organization reports to the VP of
----------------------
Sales, and is currently divided into five 'regions' - Eastern, Mid-
Atlantic/South-Eastern, Central, Western and International. ChatCom has Sales
offices in New York (Eastern region), Maryland (Mid-Atlantic/South-Eastern),
Chicago and Houston (Central), and Chatsworth (Western), each staffed by a
single regional sales representative. The International sales representative is
based in Chatsworth. There are also four sales staff located at headquarters who
provide inside support for the four domestic regions. The primary sales channel
is through value-added resellers (VARs).
In March 1996, the Company entered into a master reseller agreement with
Anixter, Inc. ("Anixter") to provide the Company with a high-quality, national
reseller. Pursuant to the master reseller agreement, Anixter will stock certain
of the Company's products to provide immediate availability to its customers.
The master reseller agreement includes stock rotation and price protection
benefits to the reseller. The stock rotation provision allows Anixter to return
inventory once per quarter for full credit, of a value not to exceed 10% of the
previous quarter's purchases. The return of inventory pursuant to the stock
rotation provision must be accompanied by a replacement order equal to or
exceeding the value of the returned inventory. The price protection provision
is intended to insulate the reseller from price reductions. Pursuant to the
price protection provision, Anixter is entitled to receive a credit, at the time
a price reduction is announced by the Company, equal to the difference between
the price at which Anixter purchased the product and the price at which Anixter
is entitled to purchase the product considering the price reduction for all
inventory that Anixter had on hand at the time the price reduction was
announced. At March 31, 1996, no credits were due to Anixter as a result of the
stock rotation or price protection provisions.
The Company, under certain conditions, sells its products directly to end-
user customers. When this occurs, an attempt is made to involve a VAR in the
appropriate region to provide customer training and support.
Page 8 of 71
<PAGE>
Office of the President. The CEO has created two Senior VP staff positions
-----------------------
reporting directly to him - the Senior VP of Technology, and the Senior VP of
Business Development. The Office of the President was created to assemble the
necessary talent to increase direct sales to large end-users and other major
accounts, by focusing executive attention on large customers, and providing the
Company with high level sales personnel and the capacity to communicate the
needs of large customers to the product management teams.
Significant Customers. The Company received approximately 6%, 20% and 41%
---------------------
of its gross revenues from sales to GBC Technologies, Inc. ("GBC"), a former
distributor of the Company's products, in the fiscal years ended March 31, 1996,
1995 and 1994, respectively. The Company and GBC terminated their relationship
in February 1996 due primarily to a decreasing proportion of sales that were
consumated through the distributor. The distributor sold to a network of VARs
which in turn sold the Company's products to end-users.
Manufacturing
- -------------
The Company buys various electronic and mechanical components from vendors
and other manufacturers. Some are complete subassemblies, such as power supplies
or custom-built chassis, while others are individual items such as bare circuit
boards and chips. Rather than manufacture the actual electronic circuit boards
used in the products, the Company subcontracts the mounting and soldering of
these assemblies and then performs assembly, integration, and final testing.
Because no heavy manufacturing such as wave soldering of circuit boards or
sheet metal work is performed by the Company at its leased premises, the Company
would be able, if it became necessary, to quickly increase its production levels
with relatively little disruption to current operations. It is estimated that
the Company is capable of doubling its present output with the addition of more
assemblers and testers.
OEM Sales. The Company currently has agreements with original equipment
---------
manufacturers ("OEMs") to manufacture the Company's RAID subsystem products and
to provide Novell(R) software to be bundled in the Company's products. Other
than the foregoing the Company does not have any significant agreements with
OEMs.
Competition
- -----------
The Computer Industry. The Company's business is, as is all of the
---------------------
computer hardware and software industry, extremely competitive and rapidly
changing. Without continued refinement of existing products, and the development
of new products, the Company could easily lose any competitive advantage it may
possess. It is therefore essential that the Company devote substantial resources
to research and new product development.
Products that are competitive with ChatterBox fall into two main
categories:
. Racked-and-stacked' stand-alone servers
. Integrated, purpose-designed rack-mounted systems (similar to
ChatterBox)
The former group simply comprises many stand-alone servers (e.g. from
manufacturers such as Compaq, HP, IBM, Dell, etc.) placed on custom metal racks.
Metal rack systems are available from numerous companies such as Wright Line,
Ergotron, American Network Products,
Page 9 of 71
<PAGE>
NetCom3, Kewaunee and others. While this approach does allow a user to maintain
some degree of tidiness, it does not significantly save space, nor does it
reduce power or cabling requirements. Furthermore, it does nothing to
consolidate the manageability of the separate systems. Nonetheless, the Company
considers its major competition to be these 'racked-and-stacked' server systems.
Among the second group of competitors (purpose-designed systems), two
manufacturers have been traditionally considered the Company's key competition
- - Cubix and CommVision.
Cubix Corporation: A strong player in managed systems-level platforms for
-----------------
Communications and Application servers, Cubix manufactures a platform with
similar functionality as ChatCom's product line. Cubix has successfully marketed
its product line by consistently communicating its product strengths.
CommVision: A relatively new company, CommVision has experienced lower
----------
sales volume than Cubix and ChatCom. CommVision's product, called the
CommSwitch, provided superior density and speed when it was released in January
1995. However, in the Company's opinion, CommVision has subsequently failed to
make meaningful advances to its technology.
In order to position itself as the superior choice in its marketplace,
ChatCom plans to increase its efforts to convey a consistent message regarding
those problems that the ChatterBox product line solves in ways that no other
manufacturer can. Additionally, ChatCom will embrace a philosophy of 'Customer
Intimacy'. This philosophy combined with a clear, consistent message of product
and service superiority will enable ChatCom to reclaim its deserved recognition
among potential users.
New Product Development
- ------------------------
The Computer Industry: The Company's business is, as is all of the
---------------------
computer hardware and software industry, extremely competitive and rapidly
changing. Without continued refinement of existing products, and the development
of new products, the Company could easily lose any competitive advantage it may
possess. It is therefore essential that substantial resources be devoted to
research and new product development.
Recent Developments: As described previously, the Company is in the
-------------------
process of repositioning its products as a family of systems, rather than a
collection of building blocks. In creating the Corporate and Office Series
products, significant new system management features have been introduced. These
comprise ChatCom's proprietary Intelli-Management(TM) monitoring and control
system, coupled with a major new version of the Company's ChatView(TM)
management software. Version 3 of this software operates in Microsoft's Windows
NT environment, and allows a ChatterBox system to be managed through industry-
standard SNMP-based products such as HP's OpenView or CastleRock's SNMP/PC.
In fiscal year 1996, the Company introduced its ChatTwin(TM) line of server
modules. The ChatTwin contains two complete processing units on a single board,
and fourteen such boards can be housed in a single card cage. The Corporate
Series Model 2040 can house up to four card cages, which provides capacity for
up to 112 processors in a 6.5' high cabinet that occupies just 5 square feet of
floor space (approximately).
Page 10 of 71
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As originally introduced, ChatTwin supported the full line of Intel's 80486
processors. The Company is currently developing a processor board that will
allow the installation of Intel Pentium processors on the ChatTwin server
module. This Pentium upgrade will be reverse compatible with a significant
portion of the server modules sold by the Company to date, allowing users with
286, 386 and 486 based units to upgrade their processing capability to current
Pentium technology. The Company expects the Pentium upgrade to be released in
the second quarter of fiscal year 1997.
In fiscal year 1996, the Company also introduced the ChatPowerPlus
redundant, hot-swappable module power supply unit for its processing systems.
The ChatPowerPlus unit is based on the "N+1" concept whereby the user populates
the unit with the number of power modules needed to provide power to the
processor units plus an additional power module. As the power modules can be
exchanged without powering down other power modules, and the load placed on a
failed power module is automatically switched over to operating power modules, a
power module failure does not result in the failure of any processing units and
the failed power module may be replaced without the interruption of any
processing. Because the ChatPowerPlus holds up to four power modules that are
individually exchangable, the user may obtain true fault tolerance and
redundancy by employing power modules with 133% of the user's maximum power
needs, as opposed to the 200% required by most redundant power systems. The
Company knows of no systems offered by its competitors that provide the
processing power density of its systems utilizing the ChatTwin and ChatPowerPlus
units.
Other projects that are nearing completion include introduction of a
Pentium Pro processor board upgrade for the ChatExpress family of server
modules, as well as a lower-priced family of Pentium-based ChatExpress modules
than those currently offered. The Pentium Pro is Intel's latest technology,
offering processor speeds up to 200MHz. With the introduction of ChatCom's
Pentium Pro server module, the Company will continue its tradition of staying on
the leading edge of hardware technology. The new lower-priced ChatExpress
Pentium-based modules will allow the Company to remain competitive in a market
that has become accustomed to constantly diminishing prices.
Future Developments: The Company has and will continue to develop products
-------------------
for the server consolidation market, with emphasis on those products which
involve hardware as well as software. The Company's management feels that with
its current server module designs, the introduction of the next generation of
processor chips can be accommodated into certain of the Company's products with
little or no redesign required. Management expects this characteristic of the
Company's products to reduce the time to market for future technology upgrades.
Research and Development. The Company has spent approximately $914,000,
------------------------
$877,000, and $532,000 on company-sponsored research and development activities
during the fiscal years ended March 31, 1996, 1995, and 1994, respectively. The
cost of such activities is not borne directly by customers.
Environmental Laws
- ------------------
Compliance with federal, state and local provisions which have been enacted
or adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, likely will not have a
significant effect upon the capital expenditures, earning, and competitive
position of the Company.
Page 11 of 71
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's present office and manufacturing facility is located at 9600
Topanga Canyon Boulevard, Chatsworth, California, and comprises approximately
25,000 square feet. This space was leased for a five (5) year term that expires
on November 30, 1998 with rental payments of approximately $153,000 for fiscal
year 1996. This facility is devoted to the Company's corporate, administrative
and manufacturing and assembly activities. Approximately 50% of the space is
allocated to production, 15% to sales and marketing, 15% to administration, and
20% to engineering and product support laboratories.
The Company does not intend to acquire real estate, interests in real
estate, or real estate mortgages, for investment. It has been and will continue
to be for the foreseeable future, the Company's policy to reinvest its earnings,
if any, in its business to increase the working capital and to expand the
production capacity of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding, the outcome of
which it believes could have a material adverse effect on the Company. The
Company is not aware of any proceeding contemplated by a governmental authority.
From time to time the Company may be a party to legal actions arising in the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1996, the Company submitted the
following matters to a vote of security holders at the annual meeting of
shareholders, which was held on February 8, 1996:
(1) Name Change - The Company proposed the change of the name of the
-----------
Company from "Astro Sciences Corporation" to "ChatCom, Inc." in order
to unify the name by which the Company is known in the investment
community with the name by which it is known to its customers. The
name selected was also intended to more accurately reflect the nature
of the Company's business and products. The proposal passed with
4,965,768 votes for, 16,165 votes against and 1,549,154 votes
withheld.
(2) Slate of Directors - The Company proposed the following slate of
------------------
directors for service until the next annual meeting of shareholders:
Mr. Richard F. Gordon, Jr., Mr. A. Charles Lubash, Mr. George L.
Lazik, PhD., Mr. Gerald R. Sayer, PhD., Mr. James D. Edwards, Mr.
Philip B. Smith and Mr. Sanford C. Sigoloff. The entire slate of
directors proposed by management were elected by the following votes:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
-------------- --------------
<S> <C> <C>
Mr. Gordon 4,850,250 1,690,500
Mr. Lubash 5,000,100 1,522,150
Mr. Lazik 5,025,150 1,515,600
Mr. Sayer 6,540,650 100
Mr. Edwards 6,540,750 -0-
Mr. Smith 6,540,650 100
Mr. Sigoloff 6,540,650 100
</TABLE>
Page 12 of 71
<PAGE>
(3) Amendment to the 1994 Stock Option Plan - The Company proposed an
---------------------------------------
amendment to the 1994 Stock Option Plan to amend the formula options
to be granted to non-employee directors of the Company in order to
attract and retain qualified directors of the Company. The proposal
passed with 6,492,442 votes for, 25,324 votes against and 19,116 votes
withheld.
(4) Ratification of the Company's Auditors - The Company proposed the
--------------------------------------
ratification of Deloitte & Touche, LLP as the independent auditors for
the Company for the fiscal year ended March 31, 1996. The proposal
passed with 4,834,030 votes for, 1,595,092 votes against and 91,431
votes withheld.
Page 13 of 71
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock currently trades on The Nasdaq Stock Market,
listed under SmallCap issues and quoted under the symbol "CHAT." Such stock
began trading on The Nasdaq Stock Market in February 1993 under the symbol
"AOSC." On February 23, 1996, the Company's common stock began trading under the
symbol "CHAT" as a result of the change in the name of the Company.
The following table presents the range of the high and low bid prices for
the Company's shares for the periods indicated. The number of transactions in
the public trading market for the Company's common stock is limited. The
information has been obtained from the listing of Nasdaq SmallCap quotations in
the Wall Street Journal. The eighteen (18) known market makers for the Company's
stock are Barron Chase Securities, Inc.; Comprehensive Capital Corporation;
Ernst & Company; Fahnestock & Co., Inc.; Harriman Group, Inc.; Herzog, Heine and
Geduld, Inc.; Josephthal, Lyon & Ross; Mayer & Schweitzer, Inc.; Knight
Securities, L.P.; NAIB Trading; Nash, Weiss & Co.; Redstone Securities; Sharpe
Capital, Inc.; Sherwood Securities Corporation; Troster Singer Corporation;
Wedbush Morgan Securities; Don Weckstein and Company, Inc. and Wien Securities
Corp. The bid prices reflect inter-dealer prices, do not reflect any retail
mark-up, mark-down,commissions or transaction costs, may not represent any
actual transactions, and are not necessarily a reliable indication of the prices
at which more than a limited number of shares would trade.
<TABLE>
<CAPTION>
Fiscal Year 1996 Fiscal Year 1995
--------------------- ---------------------
Quarter High Bid Low Bid High Bid Low Bid
------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
First Quarter $5.50 $3.125 $3.50 $2.50
Second Quarter $3.875 $2.875 $2.625 $1.00
Third Quarter $3.25 $1.50 $3.00 $1.25
Fourth Quarter $2.625 $1.625 $5.875 $2.125
</TABLE>
As of June 11, 1996, there were 634 stockholders of record of the Company.
No dividends have been declared or paid on the Company's common stock by
the Company. Management of the Company does not intend to pay any cash dividends
on common stock in the foreseeable future. Instead, it is anticipated that the
Company will retain any earnings to finance its operations and growth.
Page 14 of 71
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Fiscal Year Ended March 31, 1996, Compared to the
Fiscal Year Ended March 31, 1995
- --------------------------------------------------------------------------------
The Company recorded a net loss of approximately $1,968,000 for the fiscal
year ended March 31, 1996, on revenues of approximately $14,790,000 as compared
to net loss of $1,928,000 on revenues of $14,962,000 for the year ended March
31, 1995.
