<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-QSB
___
| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
___ OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
Commission file number 0-20462
CHATCOM, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 TOPANGA CANYON BOULEVARD, CHATSWORTH, CALIFORNIA 91311
(Address of principal executive offices)
818/709-1778
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of February 11, 1997, there were 9,826,892 shares of the issuer's common
stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
Exhibit Index on Page 15
<PAGE>
CHATCOM, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
BALANCE SHEETS (UNAUDITED)
===============================================================================
DECEMBER 31, MARCH 31,
ASSETS NOTES 1996 1996
--------- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 2,536,548 $ 1,067,397
Restricted cash 500,000
Accounts receivable, net of
allowances of $226,094
(December 31, 1996) and $262,228
(March 31, 1996) 1,817,422 1,968,267
Inventories 2 3,019,958 3,481,195
Prepaid expenses and other current
assets 193,095 201,431
----------- -----------
Total current assets 7,567,023 7,218,290
EQUIPMENT AND FIXTURES, Net 3 577,629 539,449
DEPOSITS 22,383 20,693
----------- ------------
TOTAL $ 8,167,035 $ 7,778,432
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,213,893 $ 1,842,942
Accrued expenses 686,627 907,668
Short term borrowings 4 938,461
Current portion of capital lease
obligations 16,850 29,525
----------- -----------
Total current liabilities 1,917,370 3,718,596
CAPITAL LEASE OBLIGATIONS
-less current portion 24,996 18,583
SHAREHOLDERS' EQUITY 5
Preferred stock, no par value;
authorized 1,000,000 shares;
Series B Preferred Stock, $20,000
stated value per
share, authorized 1,000
shares, issued and
outstanding 0 and 75 shares
at December 31, and
March 31, 1996, respectively 1,294,000
Series C Preferred Stock, $20,000
stated value per
share, authorized 1,000
shares, issued and
outstanding 0 and 0 shares at
December 31, and March 31, 1996,
respectively
Series D Preferred Stock, $1,000
stated value per
share, authorized 5,000
shares, issued and
outstanding 2,496 and 0
shares at December 31, and
March 31, 1996, respectively 2,341,623
Common stock, no par value; authorized
25,000,000 shares; issued and
outstanding 9,826,892 and 7,536,629
shares at December 31, and
March 31, 1996, respectively 9,387,718 5,859,660
Additional paid-in capital 1,440,711 1,435,711
Accumulated deficit (6,945,383) (4,548,118)
----------- -----------
Total shareholders' equity 6,224,669 4,041,253
----------- -----------
TOTAL $ 8,167,035 $ 7,778,432
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 2
<PAGE>
CHATCOM, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
=============================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $2,750,342 $4,206,683 $ 7,643,554 $12,407,327
COST OF GOODS SOLD 1,722,843 2,860,038 5,057,101 8,140,375
---------- ---------- ----------- -----------
GROSS PROFIT 1,027,499 1,346,645 2,586,453 4,266,952
OPERATING EXPENSES
Selling 810,132 705,689 2,386,067 2,660,863
General and administrative 514,975 525,219 1,719,153 1,432,918
Research and development 310,096 200,715 763,124 664,939
Severance expense 61,484
---------- ---------- ----------- -----------
Total operating expenses 1,635,203 1,431,623 4,929,828 4,758,720
LOSS FROM OPERATIONS (607,704) (84,978) (2,343,375) (491,768)
INTEREST INCOME 11,313 39,267
INTEREST EXPENSE 1,294 51,314 11,796 123,143
---------- ---------- ----------- -----------
LOSS BEFORE INCOME TAXES (597,685) (136,292) (2,315,904) (614,911)
PROVISION FOR INCOME
TAXES 4,000
---------- ---------- ----------- -----------
NET LOSS $ (597,685) $ (136,292) $(2,315,904) $ (618,911)
========== ========== =========== ===========
LOSS PER SHARE: (NOTE 6)
Primary and fully diluted loss
per share $ (0.06) $ (0.02) $ (0.27) $ (0.08)
========== ========== =========== ===========
Weighted average number of
common shares and common
share equivalents (primary and
fully diluted) 9,746,066 7,536,629 8,683,912 7,536,440
========== ========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 3
<PAGE>
CHATCOM, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
=====================================================================
NINE MONTHS ENDED
DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(2,315,904) (618,911)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 177,566 252,347
Provision for losses on accounts
receivable 145,411
Changes in operating assets and
liabilities:
Restricted cash 500,000 (500,000)
Accounts receivable 5,434 598,880
Inventories 461,237 (207,858)
Prepaid expenses and other
current assets 8,336 91,943
Deposits (1,690) (500)
Accounts payable (629,049) (408,592)
Accrued expenses (233,350) (267,917)
----------- -----------
Net cash used in operating
activities (1,882,009) (1,060,608)
CASH FLOWS FROM INVESTING
ACTIVITIES-
Capital expenditures (194,158) (164,700)
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings under notes payable 912,459
Principal payments of notes payable (938,461) (1,075,000)
Principal payments on capital leases (27,850) (24,109)
Proceeds from sale of preferred stock 3,666,623
Proceeds from sale of stock purchase
warrants 5,000
Payment of dividends on preferred
stock (10,494)
Collection of subscriptions
receivable 40,000
Exercise of stock options and
warrants 850,500 900
----------- -----------
Net cash provided (used) by
financing activities 3,545,318 (145,750)
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,469,151 (1,371,058)
CASH, BEGINNING OF PERIOD 1,067,397 1,457,260
----------- -----------
CASH, END OF PERIOD $ 2,536,548 $ 86,202
=========== ===========
</TABLE>
(CONTINUED)
Page 4
<PAGE>
CHATCOM, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended December 31, 1996, the Company accrued dividends on
preferred stock of $81,361. Dividends of $10,494 were paid in cash, dividends
of $58,558 were paid through the issuance of 38,041 shares of the Company's
common stock and dividends of $12,309 were accrued but unpaid at December 31,
1996.
During the nine months ended December 31, 1996 and 1995, the Company paid
interest of $11,798 and $121,131, respectively, and income taxes of $425 and
$4,257, respectively.
During the nine months ended December 31, 1996, the Company entered into a
capital lease agreement for equipment with costs of $21,588.
(CONCLUDED)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 5
<PAGE>
CHATCOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
1. ACCOUNTING POLICIES
The unaudited financial statements presented herein have been prepared by
ChatCom, Inc. (the "Company") in accordance with the accounting policies
described in its March 31, 1996 audited financial statements and should be
read in conjunction with the notes thereto. In the opinion of management,
all adjustments which are necessary to present fairly the Company's
financial position for the interim periods presented (consisting only of
normal recurring adjustments), have been made. Certain prior year amounts
have been reclassified to conform with current year classifications.
The results of operations for the three month and nine month periods ended
December 31, 1996, are not necessarily indicative of the results that may
be expected for the full fiscal year ending March 31, 1997.
2. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
Raw materials $ 952,719
Work in process 872,317
Finished goods 1,194,922
----------
$3,019,958
==========
</TABLE>
3. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
Equipment $ 837,983
Software 186,700
Furniture and fixtures 180,701
Leasehold improvements 43,306
----------
1,248,690
Less: accumulated depreciation 671,061
----------
Equipment and fixtures, net $ 577,629
==========
</TABLE>
Page 6
<PAGE>
CHATCOM, INC.
4. NOTES PAYABLE
On May 26, 1995, the Company entered into a $3,500,000 working capital
line-of-credit agreement with a commercial finance corporation that bore
interest at the prime rate (8.25% at March 31, 1996) plus 1.75%. The line-of-
credit facility was collateralized by substantially all of the assets of the
Company. The proceeds from the funding of this facility were used to repay the
amounts owed to a bank under a line-of-credit agreement which had expired. On
May 2, 1996, the Company repaid all amounts then outstanding and all accrued
interest owed under the line-of-credit agreement and the agreement was
terminated.
5. STOCK OPTIONS AND WARRANTS
During the nine month period ended December 31, 1996, the Company granted
options to purchase 350,000 shares of common stock to key employees pursuant to
the Company's 1994 Stock Option Plan. The options are exercisable at the
closing price of the common stock on the date of grant. 250,000 of the options
vest over a period of three years and 100,000 of the options were vested on the
date of grant.
In September 1996, the Company granted options to purchase 25,000 shares of
common stock to each of the five directors serving as chairmen of committees of
the Board of Directors. The options are exercisable at the closing price of the
common stock on the date of grant and were fully vested on the date of grant,
but are not exercisable until March 1997.
In May 1996, in connection with the sale of 75 shares of Series C Preferred
Stock, warrants to purchase 30,000 shares of common stock at an exercise price
of $3.00 per share were granted to Maximum Partners, Ltd.
The private placements of Series B Preferred Stock and Series C Preferred
Stock caused the antidilution provisions of certain stock purchase warrants to
take effect. Outstanding warrants to purchase 2,459,000 shares of common stock
at an average exercise price of $2.69 per share were affected by the
antidilution provisions, increasing the number of shares issuable upon the
exercise of such warrants to 2,631,284 and decreasing the average exercise price
to $2.51 per share. Additionally, the antidilution provisions caused the
Company to issue 19,356 additional shares of common stock relating to exercises
of warrants that occurred between the dates of the private placements and the
determination of the effect of antidilution provisions by the Company.
In November 1996, the Company granted options to purchase 3,000 shares of
common stock to each of the Company's five non-employee directors as a result of
their re-election to the Board of Directors. The options are exercisable at the
closing price of the common stock on the date of grant and were fully vested on
the date of grant, but are not exercisable until May 1997
In December 1996, in connection with the sale of 2,496 shares of Series D
Preferred Stock, warrants to purchase 400,000 shares of common stock at an
exercise price of $3.125 per share were sold to the purchasers of the Series D
Preferred Stock. Also in December 1996, warrants to purchase 100,000 shares of
common stock at an exercise price of $3.125 per share were granted to Strategic
Growth International, Inc. for services in connection with the private placement
of Series D Preferred Stock.
Page 7
<PAGE>
CHATCOM, INC.
6. LOSS PER SHARE
The computation of loss per share is detailed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
LOSS USED TO COMPUTE PRIMARY AND
FULLY DILUTED LOSS PER SHARE:
Net loss $ (597,685) $ (136,292) $(2,315,904) $ (618,911)
========== ========== =========== ==========
NUMBER OF SHARES USED TO COMPUTE
PRIMARY AND FULLY DILUTED LOSS PER
SHARE:
Weighted average number of
common shares outstanding 9,746,066 7,536,629 8,683,912 7,536,440
========== ========== =========== ==========
</TABLE>
7. RELATED PARTIES
One of the officers of the Company is also a shareholder of a law firm that
provides legal consultation to the Company. At December 31, 1996 and 1995, the
Company owed this law firm $3,563 and $6,715, respectively. During the nine
months ended December 31, 1996 and 1995, fees relating to services provided by
this law firm in the amounts of $52,890 and $86,214, respectively, were included
in operating expenses.
In May 1996, the Company paid $150,000 and granted warrants to purchase
30,000 shares of common stock to Maximum Partners, Ltd. in connection with the
placement of 75 shares of Series C Preferred Stock. A principal of Maximum
Partners, Ltd. is the son of a director and former officer of the Company.
Page 8
<PAGE>
CHATCOM, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 1995
The Company's sales revenue decreased $1,457,000, or 35%, from $4,207,000
for the quarter ended December 31, 1995 to $2,750,000 for the quarter ended
December 31, 1996 primarily due to a 39% decrease in unit sales, which was
partially mitigated by a 24% increase in average selling prices. The Company
believes that the remote control niche of the remote access market, which has
historically provided a significant portion of the Company's revenues, is not
experiencing the growth rates that it has enjoyed in the past, and may possibly
be declining, which has adversely affected unit sales of the Company's products.
In response, the Company has increased and redirected its marketing and sales
efforts to penetrate the server consolidation market and the network emulation
market. The Company believes that its products are well suited to these markets
and that these markets offer the growth potential that no longer appears to be
present in the remote control market. The Company's ability to increase
revenues will be dependent upon a number of factors, including but not limited
to the market's acceptance of the Company's future products, the ability of the
Company to penetrate new markets in which it has not previously been a
significant participant and the strength of the Company's competition.
The cost of goods sold decreased $1,137,000, or 40%, from $2,860,000 to
$1,723,000. The decrease was due to a 43% reduction in material costs related
to the decrease in unit sales and a $42,000, or 13%, decrease in manufacturing
labor and overhead related to a restructuring of the manufacturing department.
The percentage decrease in materials cost was greater than the percentage
decrease in unit sales due to increased average selling prices and an increase
in "turn-key" manufacturing, both of which allow the Company to realize higher
margins. The restructuring of the Company's manufacturing department included
an increase in the purchase of the electronic subassemblies required for the
manufacture of a significant portion of its products on a "turn-key" basis from
electronics parts distributors. The "turn-key" purchase allows the Company to
purchase the completed subassembly, as opposed to purchasing the individual
components required for the manufacture of the subassembly and subcontracting
the assembly of the subassembly. The "turn-key" manufacturing is intended to
allow the Company to take advantage of the purchasing power of the electronics
parts distributor to decrease materials costs, reduce the personnel of the
manufacturing department and lessen the Company's requirement for component
inventories to ensure against interruptions in production.
Selling expenses increased $104,000, or 15%, from $706,000 to $810,000.
The increase was primarily the result of a constant marketing program throughout
the quarter, whereas marketing efforts had been curtailed to a significant
extent during the prior year due to liquidity constraints and the departure of
the Company's director of marketing. Selling expense for the quarter ended
December 31 ,1996 was at approximately the same level as for the quarter ended
September 30, 1996. The Company anticipates some increases in selling expenses
in future quarters due to planned increases in the outside sales force and a
planned increase of marketing efforts directed toward new target markets.
General and administrative expense decreased $10,000, or 2%, from $525,000
to $515,000. The decrease was primarily the result of a decrease in legal fees.
During the quarter ended December 31, 1995, the Company changed its outside
corporate counsel, which resulted in additional attorney fees from the
transition. The decrease was partially offset by increases in salaries related
to the transfer of the Senior Vice President of Technology from the research and
development department to the general and administrative department and the
addition of a Senior Vice President of Business Development.