Sales and Costs of Goods Sold
-----------------------------
Sales decreased $172,000, or 1%, from $14,962,000 to $14,790,000. The
decrease in sales was entirely due to decreased fourth quarter sales. Sales for
the quarter ended March 31, 1996 were $2,383,000 as compared to $5,163,000 for
the quarter ended March 31, 1995, which represents a $2,780,000, or 54%,
decrease. The Company believes that the decrease was due at least in part to
decreased marketing expenditures in the third and fourth fiscal quarters of
fiscal 1996 due to cash constraints, the lack of a federal budget during that
period which slowed government purchases of durable goods and the proliferation
of alternate remote access solutions that offer lower performance at a lower
cost. The liquidity provided by the completion of private placements of
preferred stock have allowed the Company to increase and focus its marketing and
product development efforts in the first quarter of fiscal 1997. The Company
believes that the effects of federal budgeting constraints are temporary. The
Company also believes that products which are currently in development will
afford its customers with increased performance without increased costs and
allow the Company's products to penetrate markets outside of its traditional
remote access niche.
Cost of goods sold increased $214,000, or 2%, from $9,668,000 to
$9,882,000. The increase was due entirely to an increase in manufacturing labor
and overhead of $220,000. The manufacturing labor and overhead increased
primarily due to increased volume of production that was experienced during the
first nine months of the fiscal year.
Selling Expense
---------------
Selling expenses increased $198,000, or 6%, from $3,230,000 to $3,428,000.
The increase was primarily attributable to an increase of $140,000 in
advertising and business promotion related expenses and a $42,000 increase in
marketing consulting.
General and Administrative Expense
----------------------------------
General and administrative expense increased $551,000, or 38%, from
$1,453,000 to $2,004,000. The increase was attributable to the consulting
expenses of $85,000 related to the utilization of an interim president and chief
executive officer from July 1995 to March 1996, approximately $100,000 related
to officers' and directors' liability insurance premiums for a policy that was
initiated in June 1995, approximately $120,000 in management consulting fees
related to the restructuring of the Company's management and the search for the
Company's permanent president and chief executive officer, an increase of
approximately $93,000 in legal and accounting fees relating to transition costs
for the change in corporate counsel and the filing of registration statements,
an increase of consulting fees of $43,000 related to financial public relations
and a $40,000 increase in sales tax expense that resulted from an audit of
fiscal 1992, 1993 and 1994 sales taxes.
Page 15 of 71
<PAGE>
Compensation Expense due to Stock Options
-----------------------------------------
Compensation expense due to the extension of stock options decreased
$928,000, or 98%, from $948,000 to $20,000. The compensation expense recorded
in fiscal 1996 related to options granted to directors pursuant to the formula
option provision of the 1994 Stock Option Plan which provided for the grant of
options at 75% of the market price. Subsequent to that grant the formula option
provision of the 1994 Stock Option Plan was amended, whereby future grants of
options shall be exercisable at market price as of the date of grant. The
compensation expense recorded in fiscal 1995 related to the extension of the
exercise terms of options to purchase 744,000 shares of common stock.
Severance Expense
-----------------
The Company recorded a severance expense of $322,000 related to the
payments that the Company has agreed to pay to former executive officers of the
Company pursuant to the remaining terms of their employment contracts.
Research and Development Expense
--------------------------------
Research and development expense increased $37,000, or 4%, from $877,000 to
$914,000. The increase was primarily due to salary increases awarded to
employees and an increase in materials for prototypes.
Interest Expense
----------------
Interest expense decreased $175,000, or 49%, from $358,000 to $183,000, due
to the lower levels of debt financing throughout the year, which was made
possible by the proceeds of a private placement of common stock and warrants at
the end of fiscal 1995.
Income Taxes
------------
Income taxes decreased $351,000, or 99%, from $355,000 to $4,000. The
decrease was due to an addition to the valuation reserve for deferred tax assets
in the fiscal year ended March 31, 1995, which effectively reserved all amounts
previously recorded as deferred tax assets.
Results of Operations for the Fiscal Year Ended March 31, 1995, Compared to the
Fiscal Year Ended March 31, 1994
- --------------------------------------------------------------------------------
The Company recorded a net loss of approximately $1,928,000 for the fiscal
year ended March 31, 1995, on revenues of approximately $14,962,000. In the
fiscal year ended March 31, 1994, the Company recorded a net loss of
approximately $292,000 on revenues of approximately $11,725,000. Approximately
$949,000 of the loss reported for the fiscal year ended March 31, 1995 was
attributable to compensation expense recorded as a result of the extension of
exercise terms of non-qualified stock options.
Page 16 of 71
<PAGE>
Sales and Costs of Goods Sold
-----------------------------
Sales increased $3,237,000, or 28%, from $11,725,000 to $14,962,000, due
primarily to overall growth of the remote access and local area network industry
and the increased sales and marketing efforts. The growth in demand caused an
increase in unit sales of the ChatterBox(TM) family of products by approximately
43%. This increase was mitigated by a decrease in sales price per unit of
approximately 13% on ChatterBox(TM) products and a decrease in the unit sales of
the NCS family of products which caused a decrease in sales revenue from NCS
products of approximately 1%. The reported sales were also affected by a
$146,000 credit granted to its distributor relating to the Company's reduction
in pricing. Approximately 1% of sales revenue is attributable to the
introduction of an Intel Pentium(TM) based processor board in February 1995. The
increase in sales was of a greater magnitude than that experienced in the prior
year due, at least in part, to a lowering of the prices of the Company's
products in July 1994 to make the products more competitive. Costs of goods sold
increased $2,525,000, or 36%, which is attributable to the increase in unit
sales which was partially mitigated by decreases in costs of electronic
components, primarily CPU chips. The increase in manufacturing labor and
overhead of approximately 7% was of a significantly lesser magnitude than the
increase in unit sales, due to the spreading of fixed manufacturing costs over a
greater amount of product, which also contributed to the fact that the
percentage increase in cost of sales was less than the percentage increase in
unit sales. Included in cost of goods sold for fiscal 1995 was a charge of
$324,418 to increase the valuation reserves for obsolete and excess inventories,
as compared to a charge of $125,202 for an increase in such valuation reserves
for fiscal 1994.
Selling Expense
---------------
Selling expenses increased $619,000, or 24%, from $2,611,000 to $3,230,000.
The increase was the result of a concerted decision by management to increase
sales and marketing efforts to enable the achievement of management's goal of
continued growth considering the increasing competitive forces in the industry.
The increased selling expenses included (i) a 43%, or approximately $217,000,
increase in advertising expenses; (ii) a $26,000, or 34%, increase in
depreciation expense related to additional workstations and additional on-site
demonstration equipment, and (iii) a 38%, or approximately $386,000, increase in
sales and marketing payroll, commissions and employee taxes and benefits. The
increase in salaries, commissions, payroll taxes and benefits was the result of
the addition of two regional sales managers in the last quarter of fiscal 1994,
the addition of two outside salespersons in the first half of fiscal 1995, the
addition of a technical support manager, a marketing director and an after sales
support technician in the first quarter of fiscal 1995, the addition of a
telemarketer in the second quarter of fiscal 1995, and increased sales
commissions resulting from the increase in sales revenue and a restructuring of
the sales commission program. The remaining increase in selling expense was
attributable to increases in various and sundry expenses primarily due to the
expansion of the workforce.
General and Administrative Expense
----------------------------------
General and administrative expenses decreased $128,000, or 8%, from
$1,580,000 to $1,452,000. The decrease was primarily caused by lower
compensation levels for certain key executives, which resulted in a decrease of
$134,000, or 32%, and corporate moving expenses and employee relocation expenses
that were incurred in fiscal 1994 in the amounts of $42,000 and $64,000,
respectively.
Page 17 of 71
<PAGE>
Compensation Expense Related to Stock Option Extensions
-------------------------------------------------------
On August 11, 1994 the Board of Directors of the Company resolved to extend
all non-qualified options then outstanding to expire at a date exactly ten years
subsequent to the date of grant. The resolution affected options to purchase
744,000 shares of common stock at an exercise price of $0.60 per share. The
market price of the common stock at the date the extension was effected was
$1.875 per share. The extension resulted in the recording of $948,600 in
compensation expense and an addition to additional paid-in capital of $948,600.
The amount recorded as compensation expense represents the difference between
exercise price of the options and the market value of the common stock on the
date the extension was effected multiplied by the number of shares under option.
Research and Development Expense
--------------------------------
Research and development expenses increased approximately $344,000, or 65%,
from $532,000 to $876,000. Management considered an increase in research and
development expenses necessary to maintain the technical advantages of current
products and to decrease the time necessary to develop and introduce new
products. The funds expended for research and development activities resulted
in the development of the Pentium(R) based processor units, the Chat
PowerPlus(TM) product, the dual processor board product and the ChatExpress-
486(TM) product. The increase included an increase of salaries, payroll taxes
and benefits of $157,000, or 42%; a $59,000, or 146%, increase in engineering
consulting expenses; and a $96,000, or 200%, increase in prototype expenses. The
increase in payroll related expenses was attributable to the addition of a
technical writer, a software engineer, and two hardware engineers in the second
half of fiscal 1994. The increase in consulting expenses and prototype expenses
resulted from the increase in the number and complexity of engineering projects
in progress during fiscal 1995.
Interest Expense
----------------
Interest expense increased from approximately $149,000 to $358,000, or
140%. Approximately $69,500 of the increase related to borrowings under a bank
line-of-credit agreement and bank term loans. Of the increase in bank interest,
approximately $35,000 related to the increase in the prime lending rate,
approximately $16,000 related to default interest that was imposed by the bank
and the remainder was due to an increase in the amounts advanced under the
borrowing agreements.
Approximately $142,000 of the increase in interest expense relates to
convertible subordinated debt that was issued by the Company in May 1994 and
retired in March 1995. Included in interest expense relating to the convertible
subordinated debt was cash interest and fees of $87,000, and $55,000 as
consideration for extensions granted by the creditors. The consideration for
the extensions was in the form of common stock and warrants.
Income Taxes
------------
The Company recorded income tax expense of $355,000, which relates almost
entirely to additions to the valuation reserves for deferred tax assets. In the
fourth quarter of fiscal 1995, the Company re-evaluated the valuation of its
deferred tax asset. As a result of the re-evaluation, considering recent
operating losses, the Company determined that it was appropriate to record an
addition to the deferred tax asset valuation reserve in the amount of $354,000.
As of March 31, 1995, the Company has fully reserved all deferred tax assets.
The revaluation of the asset was
Page 18 of 71
<PAGE>
necessitated by the reporting of operating losses for the two most recent fiscal
years and uncertainty related to future operating results.
Financial Condition as of March 31, 1996
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
During the year ended March 31, 1996, the Company had a negative cash flow
from operations of $925,000. Additionally, $190,000 of cash was expended for the
purchase of capital assets that are used in operations. The negative operating
cash flow was primarily the result of the net loss of $1,968,000, which was
partially mitigated by collections of accounts receivable. The Company managed
its capital resouces throughout the year by utilizing an asset-based line-of-
credit agreement that allowed for increased borrowings with increases in
accounts receivable balances. Financing activities provided a positive cash flow
of $726,000 primarily due to the private placement of Series B 6% Redeemable
Convertible Preferred Stock, $20,000 stated value per share(the "Series B
Preferred Stock") in the amount of $1,294,000.
In March 1996, the Company sold 75 shares of Series B Preferred Stock for
gross proceeds of $1,500,000 (net proceeds of $1,294,000) and in May 1996, the
Company sold 75 shares of Series C 6% Redeemable Convertible Preferred Stock,
$20,000 stated value per share(the "Series C Preferred Stock") for additional
gross proceeds of $1,500,000 (net proceeds of approximately $1,325,000). A
portion of the proceeds from the sale of these securities was utilized to repay
the amounts previously advanced under the Company's line-of-credit financing
agreement on May 2, 1996, and the line-of-credit agreement was terminated. The
repayment of the line-of-credit allowed the Company to liqudate the $500,000
certificate of deposit that was pledged as additional collateral for the line-
of-credit. Exercises of outstanding options and warrants to purchase 301,000
shares of the Company's common stock generated an additional $850,500 of capital
for the Company in June 1996.
Liquidity
- ---------
The Company previously relied upon a line-of-credit financing arrangement
for working capital to support its operations. The amount of borrowing that was
available under the Company's line-of-credit agreement was dependent upon the
Company's accounts receivable balances, the nature of the accounts receivable
balances, and the amounts outstanding under the line-of-credit. The Company's
maximum borrowing capacity under the line-of-credit was $3,500,000. Accordingly,
the Company was able to finance revenue growth as the available borrowings
generally increased with the increase of accounts receivable balances that
accompany such growth. However, the Company repaid all amounts owing under the
line-of-credit in May 1996. The Company has not replaced this line-of-credit
with another line-of-credit financing facility and has no immediate plans to do
so. The Company intends to meet its short-term working capital needs with the
remaining proceeds from a private placement of equity securities that it
completed in May 1996 and proceeds from exercises of warrants and options in
June 1996. 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 results 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.
Page 19 of 71
<PAGE>
The Company believes that the infusion of capital in the amount of
$2,172,500 subsequent to March 31, 1996, coupled with the restructuring of
management, the introduction of new products, new marketing initiatives and
plans for the more effective utilization of resources will provide the Company
with sufficient capital resources and revenues to sustain operations for a
reasonable period of time.
The Company may seek additional public or private financing to meet its
longer term capital needs if market conditions are favorable. If additional
funds are raised through the issuance of equity securities, it is likely that
the Company will be required to sell such securities at a substantial discount
to the current market price for the Company's Common Stock, the percentage
ownership of the then current shareholders of the Company will be reduced, and
such equity securities may have rights, preferences or privileges senior to
those of the holders of the Company's Common Stock. No assurance can be given
that additional financing will be available or that, if available, it will be
available on terms favorable to the Company or its shareholders. Any increase in
the outstanding number of shares of Common Stock or options and warrants may
have an adverse effect on the market price of the Common Stock and may hinder
efforts to arrange future financing.
The Company has no material commitments for capital expenditures as of the
date hereof. The Company anticipates, however, acquiring additional equipment
and fixtures from time to time as considered necessary by the Company's
management.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters
discussed in this annual 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, services 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.
Item 7. FINANCIAL STATEMENTS
The Company's financial statements appear on pages 27 to 43 of this Annual
Report on Form 10-KSB, following Part IV.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Page 20 of 71
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company hereby incorporates by reference the information contained
under the headings "Election of Directors" and "Compliance With Section 16(a) of
the Securities Exchange Act of 1934" from its definitive Proxy Statement to be
delivered to the Shareholders of the Company in connection with the 1996 Annual
Meeting of Shareholders, to be held on September 5, 1996.
Item 10. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information contained
under the headings "Executive Compensation" from its definitive Proxy Statement
to be delivered to the Shareholders of the Company in connection with the 1996
Annual Meeting of Shareholders, to be held on September 5, 1996.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates by reference the information contained
under the headings "Security Ownership of Principal Stockholders and Management"
from its definitive Proxy Statement to be delivered to the Shareholders of the
Company in connection with the 1996 Annual Meeting of Shareholders, to be held
on September 5, 1996.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference the information contained
under the headings "Certain Transactions with Management" from its definitive
Proxy Statement to be delivered to the Shareholders of the Company in connection
with the 1996 Annual Meeting of Shareholders, to be held on September 5, 1996.