Research and development expense increased $109,000, or 54%, from $201,000
to $310,000. The increase primarily consisted of $48,000 related to personnel
costs and $48,000 in consulting expenses. These increases are associated with
the Company's efforts to decrease development time for products and increase
product testing during the development cycle. The personnel cost increases
Page 9
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CHATCOM, INC.
included the addition of a Director of Engineering and two engineers. The
increases were partially offset by the transfer of a Senior Vice President to
the General and Administrative Department. The Company expects product
development related expenses in the immediate future to approximate those
experienced in the quarter ended December 31, 1996. Competitive pressure and an
increased rate of development of personal computer related technology, however,
could cause the Company to increase these expense levels, as it will be required
to ensure that its products include, and are compatible with, the technological
advances.
Interest income increased $11,000 due to larger cash balances during the
quarter, due to proceeds from private placements of preferred stock in March
1996, May 1996 and December 1996 and the exercise of options and warrants in
June 1996.
Interest expense decreased $50,000, or 97%, from $51,000 to $1,000. The
decrease was caused by a retirement of the line-of-credit financing agreement
during the quarter ended June 30, 1996.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO
THE NINE MONTHS ENDED DECEMBER 31, 1995
The Company's sales revenue decreased $4,763,000, or 38%, from $12,407,000
to $7,644,000 primarily due to a 45% decrease in unit sales, which was partially
mitigated by a 12% increase in average selling prices. The Company believes
that the remote control niche of the remote access market, which has
historically provided a significant portion of the Company's revenues, is not
experiencing the growth rates that it has enjoyed in the past, and may possibly
be declining, which has adversely affected unit sales of the Company's products.
In response, the Company has increased and redirected its marketing and sales
efforts to penetrate the server consolidation market and the network emulation
market. The Company believes that its products are well suited to these markets
and that these markets offer the growth potential that no longer appears to be
present in the remote control market. The Company's ability to increase
revenues will be dependent upon a number of factors, including but not limited
to the market's acceptance of the Company's future products, the ability of the
Company to penetrate new markets in which it has not previously been a
significant participant and the strength of the Company's competition.
The cost of goods sold decreased $3,083,000, or 38%, from $8,140,000 to
$5,057,000. The decrease was due to a 42% reduction in material costs related
to the decrease in unit sales and a $296,000, or 29%, decrease in manufacturing
labor and overhead related to a restructuring of the manufacturing department.
These decreases were partially offset by a $174,000 increase in additions to
inventory reserves related to product changes in response to progressing
technology and market redirection. The percentage decrease in materials cost
was greater than the percentage decrease in unit sales due to increased average
selling prices and an increase in "turn-key" manufacturing, both of which allow
the Company to realize higher margins. The restructuring of the Company's
manufacturing department included an increase in the purchase of the electronic
subassemblies required for the manufacture of a significant portion of its
products on a "turn-key" basis from electronics parts distributors. The "turn-
key" purchase allows the Company to purchase the completed subassembly, as
opposed to purchasing the individual components required for the manufacture of
the subassembly and subcontracting the assembly of the subassembly. The "turn-
key" manufacturing is intended to allow the Company to take advantage of the
purchasing power of the electronics parts distributor to decrease materials
costs, reduce the personnel of the manufacturing department and lessen the
Company's requirement for component inventories to ensure against interruptions
in production.
Selling expenses decreased $275,000, or 10%, from $2,661,000 to $2,386,000.
The decrease was primarily the result of a $227,000 decrease in advertising
costs, which was primarily due to a marketing hiatus that occurred from
approximately February 1996 through June 1996 and was related to liquidity
constraints of the Company and a vacancy in the Director of Marketing position.
Additionally, advertising subsequent to the hiatus has focused upon target
market directed advertising, which has
Page 10
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CHATCOM, INC.
reduced the number of publications in which the Company advertises. The Company
anticipates some increases in selling expenses in future quarters due to planned
increases in the outside sales force and a planned increase in marketing efforts
directed toward new target markets.
General and administrative expense increased $286,000, or 20%, from
$1,433,000 to $1,719,000. Approximately $100,000 of the increase related to
additions to the allowance for doubtful accounts relating to the Company's
assessment of the collectibility of a receivable from a certain reseller that is
experiencing some financial difficulties. Approximately $240,000 of the
increase related to the restructuring of the management of the Company, which
included the transfer of two vice presidents from operational cost centers to
the administrative cost center and the addition of a Senior Vice President of
Business Development position. The increases were partially mitigated by a
decrease in legal fees of $63,000 and by the elimination of the Executive Vice
President position, which resulted in a savings of approximately $100,000.
Research and development expense increased $98,000, or 15%, from $665,000
to $763,000. The increase primarily consisted of $30,000 related to personnel
costs and $67,000 in consulting expenses. These increases are associated with
the Company's efforts to decrease development time for products and increase
product testing during the development cycle. The personnel cost increases
included the addition of a Director of Engineering and two engineers. The
increases were partially offset by the transfer of a Senior Vice President to
the General and Administrative Department. The Company expects product
development related expenses in the immediate future to approximate those
experienced in the quarter ended December 31, 1996. Competitive pressure and an
increased rate of development of personal computer related technology, however,
could cause the Company to increase these expense levels, as it will be required
to ensure that its products include, and are compatible with, the technological
advances.
Interest income increased $39,000 due to larger cash balances during the
nine months, due to proceeds from private placements of preferred stock in March
1996, May 1996 and December 1996 and the exercise of options and warrants in
June 1996.
Interest expense decreased $111,000, or 90%, from $123,000 to $12,000. The
decrease was caused by a retirement of the line-of-credit financing agreement
during the quarter ended June 30, 1996.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION DURING THE NINE MONTHS
ENDED DECEMBER 31, 1996
The Company recorded a net loss of $2,316,000 for the nine months ended
December 31, 1996. Cash increased $1,469,000 during the nine months ended
December 31, 1996 and is the result of the receipt of net proceeds of $2,343,000
from the sale of 2,496 shares of Series D Preferred Stock and stock purchase
warrants, net proceeds of $1,325,000 from the sale of 75 shares of Series C
Preferred Preferred Stock and $850,000 in proceeds from the exercise of options
and warrants. The impact of the proceeds from financing activities on cash flow
was mostly offset by a loss from operations of $2,316,000, and the repayment of
short term borrowings of $938,000. Working capital increased approximately
$2,150,000, or 61%, from $3,500,000 to $5,650,000 primarily due to the proceeds
from the sale of preferred stock and the exercise of stock options and warrants.
Accounts receivable decreased $151,000, or 8%, from $1,968,000 to
$1,817,000. The decrease was primarily attributable to revenues during the two
months (which approximates one receivables cycle) prior to December 31, 1996
being approximately 4% lower than those for the two months prior to March 31,
1996 and the addition of accounts receivable reserves.
Inventories decreased $462,000, or 13%, from $3,481,000 to $3,019,000. The
decrease was primarily the result of a decrease in unit sales and "turn-key"
purchasing of subassemblies, which has been implemented by the Company on
certain of its products. The Company has traditionally purchased the individual
components required to manufacture an electronic assembly, sent the components
to a
Page 11
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CHATCOM, INC.
subcontractor to be soldered onto the circuit board, and performed final
assembly and test upon its return from the subcontractor. The Company has begun
to institute "turn-key" purchasing for some of its products, whereby the
subassembly is purchased already soldered and ready for final assembly and
testing. The Company intends to implement "turn-key" purchasing for all
assemblies that meet volume thresholds required by the vendor in order to
significantly reduce the requirement to stock individual components.
Prepaid expenses decreased $8,000, or 4%, from $201,000 to $193,000. The
decrease was primarily a result of the timing of downpayments for insurance
policies and amortization of prepaid expense items.
Equipment and fixtures increased $38,000, or 7%, due to the acquisition of
equipment with cost of $143,000, which was mostly offset by depreciation of
$176,000. The purchased equipment primarily consisted of office equipment and
workstations.
Accounts payable decreased $629,000, or 34%, from $1,843,000 to $1,214,000,
due to decreased purchasing of inventory and a shortening of the payables cycle
that the Company was able to effectuate with the proceeds from the sale of
preferred stock and the exercise of options and warrants during the nine months
ended December 31, 1996.
Accrued expenses decreased $221,000, or 24%, from $908,000 to $687,000.
The decrease was primarily due to the payment of a lawsuit settlement and
payment of a portion of the accrued severance pay to two former officers.
Short term borrowings decreased by $938,000 due to the repayment and
termination of the line-of-credit financing agreement with Deutsche Financial
Services.
Capital lease obligations decreased $6,000, or 13%, from $48,000 to
$42,000. The decrease was the result principal payments of $28,000, which were
mostly offset by the addition of an office equipment lease in the amount of
$22,000.
Series B Preferred Stock decreased $1,294,000 due to the conversion of all
outstanding shares of Series B Preferred Stock into 1,024,768 shares of common
stock.
Series D Preferred Stock increased $2,342,000 due to the sale of 2,496
shares of Series D Preferred Stock, $1,000 per share stated value, during
December 1996.
Additional paid in capital increased $5,000 as a result of warrants issued
in connection with the placement of the Series D Preferred Stock in December
1996.
Common stock increased $3,528,000 due to the conversions of Series B
Preferred Stock, the issuance and subsequent conversion of Series C Preferred
Stock, the exercise of options and warrants and the payment of dividends on
preferred stock through the issuance of common stock.
The accumulated deficit increased by $2,397,000 due to the net loss of
$2,316,000 recorded for the nine months ended December 31, 1996 and the payment
or accrual of $81,000 of dividends on preferred stock.
Liquidity
- ---------
As of December 31, 1996, the Company had working capital of $5,649,000.
The Company currently relies on liquid assets to fund operations. In July 1996,
the Company reduced its workforce in connection with a restructuring to allow
for greater conservation of liquid resources and the outsourcing of a greater
portion of the manufacturing activities. The Company believes that the
outsourcing of manufacturing will allow the Company to respond more rapidly to
changes in sales volume, reduce the
Page 12
<PAGE>
CHATCOM, INC.
amount of inventory on hand and realize cost savings by utilizing the purchasing
power of the Company's subcontractors for component purchases.
The Company believes that the capital resources that it currently possesses
would be sufficient to sustain operations at current revenue levels for only
approximately the next twelve months. However, the Company's plan of operations
anticipates increasing revenues through penetration of the server consolidation
market, a focused marketing program and product improvements, which should
decrease the rate of utilization of capital resources. There can be no
assurance, however, that the Company will be successful in its efforts to
increase revenues or that any increase in revenues will enable the Company to
sustain its operations for more than the next twelve months without additional
capital resources. Additional capital resources might be obtained through the
calling or the voluntary exercise of warrants that were issued in conjunction
with the Company's 1995 private placement. The exercise of these warrants could
yield proceeds of up to $4,820,000. The Company may call these warrants for
redemption at $2.80 per warrant if the market value of the Company's common
stock has been greater than $3.60 per share for ten consecutive trading days. As
of the date of this report, the conditions necessary for the Company to call the
warrants have not been satisfied. To the extent required, the Company may also
seek additional public or private financing to meet its capital needs if market
conditions permit.
The Company has incurred operating losses in each of its last three fiscal
years. Should the Company continue to experience operating losses in the future
which result in a significant utilization of liquid resources, the Company's
liquidity and its ability to sustain operations at current levels could be
materially, adversely affected. Should the Company experience significant
growth in revenues that requires the utilization of significant liquid resources
for the financing of increased accounts receivable and inventory balances, the
Company may seek a new line-of-credit financing agreement to assist in meeting
such cash requirements. The Company does not currently have a commitment from
any third party to provide short-term financing.
The Company had no material commitments for capital expenditures as of
December 31, 1996.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters
discussed in this quarterly report on Form 10-QSB are forward-looking statements
which involve risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products and prices, and other factors discussed in the
Company's various filings with the Securities and Exchange Commission, including
without limitation the Current Report on Form 8-K, dated August 29, 1996.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On December 13, 1996, the Company completed a private placement pursuant to
which it sold 2,496 shares of the Company's Series D 10% convertible redeemable
voting preferred stock, $1,000 stated value per share ("Series D Preferred
Stock"), and warrants to purchase 400,000 shares of the Company's common stock
(the "Warrants") to two institutional investors. The Series D Preferred Stock
and the Warrants were exempt from registration requirements of the Securities
Act of 1933 (the "Securities Act") pursuant to Regulation D promulgated under
the Securities Act. The Company received various representations and warranties
from the purchasers including a representation that the purchasers are
"accredited investors" within the meaning of Regulation D. The Warrants are
exercisable commencing on May 1, 1997 through December 31, 2001 at $3,125 per
share. Gross proceeds from this private placement were $2,500,000 and total
offering fees and costs incurred by the Company consisted of approximately
$153,000 in cash and warrants to purchase 100,000 shares of the Company's common
Page 13
<PAGE>
CHATCOM, INC.
stock exercisable at $3.125 per share, of which $125,000 in cash and warrants to
purchase 100,000 shares of the Company's common stock were paid to Strategic
Growth International, Inc. There were no underwriters or placement agents
involved in connection with the private placement.
The proceeds from the placement will be utilized to provide working capital
for operations.
The Company can require the holders of the Series D Preferred Stock to
convert these shares into shares of the Company's common stock at any time prior
to December 14, 1997 by acquiring the shares of Series D Preferred Stock from
the holders in exchange for shares of the Company's common stock. The Series D
Preferred Stock is also convertible at the election of the holders into shares
of the Company's common stock during the one-year period commencing on December
14, 1997. The actual number of shares of common stock into which the Series D
Preferred Stock and any dividends that are payable in shares of common stock are
convertible is variable, with the conversion value of the shares of common stock
being equal to the market price of the common stock (determined based on the
closing sale price of the common stock for the ten trading days preceding the
date of conversion). The conversion value of the common stock will have a cap
of $4.50 per share, and commencing on December 14, 1997, will have a floor of
$1.50 per share. The Company has agreed to register the shares issuable upon
conversion of the Series D Preferred Stock or upon exercise of the Warrants.
The purchasers of the Series D Preferred Stock will have voting rights for
each share of the Series D Preferred Stock then outstanding equivalent to that
of 380 shares of common stock for each share of such preferred stock. Holders
of the Series D Preferred Stock also will have the right to elect a majority of
the Company's directors in the event of a default by the Company in the payment
of dividends on the Series D Preferred Stock or upon certain other defined
events of default.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the third quarter of fiscal year 1997, the Company submitted the
following matters to a vote of security holders at the annual meeting of
shareholders, which was held on November 21, 1996.
(1) Amendment to the Company's Bylaws - The Company proposed an amendment
---------------------------------
to the Company's Bylaws to amend the authorized number of directors of
the Company. The amendment proposed that the authorized number of
directors that the Company shall have shall not be less than five nor
greater than nine, with the exact number being fixed by the Board of
Directors. Prior to the amendment the Bylaws stated that the
authorized number of directors that the Company shall have shall not
be less than four nor greater than seven with the exact number being
fixed by the Board of Directors. The proposal passed with 7,734,991
votes for, 145,641 votes against and 21,690 votes withheld.
(2) Slate of Directors - The Company proposed the following slate of
------------------
directors for service until the next annual meeting of shareholders:
Richard F. Gordon, Jr., A. Charles Lubash, George L. Lazik, Ph.D.,
Gerald R. Sayer, Ph.D., James D. Edwards, Philip B. Smith, Sanford C.
Sigoloff and James B. Mariner. The entire slate of directors proposed
by management were elected by the following votes:
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<PAGE>
CHATCOM, INC.
<TABLE>
<CAPTION>
Votes Votes
For Withheld
--------- --------
<S> <C> <C>
Mr. Gordon 8,017,757 2,250
Mr. Lubash 8,023,376 36,750
Mr. Lazik 7,988,876 7,769
Mr. Sayer 8,023,726 1,900
Mr. Edwards 8,024,126 1,500
Mr. Smith 8,023,976 1,650
Mr. Sigoloff 8,019,238 6,388
Mr. Mariner 8,020,926 4,700
</TABLE>
(3) Amendments to the 1994 Stock Option Plan - The Company proposed
----------------------------------------
amendments to the 1994 Stock Option Plan (the "1994 Plan") to (i)
eliminate the formula option grant system for non-employee directors
and (ii) provide the Board of Directors with greater flexibility in
amending the 1994 Plan in the future. The proposal passed with
7,385,667 votes for, 182,786 votes against and 43,186 votes
abstaining.
(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 ending March 31, 1997. The proposal
passed with 8,009,061 votes for, 26,785 votes against and 14,082 votes
abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits. The following exhibits are filed with this Form 10-QSB or
are incorporated by reference to the document described:
3.1 Bylaws of ChatCom, Inc., as amended at the annual meeting of
shareholders held on November 21, 1996.
10.1 Purchase Agreement, dated as of December 9, 1996, regarding the
sale of Series D Preferred Stock and Warrants to Purchase Common
Stock of ChatCom, Inc.
10.2 Form of Warrant Agreement, between ChatCom, Inc. and Strategic
Growth International, Inc. relating to warrants to purchase
100,000 shares of common stock of ChatCom, Inc.
10.3 1994 Stock Option Plan of ChatCom, Inc., as amended at the
annual meeting of shareholders held on November 21, 1996.
27. Financial Data Schedule
b. Reports on Form 8-K.
A current report on Form 8-K was filed on December 23, 1996, under
Item 5 to disclose the completion of a private placement of Series D
Preferred Stock and warrants to purchase common stock.
No other information is required to be filed under Part II of this Form 10-QSB.
Page 15
<PAGE>
CHATCOM, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHATCOM, INC.,
a California corporation
Date: February 11, 1997 By: /s/ James B. Mariner
-------------------------------------
James B. Mariner, President
and Chief Executive Officer
By: /s/ John R. Grady
-------------------------------------
John R. Grady,
Chief Financial Officer
Page 16
<PAGE>
EXHIBIT 3.1
RESTATED AND AMENDED
BYLAWS
OF
CHATCOM, INC.,
A California Corporation
(As of February 1, 1997)
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICES. The board of directors shall fix the
location of the principal executive office of the corporation at any place
within or outside the State of California. If the principal executive office is
located outside this state, and the corporation has one or more business offices
in this state, the board of directors shall fix and designate a principal
business office in the State of California.
Section 2. OTHER OFFICES. The board of directors may at any time
establish branch or subordinate offices at any place or places where the
corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place within or outside the State of California designated by the board of
directors. In the absence of such designation, shareholders' meetings shall be
held at the principal executive offices of the corporation.
Section 2. ANNUAL MEETING. The annual meeting of shareholders shall be
held at any place within or outside the State of California designated by the
board of directors. At each annual meeting directors shall be elected, and any
other proper business shall be transacted.
Section 3. SPECIAL MEETING. A special meeting of the shareholders may be
called at any time by the board of directors, or by the chairman of the board,
or by the president, or by one or more shareholders holding shares in the
aggregate entitled to cast not less than ten percent (10%) of the votes at that
meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general
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<PAGE>
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president, or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Section 4 and 5 of this Article II, that a meeting will
be held at the time requested by the person or persons calling the meeting, not
less than thirty-five (35) nor more than sixty (60) days after receipt of the
request. If the notice is not given within twenty (20) days after receipt of the
request, the person or persons requesting the meeting may give the notice.
Nothing contained in this paragraph of this Section 3 shall be construed as
limiting, fixing or affecting the time when a meeting of the shareholders called
by action of the board of directors may be held.
Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) days nor more than sixty (60) days before
the date of the meeting. The notice shall specify the place, date and hour of
the meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted, or (ii) in the case of the annual meeting, those
matters which the board of directors, at the time of giving notice, intends to
present for action by the shareholders. The notice of any meeting at which
directors are to be elected shall include the name of any nominee or nominees
whom, at the time of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the articles of incorporation, pursuant to Section 902 of that
Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of
that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section
1900 of that Code, or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares, pursuant to Section 2007 of
that Code, the notice shall also state the general nature of that proposal.
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder to the corporation for the
purpose of notice. If no such address appears on the corporation's books or is
given, notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the
corporation's principal executive office, or if published at least once in a
2
<PAGE>
newspaper of general circulation in the county which that office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, all
future notices or reports shall be deemed to have been duly given without
further mailing if these shall be available to the shareholder on written demand
of the shareholders at the principal executive office of the corporation for a
period of one year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary,
or any transfer agent of the corporation giving the notice, and shall be filed
and maintained in the minute book of the corporation.
Section 6. QUORUM. The presence in person or by proxy of the holders of a
one-third (1/3) of the shares entitled to vote at any meeting of shareholders
shall constitute a quorum for the transaction of business. The shareholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until withdrawal of enough shareholders to leave less
than a quorum if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.
Section 7. ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual
or special, whether or not a quorum is present, may be adjourned from time to
time by the vote of the majority of the shares represented at that meeting,
either in person or by proxy, but in the absence of a quorum, no other business
may be transacted at that meeting, except as provided in Section 6 of this
Article II.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed, or unless the
adjournment is for more than forty-five (45) days from the date set for the
original meeting, in which case the board of directors shall set a new record
date. Notice of any such adjourned meeting shall be given to each shareholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 4 and 5 of this Article II. At any adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
3
<PAGE>
Section 8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 11
of this Article II, subject to the provisions of Sections 702 and 704,
inclusive, of the Corporations Code of California (relating to voting shares
held by a fiduciary, in the name of the corporation, or in joint ownership). The
shareholders' vote may be by voice vote or by ballot; provided, however, that
any election for directors must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of directors,
any shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares that the shareholder
is entitled to vote. If a quorum is present, the affirmative vote of the
majority of the shares represented at the meeting and entitled to vote on any
matter (other than the election of directors) shall be the act of the
shareholders, unless the vote of a greater number or voting by classes is
required by California General Corporation Law or by the Articles of
Incorporation.
At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one or more
candidates a number of votes greater than the number of the shareholder's
shares) unless the candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder's intentions to cumulate votes for
candidates in nomination and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which
that shareholder's shares are entitled, or distribute the shareholder's votes on
the same principle among any or all of the candidates, as the shareholder thinks
fit. The candidates receiving the highest number of votes, up to the number of
directors to be elected, shall be elected.
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy and, if either before or after the meeting, each person
entitled to vote who was not present or by proxy, signs a written waiver of
notice or a consent to a holding of the meeting or an approval of the minutes.
The waiver of notice or consent need not specify either the business to be
transacted or the purpose of any annual or special meeting of shareholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in the second paragraph of Section 4 of this Article II,
the waiver of notice or consent shall state the general nature of the proposal.
All
4
<PAGE>
such waivers, consents or approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice at that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the meeting.
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken is signed by the holders of outstanding shares
having not less than the minimum number of votes that would be necessary to
authorize or take that action at a meeting at which all shares entitled to vote
on that action were present and voted. In the case of election of directors,
such a consent shall be effective only if signed by the holders of all
outstanding shares entitled to vote for the election of directors; provided,
however, that a director may be elected at any time to fill a vacancy on the
board of directors that has not been filled by the directors, by the written
consent of the holders of a majority of the outstanding shares entitled to vote
for the election of directors. All such consents shall be filed with the
secretary of the corporation and shall be maintained in the corporate records.
Any shareholder giving a written consent, of the shareholder's proxy holders, or
a transferee of the shares or a personal representative of the shareholder or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
This notice shall be given in the manner specified in Section 5 of this Article
II. In the case of approval of (i) contracts or transactions in which a director
has a direct or indirect financial interest, pursuant to Section 3io of the
Corporations Code of California, (ii) indemnification of agents of organization
of the corporation, pursuant to Section 317 of that Code, (iii) a reorganization
of the corporation, pursuant to Section 1201 of that Code and (iv) a
distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, pursuant to Section 2007 of that Code, the notice
shall be given at least ten (10) days before the consummation of any action
authorized by that approval.
5
<PAGE>
Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of
any meeting, the board of directors may fix, in advance, a record date, which
shall not be more than sixty (60) days nor less than ten (10) days before the
date of any such meeting nor more than sixty (60) days before any such action
without a meeting, and in this event only shareholders of record on the date so
fixed are entitled to notice and to vote or to give consents, as the case may
be, notwithstanding any transfer of any shares on the books of the corporation
after the record date, except as otherwise provided in the California General
Corporation Law.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the closed of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, (i) when no prior action by
the board has been taken, shall be the day on which the first written consent is
given, or (ii) when prior action of the board has been taken, shall be at the
close of business on the day on which the board adopts the resolution relating
to that action, or the sixtieth (60th) day before the date of such other action,
whichever is first.
Section 12. PROXIES. Every person entitled to vote for directors or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the shareholder or by
shareholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i) a
writing delivered to the corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date of the proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Sections 705(e) and 705(f) of the Corporations Code of California.
6
<PAGE>
Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the board of directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may, and upon
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the results; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the California General
Corporation Law and any limitations in the Articles of Incorporation and these
bylaws relating to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors
of the corporation shall not be less than five (5) nor more than nine (9). The
exact number of directors shall be eight (8) until changed, within the limits
specified
7
<PAGE>
above, by the board of directors or by the shareholders. The indefinite number
of directors may be changed, or a definite number fixed without provision for an
indefinite number, by a duly adopted amendment to the articles of incorporation
or by an amendment to this bylaw duly adopted by the vote or written consent of
holders of a majority of outstanding shares entitled to vote; provided, however,
that an amendment reducing the number or the minimum number of directors to a
number less than five (5) cannot be adopted if the votes cast against its
adoption at a meeting of the shareholders, or the shares not consenting in the
case of action by written consent, are equal to more than 16-2/3 percent of the
outstanding shares entitled to vote. No amendment may change the stated maximum
number of authorized directors to a number greater than two times the stated
minimum number of directors minus one.
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of the shareholders to hold office until the next
annual meeting. Each director, including a director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
Section 4. VACANCIES. Vacancies in the board of directors may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director, except that a vacancy created by the removal of a
director by the vote or written consent of the shareholders or by court order
may be filled only by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding shares entitled to
vote. Each director so elected shall hold office until the next annual meeting
of the shareholders or until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
in the event of the death, resignation, or removal of any director, or if the
board of directors by resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or convicted of a felony,
or if the unauthorized number of directors is increased, of if the shareholders
fail, at any meeting of shareholders at which any director or directors are
elected, to elect the number of directors to be voted for at that meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary, or the board of directors, unless
the notice specified a later time
8
<PAGE>
for that resignation to become effective. If the resignation of a director is
effective at a future time, the board of directors may elect a successor to take
office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
Section 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular meetings
of the board of directors may be held at any place within or outside the State
of California that has been designated from time to time by resolution of the
board. In the absence of such a designation, regular meeting shall be held at
the principal executive office of the corporation. Special meetings of the board
shall be held at any place within or outside the State of California that has
been designated in the notice of the meeting, or, if not stated in the notice or
there is no notice, at the principal executive office of the corporation. Any
meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all directors participating in the meeting
can hear one another, and all such directors shall be deemed to be present in
person at the meeting.
Section 6. ANNUAL MEETING. Immediately following each annual meeting of
shareholders, the board of directors shall hold a regular meeting for the
purpose of organization, and desired election of officers, and the transaction
of other business. Notice of this meeting shall not be required.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of
directors shall be held without call at such time as shall from time to time be
fixed by the board of directors. Such regular meetings may be held without
notice.
Section 8. SPECIAL MEETINGS. Special meetings of the board of directors
for any purpose or purposes may be called at any time by the chairman of the
board or the president or any vice president or the secretary or any two
directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown in the records of the corporation. In case the notice is mailed,
it shall be deposited in the United States mail at least four days before the
time of the holding of the meeting. In case the notice is delivered personally,
or by telephone or telegram, it shall be delivered forty-eight (48) hours before
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director.
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The notice need not specify the purpose of the meeting nor the place if the
meeting is to be held at the principal executive office of the corporation.
Section 9. QUORUM. A majority of the authorized number of directors shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 11 of this Article III. Every act or decision done or made
by a majority of the directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the board of directors.