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following financial statements are included as part of this Annual
Report on Form 10-KSB:
Independent Auditors' Report
Balance Sheets as of March 31, 1996, and 1995.
Statements of Operations for the Years Ended March 31, 1996, 1995, and
1994.
Statements of Cash Flows for the Years Ended March 31, 1996, 1995, and
1994.
Statements of Stockholders' Equity for the Years Ended March 31, 1996,
1995, and 1994.
Page 21 of 71
<PAGE>
Notes to Financial Statements
The following exhibits are filed with this Form 10-KSB or are
incorporated herein by reference to the document described:
3.1 Articles of Incorporation of Astro Systems and Engineering,
Inc., filed March 22, 1982 are incorporated by reference to
Exhibit 3(a) to the Company's Form 10 Registration Statement as
amended by Form 8, Amendment No. 2, dated January 22, 1993 (the
"Company's Form 10").
3.2 Certificate of Amendment of Articles of Incorporation filed
March 26, 1984, is incorporated by reference to Exhibit 3(b) to
the Company's Form 10.
3.3 Certificate of Amendment of Articles of Incorporation filed May
28, 1985, is incorporated by reference to Exhibit 3(c) to the
Company's Form 10.
3.4 Certificate of Amendment of Articles of Incorporation filed
January 10, 1991, is incorporated by reference to Exhibit 3(d)
to the Company's Form 10.
3.5 Certificate of Determination filed with the California
Secretary of State on January 10, 1991, is incorporated by
reference to Exhibit 3(e) to the Company's Form 10.
3.6 Restated Bylaws, dated April 7, 1982, is incorporated by
reference to Exhibit 3(f) to the Company's Form 10.
3.7 Certificate of Amendment of Bylaws dated January 9, 1991, is
incorporated by reference to Exhibit 3(g) to the Company's Form
10.
3.8 Certificate of Amendment of Articles of Incorporation filed
with the California Secretary of State on December 6, 1993, is
incorporated by reference to the Company's 1994 Form 10-KSB.
3.9 Certificate of Amendment of Articles of Incorporation filed
Determination filed with the California Secretary of State on
February 14, 1996.
3.10 Certificate of Determination and Decrease for Series B
Preferred Stock filed with the California Secretary of State on
March 19, 1996, is incorporated by reference to exhibit 4(b) to
the Company's Registration Statement on Form S-3 (Registration
No. 333-3792), as amended by Amendment No. 1 dated June 3, 1996
(the "Registration Statement").
3.11 Certificate of Determination for Series C Preferred Stock filed
with the California Secretary of State on April 15, 1996, is
incorporated by reference to Exhibit 4(d) to the Registration
Statement.
Page 22 of 71
<PAGE>
10.1 Indemnification Agreement between the Company and A. Charles
Lubash, dated February 1, 1992, is incorporated by reference to
Exhibit 10(k) to the Company's Form 10.
10.2 Indemnification Agreement between the Company and George L.
Lazik, dated February 1, 1992, is incorporated by reference to
Exhibit 10(l) to the Company's Form 10.
10.3 Indemnification Agreement between the Company and Richard F.
Gordon, Jr., dated February 1, 1992, is incorporated by
reference to Exhibit 10(m) to the Company's Form 10.
10.4 Indemnification Agreement between the Company and Charles
Conrad, Jr., dated February 1, 1992, is incorporated by
reference to Exhibit 10(n) to the Company's Form 10.
10.5 Indemnification Agreement between the Company and James R.
Spievak, dated February 1, 1992, is incorporated by reference
to Exhibit 10(o) to the Company's Form 10.
10.6 Option Agreement between the Company and A. Charles Lubash,
dated May 8, 1992, is incorporated by reference to Exhibit
10(v) to the Company's 1993 Form 10-KSB.
10.7 Option Agreement between the Company and George L. Lazik, dated
May 8, 1992, is incorporated by reference to Exhibit 10(w) to
the Company's 1993 Form 10-KSB.
10.8 Lease between HWL Properties, a California partnership, and the
Company, dated May 5, 1993, as amended June 1, 1993, is
incorporated by reference to Exhibit 10(x) to the Company's
1993 Form 10-KSB.
10.9 $3,500,000 Business Financing Agreement with Deutsche Financial
Services Corporation (formerly ITT Commercial Finance
Corporation), dated May 16, 1995, is incorporated by reference
to Exhibit 10(y) to the Company's 1995 Form 10-KSB, as filed
with the Commission on June 26, 1995.
10.10 1994 Stock Option Plan, dated August 31, 1994, is incorporated
by reference to Exhibit 10(z) to the Company's 1995 Form 10-
KSB, as filed with the Commission on June 26, 1995.
10.11 Employment Agreement between A. Charles Lubash and the Company,
dated April 1, 1995, is incorporated by reference to Exhibit
10(dd) to the Company's 1995 Form 10-KSB, as filed with the
Commission on June 26, 1995.
10.12 Consulting Agreement between George L. Lazik and the Company,
dated March 11, 1996.
Page 23 of 71
<PAGE>
10.13 Amended and Restated Employment Agreement between Russell
Jackson and the Company, effective April 1, 1993, is
incorporated by reference to Exhibit 10(ff) to the Company's
1995 Form 10-KSB, filed with the Commission on June 26, 1995.
10.14 Form of Stock Purchase Agreement for Series B Preferred Stock
and Series C Preferred Stock, entered into by the Company and
Julie Nordlicht, A. Ziskind, Tail Wind Fund, Ltd., Cassolette,
David Freund and Legong Investments N.V.
10.15 Letter of agreement between the Company and James B. Mariner
describing terms of employment.
27 Financial Data Schedule
(b) Reports on Form 8-K.
-------------------
On January 26, 1996, the Company filed a report on Form 8-K with
the Securities and Exchange Commission reporting under Item 5 that the
Company would report a loss for the quarter ended December 31, 1995
which would cause the Company to violate the maintenance of earnings
covenant contained in its line-of-credit financing agreement.
On February 7, 1996, the Company filed a report on Form 8-K with
the Securities and Exchange Commisssion reporting under Item 5 that on
February 5, 1996 the Securities and Exchange Commission declared the
Regisistration Statement on Form S-3 that was filed by the Company to
be effective. The Registration Statement on Form S-3 registered the
resale of up to 5,365,000 shares of common stock of the Company for
resale by certain securityholders. The shares of common stock
registered for resale included 2,105,000 shares of issued and
outstanding common stock and 3,260,000 of common stock reserved for
issuance upon the exercise of specified outstanding options and
warrants to purchase shares of common stock.
On February 20, 1996, the Company filed a report on Form 8-K with
the Securities and Exchange Commission to report under Item 5 the
change of the Company's name to "ChatCom, Inc." from "Astro Sciences
Corporation" and the election of Richard F. Gordon, Jr., A. Charles
Lubash, George L. Lazik, Gerald R. Sayer, James D. Edwards, Sanford C.
Sigoloff and Philip B. Smith to serve as directors of the Company.
On March 11, 1996, the Company filed a report on Form 8-K with
the Securities and Exchange Commission reporting under Item 5 that Mr.
James B. Mariner had accepted the position of President and Chief
Executive Officer of the Company and reporting an agreement with the
Company's lender to repay all amounts previously advanced under the
line-of-credit financing agreement by April 25, 1996.
Page 24 of 71
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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
Dated: June 26, 1996 By: /s/ James B. Mariner
---------------------------------
James B. Mariner, President and
Chief Executive Officer
Dated: June 26, 1996 By: /s/ John R. Grady
---------------------------------
John R. Grady, Chief Financial
Officer and principal accounting
officer
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Dated: June 26, 1996 By: /s/ Richard F. Gordon, Jr.
---------------------------------
Richard F. Gordon, Jr.
Chairman of the Board
Dated: June 26, 1996 By: /s/ A. Charles Lubash
---------------------------------
A. Charles Lubash, Director
Dated: June 26, 1996 By: /s/ George L. Lazik
---------------------------------
George L. Lazik, Director
Dated: June 26, 1996 By: /s/ Gerald R. Sayer
---------------------------------
Gerald R. Sayer, Director
Dated: June 26, 1996 By: /s/ James D. Edwards
---------------------------------
James D. Edwards, Director
Dated: June 26, 1996 By: /s/ Sanford C. Sigoloff
---------------------------------
Sanford C. Sigoloff, Director
Dated: June 26, 1996 By: /s/ Philip B. Smith
---------------------------------
Philip B. Smith, Director
Page 25 of 71
<PAGE>
FINANCIAL STATEMENTS
Page 26 of 71
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors of
ChatCom, Inc.
Chatsworth, California:
We have audited the accompanying balance sheets of ChatCom, Inc., formerly Astro
Sciences Corporation, (the "Company") as of March 31, 1996 and 1995, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ChatCom, Inc. as of March 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche, L.L.P.
Los Angeles, California
June 26, 1996
Page 27 of 71
<PAGE>
CHATCOM, INC.
- -------------
BALANCE SHEETS
MARCH 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes 1996 1995
----- ---- ----
<S> <C> <C> <C>
ASSETS 5
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,067,397 $ 1,457,260
Restricted cash 5 500,000
Accounts receivable, net of allowances of
$ 262,228 (1996) and $84,770 (1995) 1,968,267 3,460,073
Inventories 2 3,481,195 3,121,876
Prepaid expenses and other
current assets 201,431 394,133
--------------- ---------------
Total current assets 7,218,290 8,433,342
EQUIPMENT AND FIXTURES, Net 3,6 539,449 643,969
DEPOSITS 20,693 20,193
--------------- ---------------
TOTAL $ 7,778,432 $ 9,097,504
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 12 $ 1,842,942 $ 2,611,332
Accrued expenses 4 907,668 736,348
Short-term borrowings 5 938,461 1,075,000
Current portion of capital lease
obligations 6 29,525 32,604
--------------- ---------------
Total current liabilities 3,718,596 4,455,284
CAPITAL LEASE OBLIGATIONS -
less current portion 6 18,583 48,037
STOCKHOLDERS' EQUITY: 9
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
75 shares 8 1,294,000
Common stock, no par value,
authorized, 25,000,000 shares,
issued and outstanding, 7,536,629
(1996) and 7,534,629 (1995) shares 5,859,660 5,858,760
Subscription receivable (100,000)
Additional paid-in capital 1,435,711 1,415,536
Accumulated deficit (4,548,118) (2,580,113)
--------------- ---------------
Total stockholders' equity 4,041,253 4,594,183
--------------- ---------------
TOTAL $ 7,778,432 $ 9,097,504
=============== ===============
</TABLE>
See notes to financial statements
Page 28 of 71
<PAGE>
CHATCOM, INC.
- -------------
STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes 1996 1995 1994
----- ---- ---- ----
<S> <C> <C> <C> <C>
SALES 1 $14,790,335 $14,962,260 $11,725,138
COST OF GOODS SOLD 9,882,375 9,668,237 7,143,091
--------------- --------------- ---------------
GROSS PROFIT 4,907,960 5,294,023 4,582,047
--------------- --------------- ---------------
OPERATING EXPENSES: 12
Selling expense 3,427,898 3,230,471 2,610,918
General and administrative expense 2,003,966 1,452,598 1,580,281
Compensation expense related to stock options 9 20,175 948,600
Research and development expense 914,351 876,520 532,477
Severance expense 10 322,303
--------------- --------------- ---------------
Total operating expenses 6,688,693 6,508,189 4,723,676
--------------- --------------- ---------------
LOSS FROM OPERATIONS (1,780,733) (1,214,166) (141,629)
INTEREST EXPENSE 12 183,272 358,259 149,193
--------------- --------------- ---------------
LOSS BEFORE PROVISION FOR
INCOME TAXES (1,964,005) (1,572,425) (290,822)
PROVISION FOR INCOME TAXES 11 4,000 355,271 800
--------------- --------------- ---------------
NET LOSS ($1,968,005) ($1,927,696) ($291,622)
=============== =============== ===============
LOSS PER SHARE:
Net loss per share ($0.26) ($0.34) ($0.05)
=============== =============== ===============
Weighted average number of common shares 7,536,629 5,675,999 5,410,336
</TABLE>
See notes to financial statements
Page 29 of 71
<PAGE>
CHATCOM, INC.
- -------------
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Number of Number of
Notes Shares Amount Shares Amount
----- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, April 1, 1993 $ 36,000 5,384,000 $ 2,112,108
Stock options exercised 9 34,000 14,110
Conversion of preferred stock
dividends (36,000) 11,629 36,000
Net loss
----------- ------------ ----------- -------------
BALANCE, March 31, 1994 5,429,629 2,162,218
Extension of convertible subordinated
debt 7 27,500 55,000
Options granted for services
Extension of stock options
Issuance of common stock and
warrants 2,077,500 3,641,542
Net loss
----------- ------------ ----------- ------------
BALANCE, March 31, 1995 7,534,629 5,858,760
Exercise of stock options 9 2,000 900
Grant of stock options
Payment of subscription receivable
Issuance of Series B Preferred Stock 8 75 1,294,000
Net loss
----------- ------------ ----------- -------------
75 $ 1,294,000 7,536,629 $ 5,859,660
=========== ============ =========== =============
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Additional
Subscription Paid-in Accumulated Stockholders'
Receivable Capital Deficit Equity
------------------ ------------- --------------- -------------------
<S> <C> <C> <C> <C>
BALANCE, April 1, 1993 $ 348,200 $ (360,795) $ 2,135,513
Stock options exercised 14,110
Conversion of preferred stock
dividends
Net loss (291,622) (291,622)
------------------ ------------- --------------- -------------------
BALANCE, March 31, 1994 $ 348,200 $ (652,417) $ 1,858,001
Extension of convertible subordinated
debt 55,000
Options granted for services 118,736 118,736
Extension of stock options
948,600 948,600
Issuance of common stock and
warrants $(100,000) 3,541,542
Net loss (1,927,696) (1,927,696)
------------------ ------------- --------------- -------------------
BALANCE, March 31, 1995 (100,000) 1,415,536 (2,580,113) 4,594,183
Exercise of stock options 900
Grant of stock options 20,175 20,175
Payment of subscription receivable 100,000 100,000
Issuance of Series B Preferred Stock 1,294,000
Net loss (1,968,005) (1,968,005)
------------------ ------------- --------------- -------------------
$ 1,435,711 $ (4,548,118) $ 4,041,253
================== ============= =============== ===================
</TABLE>
See notes to financial statements
Page 30 of 71
<PAGE>
CHATCOM, INC.