Section 10. WAIVER OF NOTICE. The transactions of any meeting of the
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes. The waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. Notice of a meeting shall also be deemed given to any director who
attends the meeting without protesting before or at its commencement, the lack
of notice to that director.
Section 11. ADJOURNMENT. A majority of the directors present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given, unless the meeting is adjourned
for more than twenty-four (24) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting, in the manner specified
in Section 8 of this Article III, to the directors who were not present at the
time of adjournment.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to
that action. Such action by written consent shall have the same force and effect
as a unanimous vote of the board of directors. Such written consent or consents
shall be filed with the minutes of the proceedings of the board.
Section 14. TELEPHONE CONFERENCE. Members of the board may participate in
a meeting through use of conference telephone or similar communications
equipment, so long as all members participating in such meeting can hear one
another. Participation in a meeting pursuant to this subdivision constitutes
presence in person at such meeting.
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Section 15. FEES AND COMPENSATION FOR DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursements of expenses, as may be fixed or determined by resolution of the
board of directors. This Section 15 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee or otherwise and receiving compensation for those services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF DIRECTORS. The board of directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the board. The board may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. Any committee, to the extent provided in
the resolution of the board, shall have all the authority of the board, except
with respect to:
(a) The approval of any action which, under the General Corporation Law of
California r also requires shareholders' approval or approval of the outstanding
shares;
(b) The filling of vacancies on the board of directors or in any committee;
(c) The fixing of compensation of the directors for serving on the board or
on any committee;
(d) The amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
(e) The amendment or repeal of Bylaws or the adoption of new Bylaws;
(f) A distribution to the shareholders of the corporation, except at a rate
or in a periodic amount or within a price range determined by the board of
directors; or
(g) The appointment of any other committees of the board of directors or
the members of these committees.
Section 2. MEETINGS AND ACTIONS OF COMMITTEES. Meetings and actions of
committees shall be governed by, and held, and taken in accordance with, the
provisions of Article III of these bylaws, Sections 5 (place of meetings), 7
(regular meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of
notice), 11 (adjournment), 12 (notice of adjournment), and 13 (action without a
meeting), with such changes in the context of those
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bylaws as are necessary to substitute the committee and its members for the
board of directors and its members, except that the time of regular meetings of
committees may be determined either by resolution of the board of directors or
by resolution of the committee; special meetings of committees may also be
called by resolution of the board of directors; and notice of special meetings
of committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these bylaws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article V. Any number of offices may be
held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the corporation, except
such officers as may be appointed in accordance with the provisions of Section 3
or Section 5 of this Article V, shall be chosen by the board of directors, and
each shall serve at the pleasure of the board, subject to the rights, if any, of
an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The board of directors may appoint, and
may empower the president to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority and perform such duties as are provided in the bylaws or as the
board of directors may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the board of directors, at any regular or
special meeting of the board, or, except in the case of an officer chosen by the
board of directors, by an officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the time of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if
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any, of the corporation under any contract to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these bylaws for regular appointments to that
office.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer be elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the board of directors or prescribed by the
bylaws. If there is no president, the chairman of the board shall in addition be
the chief executive officer of the corporation and shall have the powers and
duties described in Section 7 of this Article V.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may
be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction, and control of the business and the officers of
the corporation. He shall preside at all meetings of the shareholders and, in
the absence of the chairman of the board, or if there be none, at all meetings
of the board of directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the board of directors
or by the bylaws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
president, the vice presidents, if any, in order of their rank as fixed by the
board of directors, if not ranked, a vice president designated by the board of
directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors or the bylaws, and the president, or the chairman of the
board.
Section 9. SECRETARY. The secretary shall keep or cause to be kept, at
the principal executive office or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice given, the names
of those present at directors' meetings or committee meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings.
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The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, as
determined by resolution of the board of directors, a share register, or a
duplicate share register, showing the names and classes of shares held by each,
the number and date of certificates issued for the same, and the number and date
of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required by the bylaws or by law
to be given, and he shall keep the seal of the corporation if one be adopted, in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by the bylaws.
Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of account of the properties and business transactions of the
corporation, including accounting of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings, and shares. The book
of accounts shall at all reasonable time be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or the bylaws.
ARTICLE VI
INDEMNIFICATION
Section 6.1. DEFINITIONS. For purposes of this Article, "agent" includes
any person who is or was a Director, Officer, employee, or other agent of the
Corporation, or is or was serving at the request of the Corporation as a
Director, Officer, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, or other enterprise, or was a
Director, Officer, employee, or agent of a foreign or domestic corporation which
was a predecessor corporation of the Corporation or of another enterprise at the
request of such predecessor corporation; "proceeding" includes any threatened,
pending, or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes, without limitation,
attorneys' fees and expenses of
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establishing a right to indemnification under Section 6.4 or Section 6.5(d) of
this Article.
Section 6.2. INDEMNIFICATION IN ACTIONS BY THIRD PARTIES. The Corporation
shall have the power to indemnify any person who was or is a party or is
threatened to be made a party to any proceeding (other than an action by or in
the right of the Corporation) by reason of the fact that such person is or was
an agent of the Corporation, against expenses, judgments, fines, settlements,
and other amounts actually and reasonably incurred in connection with such
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in the best interests of the Corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct of
such person was unlawful.
The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in the best interests of the
Corporation or that the person had reasonable cause to believe that the person's
conduct was unlawful.
Section 6.3. INDEMNIFICATION IN ACTIONS BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation shall have power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that such person is or was an agent of the
Corporation, against expenses actually and reasonably incurred by such person in
connection with the defense or settlement of such action if such person acted in
good faith, in a manner such person believed to be in the best interests of the
Corporation and its Shareholders.
No indemnification shall be made under this Section 6.3 for any of the
following:
(a) Any claim, issue, or matter as to which such person shall have
been adjudged to be liable to the Corporation in the performance of such
person's duty to the Corporation and its Shareholders, unless and only to the
extent that the court in which such proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for the expenses which such court
shall determine;
(b) Amounts paid in settling or otherwise disposing of a pending
action, without court approval; or
(c) Expenses incurred in defending a pending action which is settled
or otherwise disposed of without court approval.
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Section 6.4. INDEMNIFICATION AGAINST EXPENSES. To the extent that an
agent of the Corporation has been successful on the merits in defense of any
proceeding referred to in Sections 6.2 or 6.3 of this Article or in defense of
any claim, issue or matter therein, the agent shall be indemnified against
expenses actually and reasonably incurred by the agent in connection therewith.
Section 6.5. REQUIRED DETERMINATIONS. Except as provided in Section 6.4
of this Article, any indemnification under this Article shall be made by the
Corporation only if authorized in the specific case, upon a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in Sections 6.2 and 6.3 of
this Article by:
(a) A majority vote of a quorum consisting of Directors who are not
parties to such proceeding;
(b) If such a quorum of Directors is not obtainable, by independent
legal counsel in a written opinion;
(c) Approval of the Shareholders, with the shares owned by the person
to be indemnified not being entitled to vote thereon; or
(d) The court in which such proceeding is or was pending upon
application made by the Corporation or the agent or the attorney or other person
rendering services in connection with the defense, whether or not such
application by the agent, attorney, or other person is opposed by the
Corporation.
Section 6.6. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by the Corporation prior to the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount unless it shall be determined ultimately that the agent is
entitled to be indemnified as authorized in this Article.
Section 6.7. NONEXCLUSIVE PROVISIONS. The indemnification authorized by
this Article shall not be deemed exclusive of any additional rights to
indemnification for breach of duty to the Corporation and its Shareholders while
acting in the capacity of a Director or Officer of the Corporation to the extent
the additional rights to indemnification are authorized in an article provision
adopted pursuant to California Corporations Code Section 204(a)(11). The
indemnification provided by this Article for acts, omissions, or transactions
while acting in the capacity of, or while serving as, a Director or Officer of
the Corporation but not involving breach of duty to the Corporation and its
Shareholders shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any bylaw, agreement, vote of
shareholders or disinterested
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directors, or otherwise, to the extent the additional rights to indemnification
are authorized in the Articles.
An Article provision authorizing indemnification "in excess of that
otherwise permitted by Corporations Code Section 317" or "to the fullest extent
permissible under California law" or the substantial equivalent thereof shall be
construed to be both a provision for additional indemnification for breach of
duty to the Corporation and its Shareholders as referred to in, and with the
limitations required by, California Corporations Code Section 204(a)(11), and a
provision for additional indemnification as referred to in the second sentence
of the first paragraph of this Section.
The rights to indemnity hereunder shall continue for a person who has
ceased to be a Director, Officer, employee, or agent and shall inure to the
benefit of the heirs, executors, and administrators of the person. Nothing
contained in this Article shall affect any right to indemnification to which
persons other than the Directors and Officers may be entitled by contract or
otherwise.
Section 6.8. FORMS OF INDEMNIFICATION NOT PERMITTED. No indemnification
or advance shall be made under this Article, except as provided in Section 6.4
or Section 6.5(d) of this Article in any circumstance where it appears:
(a) That it would be inconsistent with a provision of the Articles,
these Bylaws, a resolution of the Shareholders or an agreement in effect at the
time of the accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
Section 6.9. INSURANCE. The Corporation shall have power to purchase and
maintain insurance on behalf of any agent of the Corporation against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not the Corporation would have the
power to indemnify the agent against such liability under the provisions of this
Article.
Section 6.10. NONAPPLICABILITY TO FIDUCIARIES OF EMPLOYEE BENEFIT PLANS.
This Article does not apply to any proceeding against any trustee, investment
manager, or other fiduciary of an employee benefit plan in such person's
capacity as such, even though such person may also be an agent of the
Corporation as defined in Section 6.1 of this Article. The Corporation shall
have power to indemnify such trustee, investment manager or other fiduciary to
the extent permitted by subdivision (f) of Section 207 of the California
Corporations Code.
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ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation
shall keep at its principal executive office, or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the board of directors, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each
shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours on five (5) days' prior
written demand on the corporation, and (ii) obtain from the transfer agent of
the corporation, on written demand and on the tender of such transfer agent's
usual charges for such list, a list of the shareholders' names and addresses,
who are entitled to vote for the election of directors, and their shareholdings,
as of the most recent record date for which the list has been compiled or as of
a date specified in by the shareholder after the date specified in the demand.
This list shall be made available to any such shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or the date
specified in the demand of any shareholder or holder of a voting trust
certificate, at any time during usual business hours, for a purpose reasonably
related to the holder's interest as a shareholder or as the holder of voting
trust certificate. Any inspection and copying under this Section 1 may be made
in person or by an agent or attorney of the shareholder or holder of a voting
trust certificate making the demand.
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office, or if its principal executive office is
not in the State of California, at its principal business office in this state,
the original or a copy of the bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside the State of
California and the corporation has no principal business office in this state,
the secretary shall, upon the written request of any shareholder, furnish to
that shareholder a copy of the bylaws as amended to date.
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of any proceedings of the shareholders
and the board of directors and any committee or committees of the board of
directors shall be kept at such place or places designated by the board of
directors, or, in the absence of such designation, at the
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principal executive office of the corporation. The minutes shall be kept in
written form and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection upon
the written demand of any shareholder or holder of a voting trust certificate.
The inspection may be made in person or by an agent or attorney, and shall
include the right to copy and make extracts. These rights of inspection shall
extend to the records of each subsidiary corporation of the corporation.
Section 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records, and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This inspection by a director may be made in
person or by an agent or attorney, and the right of inspection includes the
right to copy and make extracts of documents.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to the
shareholders referred to in Section 1501 of the California General Corporation
Law is expressly dispensed with, but nothing herein shall be interpreted as
prohibiting the board of directors from issuing annual or other periodic reports
to the shareholders of the corporation as they may consider appropriate.
Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement
and any income statement of the corporation for each quarterly period of each
fiscal year, and any accompanying balance sheet of the corporation as of the end
of each such period, that has been prepared by the corporation shall be kept on
file in the principal executive office of the corporation for twelve (12) months
and each such statement shall be exhibited at all reasonable times to any
shareholder demanding an examination of any such statement or a copy shall be
mailed to any such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and a balance
sheet of the corporation as of the end of that period, the chief financial
officer shall cause that statement to be prepared, if not already prepared, and
shall deliver personally or mail that statement or statements to the person
making the request within thirty (30) days after the receipt of the request.
If the corporation has not sent to the shareholders its annual report for the
last fiscal years this report shall likewise be delivered or mailed to the
shareholder or shareholders within thirty (30) days after the request.
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The corporation shall also, on the written request of any shareholder, mail
to the shareholder a copy of the last annual, semi-annual, or quarterly income
statement which it has prepared, and a balance sheet as of the end of that
period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall
file with the Secretary of State of California, on the prescribed form, a
statement setting forth the authorized number of directors, the names and
complete business or residence addresses of all directors, the names and
complete business or residence addresses of all incumbent directors, the names
and complete business or residence addresses of the chief executive officer,
secretary and chief financial officer, the street address of its principal
executive office or principal business office in this state, and the general
type of business constituting the principal business activity of the
corporation, together with a designation of the agent of the corporation for the
purpose of service of process, all in compliance with Section 1502 of the
Corporations Code of California.
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect to any lawful action (other than action by
shareholders by written consent without a meeting), the board of directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
before any such action, and in that case only shareholders of record on the date
so fixed are entitled to receive the dividend, distribution, or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date so
fixed, except as otherwise provided in the California General Corporation Law.
If the board of directors does not so fix a record date, the record date
for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts,
or other orders for payment of money, notes, or
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other evidences of indebtedness, issued in the name of or payable to the
corporation, shall be signed or endorsed by such person or persons and in such
manner as, from time to time, shall be determined by resolution of the board of
directors.
Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board
of directors, except as otherwise provided in these bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name or on behalf of the corporation, and this authority may
be general or confined to specific instances; and, unless so authorized or
ratified by the board of directors within the agency power of an officer, no
officer, agent, or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
Section 4. CERTIFICATES OF SHARES. A certificate or certificates for
shares of the capital stock of the corporation shall be fully paid, and the
board of directors may authorize the issuance of certificates for shares as
partly paid provided that these certificate shall state the amount of the
consideration to be paid for them and the amount paid. All certificates shall be
signed in the name of the corporation by the chairman of the board or vice
chairman of the board or the president or vice president and by the chief
financial officer or an assistant treasurer or the secretary or any assistant
secretary, certifying the number of shares and the class or series of shares
owned by the shareholder. Any or all of the signatures on the certificate may be
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed on a certificate shall have ceased to
be that officer, it may be issued by the corporation with the same effect as if
that person were an officer, transfer agent, or registrar at the date of issue.