- ------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (1,968,005) $ (1,927,696) $ (291,622)
Adjustments to reconcile net loss
to net cash used in operating activities:
Grant/extension of stock options 20,175 948,600
Depreciation and amortization 312,279 309,413 156,241
Loss on disposal of assets 56,944 7,130 53,962
Deferred income taxes 354,471 9,754
Provision for losses on accounts
receivable 37,230 57,055 3,164
Changes in operating assets and
liabilities:
Accounts receivable 1,454,576 (1,368,320) (636,581)
Inventories (359,319) (439,293) 717,265
Prepaid expenses and other
current assets 118,492 (201,519) 742
Deposits (500) (885) (408)
Accounts payable (768,390) 1,144,461 (329,279)
Accrued expenses 171,320 213,456 (139,025)
------------- ------------- -----------
Net cash used in operating
activities (925,198) (903,127) (455,787)
------------- ------------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES - Capital expenditures (190,493) (192,184) (412,558)
------------- ------------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from short term borrowings 938,461 755,000
Repayments of short term borrowings (1,075,000) (875,000)
Increase in restricted cash (500,000)
Principal payments of capital leases (32,533) (28,149) (16,196)
Proceeds from issuance of common
stock and warrants 3,241,542
Collection of subscription receivable 100,000
Proceeds from issuance of Series B
Preferred Stock 1,294,000
Proceeds from issuance of convertible
subordinated debt 550,000
Repayment of convertible subordinated debt (250,000)
Advances from officers 51,622
Repayment of notes payable to officers (88,122)
Proceeds from exercise of stock options 900 14,110
------------- ------------- -----------
Net cash provided by financing
activities 725,828 2,550,271 804,536
------------- ------------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (389,863) 1,454,960 (63,809)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,457,260 2,300 66,109
------------- ------------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 1,067,397 $ 1,457,260 $ 2,300
============= ============= ===========
</TABLE>
See notes to financial statements
(Continued)
Page 31 of 71
<PAGE>
CHATCOM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash paid (refunded) for income taxes $ 2,300 $(64,800) $174,939
Cash paid for interest $196,754 $291,953 $147,296
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended March 31, 1996, 1995, and 1994, the Company acquired
office equipment under capital leases in the amount of $0, $15,056, and
$76,780, respectively.
In fiscal 1996, the Company granted 15,000 options to purchase the
Company's common stock to directors at an exercise price of $4.03 per
share. The market price on the date of grant was $5.37. The grant of the
options resulted in the recording of general and administrative expense and
additional paid-in capitial of $20,175.
In March 1995, the Company issued common stock and warrants in exchange for
the receipt of a personal check in the amount of $100,000. Subsequent to
the issuance of the securities, the check proved to be drawn on an account
with insufficient funds. During fiscal 1996, the Company received the
$100,000 subscription receivable.
In March 1995, convertible subordinated debt with a principal balance of
$300,000 was converted into 150,000 shares of common stock and warrants to
purchase 150,000 shares of common stock.
In August 1994, the Company extended the exercise terms of all non-
qualified stock options then outstanding resulting in the recording of
compensation expense and additional paid-in capital in the amount of
$948,600.
In December 1994, the Company agreed to issue 27,500 shares of common stock
and warrants to purchase 27,500 shares of common stock as consideration for
the extension of the due dates of the convertible subordinated debt.
Interest expense for the year ended March 31, 1995, and common stock at
March 31, 1995, each contain an amount of $55,000 related to this
transaction.
In November 1994, the Company granted options to purchase 200,000 shares of
common stock to a consulting firm in exchange for investor relations
services for the period from November 15, 1994, through November 14, 1995.
The granting of the options resulted in an increase of additional paid-in
capital of $118,736. The balance of prepaid expenses as of March 31, 1995,
included $74,210 in prepaid consulting fees and general and administrative
expense for the years ended March 31, 1996 and 1995, included amounts of
$74,210 and $44,526, respectively, related to this transaction.
On July 29, 1993, the Company paid dividends in arrears on preferred stock
through the issuance of 11,629 shares of common stock.
See notes to financial statements.
(Concluded)
Page 32 of 71
<PAGE>
CHATCOM, INC.
- -------------
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- -----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - ChatCom, Inc., formerly Astro Sciences Corporation, (the
--------
"Company") a California corporation, is engaged in the business of
developing, manufacturing and marketing local area network communications
systems.
During the years ended March 31, 1996, 1995 and 1994 the Company incurred
net losses of $1,968,005, $1,927,696 and $291,622, respectively.
Additionally, revenues during the fourth quarter of fiscal 1996 were lower
than that of the fourth quarter of the previous year and of the first three
quarters of fiscal 1996. These factors are mitigated by the infusion of
$3,469,500 in capital through the issuance of equity securities subsequent
to March 1, 1996, the restructuring of management, the introduction of new
products, new marketing initiatives and plans for the more effective
utilization of resources. For the reasons stated above, management believes
that the Company has sufficient capital in order to continue to operate as
a going concern for a reasonable period of time.
Use of Estimates - The preparation of financial statements in conformity
----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the 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.
Cash and Cash Equivalents - The Company considers cash on hand, demand
-------------------------
deposits and short-term investments with original maturities of 90 days or
less to be cash equivalents. At March 31, 1996 and 1995, the balance of
cash and cash equivalents consisted of cash on hand and demand deposits.
Financial Instruments - The carrying value of cash and cash equivalents,
---------------------
restricted cash, accounts receivable, accounts payable and short term
borrowings approximate fair value due to the short maturities of such
instruments.
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of its cash and cash equivalents, restricted
cash and accounts receivables. The Company restricts its investment of cash
and cash equivalents and restricted cash to financial institutions with
high credit standing. Credit risk on accounts receivables is minimized as a
result of the large number and geographic dispersion of the Company's
nationwide customer base. The Company performs ongoing credit evaluations
of its customers' financial condition and maintains an allowance for
potential credit losses.
Page 33 of 71
<PAGE>
Inventories - Inventories are stated at the lower of cost (first-in,
-----------
first-out) or market. The Company reviews its inventories and assesses the
reserve for obsolete and excess inventories required to state inventories
at the lower of cost or market approximately quarterly. The balance of the
reserve for obsolete and excess inventories at March 31, 1996 and 1995 was
$390,587 and $764,929, respectively. The charges to cost of sales for the
valuation of obsolete and excess inventories were $162,338, $324,418 and
$125,202 for the years ended March 31, 1996, 1995 and 1994, respectively.
Equipment and Fixtures - Equipment and fixtures are stated at cost.
----------------------
Depreciation and amortization are computed on the straight-line method over
the following estimated useful lives of the assets:
<TABLE>
<S> <C>
Equipment 5 years
Software 3 years
Furniture and fixtures 5 years
Leasehold improvements Lesser of lease
term or 5 years
</TABLE>
Software Costs - The Company capitalizes the cost of purchased software.
--------------
These costs are amortized over three years.
Research and Development - All research and development costs are
------------------------
expensed as incurred.
Revenue Recognition - The Company records revenue for sales of hardware
-------------------
and software products at the time the title to the product is transferred
to the customer. The Company does not have significant obligations to
provide hardware or software upgrades or service beyond a standard warranty
period of one year. The cost to provide standard warranty services for
previously sold products is estimated quarterly and accrued.
At the time an extended warranty agreement is sold, the proceeds are
recorded as deferred revenue and amortized to income on a straight-line
basis over the extended warranty period. Sales of extended warranty
agreements began in February 1994. Extended warranty agreements in the
amounts of $94,231, $43,718 and $4,710 were sold during the years ended
March 31, 1996, 1995 and 1994, respectively. Deferred revenue related to
extended warranty agreements of $90,911 and $32,574 was included in current
liabilities at March 31, 1996 and 1995, respectively.
Major Customers - The Company had sales to a single customer in the amount
---------------
of $852,781, $3,054,823 and $4,109,661 during the years ended March 31,
1996, 1995 and 1994, respectively.
Sales Returns and Allowances - The Company's distributor has the right to
----------------------------
return a portion of its purchases during the previous quarter, provided
that a replacement order in an amount equal to or greater than the return
is placed concurrently with the return. The Company also allows its
distributor to receive credits at the time a price reduction is announced
by the Company equal to the difference in the selling prices of inventories
that the distributor has on hand. At March 31, 1996 and 1995 there were no
price reductions for which the distributor had not received credits.
Income Taxes - Deferred income tax assets and liabilities are computed
------------
annually for differences between the financial statement and income tax
bases of assets and liabilities. Such deferred income tax
Page 34 of 71
<PAGE>
asset and liability computations are based on enacted tax law and rates
applicable in periods in which the differences are expected to reverse. If
necessary, a valuation allowance is established to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period and the effect of any changes in
deferred income tax assets and liabilities during the period.
Earnings per Share - Earnings per share are computed based on the weighted
------------------
average number of common shares and dilutive common share equivalents
(consisting of convertible preferred stock, stock warrants and stock
options) outstanding during the periods. The difference between primary
earnings per share and fully diluted earnings per share was not material
for any of the periods presented.
Reclassification - Certain amounts in the accompanying 1995 and 1994
----------------
financial statements have been reclassified to conform with the 1996
presentation.
Recent Accounting Pronouncements - In 1995, the Financial Accounting
--------------------------------
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." The principles established in the
new statement must be applied by the Company in fiscal 1997. Among other
provisions, the statement changed current accounting practices for the
evaluation of impairment of long-lived assets. Management has not yet
completed its analysis of the effect of adopting the new statement.
In 1995, the FASB also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company beginning April 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will continue
to apply APB Oponion No. 25 to its stock-based compensation awards to
employees and will disclose the required pro forma effect on net income and
earnings per share.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Raw materials $1,157,120 $1,047,223
Work-in process 1,004,363 1,066,586
Finished goods 1,319,712 1,008,067
------------ ------------
$3,481,195 $3,121,876
============ ============
</TABLE>
Page 35 of 71
<PAGE>
3. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
March 31,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Equipment $ 755,315 $ 916,294
Software 83,979 73,701
Furniture and fixtures 154,197 174,651
Leasehold improvements 39,806 39,806
------------ ------------
1,033,297 1,204,452
Less accumulated depreciation
and amortization 493,848 560,483
------------ ------------
$ 539,449 $ 643,969
============ ============
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
March 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Accrued payroll and related expenses $219,240 $282,853
Accrued bonuses and commissions 32,494 192,005
Reserve for severance 317,303
Reserve for stock registration 35,540 75,000
Accrued royalties 35,206 35,205
Deferred rent 39,216 48,324
Deferred revenue 90,911 32,574
Accrued warranty expense 15,393 15,393
Accrued interest 13,482
Other liabilities 122,365 41,512
------------ ------------
$907,668 $736,348
============ ============
</TABLE>
5. SHORT TERM BORROWINGS
At March 31, 1995, the Company had a line-of-credit agreement with a bank
that expired on May 15, 1995 and provided working capital borrowings up to
$1,500,000 bearing interest at the bank's prime lending rate (9% at March
31, 1995) plus 2%. The line-of-credit was collateralized by the Company's
accounts receivable and inventories. At March 31, 1995, $1,075,000 was
outstanding under the line-of-credit. On May 26, 1995, all amounts
outstanding on this credit facility were repaid with the proceeds from the
funding of a line-of-credit from a commercial finance corporation.
On May 26, 1995, the Company entered into a $3,500,000 working capital
line-of-credit facility 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 was collateralized by substantially all of the assets of the
Company and contained covenants requiring the Company to maintain a
prescribed level of earnings and certain financial ratios. The maximum
amount of
Page 36 of 71
<PAGE>
borrowing that was allowed under the line-of-credit agreement was equal to
80% of eligible accounts receivable.
The Company failed to comply with the maintenance of earnings covenant
contained in the line-of-credit agreement for the fiscal quarters ended
September 30, 1995 and December 31, 1995. The lender waived compliance with
the covenant for the quarter ended September 30, 1995 upon the Company
securing the facility with a $500,000 six-month irrevocable standby letter
of credit. The lender waived compliance with the covenant for the quarter
ended December 31, 1995 upon the agreement by the Company to repay all
amounts owing under the line by May 3, 1996. 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.
6. LEASE OBLIGATIONS
The Company leases its operating facility under an operating lease expiring
on November 30, 1998. The Company relocated its operations to the current
facility in August 1993, prior to which the Company leased its previous
operating facility under a separate operating lease agreement. Rent expense
under such lease agreements in fiscal years 1996, 1995 and 1994 was
$153,104, $136,202 and $140,422, respectively.
The Company has financed the purchase of office equipment through capital
lease agreements. The obligations are collateralized by the leased
equipment, which had a net book value of $42,106 and $66,679 at March 31,
1996 and 1995, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending Operating Capital
March 31, Leases Leases
------------- ----------- -----------
<S> <C> <C>
1997 $ 166,302 $ 33,033
1998 162,408 16,225
1999 92,572 3,682
2000 494
----------- -----------
$ 421,776 52,940
===========
Less interest 4,832
Less current portion 29,525
-----------
$ 18,583
===========
</TABLE>
7. CONVERTIBLE SUBORDINATED DEBT
On May 4, 1994, the Company issued 9% convertible subordinated debt with
principal of $550,000, maturing on November 4, 1994. Upon maturity, the
Company negotiated extensions of the due dates of the convertible
subordinated debt until March 4, 1995. During the extension period,
interest at the rate of 12% per annum was paid by the Company. As
additional consideration for the extension, the noteholders were issued
27,500 shares of common stock and warrants to purchase 27,500 shares of
common stock at an exercise price of $3.00 per share. In March 1995, the
Company repaid $250,000 of the convertible subordinated debt and the
remaining $300,000 was converted into 150,000
Page 37 of 71
<PAGE>
shares of common stock and warrants to purchase 150,000 shares of common
stock at an exercise price of $3.00 per share.
8. PREFERRED STOCK - SERIES B
In March 1996, the Company sold 75 shares of Series B Preferred Stock,
$20,000 stated value per share (the "Series B Preferred Stock"), for gross
proceeds of $1,500,000. Offering costs of $206,000, consisting of finders'
fees, legal fees, accounting fees, listing fees and registration costs,
were incurred by the Company. Dividends are payable in cash or common
stock, at the option of the Company, at a rate of 6% per annum. The shares
are convertible to common stock with a conversion price equal to the lesser
of the average closing bid price for the five trading days prior to the
date of sale or 75% of the average closing bid price for the five trading
days prior to the date of conversion or redemption. The average closing bid
price for the five trading days prior to the date of sale was approximately
$1.79 and $2.16 for 62.5 and 12.5 shares, respectively. The Series B
Preferred Stock may be redeemed, in whole or in part, at the option of the
Company for a total amount equal to 133% of the stated value of the
redeemed shares, plus accrued dividends on such shares.