The corporation shall have the right to impose restrictions on the sale or
other disposition of its shares which restrictions may be placed upon all or a
portion or portions of the certificates evidencing the corporation's shares to
which such restrictions apply.
Section 5. LOST CERTIFICATES. Except as provided in this Section 5, no
new certificate for shares shall be issued to replace an old certificate unless
the latter is surrendered to the corporation and cancelled at the same time. The
board of directors may, in case any share certificate or certificate for any
other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the board may require,
including provision for indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft, or destruction
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of the certificate or the issuance of the replacement certificate.
Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of
the board, the president, or any vice president, or any other person authorized
by resolution of the board of directors or by any of the foregoing designated
officers, is authorized to vote on behalf of the corporation any and all shares
of any other corporation or corporations, foreign or domestic, standing in the
name of the corporation. The authority granted to these officers to vote or
represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by a proxy duly
executed by these officers.
Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
California General Corporation Law shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these
bylaws may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that if
the articles of incorporation of the corporation set forth the number of
authorized directors of the corporation, the authorized number of directors may
be changed only by an amendment to the articles of incorporation. '
Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section 1 of this Article IX, bylaws, other than a
bylaw or an amendment of a bylaw changing the authorized number of directors,
may be adopted, amended, or repealed by the board of directors.
22
<PAGE>
EXHIBIT 10.1
------------
[COMPOSITE CONFORMED COPY]
================================================================================
PURCHASE AGREEMENT
DATED AS OF DECEMBER 9, 1996
REGARDING
SERIES D CONVERTIBLE PREFERRED STOCK
AND
WARRANTS TO PURCHASE COMMON STOCK
OF
CHATCOM, INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<C> <S> <C>
SECTION 1. SALE AND PURCHASE OF CONVERTIBLE
PREFERRED STOCK AND WARRANTS..................... 1
SECTION 2. THE CLOSING...................................... 1
SECTION 3. DEFINITIONS...................................... 2
SECTION 4. REPRESENTATIONS AND WARRANTIES
OF THE COMPANY................................... 9
4.1. Corporate Existence, Power and Authority......... 9
4.2. Stock Ownership.................................. 9
4.3. Subsidiaries..................................... 10
4.4. Business......................................... 10
4.5. No Conflicts or Defaults......................... 10
4.6. Financial Statements; Other Information.......... 11
4.7. Litigation....................................... 11
4.8. Taxes............................................ 11
4.9. ERISA............................................ 12
4.10. Legal Compliance................................. 12
4.11. Permits and Approvals............................ 12
4.12. Patents, Trademarks and Other Rights............. 12
4.13. Status Under Certain Statutes.................... 13
4.14. Key Employees.................................... 13
4.15. Properties....................................... 13
4.16. Offering of Preferred Stock and Warrants......... 13
4.17. No Margin Violation.............................. 13
SECTION 5. REPRESENTATIONS AND COVENANTS
OF THE PURCHASERS................................ 13
5.1. Legal Power...................................... 14
5.2. Due Execution.................................... 14
5.3. Investment Intent................................ 14
5.4. Unregistered Securities; Legends................. 14
5.5. Economic Risk.................................... 15
5.6. Restricted Securities............................ 15
5.7. Address.......................................... 15
SECTION 6. OPTIONAL REDEMPTION; CONVERSION.................. 15
6.1. Conversion....................................... 15
6.2. Delivery of Stock Certificates; Time
Conversion Effective............................. 16
6.3. Payment of Dividends Upon Conversion............. 17
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
6.4. Adjustment of Exercise Price, Floor Price and
Cap Price........................................ 17
6.5. Company's Consolidation or Merger................ 21
6.6. No Fractional Shares to be Issued................ 22
6.7. Taxes on Conversion.............................. 22
6.8. Notice to Holders of Preferred Stock or
Warrants......................................... 22
6.9. Optional Redemption.............................. 23
SECTION 7. AFFIRMATIVE COVENANTS............................ 23
7.1. Use of Proceeds.................................. 23
7.2. Financial Information............................ 23
7.3. [Intentionally Omitted].......................... 23
7.4. Inspection....................................... 23
7.5. Maintenance of Existence, Properties and
Franchises; Compliance with Law; Taxes;
Insurance........................................ 24
7.6. Office for Exchange and Registration............. 24
7.7. Notices.......................................... 25
7.8. Reservation and Validity of Conversion Shares.... 25
7.9. Listing of Conversion Shares..................... 25
7.10. Securities Exchange Act Registration............. 25
7.11. Fiscal Year...................................... 25
SECTION 8. NEGATIVE COVENANTS............................... 25
8.1. Restricted Payments; Investments................. 25
8.2. Sale of Substantial Portion of Assets............ 26
8.3. No Change in Business; Subsidiary Assets......... 26
8.4. Maintenance of Public Market..................... 26
8.5. Indebtedness..................................... 26
8.6. Liens............................................ 26
8.7. Stock Options.................................... 27
SECTION 9. CONDITIONS TO THE COMPANY'S OBLIGATIONS.......... 27
9.1. Accuracy of Representations and Warranties....... 27
9.2. Purchase of all Preferred Stock and Warrants..... 28
SECTION 10. CONDITIONS TO PURCHASERS' OBLIGATIONS............ 28
10.1. Accuracy of Representations and Warranties; No
Noncompliance.................................... 28
10.2. Officers' Certificate............................ 28
10.3. Closing with Other Purchasers.................... 28
10.4. Proceedings...................................... 28
10.5. Opinion of Company Counsel....................... 28
10.6. Other Documents and Opinions..................... 28
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
SECTION 11. AMENDMENT AND WAIVER............................. 29
SECTION 12. EXCHANGE OF PREFERRED STOCK AND WARRANTS;
CANCELLATION OF SURRENDERED PREFERRED STOCK AND
WARRANTS......................................... 29
SECTION 13. REPLACEMENT OF PREFERRED STOCK CERTIFICATES AND
WARRANTS......................................... 30
SECTION 14. EVENTS OF NONCOMPLIANCE.......................... 30
SECTION 15. REMEDIES......................................... 32
SECTION 16. RESTRICTIONS ON TRANSFER......................... 32
SECTION 17. REGISTRATION RIGHTS.............................. 33
17.1. Registration at the Request of Holders........... 33
17.2. Piggyback Rights................................. 35
17.3. Expenses......................................... 36
17.4. Procedures....................................... 36
17.5. Provision of Documents........................... 38
17.6. Indemnification.................................. 38
17.7. Denial of Registration Rights.................... 39
SECTION 18. CERTAIN FEES AND EXPENSES........................ 40
SECTION 19. HOME OFFICE PAYMENTS............................. 40
SECTION 20. NOTICES.......................................... 41
SECTION 21. MISCELLANEOUS.................................... 41
21.1. Entire Agreement................................. 41
21.2. Survival......................................... 41
21.3. Counterparts..................................... 42
21.4. Headings......................................... 42
21.5. Binding Effect and Assignment.................... 42
21.6. Severability..................................... 42
21.7. Governing Law.................................... 42
21.8. Jurisdiction and Venue........................... 43
</TABLE>
<PAGE>
EXHIBITS:
- --------
EXHIBIT A - Convertible Preferred Stock and Warrants Purchased by each
Purchaser
EXHIBIT B - Forms of Convertible Preferred Stock and Warrant
EXHIBIT C - Other Warrants; Options
EXHIBIT D - Disclosure Schedule
EXHIBIT E - Liens
EXHIBIT F - Form of Opinion of Company Counsel
<PAGE>
To the Purchasers listed on the
Signature Pages of this Agreement:
Gentlemen:
CHATCOM, INC., a California corporation (the "Company"), hereby agrees
-------
with you as of December 9, 1996 as follows:
SECTION 1. SALE AND PURCHASE OF CONVERTIBLE
PREFERRED STOCK AND WARRANTS
(a) The Company agrees to sell to you and, subject to the terms and
conditions hereof and in reliance upon the representations and warranties of the
Company contained herein or made pursuant hereto, you severally and not jointly
agree to purchase from the Company on the Closing Date specified in Section 2
hereof, the number of shares of Series D Convertible Preferred Stock set forth
opposite your respective names on Exhibit A hereto, at a purchase price equal to
---------
$1,000.00 per share, and a Warrant or Warrants to purchase the number of shares
of the Company's Common Stock, no par value, set forth opposite your respective
names on said Exhibit A, at a purchase price equal to the aggregate number of
---------
shares of Common Stock set forth opposite your respective names on said Exhibit
-------
A multiplied by $.01.
- -
(b) As used herein, "Preferred Stock" means the aggregate of up to
---------------
2,496 shares of the Company's Series D Convertible Preferred Stock, together
with all Preferred Stock issued in exchange therefor or replacement thereof.
The Preferred Stock is convertible into shares of the Company's Common Stock, no
par value, at the conversion price specified in Section 6 hereof. Dividends on
the Preferred Stock shall be payable without further declaration by the
Company's Board of Directors semi-annually on May 15 and November 15 of each
year, commencing May 15, 1997. The form of Preferred Stock is attached hereto
as Exhibit B-1. As used herein, "Warrants" mean Stock Purchase Warrants to
----------- --------
purchase an aggregate of up to 400,000 shares of the Company's Common Stock, no
par value, together with all Warrants issued in exchange therefor or replacement
thereof. The Warrants are exercisable into shares of the Company's Common
Stock, no par value, at the exercise prices specified in Section 6 hereof. The
form of Warrants is attached hereto as Exhibit B-2.
-----------
SECTION 2. THE CLOSING
(a) The closing (the "Closing") of the purchase and sale of the
-------
Preferred Stock and Warrants will take place at the offices of Moses & Singer
LLP, 1301 Avenue of the Americas, New York, New York, at 1:00 P.M., New York
time, on December 9, 1996 or such other place, time and date as shall be
mutually agreed to by the Company and the Purchasers. Such time and date is
herein referred to as the "Closing Date".
------------
<PAGE>
(b) On the Closing Date, the Company will deliver to each Purchaser a
certificate or certificates evidencing Preferred Stock, substantially in the
form of Exhibit B-1 hereto and dated the Closing Date, for the number of shares
-----------
of Preferred Stock set forth opposite such Purchaser's name on Exhibit A hereto
---------
and a Warrant or Warrants, substantially in the form of Exhibit B-2 hereto and
-----------
dated the Closing Date, to purchase the number of shares of the Company's Common
Stock, no par value, set forth opposite such Purchaser's name on Exhibit A
---------
hereto, against delivery by such Purchaser to the Company of a wire transfer in
an amount equal to the aggregate of the purchase prices for such Purchaser's
Preferred Stock and Warrant or Warrants specified in Section 1(a) hereof payable
to the order of the Company in immediately available funds.
SECTION 3. DEFINITIONS
For purposes of this Agreement, the Preferred Stock and the Warrants,
the following definitions shall apply unless the context otherwise requires
(such definitions to be equally applicable to both the singular and plural forms
of the terms defined):
"Additional Common Stock" has the meaning set forth in Section 6.4(c)
-----------------------
hereof.
"Affiliate", when used with respect to any Person, means (i) if such
---------
Person is a corporation, any officer or director thereof and any Person (other
than any Purchaser) which is, directly or indirectly, the beneficial owner of
more than 10% of any class of any equity security (as defined in the Securities
Exchange Act) thereof, and, if such beneficial owner is a partnership, any
partner thereof, or if such beneficial owner is a corporation, any Person
controlling, controlled by or under common control with such beneficial owner,
or any officer or director of such beneficial owner or of any corporation
occupying any such control relationship, (ii) if such Person is a partnership,
any partner thereof, and (iii) any other Person (other than any Purchaser)
which, directly or indirectly, controls or is controlled by or is under common
control with such Person. For purposes of this definition, "control" (including
the correlative terms "controlling", "controlled by" and "under common control
with"), with respect to any Person, shall mean possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise.
"Agreement" means this Agreement (together with exhibits) as from time
---------
to time supplemented or amended or as the terms hereof from time to time may be
waived.
"Board" or "Board of Directors" means, with respect to any Person
----- ------------------
which is a corporation, a joint stock company or a business trust, the board of
directors or other group, however designated, which is charged with legal
responsibility for the management of such Person, or any committees of such
board of directors or
2
<PAGE>
group, however designated, which is authorized to exercise the power of such
board or group in respect of the matter in question.
"Business Day" means any day, other than a Saturday, Sunday or legal
------------
holiday, on which banks in the location of the office of the Company provided
for in Section 7.6 hereof are open for business.
"Cap Price" means $4.50 per share, as adjusted from time to time in
---------
accordance with Section 6.
"Capitalized Leases" means any lease to which the Company or a
------------------
Subsidiary is a party as lessees, or by which it is bound, under which it leases
any property (real, personal or mixed) from any lessor other than the Company or
a Subsidiary, and which either is required to be capitalized in accordance with
generally accepted accounting principles, or, even if not so required to be
capitalized, shall have (or have had), at the time first entered into, an
initial term of greater than five years (including leases of shorter duration
which are or were extendible to a total term greater than five years at the
option of the lessor). The value of Capitalized Leases, as of the time of any
determination thereof, shall mean the sum of the then present values, deter
mined as hereinafter provided, of future obligations of lessees under then
existing Capitalized Leases. To compute the value of any Capitalized Lease, the
following methods shall be used, as applicable:
(i) values of leases required to be capitalized in
accordance with generally accepted accounting principles (whether or
not the initial term or total term thereof is greater than five years)
shall be computed in accordance with such principles; and
(ii) values of other capitalized leases shall be computed by
discounting, to the date of determination, at an assigned interest
rate of ten percent (10%) per annum, the minimum amount of future
rental payments that will be due under the related leases, including
rental payments that may be during extensions which are at the
lessor's option, but excluding any amounts in respect of insurance on,
taxes on and/or maintenance of the properties subject to such leases,
provided that such amounts are owed and paid only to the extent
actually incurred.
"Closing" has the meaning set forth in Section 2(a) hereof.
-------
"Closing Date" has the meaning set forth in Section 2(a)
------------
hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended
----
from time to time.
3
<PAGE>
"Commission" means the Securities and Exchange Commission and any
----------
other similar or successor agency of the federal government administering the
Securities Act or the Securities Exchange Act.
"Common Stock" means that class or classes of stock or other
------------
equivalent evidences of ownership of a corporation, the holders of which are
entitled to elect the Board of such corporation.
"Company" means ChatCom, Inc., a California corporation, its
-------
successors and assigns.
"Consolidated" or "consolidated", when used with reference to any
------------ ------------
financial term in this Agreement means the aggregate for the Company and its
Subsidiaries, if any, of the amounts signified by such term for all such
Persons, with intercompany items eliminated, and, with respect to earnings,
after eliminating the portion of earnings properly attributable to minority
interests, if any, in the capital of any such Person (other than in the capital
of the Company) and otherwise as determined in accordance with generally
accepted accounting principles consistently applied.
"Conversion" or "conversion" has the meaning set forth in
---------- ----------
Section 6.1(d) hereof.
"Conversion Date" means the date specified in a Conversion Notice
---------------
delivered by the Company pursuant to Section 6.1(a) or by a Purchaser pursuant
to Section 6.1(b) or 6.1(c) as the date upon which the conversion of a Preferred
Stock or Warrants shall be effective, which date shall be no earlier than the
date of actual delivery of such Conversion Notice pursuant to Section 20 hereof.
"Conversion Notice" means a written notice (i) given by the Company to
-----------------
a Purchaser in accordance with Section 6.1(a) whereby the Company elects to
convert all (but not less than all) of the Preferred Stock held by such
Purchaser into Shares, (ii) given by a Purchaser to the Company in accordance
with Section 6.1(b) whereby such Purchaser elects to convert all or a portion of
the Preferred Stock held by such Purchaser into Shares or (iii) given by a
Purchaser to the Company in accordance with Section 6.1(c) whereby such
Purchaser elects to exercise a Warrant.
"Conversion Price" means in respect of the Preferred Stock, (i) as of
----------------
any date of determination thereof occurring on or prior to the first anniversary
of the Closing Date, the average of the Market Prices per Share for the ten (10)
consecutive trading dates immediately preceding the date of determination (the
"Average Market Price"), and (ii) as of any date of determination thereof
--------------------
occurring after the first anniversary of the Closing Date, the greater of (A)
the Average Market Price and (B) the Floor Price, in each case as the same may
be adjusted from time to time in accordance with Section 6; provided, however,
-------- -------
that in no event shall the Conversion Price determined pursuant to clauses (i)
and (ii) be greater than the Cap Price.
4
<PAGE>
"Conversion Shares" means the Shares issuable upon conversion of the
-----------------
Preferred Stock and exercise of the Warrants.
"Distributions on Common Stock" has the meaning set forth in Section
-----------------------------
6.4(b) hereof.
"Dollar" and the sign "$" means lawful money of the United States of
------ -
America.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
of 1974, as amended from time to time.
"ERISA Affiliate" shall mean each trade or business (whether or not
---------------
incorporated) which together with the Company or a Subsidiary of the Company
would be deemed to be a "single employer" within the meaning of Section 4001 of
ERISA.
"ERISA Termination Event" shall mean (i) a "Reportable Event"
-----------------------
described in Section 4043 of ERISA and the regulations issued thereunder (other
than a "Reportable Event" not subject to the provision for thirty (30) day
notice to the PBGC under such regulations), or (ii) the withdrawal of the
Company or any of its ERISA Affiliates from a Plan during a plan year in which
it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or
(iii) the filing of a notice of intent to terminate a Plan or the treatment of a
Plan amendment as a termination under Section 4041 of ERISA, or (iv) the
institution of proceedings to terminate a Plan by the PBGC or (v) any other
event or condition which might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any Plan.
"Event of Noncompliance" has the meaning set forth in Section 14
----------------------
hereof.
"Exercise Price" means $3.125 per share, in each case as such exercise
--------------
price may be adjusted from time to time in accordance with Section 6.
"Floor Price" means $1.50 per share, as adjusted from time to time in
-----------
accordance with Section 6.
"Indebtedness" of any Person means and includes, without duplication,
------------
as of any date as of which the amount thereof is to be determined, (i) all
obligations of such Person to repay money borrowed (including, without
limitation, all notes payable and drafts accepted representing extensions of
credit, all obligations evidenced by bonds, debentures, notes or other similar
instruments and all obligations upon which interest charges are customarily
paid), (ii) the value of all Capitalized Leases in respect of which such Person
is liable as lessee or as the guarantor of the lessee, (iii) the principal
amount of all monetary obligations which are secured by any perfected lien
5
<PAGE>
or security interest existing on property owned by such Person and (iv) all
guaranties of the Indebtedness of any other Person.
"Investment" means, with respect to any Person, any loan, advance or
----------
extension of credit by such Person to, and any guaranty or other contingent
liability with respect to the capital stock, Indebtedness or other obligations
of, and any contributions to the capital of, any other Person, as well as any
ownership, purchase or other acquisition by such Person of any interest in any
capital stock or other securities of any such other Person as well as any
transfer or sale of property of such Person to any other Person other than upon
full payment, in cash, of not less than the agreed sale price or the fair value
of such property, whichever is higher.
"Lien" means any mortgage, pledge, security interest, financing
----
statement, encumbrance, lien, segregation, charge or deposit arrangement or
other arrangement having the practical effect of any of the foregoing and shall
include the interest of a vendor or lessor under any conditional sale agreement,
Capitalized Lease or other title retention agreement.
"Majority in Interest of Outstanding Preferred Stock" means as of any
---------------------------------------------------
particular time any holder or holders of a majority of shares of the Preferred
Stock then Outstanding.
"Majority in Interest of Outstanding Warrants" means as of any
--------------------------------------------
particular time any holder or holders of Outstanding Warrants convertible into a
majority of the Shares issuable upon conversion of all Warrants then
Outstanding.
"Market Price" means, for any day, the last sale price of the Common
------------
Stock (or, if such information is not provided by such exchange or by the
National Association of Securities Dealers, Inc. Automated Quotation System, the
average of closing bid and asked prices of the Common Stock ) as reported by the
principal national securities exchange on which the Common Stock of the Company
is listed or admitted to trading, or if the Common Stock of the Company is not
listed or admitted to trading on any national securities exchange, as furnished
by the National Association of Securities Dealers Inc. Automated Quotation
System, or comparable sys tem, or in the absence of the foregoing, the fair
market value as reasonably determined by the Board of Directors of the Company
and the Purchasers. In the event that such closing sales price for any day is
stated in a currency other than Dollars, such price shall be translated into
Dollars at the exchange rates in effect on such day as determined by the
Purchasers.
"Outstanding" means, when used with reference to the shares of
-----------
Preferred Stock or the Warrants as of a particular time, all shares of Preferred
Stock or Warrants, as the case may be, theretofore duly issued except (i) shares
of Preferred Stock or Warrants theretofore reported as lost, stolen, mutilated
or destroyed or surrendered for transfer, exchange or replacement, in respect of
which replacement shares of Preferred Stock or Warrants have been issued by the
Company, (ii) shares of
6
<PAGE>
Preferred Stock theretofore redeemed in full, (iii) Warrants theretofore
acquired by the Company or exercised in full, (iv) Warrants theretofore expired
and (v) shares of Preferred Stock and Warrants theretofore canceled by the
Company, whether upon conversion or otherwise; except that, for the purpose of
determining whether holders of the requisite amount of shares of Preferred Stock
or the requisite holders of Warrants have made or concurred in any declaration,
waiver, consent, approval, notice or other communication under this Agreement or
any Preferred Stock or Warrants, Preferred Stock and Warrants registered in the
name of, as well as Preferred Stock and Warrants owned beneficially by, the
Company, any Subsidiary or any Affiliate (other than a Purchaser) of either
shall not be deemed to be Outstanding.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
----
successor thereto.
"Person" or "person" means an individual, corporation, partnership,
------ ------
firm, association, joint venture, trust, unincorporated organization,
government, governmental body, agency, political subdivision or other entity.
"Plan" shall mean any multiemployer plan or single employer plan, as
----
defined in Section 4001 and subject to Title IV of ERISA, which is maintained,
or at any time during the five calendar years preceding the date of this
Agreement was maintained, for employees of the Company or a Subsidiary of the
Company or an ERISA Affiliate.
"Potential Noncompliance" means a condition or event which, with
-----------------------
notice or lapse of time or both, would constitute an Event of Noncompliance.
"Preferred Stock" has the meaning set forth in Section 1(b) hereof.
---------------
"Purchase Agreement" or "this Agreement", means this Agreement
------------------ --------------
together with the Exhibits hereto, as amended, supplemented or otherwise
modified from time to time.
"Purchase Documents" means, collectively, this Agreement, certificates
------------------
evidencing Preferred Stock, the Warrants and any other instruments, documents
and agreements referred to herein or therein or related hereto or thereto in
favor of the Purchasers.
"Purchasers" means the purchasers of the Preferred Stock and Warrants
----------
listed on Exhibit A hereto.
---------
"Registration Demand" has the meaning set forth in Section 17.1(b)
-------------------
hereof.
7
<PAGE>
"Restricted Payment" means (i) every dividend or other distribution
------------------
paid, made or declared by the Company on or in respect of any class of its
capital stock, (ii) every payment in connection with the redemption, purchase,
retirement or other acquisition by or on behalf of the Company or any Subsidiary
of any shares of the Company's or any Subsidiary's capital stock, whether or not
owned by the Company or any Subsidiary, (iii) any optional prepayments made on
subordinated Indebtedness of the Company or a Subsidiary, (iv) every payment to
or on behalf of any Affiliate of the Company or of any Subsidiary on account of
or with respect to any lease arrangements and (v) every payment by or on behalf
of the Company or any Subsidiary (whether as repayment or prepayment of
principal or as interest or otherwise) on or with respect to (A) any obligation
to repay money borrowed owing to any Affiliate of the Company or of any
Subsidiary or (B) any obligation, to any Person, of any Affiliate of the Company
or of any Subsidiary, which obligation is assumed or guaranteed by the Company
or a Subsidiary; provided, however, (a) that the restrictions of the foregoing
clauses (i) and (ii) shall not apply to any dividend, distribution or other
payment to the extent payable in shares of the capital stock of the Company, (b)
that none of the foregoing clauses shall apply to any payments from a Subsidiary
to the Company and (c) that none of the foregoing clauses shall apply to any
payments on or with respect to Preferred Stock. For purposes of this
definition, "capital stock" shall also include warrants (other than the
Warrants) and other rights and options to acquire shares of capital stock (other
than the Preferred Stock).
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules, regulations and interpretations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
as amended, and the rules, regulations and interpretations thereunder.
"Share" or "Shares" means fully-paid and non-assessable shares of
----- ------
Common Stock of the Company.
"Subsidiary" means any Person in which at least a majority of the
----------
shares of each class of the capital stock, at the time as of which any
determination is being made, is owned, beneficially and of record, by the
Company or one or more of its Subsidiaries, or both.
"Warrant" or "Warrants" has the meaning set forth in Section 1(b)
------- --------
hereof.
"Warrant Expiration Date" shall mean the close of business on the
-----------------------
fifth anniversary of the Closing Date.
8
<PAGE>
SECTION 4. REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants that, except as disclosed on
Exhibit D hereto:
- ---------
4.1. Corporate Existence, Power and Authority.
----------------------------------------
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of its
incorporation and is duly qualified and authorized to do business and in good
standing in each other jurisdiction in which it is required to be qualified or
where it owns any material property or conducts any material operations.
(b) No proceeding has been commenced looking toward the
dissolution or merger of the Company or the amendment of the Articles of
Incorporation, as amended (or comparable document), in any regard, other than
the filing of the Certificate of Determination and Decrease with respect to the
Preferred Stock. The Company is not in violation in any respect of the Articles
of Incorporation, as amended (or comparable document), or By-Laws.
(c) The Company has all requisite power, authority and
legal right to conduct its business as now being conducted.
(d) The Company has all requisite power, authority and
legal right to execute, deliver, enter into, consummate and perform this
Agreement and the other Purchase Documents to which it is a party, including,
without limitation, the issuance by the Company of the Preferred Stock, the
Warrants and the Conversion Shares, as contemplated herein. The execution,
delivery and performance by the Company of this Agreement and the other Purchase
Documents to which it is a party (including, without limitation, the issuance by
the Company of the Preferred Stock, the Warrants and the Conversion Shares, as
contemplated herein) have been duly authorized by all required corporate and
other actions. The Company has duly executed and delivered this Agreement and
this Agreement constitutes, and the other Purchase Documents when executed and
delivered (including, without limitation, the Preferred Stock, the Warrants and
the Conversion Shares, when issued) will constitute, the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms.
4.2. Stock Ownership. As of the Closing Date, the capital stock
---------------
of the Company consists of (i) 25,000,000 authorized shares of Common Stock, no
par value per share, of which 9,826,893 Shares have been duly authorized and are
validly issued and outstanding and fully-paid and non-assessable and (ii)
1,000,000 authorized shares of Preferred Stock. As of the Closing Date, the
Company has reserved from its authorized but unissued shares of Common Stock, an
aggregate of 7,807,451 Shares, of which 2,066,667 Conversion Shares will be
reserved for issuance upon
9
<PAGE>
conversion of the Preferred Stock and the Warrants. Except as set forth on
Exhibit C, there are no outstanding options, warrants, rights, convertible
- ---------
securities or other agreements or plans under which the Company may become
obligated to issue or transfer shares of its capital stock or other securities,
other than the Preferred Stock, the Warrants and Conversion Shares to be issued
as provided in the Purchase Documents.
4.3. Subsidiaries. The Company has no Subsidiaries.
------------
4.4. Business. The Company is primarily engaged in the business of
--------
manufacturing and marketing computer network equipment. The Company does not
have any present intention of engaging in any other non-related business.