9. STOCK OPTIONS AND WARRANTS
The Company had an incentive stock option plan that expired in April 1995
(the "1985 Plan"), under which options to purchase 400,000 shares of the
Company's common stock could be granted to officers and employees. Options
granted were at 100% of the estimated fair market value on the dates of
grant. On November 22, 1994, the shareholders of the Company approved and
adopted the Company's 1994 Stock Option Plan (the "1994 Plan") to replace
the expiring 1985 Plan. Under the 1994 Plan, options to purchase up to
2,000,000 shares of the Company's common stock may be granted to officers,
employees, directors and consultants of the Company. On February 8, 1996,
the shareholders of the Company approved and adopted an amendment to the
1994 Plan which revised the provision for the granting of formula options
to non-employee directors of the Company. The following summarizes the
transactions relating to stock options granted pursuant to the terms of the
stock option plans:
<TABLE>
<CAPTION>
Shares Average
Under Price Price
Option Per Share Range
------------ ----------- -------------
<S> <C> <C> <C>
Balance at April 1, 1993 95,000 $1.47 $0.45-$2.70
Granted 60,000 $4.00 $3.00-$5.00
Exercised 2,000 $0.45 $0.45
------------
Balance at March 31, 1994 153,000 $2.47 $0.45-$5.00
Granted 186,100 $2.16 $1.67-$2.22
------------
Balance at March 31, 1995 339,100 $2.30 $0.45-$5.00
Granted 798,750 $2.19 $1.75-$3.63
Exercised 2,000 $0.45 $0.45
Canceled and expired 132,250 $2.27 $0.45-$3.63
------------
Balance at March 31, 1996 1,003,600 $2.22 $1.67-$5.00
============
</TABLE>
Page 38 of 71
<PAGE>
419,600 and 251,100 stock options were exercisable under the 1994 Plan at
March 31, 1996 and 1995, respectively, and 40,000 and 88,000 employee
incentive stock options were exercisable under the 1985 Plan at March 31,
1996 and 1995, respectively. Pursuant to the terms of the 1994 Stock Option
Plan, the options granted to employees have an exercise price equal to the
market value of the common stock on the date of grant. Accordingly, no
compensation expense was recorded with respect to the granting of employee
options. The 544,000 options that were not exercisable at March 31, 1996
consist of 184,000 options granted to directors and 360,000 options
granted to an officer. 146,000 and 38,000 of the options granted to
directors become exercisable during the years ending March 31, 1997 and
1998, respectively. The options granted to an officer become exercisable
over six years, the timing of which is dependent upon the Company achieving
certain performance criteria.
From December 1994 through March 1995, the Company sold units consisting of
common stock and warrants through a private placement. In conjunction with
this offering, warrants to purchase 1,877,500 shares at an exercise price
of $3.00 per share were issued. The warrants expire on December 31, 1997
and may be called by the Company if certain conditions are met in the
future. The warrants become callable by the Company after the common stock
underlying the warrants is registered and the common stock of the Company
has had a closing bid price of at least $3.60 for the most recent ten
consecutive trading days.
In December 1994, the Company issued warrants to purchase 27,500 shares of
common stock at an exercise price of $3.00 per share in connection with the
negotiation of the extension of maturity dates for the convertible
subordinated debt that was outstanding for a portion of fiscal 1995. The
warrants expire on December 31, 1997. The warrants become callable by the
Company after the common stock underlying the warrants is registered and
the common stock of the Company has had a closing bid price of at least
$3.60 for the most recent ten consecutive trading days.
In December 1994, the Company sold units consisting of common stock and
warrants through a private placement. In conjunction with this offering,
warrants to purchase 200,000 shares at an exercise price of $2.00 per share
were issued. The warrants expire on January 1, 1998. The warrants become
callable by the Company after June 30, 1995 if the common stock of the
Company has had a closing bid price of at least $4.00 for the most recent
five consecutive trading days.
In November 1994, the Company granted options to purchase 200,000 shares of
common stock for $1.50 per share to a group of consultants as consideration
for investor relations consulting services for the period from November 15,
1994 through November 14, 1995. The options expire November 15, 1997.
Although the closing market price for the Company's common stock on the
date of grant exceeded the exercise price of the options, as the optionees
were not employees or directors of the Company, the Company recorded a
prepaid consulting fee and additional paid in capital in the amount of
$118,736 based on an estimate of fair market value of the options. The
prepaid expense was amortized to consulting expense on a straight line
basis over the term of the agreement.
In August 1994, the Company extended the exercise terms of 744,000 non-
qualified options (which consisted of 44,000 options granted to directors
in fiscal 1992 for service on the Board of Directors, 400,000 options
granted to officers of the Company in fiscal 1992 pursuant to the terms of
their employment agreements, and 300,000 options that were granted to
directors in fiscal 1991 in connection with loan guarantees) to expire at a
Page 39 of 71
<PAGE>
date ten years from the original grant date. All of the options were
originally granted to directors, some of whom are major shareholders, of
the Company prior to the end of fiscal 1992. As the market price of the
Company's common stock on the date that the option terms were extended
exceeded the exercise price of the options, the Company recorded
compensation expense of $948,600 relating to the extension of the exercise
terms.
In fiscal 1993, the Company granted options to purchase 30,000 shares of
common stock to a consultant, which were exercisable at a price of $1.25
per share. On April 15, 1996, the consultant exercised all of the options.
In fiscal 1992, the Board of Directors authorized the Company to grant
options to purchase 99,000 shares of common stock to three directors
(33,000 for each director) for $0.60 per share. One third of the options
become exercisable after each of the three fiscal year-ends following the
date of grant, provided that the Company's income before taxes exceeded
$200,000 for the fiscal year then ended. As of March 31, 1996, 22,000 of
these options had been exercised, 33,000 had been canceled and 44,000 of
these options were exercisable. These options originally were to expire on
March 31, 1995. As described above, in August 1994, the Company extended
the exercise terms of 44,000 options then outstanding to expire on March 5,
2002. The Company recorded $56,100 in compensation expense related to the
extension of the exercise terms of these options.
In fiscal 1992, the Board of Directors granted options to purchase 400,000
shares of common stock for $0.60 per share to two of the officers of the
Company pursuant to their employment agreements. The timing of the vesting
of the stock options was dependent on the achievement of specified net
income goals. At March 31, 1996, all of the options were exercisable and
outstanding. These options were originally to expire on January 31, 1997.
As described above, in August 1994, the Company extended the exercise terms
of these options to expire on January 31, 2002. The Company recorded
$510,000 in compensation expense related to the extension of the exercise
terms of these options.
In fiscal 1992, the Company issued warrants to purchase 625,000 shares of
common stock at $0.80 per share in connection with the private placement of
1,250,000 shares of the Company's common stock. The warrants expire on
March 5, 1999.
In fiscal 1991, the Company granted major stockholders and directors stock
options to purchase 350,000 shares of the Company's common stock at
exercise prices of $0.60 per share. These options were originally to expire
on February 1, 1996. As described above, in August 1994, the Company
extended the exercise terms of the 300,000 of these options then
outstanding to expire on January 1, 2002. The Company recorded $382,500 in
compensation expense related to the extension of the exercise terms of
these options.The stock options were granted in connection with loan
guarantees on the Company's borrowings provided by the stockholders and
directors. As of March 31, 1996, 50,000 of these options had been exercised
and the remaining 300,000 options were exercisable.
10. SEVERANCE EXPENSE
During the fourth quarter of fiscal 1996, the Company recorded severance
expense in the amount of $322,303 relating to a change in the executive
officers of the Company. The amount charged as severance expense relates to
the required payments remaining on the contracts of the former executive
officers of the Company.
Page 40 of 71
<PAGE>
11. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 0 $ 0 $ (10,346)
State 4,000 800 1,392
----------- ----------- ------------
Total current 4,000 800 (8,954)
----------- ----------- ------------
Deferred:
Federal 286,506 16,442
State 67,965 (6,688)
----------- ----------- ------------
Total deferred 354,471 9,754
----------- ----------- ------------
Total income tax expense $ 4,000 $355,271 $ 800
=========== =========== ============
</TABLE>
The reasons for the differences between income tax expense and the amount
computed by applying the federal statutory income tax rate to income before
income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> ---- ---- ----
Tax expense at federal <C> <C> <C>
statutory rate 35% 35% 35%
State franchise tax, net of
federal income tax benefit 7 7 7
Extension of stock options (24)
Addition of deferred income tax asset
valuation reserves (42) (39) (42)
Other (2)
------ ------ ------
Actual tax expense 0% 23% 0%
====== ====== ======
</TABLE>
The components of deferred tax assets (liabilities) at March 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deductible:
Net operating loss carryforward $ 973,760 $289,935
Reserve for restructuring 108,800
Alternative minimum tax credits 20,868 20,868
Uniform capitalization rules 33,013 33,013
Reserve for bad debts 48,525 29,084
Inventory reserves 132,800 260,076
Vacation accrual 38,351 43,257
Warranty reserves 5,234 5,234
State taxes (net of federal taxes) 237,651 160,071
------------- -------------
$1,599,002 $841,538
============== =============
</TABLE>
Page 41 of 71
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Taxable:
Depreciation $ (27,982) $ (30,873)
State taxes (net of federal taxes) (7,407) (8,445)
------------- -------------
$ (35,389) $ (39,318)
</TABLE> ============= =============
The net deferred tax asset at March 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets $1,599,002 $ 841,538
Deferred tax liabilities (35,389) (39,318)
------------- -------------
1,563,613 802,220
Valuation allowance (1,563,613) (802,220)
------------- -------------
$ 0 $ 0
============= =============
</TABLE>
The deferred tax asset valuation allowance increased $761,393, $609,373 and
$93,674 in the fiscal years ended March 31, 1996, 1995 and 1994,
respectively.
At March 31, 1996, the Company had net operating loss carryforwards of
approximately $3,184,000 and $1,797,000 for federal income tax and state
franchise tax purposes, respectively. The federal net operating loss
carryforwards expire in the fiscal years ending March 31, 2004 through
2011, and state net operating loss carryforwards expire in the fiscal years
ending March 31, 1997 through 2001.
12. RELATED PARTY TRANSACTIONS
A former director of the Company is also a principal in a law firm that
provides legal consultation to the Company, and was a principal in another
law firm, which has been dissolved, that provided services to the Company.
At March 31, 1996, the Company owed the current law firm $10,101, and
$10,101 of legal fees relating to this firm were included in operating
expenses for the year ended March 31, 1996. At March 31, 1996 and 1995, the
Company owed the dissolved law firm $297 and $24,154, respectively. In
fiscal 1996, 1995 and 1994 legal fees relating to this law firm in the
amounts of $236,839, $199,048, and $142,045, respectively, were included in
operating expenses. Additionally, in fiscal 1995, legal expenses for this
law firm related to the private placement of securities in the amount of
$39,708 were offset against the proceeds of the placement.
In fiscal 1996, the Company paid Maximum Partners, Ltd. a finder's fee in
the amount of $150,000 related to the placement of the Series B Preferred
Stock. The son of the Company's Vice Chairman is a principal of Maximum
Partners, Ltd. Subsequent to March 31, 1996, Maximum Partners, Ltd. also
received $150,000 and warrants to purchase 30,000 shares of common stock at
an exercise price of $3.00 per share as a finder's fee for the placement of
the Series C Preferred Stock.
The Company had subordinated notes payable to two individuals who were each
officers, major stockholders and directors of the Company, which were
repaid during fiscal 1995. The notes were payable on demand with interest
at 9% per annum and were secured by all
Page 42 of 71
<PAGE>
of the assets of the Company. The Company paid interest of $2,707, and
$10,069 during the fiscal years ended March 31, 1995 and 1994,
respectively, related to these loans.
13. SUBSEQUENT EVENTS
Placement of Series C Preferred Stock - In April 1996, the Company sold 75
-------------------------------------
shares of Series C Preferred Stock, $20,000 stated value per share (the
'Series C Preferred Stock"), for gross proceeds of $1,500,000 (net proceeds
of approximately $1,325,000). Dividends are payable in cash or common
stock, at the option of the Company, at a rate of 6% per annum. The shares
are convertible to common stock with a conversion price equal to the lesser
of the average closing bid price for the five trading days prior to the
date of sale or 75% of the average closing bid price for the five trading
days prior to the date of conversion or redemption. The average closing bid
price for the five trading days prior to the date of sale was $2.24 per
share. The Series C Preferred Stock may be redeemed, in whole or in part,
at the option of the Company for a total amount equal to 133% of the stated
value of the redeemed shares, plus accrued dividends on such shares.
Repayment of Line-of-Credit - On May 2, 1996, the Company repaid all
---------------------------
amounts that were outstanding under its line-of-credit financing agreement
and the agreement was terminated.
Exercise of Options and Warrants - Subsequent to March 31, 1996, options to
--------------------------------
purchase 30,000 shares of the Company's common stock and warrants to
purchase 271,000 shares of the Company's common stock were exercised. The
Company received $850,500 in proceeds as a result of the exercises.
Conversion of Preferred Stock - Subsequent to March 31, 1996, 30
-----------------------------
shares of Series B Preferred Stock were converted into 363,087 shares of
common stock.
* * * * * *
Page 43 of 71
<PAGE>
Exhibit 3.9
Certificate of Amendment of Articles of Incorporation filed February 14, 1996.
A471639
State of California
SECRETARY OF STATE
CORPORATE DIVISION
I, BILL JONES, Secretary of State of the State of California, hereby
certify:
That the annexed transcript has been compared with the corporate record on
file in this office, of which it purports to be a copy, and that same is full,
true and correct.
IN WITNESS WHEREOF, I execute this
certificate and affix the Great Seal
of the State of California this FEB
14, 1996
[The Great Seal of the State of California]
/s/ Bill Jones
Secretary of State
Page 44 of 71
<PAGE>
A471639
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ASTRO SCIENCES CORPORATION,
a California corporation
Gerald R. Sayer and James R. Spievak certify that:
1. They are the President and Secretary, respectively, of Astro Sciences
Corporation, a California corporation (the "Corporation").
2. Article I of the Corporation's Articles of Incorporation is amended
and restated to read in its entirety as follows:
"The name of the Corporation is CHATCOM, INC."
3. The foregoing amendment to the Corporation's Articles of Incorporation
has been duly approved by the Board of Directors of the Corporation.
4. The foregoing Amendment to the Corporation's Articles of Incorporation
has been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding shares of
Common Stock is 7,536,629 and the total number of outstanding shares of
Preferred Stock is 0. The number shares voting in favor of the amendment
equaled or exceeded the vote required. The minimum percentage vote required was
more than fifty percent of the outstanding shares of Common Stock. No shares of
Preferred Stock are outstanding.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: February 8, 1996 /s/ Gerald R. Sayer
-----------------------------------
Gerald R. Sayer, President
/s/ James R. Spievak
-----------------------------------
James R. Spievak, Secretary
Page 45 of 71
<PAGE>
Exhibit 10.12
CONSULTING AGREEMENT
--------------------
This Consulting Agreement (this"Agreement") is made as of this 11th day of
March 1996, between ChatCom, Inc., a California corporation ("ChatCom"), and
George L. Lazik, an independent consultant ("Consultant").
In consideration of the mutual promises and covenants contained herein, the
parties hereto agree as follows:
Purpose. ChatCom hereby employs Consultant during the term hereof to
-------
provide consulting services to ChatCom upon the terms and conditions set forth
herein, and Consultant agrees to serve as a consultant to ChatCom upon such
terms and conditions.
Term. The term of this Consulting Agreement shall be for eighteen
----
months from the date hereof. This Agreement shall not be terminable by any
party expect for cause, which shall be defined for purposes hereof as a material
breach of this Agreement, gross negligence or wilful misconduct.
Devotion of Time; Duties of Consultant. During the term hereof,
--------------------------------------
Consultant will devote 20 hours per week (non-cumulative) to projects and/or
tasks assigned by ChatCom's Chief Executive Officer or Board of Directors to
Consultant from time to time. Such projects and tasks will be related to
strategic direction, products, business development and other matters agreed to
by ChatCom's Chief Executive Officer or Board of Directors and Consultant. It
is understood that Consultant is not to be obligated to be available in
accordance with any regular daily work schedule but only from time to time on an
intermittent or periodic basis in accordance with consulting requests made by
ChatCom. Consultant shall, on the 3rd business day after each pay period during
the term of this Agreement, submit to ChatCom's Chief Executive Officer a
written description of the consulting services performed by Consultant during
such pay period.