4.5. No Conflicts or Defaults.
------------------------
(a) No Event of Noncompliance or Potential Noncompliance has
occurred and is continuing.
(b) The Company is not in violation or default in any material
respect (or in default in any respect regarding any Indebtedness) under any
material indenture, agreement or instrument to which it is a party or by which
it or its properties may be bound.
(c) None of the execution, delivery or performance by the
Company of this Agreement and the other Purchase Documents or any of the
transactions contemplated hereby (including, without limitation, the issuance of
the Preferred Stock, Warrants and Conversion Shares, as contemplated herein) (i)
violates or conflicts or will violate or conflict with, with or without the
giving of notice or the passage of time or both, any provision of (A) the
Articles of Incorporation, as amended (or comparable document), or By-Laws of
the Company or (B) any law, rule, regulation, order, judgment, writ, injunction,
decree, material agreement, material indenture or other material instrument
applicable to the Company or any of its properties (or to which the Company is a
party or by which it or its properties may be bound), (ii) results or will
result in the creation of any security interest or lien upon any of the
Company's properties, assets or revenues, (iii) requires or will require the
consent, waiver, approval, order or authorization of, or declaration,
registration, qualification or filing with, any Person (whether or not a
governmental authority and including, without limitation, any stockholder
approval), other than the authorization and approval of the Board of Directors
of the Company and the filing of the Certificate of Determination and Decrease
with the California Secretary of State, or (iv) causes or will cause anti-
dilution clauses of any outstanding securities to become operative. No such
provision does or will materially adversely affect the assets, properties,
liabilities, business, results of operations or financial or other condition of
the Company or the ability of the Company to perform any of the Purchase
Agreements or the transactions contemplated hereby or thereby.
10
<PAGE>
4.6. Financial Statements; Other Information.
---------------------------------------
(a) The Company has furnished to each Purchaser financial
statements of the Company consisting of (i) the Company's Annual Report on form
10-KSB for the fiscal years ended March 31, 1995 and March 31, 1996 and (ii) the
Company's Quarterly Report on form 10-QSB for the quarterly period ended
September 30, 1996. There has been no material adverse change in the assets,
properties, liabilities, business, results of operations, condition (financial
or otherwise) or prospects of the Company as reported in the Quarterly Report on
form 10-QSB for the quarterly period ended September 30, 1996.
(b) The Company is not aware of any material liabilities,
contingent or otherwise, that have not been disclosed in the financial
statements referred to in Section 4.6(a) above.
(c) Nothing has come to the attention of the Company that
would cause it to believe that any financial statements or other material
heretofore furnished to any Purchaser contained or contains a false or
misleading statement of a material fact or omits to state any material fact
necessary in order to make the statements made in such material, in the light of
the circumstances under which they were made, not misleading.
4.7. Litigation. There is no material action, suit, proceeding,
----------
investigation or claim pending or, to the knowledge of the Company, threatened
in law, equity or otherwise before any court, administrative agency or
arbitrator which either (i) questions the validity of any of the Purchase
Documents or any action taken or to be taken pursuant thereto, or (ii) might
adversely affect the right, title or interest of the Purchasers to the Preferred
Stock, the Warrants or the Conversion Shares or (iii) might result in a material
adverse change in the assets, properties, liabilities, business, results of
operation or financial or other condition of the Company.
4.8. Taxes. The Company has filed all federal, state, local and
-----
other tax returns and reports required to be filed on or before the date of this
Agreement. The Company has paid or caused to be paid all taxes (including
interest and penalties) that are due and payable on or before the date of this
Agreement, except those which are being contested by the Company in good faith
by appropriate proceedings and in respect of which adequate reserves are being
maintained on the Company's books in accordance with generally accepted
accounting principles consistently applied. The Company has no material
liabilities for taxes other than those incurred in the ordinary course of
business and in respect of which adequate reserves are being maintained by the
Company in accordance with generally accepted accounting principles consistently
applied.
11
<PAGE>
4.9. ERISA.
-----
(a) Each Plan is in substantial compliance with ERISA, no Plan
has an accumulated or waived funding deficiency within the meaning of Section
412 or Section 418(B) of the Code, no proceedings have been instituted to
terminate any Plan, and neither the Company nor an ERISA Affiliate has incurred
any material liability to or on account of a Plan under ERISA, and no condition
exists which presents a material risk to the Company of incurring such a
liability.
(b) The execution, delivery and performance of the Purchase
Documents and the consummation of the transactions contemplated thereby
(including without limitation, the offer, issue and sale by the Company, and the
purchase by the Purchasers, of the Preferred Stock, Warrants and Conversion
Shares) will not, to the best of the knowledge and belief of the Company,
involve any "prohibited transaction", as such term is defined in Section 4975 of
the Code with respect to any Plan.
4.10. Legal Compliance.
----------------
(a) The Company has complied with all applicable laws, rules,
regulations, orders, licenses, judgment, writs, injunctions, decrees or demands,
except to the extent that failure to comply would not materially adversely
affect its assets, properties, liabilities, business, results of operations or
condition (financial or otherwise).
(b) There are no adverse orders, judgments, writs,
injunctions, decrees or demands of any court or administrative body, domestic or
foreign, or of any other governmental agency or instrumentality, domestic or
foreign, outstanding against the Company.
4.11. Permits and Approvals. The Company possesses such material
---------------------
franchises, licenses, permits and other authority as are necessary for the
conduct of its business as now being conducted and as proposed to be conducted
and is not in default under any of such franchises, permits, licenses or other
authority.
4.12. Patents, Trademarks and Other Rights. The Company possesses
------------------------------------
all patents, patent rights, trademarks, trademark rights, tradenames, tradename
rights and copyrights necessary to conduct its business as now being conducted
and as proposed to be conducted. To the best of the Company's knowledge, the
rights of the Company in respect of such patents, patent rights, trademarks,
trademark rights, tradenames, tradename rights or copyrights do not conflict
with or infringe any rights of others which might materially adversely affect
the assets, properties, liabilities, business, results of operations, condition
(financial or otherwise) or prospects of the Company, and no such claim of
conflict or infringement has been asserted by any Person.
12
<PAGE>
4.13. Status Under Certain Statutes. The Company is not (i) a
-----------------------------
"public utility company" or a "holding company", or an "affiliate" or a
"subsidiary company" of a "holding company", or an "affiliate" of such a
"subsidiary company", as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended, (ii) a "public utility" as defined in the
Federal Power Act, as amended, or (iii) an "investment company" or an
"affiliated person" thereof or an "affiliated person" of any "affiliated
person", as such terms are defined in the Investment Company Act of 1940, as
amended, except to the extent, if any, that the Company may be deemed to be such
an "affiliate" or "affiliated person" solely as the result of the status of any
Purchaser or any "affiliated person" of any Purchaser.
4.14. Key Employees. The Company has no knowledge that any key
-------------
employee or group of key employees has given notice of the decision to leave the
employ of the Company.
4.15. Properties. The Company does not own any material real
----------
property. Real property used by the Company in the conduct of its business is
held under lease, and the Company is not aware of any pending or threatened
claim or action by any lessor of any such property to terminate any such lease.
4.16. Offering of Preferred Stock and Warrants. Neither the
----------------------------------------
Company nor any agent or other Person acting on its behalf, directly or
indirectly, has offered any of the Preferred Stock or Warrants or any similar
security of the Company for sale to or solicited offers to buy any thereof from,
or otherwise approached or negotiated with respect thereto with, any Person
other than the Purchasers and not more than five other institutional investors.
4.17. No Margin Violation. No portion of the proceeds from the
-------------------
sale of the Preferred Stock and Warrants will be used for the purpose, whether
immediate, incidental or ultimate, of purchasing or carrying, within the meaning
of Regulation U of the Board Of Governors of the Federal Reserve System, as
amended from time to time, any "margin stock", as defined in said Regulation U,
or any "margin stock", as defined in Regulation G of the Board of Governors of
the Federal Reserve System, as amended from time to time, or for the purpose of
purchasing, carrying or trading in securities within the meaning of Regulation T
of the Board of Governors of the Federal Reserve System, as amended from time to
time, or for the purpose of reducing or retiring any indebtedness which was
originally incurred to purchase any such margin stock or other securities.
SECTION 5. REPRESENTATIONS AND COVENANTS OF THE PURCHASERS
Each Purchaser hereby severally represents, warrants and covenants to
and with the Company as follows:
13
<PAGE>
5.1. Legal Power. Each Purchaser has the requisite legal power to
-----------
enter into this Agreement and to carry out and perform its obligations under the
terms of this Agreement.
5.2. Due Execution. This Agreement has been duly authorized,
-------------
executed and delivered by such Purchaser, and, upon due execution and delivery,
this Agreement will be a valid and binding agreement of such Purchaser,
enforceable against such Purchaser in accordance with its terms.
5.3. Investment Intent. Such Purchaser is acquiring the Preferred
-----------------
Stock and Warrants, and would be acquiring the Conversion Shares issuable upon
conversion of the Preferred Stock or exercise of Warrants, for its own account,
for investment and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act.
5.4. Unregistered Securities; Legends.
--------------------------------
(a) Such Purchaser understands that (i) the Preferred Stock
and Warrants being purchased by such Purchaser and the underlying Conversion
Shares have not been registered under the Securities Act, that they must be held
by such Purchaser indefinitely, and that such Purchaser must, therefore, bear
the economic risk of such investment indefinitely, unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from
such registration; (ii) each Preferred Stock certificate and Warrant certificate
purchased by each Purchaser, and each Conversion Share certificate, will be
endorsed with the following legend:
"THE SECURITIES EVIDENCED BY THIS [CERTIFICATE] [WARRANT] HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933
ACT"), AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED
UNLESS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933
ACT COVERING SUCH SECURITIES OR SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE 1933
ACT."
The Company agrees to remove the foregoing legend from any certificate
evidencing Conversion Shares if the Conversion Shares represented by such
certificate have been registered with the Commission pursuant to the Securities
Act and the Purchaser agrees to comply with applicable prospectus delivery and
black-out period requirements, or Rule 144(k) under the Securities Act (or any
successor rule or regulation) is then applicable to such Conversion Shares.
(b) Each Purchaser understands that each Preferred Stock
certificate purchased by each Purchaser will be endorsed with the following
legend:
14
<PAGE>
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF
THE COMPANY TO PURCHASE SUCH SECURITIES, UNTIL DECEMBER , 1997, WHICH
RIGHT IS DESCRIBED IN SECTION 6.1(a) OF THE PURCHASE AGREEMENT DATED
AS OF DECEMBER 9, 1996 BETWEEN THE COMPANY AND INITIAL PURCHASER OF
SUCH SECURITIES. A COPY OF SUCH PURCHASE AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY.
5.5. Economic Risk. Each Purchaser hereby severally and not
-------------
jointly represents that such Purchaser is capable of evaluating the risk of his
investment in the Preferred Stock and Warrants and is able to bear the economic
risk of such investment, that such Purchaser is an "accredited investor" within
the meaning of Regulation D under the Securities Act, and that the Company has
made available all additional information which such Purchaser has requested and
that such Purchaser has had the opportunity to ask questions of and receive
complete and satisfactory answers from the Company concerning an investment in
the Preferred Stock and Warrants.
5.6. Restricted Securities. Such Purchaser understands that the
---------------------
Preferred Stock and Warrants, together with any of the Conversion Shares
available upon conversion, it is purchasing are characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may be resold
without registration under the Securities Act only in certain limited
circumstances, and it represents that it is familiar with Commission Rule 144,
as presently in effect, and understands the resale limitations imposed thereby
and by the Securities Act.
5.7. Address. Such Purchaser's principal address is as set forth
-------
in Exhibit A hereto.
---------
SECTION 6. OPTIONAL REDEMPTION; CONVERSION
6.1. Conversion.
----------
(a) The Company shall have the right, at the option of the
Company, at any time on or prior to the first anniversary of the Closing Date,
to purchase, subject to the terms and provisions of this Section 6 and provided
that no Event of Noncompliance or Potential Noncompliance shall have occurred
and be continuing, all (but not less than all) Outstanding shares of Preferred
Stock from all of the Purchasers. The purchase price for such Preferred Stock
shall be payable in Conversion Shares in an amount determined by dividing the
product of $1,000 times the number of shares of Preferred Stock to be purchased
by the Conversion Price in effect on the applicable Conversion Date, calculated
to the nearest Conversion Share (fractions of less than 1/2 being disregarded
and fractions of 1/2 or greater being rounded up to the next
15
<PAGE>
full share). Such right to purchase shall be exercised by delivery by the
Company to each Purchaser of written notice of the Company's election to
purchase the Preferred Stock, which notice shall specify a Conversion Date on or
prior to the first anniversary of the Closing Date. Promptly upon receipt by a
Purchaser of such written notice, such Purchaser shall deliver the certificates
evidencing Preferred Stock held by such Purchaser to the Company at the office
of the Company provided for in Section 7.6.
(b) Each holder of Preferred Stock shall have the right,
at the option of such holder, at any time after the first anniversary of the
Closing Date through and including the second anniversary of the Closing Date to
convert, subject to the terms and provisions of this Section 6, all or any
portion of such Preferred Stock into Conversion Shares. Such conversion of
Preferred Stock into Conversion Shares shall be made at the Conversion Price in
effect on the Conversion Date. Such right of conversion shall be exercised by
delivery of the certificates evidencing Preferred Stock to the Company at the
office of the Company provided for in Section 7.6, accompanied by written notice
of the holder's election to convert the Preferred Stock or specified portion
thereof, which such notice shall specify the Conversion Date.
(c) The holder of a Warrant shall have the right, at the
option of such holder, at any time after April 30, 1997 through and including
the Warrant Expiration Date to exercise, subject to the terms and provisions of
this Section 6, such Warrant or any portion thereof into Conversion Shares. Such
exercise of Warrants for Conversion Shares shall be made at the Exercise Price.
Such right of exercise shall be exercised by delivery of the Warrant to the
Company at the office of the Company provided for in Section 7.6, accompanied by
written notice of the holder's election to exercise the Warrant or portion
thereof, which notice shall specify the Conversion Date.