Consultant shall be free to engage in personal business ventures apart from
his consulting duties under this Agreement.
Payment to Consultant. ChatCom shall pay to Consultant a consulting
---------------------
fee of (a) $80,000 for the first 12- month period during the term of this
Agreement, and (b) $50,000 for the last six-month period during the term of this
Agreement (the "Consulting Fee"). Consulting Fees shall be payable every two
weeks in accordance with the regular executive payroll procedures of ChatCom.
If ChatCom is acquired or merged, ChatCom, at Consultant's option, shall pay to
Consultant on the effective date of such acquisition or merger all Consulting
Fees which are due but unpaid on such date or are payable during the then
remaining term of this Agreement.
Automobile and Telephone Allowance. ChatCom shall pay Consultant $600
----------------------------------
per month as a combined automobile and cellular telephone allowance.
Expenses. ChatCom shall reimburse Consultant for out-of-pocket
--------
expenses authorized in writing, in advance and necessarily and reasonably
incurred by Consultant in providing consulting services as requested by ChatCom
hereunder. Reimbursement of expenses shall be made by ChatCom within ten
business days after submission to ChatCom of appropriately detailed and
supported expense statements.
Medical Insurance. ChatCom shall continue to provide medical
-----------------
insurance coverage to Consultant during the term of this Agreement. The terms
of such coverage will be as currently in force or, if ChatCom reduces the
coverage it generally provides to its other executives, consistent with such
reduced coverage.
Page 46 of 71
<PAGE>
Termination of Employment Agreement. Consultant hereby agrees and
-----------------------------------
acknowledges that the Employment Agreement made as of April 1, 1995 between
Astro Sciences Corporation (whose name has been changed to ChatCom, Inc.) and
Consultant (the "Employment Agreement") has by mutual agreement of ChatCom and
Consultant been cancelled and superseded by this Agreement. Consultant further
agrees and acknowledges that all compensation, allowances, reimbursements and
other obligations currently due, or to become due or payable, to Consultant in
the future pursuant to the terms of the Employment Agreement have been satisfied
in full or are hereby cancelled, forgiven or otherwise discharged in full.
Resignation. Consultant hereby resigns as Executive Vice President of
-----------
ChatCom. Such resignation shall be effective immediately upon execution of this
Agreement by ChatCom and Consultant.
Departure from ChatCom Office; ChatCom Property. Consultant agrees to
-----------------------------------------------
vacate ChatCom's physical offices by 5:00 p.m. Pacific Standard Time on March 9,
1996. All ChatCom property in possession of Consultant, including but not
limited to, the camera will be left at or returned to ChatCom's offices prior to
such time. Consultant shall, during the term of this Agreement, be entitled to
retain possession of the computer system currently located at Consultant's home.
Fiduciary Obligations.
---------------------
Inventions, Discoveries, Trade Secrets, Know-How and
----------------------------------------------------
Confidential Matters. Consultant agrees that he will treat as confidential and
- --------------------
secret all information, discoveries, customer lists, trade secrets, documents,
bids proposals, contracts, marketing plans and strategies, computer software,
pricing policies, financial information, and other information and data made
available to him during the course of his employment by ChatCom and during the
term hereof, that has not become public information, and that he will not,
directly or indirectly, make known, divulge or use any such information,
discovery, secret, document, plan, policy, or data, other than in the ordinary
course of his providing consulting services to ChatCom or as required by law.
All the terms of this Section 11.1 shall remain in full force during the term of
this Agreement and for a period of two years thereafter.
Solicitation of Customers. Consultant agrees that he will not
-------------------------
for a period of 12 months after termination of this Agreement, directly or
indirectly, either for himself or for any other person, firm, company or other
entity, solicit, divert or take away, or attempt to solicit, divert or take
away, any of the customers or clientele of ChatCom with whom it either had an
existing agreement and/or purchase order or with whom it was negotiating for
such at the time of termination of this Agreement.
Enticement of Other Employees After Termination of the
------------------------------------------------------
Consulting Agreement. Consultant agrees that he will not, for a period of two
- --------------------
years after the termination of this Agreement, disturb, hire away, entice away,
or in any other manner persuade any employee of ChatCom to discontinue his or
her relation to ChatCom as an employee.
Remedy for Breach. In the event of a breach or threatened
-----------------
breach of this Agreement, ChatCom shall be entitled to institute and prosecute
proceedings in any court of competent jurisdiction, either in law or in equity,
to obtain damages for any breach of this Agreement, or to enforce the specific
performance thereof by Consultant, or to enjoin the breach of threatened breach
by Consultant of the provisions of Sections 11.1, 11.2 or 11.3 above.
Non-Competition Agreement. To the extent necessary to protect
-------------------------
ChatCom's (a) business, and (b) confidential and trade secret information,
Consultant agrees that he shall not, either directly or indirectly, carry on or
engage in, either as an owner, part-owner, manager, operator, employee,
salesman, agent, or other participant, the business of ChatCom within the cities
and counties of the United States, including, but not limited to, the Counties
of California listed on Schedule A hereto, during
Page 47 of 71
<PAGE>
the term of this Agreement and for so long, not exceeding 12 months from the
date of termination of this Agreement, as ChatCom conducts business in such
cities and counties.
As consideration for Consultant's continuation of this non-competition
agreement for such 12-month period after the date of termination of this
Agreement (the Termination Date"), and continued adherence to the restrictions
of Section 11.2 and 11.3 hereof, ChatCom shall pay Consultant $20,000 within 30
days of the Termination Date.
ChatCom and Consultant acknowledge that subsequent to the date of execution
of this Agreement, Consultant may enter into business activities that are not
---
then in violation of the provisions of this Section 12 or are not the same as,
---
similar to or related to activities then anticipated or planned by ChatCom to be
part of the business of ChatCom, and ChatCom may thereafter enter into business
activities that are the same, similar to or related to such activities then
being conducted by Consultant. In such event, the provisions of this Section 12
shall not be interpreted or construed in a manner that results in Consultant
being in violation of this Section 12 for the conduct of such business
activities.
The remedy at law for breach of this Section being inadequate, ChatCom
shall be entitled, in addition to such other remedies as it may have, to
temporary, preliminary, and permanent injunctive relief for any breach or
threatened breach of this Section without proof of any actual damages that have
been or may be caused to it by such breach, Consultant hereby acknowledging that
such remedy at law is inadequate.
Disclosure to Corporation; Works Made For Hire.
----------------------------------------------
Consultant has or shall disclose fully and promptly to ChatCom in writing
any and all inventions, trade secrets, know-how, writings and other intellectual
property (whether or not patentable or copyrightable) and including any and all
improvements, discoveries, test data and findings, and computer codes and/or
programs, and other contributions conceived, developed, or begun by Consultant,
or by him jointly or with others, which arise in any way from or as a result of
Consultant's services on behalf of ChatCom or which were conceived, developed,
or begun during the term of the Employment Agreement or this Agreement, and
except as disclosed on Schedule B hereto, Consultant will not directly or
indirectly disclose or use any of such items for Consultant's or any other
party's benefit after termination of this Agreement. Consultant further agrees
that except as disclosed on Schedule B hereto, all patents applied for or
obtained as well as copyrightable material written or authored in connection
with Consultant's services on behalf of ChatCom are, and are to be, deemed works
made for hire, and owned and authored by ChatCom.
Assignment; Cooperation.
Consultant agrees to assign and hereby does assign to ChatCom all right,
title and interest in and to all such inventions, trade secrets, know-how,
writings and other intellectual property referenced in Section 13 hereof, except
those disclosed on Schedule B, and further agrees at ChatCom's request to
execute any and all patent applications, copyright applications, powers of
attorney, affidavits and other documents, reasonably deemed necessary or
desirable by ChatCom's attorneys to convey title in any of the inventions, trade
secrets, know-how, writings or other intellectual property assigned hereunder,
or to record the same in any country of the world or to claim priority therefor,
or to apply for, secure, maintain, assert or enforce patent and copyright
protection therefor in any country of the world in the name of ChatCom.
Consultant further agrees to cooperate, and on ChatCom's request to testify in
any proceeding to apply for, secure, maintain, protect or enforce ChatCom's
rights in any such inventions, trade secrets, know-how, writings or other
intellectual property, but ChatCom shall reimburse Consultant for his time and
reasonable expenses in connection therewith.
Commissions or Grant of Stock Options. ChatCom's Board of Directors
-------------------------------------
or Chief Executive Officer may in its or his sole discretion, as
Page 48 of 71
<PAGE>
the case may be, and based on its or his determination that Consultant has
rendered superior services to ChatCom during the term of this Agreement, (a)
increase the amount of the Consulting Fees payable to Consultant during the term
of this Agreement, (b) pay consultant a commission, or (c) grant stock options
to Consultant (only the Board of Directors may grant stock options), in such
amount as ChatCom's Board of Directors or Chief Executive Officer, shall
determine in its or his sole discretion, as the case may be.
Press Release. ChatCom and Consultant shall mutually agree on the
-------------
wording of the press release to be issued in connection with termination of the
Employment Agreement, Consultant's resignation as Executive Vice President, and
execution of this Agreement.
Indemnification. ChatCom shall indemnify and hold harmless consultant
---------------
from any and all liability arising in connection with or related to Consultant's
written personal guaranty of ChatCom's liabilities or obligations, made at the
request of or with the knowledge and approval of ChatCom's Board of Directors.
Miscellaneous.
-------------
Neither this Agreement nor any of the rights and obligations
hereunder shall be assignable by any party hereto, except that ChatCom may
assign its rights and obligations to an affiliate of ChatCom.
Any notice or other communication between the parties hereto
shall be sufficiently given if sent by certified or registered mail, postage
prepaid, and if to:
ChatCom: ChatCom, Inc.
9600 Topanga Canyon Boulevard
Chatsworth, California 91311
Attn: Mr. James Mariner
Consultant: George L. Lazik
20921 Arcana Road
Woodland Hills, CA 91364
or to any other address hereafter designated in writing by one party to the
other. Such notice or other communication so given shall be deemed to be given
on the date so mailed.
This Agreement sets forth the entire understanding between the
parties as to the subject matter hereof. This Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. This Agreement shall be
construed and enforced in accordance with the laws of the State of California.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect, and such term or other provision shall be amended so as to
effect the original intention of the parties as closely as possible. In the
event of litigation relating to this Agreement, the prevailing party shall be
entitled to reasonable, attorneys' fees and costs.
Page 49 of 71
<PAGE>
Nothing contained herein shall be deemed to create an
employer/employee relationship, an agency relationship, a partnership or joint
venture between consultant and ChatCom or render ChatCom or Consultant liable
for the obligations of the other. Except as otherwise herein agreed, ChatCom
shall not be liable to the Consultant for expenses incurred by the Consultant,
and the Consultant shall not have authority to bind ChatCom by a promise or
representation, unless specifically authorized in writing in a particular
transaction. The Consultant shall be an independent contractor and not a
servant, employee, joint venturer or partner of ChatCom.
IT WITNESSES WHEREOF, this Agreement has been duly executed and delivered
on the day and year first set forth above.
/S/ George L. Lazik
-------------------------------
George L. Lazik
ChatCom, Inc.,
a California corporation
By/s/ James B. Mariner
-----------------------------
James B. Mariner,
Chief Executive Officer
Page 50 of 71
<PAGE>
SCHEDULE A
CONSULTING AGREEMENT
Between ChatCom, Inc. and
George Lazik
List of California Counties in which ChatCom, Inc. is doing business or has
recently derived revenues from sales to customers as of the date of this
Agreement.
Counties
- --------
Alameda
Contra Costa
Imperial
Kern
Los Angeles
Orange
Riverside
Sacramento
San Diego
San Francisco
San Mateo
Santa Barbara
Sonoma
Ventura
Page 51 of 71
<PAGE>
Exhibit 10.14
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of the date of acceptance set
forth below, is entered into by and between CHATCOM, INC., a California
corporation, with headquarters located at 9600 Topanga Canyon Boulevard,
Chatsworth, California (the "Company"), and the undersigned (the "Buyer").
WITNESSETH:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 under Regulation D ("Regulation D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act"); and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, 6% Series B convertible Preferred Stock (no
par value) (the "Preferred Stock") of the company which will be convertible into
shares of Common Stock, no par value (the "Common Stock"), of the Company upon
the terms and subject to the conditions of such Preferred Stock, subject to
acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
A. PURCHASE. The undersigned hereby agrees to purchase from the
Company Preferred Stock of the Company, in the liquidation preference set forth
on the signature page of this Agreement and having the terms and conditions and
being in the form attached hereto as ANNEX I. The purchase price for the
Preferred Stock shall be as set forth on the signature page hereto and shall be
payable in United States Dollars.
B. FORM OF PAYMENT. The Buyer shall pay the purchase price for the
Preferred Stock by delivering immediately available good funds in United States
Dollars to the escrow agent (the "Escrow Agent") identified in the Joint Escrow
Instructions attached hereto as ANNEX II (the "Joint Escrow Instructions").
Such delivery of funds shall be made against delivery by the Company of the
Preferred Stock duly executed on behalf of the Company. Promptly following
payment by the Buyer to the Escrow Agent of the purchase price of the Preferred
Stock, the Company shall deliver a Certificate for the Preferred Stock duly
executed on behalf of the Company, to the Escrow Agent. By signing this
Agreement, the Buyer and the Company each agrees to all of the terms and
conditions of, and becomes a party to, the Joint Escrow Instructions, all of the
provisions of which are incorporated herein by this reference as if set forth in
full.
C. METHOD OF PAYMENT. Payment into escrow of the purchase price for
the Preferred Stock shall be made by wire transfer of funds to:
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<PAGE>
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Escrow Account No._______________________________
Not later than 1:00 p.m., New York time, on the date which is three (3) New York
Stock Exchange trading days after the Company shall have accepted this Agreement
and returned a signed counterpart of this Agreement to the Escrow Agent by
facsimile, the Buyer shall deposit with the Escrow Agent the aggregate purchase
for the Preferred Stock, in currently available funds.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
A. The Buyer is purchasing the Preferred Stock and would be
acquiring the shares of Common Stock issuable upon conversion of the Preferred
Stock for its own account for investment only and not with a view towards the
public sale or distribution thereof and not with a view to or for sale in
connection with any distribution thereof:
B. The buyer is (i) an "accredited investor" as that term is defined
in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501 (a)(3), and (ii) experienced in making investments of the kind
described in this Agreement, and the related documents, (iii) able, by reason of
the business and financial experience of its officers and professional advisors
(who are not affiliated with or compensated in any way by the Company or any of
its affiliates or selling agents), to protect its own interests in connection
with the transactions described in this Agreement, and the related documents,
and (iv) able to afford the entire loss of its investment in the Preferred
Stock;
C. All subsequent offers and sales of the Preferred Stock and the
shares of Common Stock issuable upon conversion of, or in lieu of payment of
interest on, the Preferred Stock (the "Shares" and, together with the Preferred
Stock, the "Securities") by the Buyer shall be made pursuant to registration of
the Shares under the 1933 Act or with respect to the Preferred Stock pursuant to
an exemption from registration;
D. The Buyer understands that the Preferred Stock is being offered
and sold and the Shares are being offered, to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understanding of the Buyer set forth herein order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Preferred Stock and to receive an offer of the shares;
E. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Preferred Stock and the offer of
the Shares which have been requested by the Buyer, including Exhibit A hereto.
The Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company and have received complete and satisfactory answers to
any such
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<PAGE>
inquiries. Without limiting the generality of the foregoing, the Buyer has had
the opportunity to obtain and to review the Company's (1) Annual Report on Form
10-K for the fiscal year ended March 31, 1995, (2) Quarterly Reports on Form 10-
Q for the fiscal quarters ended June 30, 1995, September 30, 1995 and December
31, 1995, (3) Current Reports on Form 8-K, dated February 5, 1996, February 8,
1996 and March 6, 1996, (4) definitive Proxy Statement for its 1995 Annual
Meeting of Stockholders, and (5) registration Statement on Form S-3
(Registration No. 33-99668) as declared effective by the SEC on February 5,
1996, in each case as filed with the SEC;'
F. The Buyer understands that its investment in Securities involves
high degree of risk;
G. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities; and
H. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
I. The Buyer is not purchasing the Preferred Stock for the purpose
of covering any short sales of the Common Stock made by the Buyer with the
Shares.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
A. CONCERNING THE SHARES. The Shares have been duly authorized and,
when issued upon conversion of the Preferred Stock, will be duly and validly
issued, fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder. There are no preemptive
rights of any Stockholder of the Company, as such, to acquire the shares. The
COMPANY has registered its common stock pursuant to Section 12 of the Exchange
Act and the common stock trades on NASDAQ/SMALL CAP MARKET, and has received no
notice, either oral or written, with respect to discontinuance of its continued
eligibility for such listing.
B. STOCK PURCHASE AGREEMENT; REGISTRATION RIGHTS AGREEMENT AND
STOCK. This Agreement and the Registration Rights Agreement, the form of which
is attached hereto as ANNEX III (the "Registration Rights Agreement"), have been
duly and validly authorized by the Company, this Agreement has been duly
executed and delivered by the Company and this Agreement is, and the
Registration Rights Agreement, when executed and delivered by the Company, will
be, valid and binding agreements of the Company enforceable in accordance with
their respective terms, subject as to enforceability to general principles of
equity and to bankruptcy, insolvency, moratorium, and other similar laws
affecting the enforcement of creditors' rights generally; and the Preferred
Stock will be duly and validly authorized and, when executed and delivered on
behalf of the Company in accordance with this Agreement, will be a valid and
binding obligation of the Company in accordance with its terms, subject to
general principles of equity and to bankruptcy, insolvency, moratorium, or other
similar laws affecting the enforcement of creditors' rights generally.
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<PAGE>
C. NON-CONTRAVENTION. The execution and delivery of this Agreement
and the registrations Rights Agreement by the Company and the consummation by
the Company of the issuance of the Securities and the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and the
Preferred Stock do not and will not conflict with or result in a breach by the
company of any of the terms or provisions of, or constitute a default under, the
certificate of incorporation or by-laws of the Company, or any indenture,
mortgage, deed of trust, or other material agreement or instrument to which the
company is a party of by which it or any of its properties or assets are bound,
or any material existing applicable law, rule, or regulation or any applicable
decrees, judgment, or order of any court, United States federal or state
regulatory body, administrative agency, or other governmental boding having
jurisdiction over the Company or any of its properties or assets.
D. APPROVALS. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the Stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Securities to the Buyer as
contemplated by this Agreement.
E. INFORMATION PROVIDED. The information provided by or on behalf
of the Company to the Buyer and referred to in Section 2(e) of this Agreement
does not contain any untrue statement therein, in the light of the circumstances
under which they are made, not misleading.
F. ABSENCE OF CERTAIN CHANGES. Since December 31, 1995, there has
been no material adverse change and no material adverse development in the
business, properties, operations, financial condition, results of operating or
prospects of the Company, except as disclosed in the documents referred to in
Section 2(e) hereof:
G. ABSENCE OF LITIGATION. Except as disclosed in Exhibit A hereto,
---------
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board or body pending or, to the knowledge of the Company or any
of its subsidiaries, threatened against or affecting the Company or any of its
subsidiaries, wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the properties, business, conditions (financial or
other), results of operations or prospects of the Company and its subsidiaries
taken as a whole or the transactions contemplated by this Agreement or any of
the documents contemplated hereby or which would adversely affect the validity
or enforceability of, or the authority or ability of the company to perform its
obligations under, this Agreement or any of such other documents.
H. ABSENCE OF EVENTS OF DEFAULT. No Event of Default, as defined in
any agreement to which the Company is a party, and no event which, with the
giving of notice or the passage of time or both, would become an Event of
Default (as so defined), has occurred and is continuing.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
A. TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the
Preferred Stock has not been and is not being registered under the provisions of
the 1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be
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<PAGE>
made only in accordance with the terms of said Rule and further, if said rule is
not applicable, any resales of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
B. RESTRICTIVE LEGEND. The buyer acknowledges and agrees that the
Preferred Stock, and, until such time as the shares have been registered under
the 1933 Act as contemplated by the Registration Rights Agreement and sold in
accordance with such Registration Statement, the certificates for the shares,
may bear a restrictive legend in substantially the following form (and a stop-
transfer order may be placed against transfer of the certificates for the
Shares):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
C. REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter
into the Registration Rights Agreement, in the form attached hereto as Annex
III, on or before the Closing date.
D. FILINGS. The Company undertakes and agrees to make all necessary
filings in connection with the sale of the Preferred Stock as required by United
States laws and regulations, or by any domestic securities exchange or trading
market, and to provide a copy thereof to the buyer promptly after such filing.
E. NASDAQ NOTIFICATION; REPORTING STATUS. The Company shall timely
file a "NASDAQ Small Cap market notification form for Listing of Additional
Shares and Notification Pursuant to SEC Rule 10b-17" with respect to the Shares
with the National Association of Securities Dealers, Inc. and shall provide
evidence of such filing to the Buyer. So long as the Buyer beneficially owns any
of the Securities, the Company shall file all reports required to be filed with
the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "1943 Act"), and the Company shall not terminate its status as
an issuer required to file reports under the 1934 Act even if the 1934 or the
rules and regulations thereunder would permit such termination.
F. USE OF PROCEEDS. The Company will use the proceeds from the sale
of the Preferred Stock (excluding amounts paid the Company for legal fees and
finder's fees in connection with the sale of the Preferred Stock) for the
repayment of the Company's debt and internal working capital purposes and shall
not, directly or indirectly, use such proceeds for any loan to or investment in
any other corporation, partnership enterprise or other person.
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<PAGE>
5. TRANSFER AGENT INSTRUCTIONS.
Promptly following the delivery by the Buyer of the aggregate purchase
price for the Preferred Stock in accordance with Section 1(c) hereof, and prior
to the Closing Date, the Company will irrevocably instruct its transfer agent to
issue certificates for the Shares from time to time upon conversion of the
Preferred Stock in such amounts as specified from time to time by the company to
the transfer agent, bearing the restrictive legend specified in Section 4(b) of
this Agreement prior to registration of the Shares under the 1933 Act,
registered in the name of the buyer or its nominee and in such denominations to
be specified by the Buyer in connection with each conversion of the Preferred
Stock. The Company warrants that no instruction other than such instructions
referred to in this Section 5 and stop transfer instructions to give effect to
Section 4(a) hereof prior to registration of the Shares under the 1933 Act will
be given by the Company to the transfer agent and that the Shares shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement, the Registration Rights Agreement, and
applicable law. Nothing in this Section shall affect in any way the Buyer's
obligations and agreement to comply with all applicable securities laws upon
resale of the Securities. If the Buyer provides the Company with an opinion of
counsel reasonably satisfactory to the Company that registration of a resale by
the Buyer of any of the Securities in accordance with clause (1)(B) of Section
4(a) of this Agreement is not required under the 1933 Act, the Company shall
(except as provided in clause (2) of Section 4(a) of this Agreement) permit the
transfer of the Securities and, in the case of the Shares, promptly instruct the
Company's transfer agent to issue one or more share certificates without legend
in such name and in such denominations as specified by the Buyer.
6. STOCK DELIVERY INSTRUCTIONS.
The Preferred Stock shall be delivered by the Company to the Escrow
Agent pursuant to Section 1(b) hereof on a delivery against payment basis at the
closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Stock (the "Closing
Date") shall be not later than 12:00 Noon, New York time, on the date which is
one New York Stock Exchange trading day after the date on which the Buyer has
deposited the purchase price for the Preferred Stock with the Escrow Agent in
accordance with Section 1(c) hereof, or such other mutually agreed to time but
not later than ________, 1996 unless waived by the Company. The closing shall
occur on the Closing Date at the offices of the Escrow Agent.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the company's obligation to sell the
Preferred Stock to the Buyer pursuant to this Agreement is conditioned upon:
A. The receipt and acceptance by the Company of such Agreement as
evidenced by execution of such Agreement by the Company for at least $1,500,000
in Preferred Stock;
B. Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the purchase price for the Preferred Stock
in accordance with Section 1(c) hereof; and
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<PAGE>
C. The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the closing
date and the performance by the Buyer on or before the Closing Date of all
covenants and agreements of the Buyer required to be performed on or before the
Closing Date.
D. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Stock is conditioned upon:
A. Acceptance by Purchaser of an Agreement for the sale of Preferred
Stock as indicated by execution of the Agreement;
B. Delivery by the Company to the Escrow Agent of the Stock in
accordance with this Agreement;
C. The accuracy on the Closing Date of the representations and
warranties of the Company contained in this Agreement as if made on the Closing
Date and the performance by the Company on or before the Closing Date of all
covenants and agreements of the Company required to be performed on or before
the Closing Date; and
D. On the Closing Date, the Buyer having received an opinion of
counsel for the Company, dated the Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer, to the effect set forth in Annex IV
attached hereto.
10. GOVERNING LAW; MISCELLANEOUS.
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto. This Agreement may
be signed in one or more counterparts, each of which shall be deemed an
original. The headings of the Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement. If any
provision of the Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only an instrument in writing signed by the party to be charged with
enforcement. This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof. Any notices
required or permitted to be given under the terms of this Agreement shall be
sent by mail or delivered personally or by courier and shall be effective five
days after being placed in the mail, or mailed, or upon receipt, if delivered
personally or by courier, in each case addressed to a party at such party's
address shown in the introductory paragraph or on the signature page of this
Agreement or such other address as a party shall have provided by notice to the
other party in accordance with this provision.
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
or one of its officers thereunto duly authorized as of the date set forth below.
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<PAGE>
LIQUIDATION PREFERENCE OF PREFERRED STOCK $ 250,000
PURCHASE PRICE: $ 250,000
NAME OF BUYER: ____________________________
SIGNATURE:
BY ________________________
TITLE: ___________________________
DATE:
ADDRESS:
This Agreement has been accepted as of the date set forth below.
CHATCOM, INC.
By: ____________________
Title: ____________________
Date: ____________________
Page 59 of 71
<PAGE>
Annex III
to
Stock Purchase
Agreement
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March , 1996 (this
"Agreement"), is made by and between CHATCOM, INC., a California corporation
(the "Company"), and the person named on the signature page hereto (the "Initial
Investor").
WITNESSETH:
WHEREAS, upon the terms and subject to the conditions of the Stock
Purchase Agreement, dated as of March , 1996, between the Initial Investor and
the Company (the "Stock Purchase Agreement"), the Company has agreed to issue
and sell to the Initial Investor 6% Series B Convertible Preferred Stock of the
Company (the "Preferred Stock") which will be convertible into shares of the
common stock, no par value (the "Common Stock"), of the Company (the "Conversion
Shares") upon the terms and subject to the conditions of such Preferred Stock;
and
WHEREAS, to induce the Initial Investor to execute and deliver the
Stock Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Conversion Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agrees as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investor" means the Initial Investor and any transferee or
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or order of effectiveness of
such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "Registration Statement" means the Conversion Shares.
(iv) "Registration Statement" means a registration statement of the
Company under the Securities Act.
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(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
(c) Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Stock Purchase Agreement.
2. REGISTRATION.
(A) MANDATORY REGISTRATION. The Company shall prepare, and on or
prior to the date which is fifteen (15) days after the Closing Date (as that
term is defined in Section 7 of the Stock Purchase Agreement) file with the SEC,
either a Registration Statement on Form S-3 covering at least an aggregate of
2,000,000 shares of Common Stock for the Initial Investors and any other
purchasers of the Preferred Stock (pro rata) as Registrable Securities (or such
lesser number as may be required by the SEC, but in no event less that the
number of shares into which the Preferred Stock would be convertible at the time
of filing of the Form S-3), or an amendment to any pending Company Registration
Statement on Form S-3, and such Registration Statement or amended Registration
Statement shall state that, in accordance with rule 416 under the Securities
Act, it also severs such indeterminate number of additional share of Common
Stock as may become issuable upon conversion of the Preferred Stock to prevent
dilution resulting from stock splits, or stock dividends. If at any time the
number of shares of Common Stock into which the Preferred Stock may be converted
exceeds 2,000,000 shares of Common Stock, the Company shall, within ten (10)
business days after receipt of a written notice from any Investor, either (i)
amend the Registration Statement filed by the Company pursuant to the preceding
sentence, if such Registration Statement has not been declared effective by the
SEC at that time, to register all shares of Common Stock into which the
Preferred Stock may be converted, or (ii) if such Registration Statement has
been declared effective by the SEC at that time, file with the SEC an additional
Registration Statement on Form S-3 to register the shares of Common Stock into
which the Preferred Stock may be converted that exceed the 2,000,000 shares of
Common Stock already registered.
(B) UNDERWRITTEN OFFERING. If any offering pursuant to a
Registration Statement pursuant to Section 2(a) hereof involves an underwritten
offering, the Investor who hold a majority in interest of the Registrable
Securities subject to such underwritten offering shall have the right to select
one legal counsel to represent their interests, and an investment banker or
bankers and manager or managers to administer the offering, which investment
banker or bankers or manager or managers shall be reasonably satisfactory to the
Company. The Investor who hold the Registrable Securities to be included in such
underwriting shall pay all underwriting discounts and commissions and other fees
and expenses of such investment banker or bankers and manager or managers so
selected in accordance with this Section 2(b) (other than fees and expenses
relating to registration of Registrable Securities under federal or state
securities laws, which are payable by the Company pursuant to Section 5 hereof)
with respect to their Registrable Securities and the fees and expenses of such
legal counsel so selected by the Investors.
(C) PAYMENTS BY THE COMPANY. If the Registration Statement covering
the Registrable Securities required to be filed by the Company pursuant to
Section 2(a) hereof is not effective within seventy-five (75) days after the
Closing Date (the "Initial Date"), then the Company will make payments to the
Initial Investor is such amounts and at such times as shall be determined
pursuant to this Section 2(c). The amount to be paid by the Company to the
Initial Investor shall be determined as of each Computation Date, and such
amount shall be equal to two percent (2%) of the purchase price paid by the
Initial Investor for the Preferred Stock pursuant to the
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Stock Purchase Agreement from the Initial Date to each of the first ten 910)
Computation Dates, and 1% for each of the next twenty-four (24) Computation
Dates thereafter, pro rata to the date the Registration Statement is declared
effective by the SEC (the "Periodic Amount"); provided, however, that the
-------- -------
Company may elect in lieu of payment of any Periodic Amount in cash to pay
shares of Common Stock having an Aggregate Market Value equal to the amount of
the Periodic Amount if, but only if, such shares are freely tradable by the
Initial Investor (which shall be registered with the SEC not later than forty-
five (45) days after when the shares are payable by the Company, or the Company
shall immediately thereafter pay the Initial Investor in cash the amount due),
without any restriction under the Securities Act or any state securities or
"blue sky" law. The full Periodic Amount shall be paid by the Company in
immediately available funds within three business days after each Computation
Date.
As used in this Section 2(c), the following terms shall have the
following meanings:
"Aggregate Market Value" of any shares of Common Stock as of any
Computation Date means the product obtained multiplying (a) such number of
shares of Common Stock times (b) the Average Market Price of the Common Stock
for the Measurement Period for such Computation Date.
"Average Market Price" of any security for any period shall be
computed as the closing bid price of such security (or the mean average of the
high and low bid prices for such security on any trading day for which no sales
are reported) for each trading day in such period on the principal trading
market for such security, as reported by such market.
"Computation Date" means the date which is one hundred five (105) days
after the Closing Date and, if the Registration Statement required to be filed
by the Company pursuant to Section 2(a) has not therefore been declared
effective by the SEC, each date which is thirty (30) days after the previous
Computation Date until such Registration Statement is so declared effective.
"Measurement Period" means the period of ten consecutive trading days
for the Common Stock ending on (or, if such Computation Date is not a trading
date, on the last trading day preceding) each Computation Date.
(D) ELIGIBILITY FOR FORM S-3. The Company represents and warrants
that it meets the requirements for the use of Form S-3 for registration of the
sale by the Initial Investor and any Investor who purchases the Registrable
Securities and the Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to maintain such eligibility for
the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration
of the Registrable Securities, the Company shall do each of the following.
(a) Prepare promptly, and file with the SEC not later than fifteen
(15) days after the Closing Date, a Registration Statement with respect to not
less that the number of Registrable Securities provided in Section 2(a), above,
and thereafter use its best efforts to cause each Registration Statement
relating to Registrable Securities to become effective as soon as possible after
such filing, and keep the Registration Statement effective pursuant to Rule 415
at all times until the earliest (the "Registration Period") of (i) the date that
is three years after the Closing Date (ii) the date when the Investors may sell
all Registrable Securities under Rule 144 or (iii) the date the Investors no
longer own nay of the Registrable Securities, which Registration Statement
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(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they are made, not
misleading; and
(b) Prepare and file with the SEC such amendments (including post-
effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement.
(c) Furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel, (i) promptly after
the same is prepared and publicly distributed, filed with the SEC, or received
by the Company, one (1) copy of the Registration Statement, each preliminary
prospectus and prospectus, and each amendment or supplement thereto, and (ii)
such number of copies of a prospectus, including a preliminary prospectus, and
all amendments and supplements thereto and such other documents, as such
Investor may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such Investor;
(d) Use reasonable efforts to (i) register and qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdictions as the Investors who hold a
majority in interest of the Registrable Securities being offered reasonably
request and in which significant volumes of shares of Common Stock are traded,
(ii) prepare and file in those jurisdictions such amendments (including post-
effective amendments) and supplements to such registrations and qualifications
as may be necessary to maintain the effectiveness thereof at all times during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times to qualify
the Registrable Securities for sale in such jurisdictions; provided, however,
-------- -------
that the Company shall not be required in connection therewith or as a condition
thereto to (A) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (B) subject itself
to general taxation in any such jurisdiction, (C) file a general consent to
service of process in any such jurisdiction, (D) provide any undertakings that
cause more than nominal expense or burden to the Company or (E) make any change
in its charter or by-laws, which in each case the Board of Directors of the
Company determines to be contrary to the best interests of the Company and its
stockholders;
(e) As promptly as practicable after becoming aware of such event,
notify each Investor of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Investor as such Investor may reasonably
request;
(f) As promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten
Page 63 of 71
<PAGE>
offering, the managing underwriters) of the issuance by the SEC of any stop
order or other suspension of the effectiveness of the Registration Statement at
the earliest possible time;
(g) Use its best efforts, if eligible, either to (i) cause all the
Registrable Securities covered by the Registration Statement to be listed on a
national securities exchange and on each additional national securities exchange
on which securities of the same class or series used by the Company are then
listed, if any, if the listing of such Registrable Securities is then permitted
under the rules of such exchange, or 9(ii) secure designation of all the
Registrable Securities covered by the Registration Statement as a National
Association of Securities Dealers Automated Quotations System ("NASDAQ")
"national market system security" within the meaning of Rule 11Aa2-1 of the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the quotation of the Registrable Securities on the NASDAQ/Small Cap Market; or
if , despite the Company's best efforts to satisfy the preceding clause (i) or
(ii), the Company is unsuccessful in doing so, to secure NASDAQ authorization
and quotation for such Registrable Securities and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register with the National Association of Securities Dealers, Inc. ("NASD") as
such with respect to such Registrable Securities;
(h) Provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(i) Cooperate with the Investors who hold Registrable Securities
being offered to facilitate the timely preparation and delivery of certificates
(not bearing any restrictive legends) representing Registrable Securities to be
offered pursuant to the Registration Statement and enable such certificates to
be in such denominations or amounts as the case may be, as the Investors may
reasonably request and registered in such names as the Investors may request;
and, within three (3) business days after a Registration Statement which
includes Registrable Securities is ordered effective by the SEC, the Company
shall deliver, and shall cause legal counsel selected by the Company to deliver,
to the transfer agent for the Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) an appropriate instruction and opinion of such counsel; and
(j) Take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations.
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of the Registrable
Securities held by it, as shall be reasonably required to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request. At
least five (5) days prior to the first anticipated filing date of the
Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor (the "Requested
Information") if such Investor elects to have any of such investor's Registrable
Securities included in the Registration Statement. If at least two (2) business
days prior to the filing date the Company has not received the Requested
Information from an Investor (a "Non-Responsive Investor"), then the Company may
file the Registration Statement without including Registrable Securities of such
Non-Responsive Investor.
Page 64 of 71
<PAGE>
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(e) or
3(f), above, such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or 3(f) and, if
so directed by the Company, such Investor shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
5. EXPENSES OF REGISTRATION. All reasonable expenses, other than
underwriting discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 3, but including,
without limitations, all registration, listing, and qualifications fees,
printers and accounting fees, and the fees and disbursements of counsel for the
Company, shall be borne by the Company.
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Ace of the Exchange Ace (each, an "Indemnified Person"), against any
losses, claims, damages, liabilities or expenses (joint or several) incurred
(collectively, "Claims") to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon nay of the following statement, omissions or
violations in the Registration Statement, or any post-effective amendment
thereof 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, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clause (i) through (iii) being, collectively, "Violations"). The
Company shall reimburse the Investors, promptly as such expenses are incurred
and are due and payable, for any legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a) shall not (I) apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the company by or on behalf of any
Indemnified Person expressly for use in connection with the preparation of the
Registration Statement or any such
Page 65 of 71
<PAGE>
amendment thereof or supplement thereto, if such prospectus was timely made
available by the company pursuant to Section 3(b) hereof; (II) with respect to
any preliminary prospectus, inure to the benefit of any such person from whom
the person asserting any such claim purchased the Registrable Securities that
are the subject thereof (or to the benefit of any person controlling such
person) if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected in the prospectus, as then amended or
supplemented, if such prospectus was timely made available by the Company
pursuant to Section 3(b) hereof; (III) be available to the extend such Claim is
based on a failure of the investor to deliver or cause to be delivered the
prospectus made available by the Company; or (IV) apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld. Each
Investor will indemnify the Company and its officers, directors and agents
against any claims arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company, which occurs in reliance upon and in conformity with information
furnished in writing to the Company, by or on behalf of such Investor, expressly
for use in connection with the preparation of the Registration Statement,
subject to such limitations and conditions as are applicable to the
Indemnification provided by the Company to this Section 6. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.
(b) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
-------- -------
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. In such event, the Company shall pay for only one
separate legal counsel for the Investors; such legal counsel shall be selected
by the Investors holding a majority in interest of the Registrable Securities
included in the Registration Statement to which the claim relates. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve such indemnifying party of
any liability to the Indemnified Person or Indemnified Party under this Section
6, except to the extent that the indemnifying party is prejudiced in its ability
to defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION. to the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; provided, however, that (a) no contribution shall be made under
-------- -------
circumstances where the maker would not have been liable for indemnification
under the fault
Page 66 of 71
<PAGE>
standards set forth in Section 6; (b0 no seller of Registrable Securities guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation; and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the net amount of proceeds received by such seller from the sale of such
Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agree to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under Securities Act and the Exchange Act; and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) written statement by the
Company that is has complied with the reporting requirements of rule 144, the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual or
quarterly report of the company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the
Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of all or any portion
of such securities (or all or any portion of any Preferred Stock of the Company
which is convertible into such securities) of Registrable Securities only if:
(a) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (b) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (i) the
name and address of such transferee or assignee and (ii) the securities with
respect to which such registration rights are being transferred or assigned, 9c)
immediately following such transfer or assignment the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act and applicable state securities laws, and (d) at or before the time the
Company received the written notice contemplated by clause (b) of this sentence
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions contained herein. In the event of any delay in filing the
Registration Statement as a result of such assignment, the Company shall not be
liable for any damages arising from such delay.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold a majority in interest of the Registrable Securities. Any amendment or
waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company.
Page 67 of 71
<PAGE>
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission, receipt
confirmed, or other mean) or sent by certified mail, return receipt requested,
properly addressed and with proper postage pre-paid (i) if to the Company, at
CHATCOM, INC., 9600 Topanga Canyon Boulevard, Chatsworth, California, 91311
Attention: President or Vice Chairman, with a copy to Troy & Gould, Esqs., 1801
Century Park East, 16th Floor, Los Angeles, California 90067, Attention: Sandy
Hillsberg, Esq., (ii) if to the Initial Investor, at the address set forth under
its name in the Stock Purchase Agreement, with a copy to Samuel Krieger, Esq.,
Krieger & Prager, 319 Fifth Avenue, Third Floor, New York, NY 10016 and (iii) if
to any other Investor, at such address as such Investor shall have provided in
writing to the Company, or at such other address as each such party furnished by
notice given in accordance with this Section 11(b), and shall be effective, when
personally delivered, upon receipt and, when so sent by certified mail, four (4)
calendar days after deposit with the United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of California applicable to agreements
made and to be performed entirely within such State. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not effect the validity or enforceability
of any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertaking, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understanding among
the parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning thereof.
(i) The Company acknowledges that any failure by the Company to
perform its obligations under Section 3(i), or any delay in such performance
could result in direct damages to the Investors and the Company agrees that, in
addition to any other liability the Company may
Page 68 of 71
<PAGE>
have by reason of any such failure or delay, the Company shall be liable for all
direct damages caused by any such failure or delay, unless same is the result of
force majeure. Neither party shall be liable for consequential damages.
(j) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
IN WITNESS THEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
CHATCOM, INC.
By:__________________________
Name:
Title:
_____________________________
_____________________________
By:__________________________
Name:
Title:
_____________________________
Page 69 of 71
<PAGE>
Exhibit 10.15
Letter of agreement between the Company and James B. Mariner
describing terms of employment.
[ChatCom, Inc.]
March 5, 1996
Mr. James B. Mariner
127 Riverside Avenue, #1207
Newport Beach, CA 92663
Subject: Offer, Revision B
Dear Jim,
I am very pleased to inform you that the Executive Committee of the Board of
Directors of ChatCom, Inc. Has selected you to be President and CEO.
In this role you will have responsibility for all aspects of ChatCom, receiving
your authority from the Board of Directors. The Executive Committee members,
Jim Edwards, Sandy Sigoloff and myself will be proactive supporters of you and
the Company.
In line with your excellent suggestion, your offer is structured on an "at will"
basis until you resign, or the Board terminates.
Initial compensation will be:
1. A base salary of $165,00 annually, paid bi-weekly.
2. A cash bonus of up to $50,000 based upon EBIT profits of $500,000 with a
goal of $1,000,000 during FY'97 (April 1, 1996 to March 31, 1997). These
bonuses to be paid 30 days after audited financials are completed.
3. Upon acceptance of the job offer, ChatCom, Inc. Will grant, at market
price, 360,000 options to you. Options to be exercisable during a period
seven (7) years from the date of grant. These will vest over three (3)
years (1/3,1/3,1/3) based on annual objectives: 60% profit, 40% revenue,
FY '97 60% if the Company achieves $500,000 EBIT profits during this
period and 40% shall vest if revenue increases 15%, or more,
during this period.
FY '98 & '99 To be set later with the Board and you.
4. Upon acceptance of this offer this week, you will earn a fee of $10,000 to
cover costs associated with leaving TMC quickly.
Page 70 of 71
<PAGE>
The vesting of the options in the period will be on a pro-rata basis, e.g. if
$500,000 pre-tax profit in FY '97, then 50% of the 60% vest will occur.
Likewise, 50% of the 40% will vest if revenue growth was half. Vesting will
occur at the end of the measurement period, i.e., after audit.
5. Normal Company medidical insurance, sickleave, vacation, holiday, etc.,
will be granted and you will be eligible for additional ISO options at the
Board's discretion. In addition, a car allowance of up to $500 per month will
be provided.
Sincerely,
/s/ Gerald R. Sayer
Gerald R. Sayer
Interim President/CEO
ChatCom, Inc.
Accepted: /s/ James B. Mariner March 8, 1996
---------------------
Page 71 of 71
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1995
<PERIOD-START> APR-01-1995 APR-01-1994
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 1,067,397 1,452,260
<SECURITIES> 500,000 0
<RECEIVABLES> 2,230,495 3,544,843
<ALLOWANCES> (262,228) (84,770)
<INVENTORY> 3,481,195 3,121,876
<CURRENT-ASSETS> 7,218,290 8,433,342
<PP&E> 1,033,297 1,204,452
<DEPRECIATION> (493,848) (560,483)
<TOTAL-ASSETS> 7,778,432 9,097,504
<CURRENT-LIABILITIES> 3,718,596 4,455,284
<BONDS> 0 0
0 0
1,294,000 0
<COMMON> 5,859,660 5,858,760
<OTHER-SE> (3,112,407) (1,264,577)
<TOTAL-LIABILITY-AND-EQUITY> 7,778,432 9,097,504
<SALES> 14,790,335 14,962,260
<TOTAL-REVENUES> 14,790,335 14,962,260
<CGS> 9,882,375 9,668,237
<TOTAL-COSTS> 9,882,375 9,668,237
<OTHER-EXPENSES> 6,688,693 6,508,189
<LOSS-PROVISION> 53,564 48,092
<INTEREST-EXPENSE> 183,272 358,259
<INCOME-PRETAX> (1,964,005) (1,572,426)
<INCOME-TAX> 4,000 355,271
<INCOME-CONTINUING> (1,968,005) (1,927,696)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,968,005) (1,927,969)
<EPS-PRIMARY> (0.26) (0.34)
<EPS-DILUTED> (0.26) (0.34)
</TABLE>