(d) For convenience, the conversion by the holders of the
Preferred Stock pursuant to Section 6.1(b) or the purchase by the Company
pursuant to Section 6.1(a), as the case may be, of all or a portion of the
Preferred Stock into, or in exchange for, Conversion Shares is herein sometimes
referred to as the "conversion" of the Preferred Stock, and the exercise of all
----------
or a portion of a Warrant into Conversion Shares pursuant to Section 6.1(c) is
herein sometimes referred to as the "conversion" of the Warrant.
----------
6.2. Delivery of Stock Certificates; Time Conversion Effective.
---------------------------------------------------------
(a) As promptly as practicable after the surrender as herein
provided of a certificate evidencing Preferred Stock or Warrant for conversion,
the Company shall deliver or cause to be delivered to or upon the written order
of the holder of certificate evidencing Preferred Stock or Warrant so
surrendered certificates representing the number of fully paid and non-
assessable Conversion Shares into which the Preferred Stock or Warrant, or such
portion thereof, may be converted in accordance with the provisions of this
Section 6. In the case of the conversion of Preferred Stock,
16
<PAGE>
such number shall be determined by dividing the product of $1,000 times the
number of shares of Preferred Stock to be converted by the Conversion Price on
the applicable Conversion Date, calculated to the nearest Conversion Share
(fractions of less than 1/2 being disregarded and fractions of 1/2 or greater
being rounded up to the next full share). If only a fraction of the number of
shares of Preferred Stock or Warrants are used in such conversion, the Company
shall, concurrently with the issuance of the Conversion Shares issuable upon
such conversion, take the action described in Section 12(b) hereof.
(b) Subject to the following provisions of this Section
6.2, such conversion shall be deemed to have been made at the close of business
on the Conversion Date specified in the applicable Conversion Notice, so that
the rights of the holder of the Preferred Stock or the Warrant as a holder
thereof, or such portion thereof, shall cease at such time and the Person or
Persons entitled to receive any of the Conversion Shares upon conversion of the
Preferred Stock or the Warrant shall be treated for all purposes as having
become the record holder or holders of such Conversion Shares at such time.
(c) The Company will, at the time of such conversion, in
whole or in part, upon request of the holder of the Preferred Stock or the
Warrant, acknowledge in writing its continuing obligation to such holder in
respect of any rights (including, without limitation, any right of registration
of the Conversion Shares issued upon such conversion) to which such holder shall
continue to be entitled under this Agreement after such conversion, provided
that the failure of such holder to make any such requests shall not affect the
continuing obligation of the Company to such holder in respect of such rights.
6.3. Payment of Dividends Upon Conversion.
------------------------------------
The Company shall pay all unpaid dividends on any Preferred Stock so
converted which has accrued through and including the date upon which such
conversion is deemed to have been effected in accordance with Section 6.2
hereof, such payment to be made in cash or in Conversion Shares (calculated at
the Conversion Price then in effect) at the Company's option.
6.4. Adjustment of Exercise Price, Floor Price and Cap Price.
-------------------------------------------------------
The Exercise Price, Floor Price and Cap Price shall be subject to adjustment,
from time to time, as follows:
(a) In case the Company shall, after the Closing Date, (i) pay
a stock dividend or make a distribution in shares of its capital stock (whether
of Shares or of capital stock of any other class), (ii) subdivide its
Outstanding Shares, (iii) combine its Outstanding Shares into a smaller number
of Shares or (iv) issue by reclassification of its Shares, any shares of capital
stock of the Company, the Exercise Price of the Warrants and the Floor Price and
the Cap Price of the Preferred Stock shall be adjusted so that (A) the holder of
a Warrant thereafter surrendered for conversion shall be entitled to receive the
number of shares of capital stock of the Company which
17
<PAGE>
he would have owned immediately following such action had such Warrant been
converted immediately prior thereto, and (B) the Floor Price and the Cap Price
of the Preferred Stock shall be appropriately adjusted, and such conversion
price, Floor Price and Cap Price shall thereafter be subject to further
adjustments under this Section 6. An adjustment made pursuant to this subsection
(a) shall become effective retroactively immediately after the record date in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(b) In case the Company shall, after the Closing Date, fix
a record date for the making of a distribution to all holders of its Shares
(including any such distribution made in connection with a consolidation or
merger in which the Company is the continuing corporation) of (i) assets (other
than dividends payable in Shares), (ii) evidences of indebtedness or other
securities (except for Shares) of the Company or of any corporation other than
the Company, or (iii) subscription rights, options or warrants to purchase any
of the foregoing assets or securities (excluding those referred to in Section
6.4(d)(3) hereof), whether or not such rights, options or warrants are
immediately exercisable (hereinafter collectively referred to as "Distributions
-------------
on Common Stock"), the Company shall promptly notify each Purchaser thereof in
- ---------------
writing (such notice to be given at least ten (10) Business Days prior to such
record date) and shall issue to the holders of Outstanding Preferred Stock, the
Distribution on Common Stock to which they would have been entitled if they had
converted the Preferred Stock held by them into Common Stock of the Company
immediately prior to the record date for the purpose of determining stockholders
entitled to receive such Distribution on Common Stock.
(c) Subject to the exceptions referred to in Section
6.4(e) hereof, in case the Company shall at any time or from time to time after
the Closing Date issue any additional Shares ("Additional Common Stock") for a
-----------------------
consideration per share either (I) less than the then current Market Price per
share of Common Stock of the Company (determined as provided in Section 6.4(g)
hereof) immediately prior to the issuance of such Additional Common Stock, (II)
less than the then current Exercise Price immediately prior to the issuance of
such Additional Common Stock, or (III) without consideration, then (in the case
of either clause (I), (II) or (III)), and thereafter successively upon each such
issuance, the then current Exercise Price and Floor Price shall be reduced, if
necessary, (but not increased) to the price determined by multiplying such
current Exercise Price or Floor Price, as the case may be, by a fraction, of
which
(A) the numerator shall be (i) the number of Shares
Outstanding when the then current Exercise Price or Floor Price, as the
case may be, became effective plus (ii) the number of Shares which the
aggregate amount of consideration, if any, received by the Company upon all
issues of its Common Stock (other than those referred to in Section 6.4(e)
hereof) since the then current Exercise Price or Floor Price, as the case
may be, became effective (including the consideration, if any, received for
such Common Stock) would
18
<PAGE>
purchase at the greater of (A) the then current Market Price per Share of
Common Stock of the Company or (B) the then current Exercise Price or Floor
Price, as the case may be, and
(B) the denominator shall be (i) the number of Shares
Outstanding when the then current Exercise Price or Floor Price, as the
case may be, became effective plus (ii) the number of Shares issued (other
than those referred to in Section 6.4(e) hereof) since the then current
Exercise Price, or Floor Price, as the case may be, became effective
(including the number of Shares of such Additional Common Stock).
(d) For purposes of Section 6.4(c) hereof, the following
provisions shall also be applicable:
(1) In case of the issuance of Additional Common Stock
for cash, the consideration received by the Company therefor shall be
deemed to be the net cash proceeds received by the Company for such
Additional Common Stock after deducting any commissions or other expenses
paid or incurred by the Company for any underwriting of, or otherwise in
connection with the issuance of, such Additional Common Stock.
(2) in case of the issuance (otherwise than upon
conversion of obligations or shares of stock of the Company) of Additional
Common Stock for a consideration other than cash, or a consideration a part
of which shall be other than cash, the amount of the consideration other
than cash so received or to be received by the Company shall be deemed to
be the value of such consideration at the time of its receipt by the
Company as determined in good faith by the Board of Directors of the
Company, except that where the non-cash consideration consists of the
cancellation, surrender or exchange of outstanding obligations of the
Company (or where such obligations are otherwise converted into Shares),
the value of the non-cash consideration shall be deemed to be the amount,
including principal and any accrued interest, as of the time of the
Company's receipt, of the obligations canceled, surrendered, satisfied,
exchanged or converted. If the Company receives consideration, part or all
of which consists of publicly traded securities (i.e., in lieu of cash),
----
the value of such non-cash consideration shall be the aggregate market
value of such securities (based on the latest reported trades) as of the
close of the day immediately preceding the date of their receipt by the
Company.
(3) in case of the issuance (other than by way of a
Distribution on Common Stock pursuant to Section 6.4(b) hereof), whether by
distribution or sale to holders of its Shares or to others, by the Company
of (i) any security (other than the Preferred Stock or the Warrants) that
is convertible into Shares or (ii) any rights, options or warrants to
purchase Shares (except as stated in Section 6.4(a) hereof), the Company
shall be deemed to have issued, for the consideration described below, the
number of Shares into
19
<PAGE>
which such convertible security may be converted when first convertible, or
the number of Shares deliverable upon the exercise of such rights, options
or warrants when first exercisable, as the case may be (and such Shares
shall be deemed to be Additional Common Stock for purposes of Section
6.4(c) hereof); provided, that if such number of Shares is thereafter
increased in accordance with the terms of such convertible security,
rights, options or warrants, as a result of the anti-dilution provisions of
such convertible security, rights, options or warrants or otherwise, the
Company shall be deemed to have issued at the time of such increase and at
no consideration, the additional Shares into which such convertible
securities may be converted as a result of such increase or the additional
Shares for which such rights, options or warrants may be exercised as a
result of such increase, as the case may be. The consideration to be
deemed to be received by the Company at the time of the issuance of such
convertible securities or such rights, options or warrants shall be the
consideration so received determined as provided in Section 6.4(d)(1) and
(2) hereof after deducting any commissions or other expenses paid or
incurred by the Company for any underwriting of, or otherwise in connection
with, the issuance of such convertible securities or rights, options or
warrants, plus (x) any consideration or adjustment payment to be received
by the Company in connection with such conversion, or (y) the aggregate
price at which Shares are to be delivered upon the exercise of such rights,
options or warrants when first exercisable or, if no price is specified and
such Shares are to be delivered at an option price related to the market
value of the Common Stock, an aggregate option price bearing the same
relation to the market value of the Common Stock at the time such rights,
options or warrants were granted; provided, that as to such rights, options
--------
or warrants further adjustment as shall be necessary on the basis of the
actual option price at the time of exercise shall be made at such time if
the actual option price is less than the aforesaid assumed option price.
No further adjustment of the Conversion Price or Exercise Price shall be
made as a result of the actual issuance of Shares referred to in this
paragraph (3). If any rights or warrants which lead to an adjustment of
the Exercise Price or the Floor Price expire or terminate without having
been exercised, the Exercise Price or the Floor Price, as the case may be,
then in effect will be appropriately readjusted. However, a readjustment
of the Exercise Price or the Floor Price will not affect any conversions
which take place before the readjustment.
(4) In case any event shall occur as to which the
provisions of paragraphs (1), (2) or (3) of this Section 6.4(d) are not
strictly applicable but the failure to make any adjustment would not fairly
protect the conversion rights represented by the Preferred Stock or the
Warrants in accordance with the essential intent and principles of such
subsections, then, in each such case, the Company shall, if requested by a
Majority in Interest of Outstanding Preferred Stock or a Majority in
Interest of Outstanding Warrants, at the expense of the Purchasers, appoint
a firm of independent public accountants of recognized national standing
selected by the Board of Directors of the Company (who may be the regular
auditors of the Company), which shall give
20
<PAGE>
their good faith opinion upon the adjustment, if any, on a basis consistent
with the essential intent and principles established in paragraphs (1), (2)
or (3) of this Section 6.4(d), necessary to preserve, without dilution, the
conversion rights represented by the Preferred Stock or the Warrants, as
the case may be. Such opinion upon such adjustment, if any, as may be
necessary shall be final and binding on the parties hereto and all
subsequent holders of Preferred Stock and/or Warrants. Upon receipt of
such opinion, the Company will promptly mail copies thereof to the holders
of the Preferred Stock and the holders of the Warrants and shall make the
adjustments described therein.
(e) No adjustment of the Exercise Price or the Floor Price shall be
made as a result of or in connection with the issuance of Shares upon conversion
of the Preferred Stock or the Warrants or upon conversion of any convertible
securities outstanding as of the Closing Date or any options granted under the
Company's qualified stock option plans, all of which convertible securities and
stock option plans are set forth on Exhibit C hereto. To the extent the
issuance (or deemed issuance) of Shares shall not result in any adjustment of
the Exercise Price or the Floor Price pursuant to the provisions of this Section
6.4(e), then such Shares shall not be taken into account for purposes of
determining the prices under Section 6.4(c) hereof.
(f) Whenever the Conversion Price and/or the Floor Price and/or the
Cap Price and/or the Exercise Price is adjusted as provided in this Section 6.4,
the Company will promptly provide a certificate of its chief financial officer,
and, if requested by a Majority in Interest of Outstanding Preferred Stock or a
Majority in Interest of Outstanding Warrants, will promptly obtain a certificate
of a firm of independent public accountants of recognized national standing
selected by the Board of Directors of the Company (who may be the regular
auditors of the Company), setting forth the Conversion Price and/or the Floor
Price and/or the Cap Price and/or the Exercise Price as so adjusted and a brief
statement of facts accounting for such adjustment, and will mail a brief summary
thereof to the holders of the Preferred Stock and the holders of the Warrants.
(g) For the purpose of any computation under this Section 6, the
current "Market Price" per share of Common Stock of the Company on any date
------------
shall be deemed to be the average of the Market Prices for the 10 consecutive
trading dates commencing 12 trading days before such date.
6.5. Company's Consolidation or Merger. If the Company shall at
---------------------------------
any time consolidate with or merge into another corporation (where the Company
is not the continuing corporation after such merger or consolidation), the
holder of Preferred Stock or a Warrant shall thereafter be entitled to receive,
upon the conversion thereof, the securities or property to which a holder of the
number of Conversion Shares then deliverable upon the conversion thereof would
have been entitled upon such consolidation or merger had such holder exercised
or converted immediately prior to such consolidation or merger (subject to
subsequent adjustments under Section 6.4 hereof), and the Company shall take
such steps in connection with such consolidation or merger as
21
<PAGE>
may be reasonably necessary to assure such holder that the provisions of this
Agreement shall thereafter be applicable in relation to any securities or
property thereafter deliverable upon the conversion of the Preferred Stock and
the Warrants, including, but not limited to, obtaining a written acknowledgment
from the continuing corporation of its obligation to supply such securities or
property upon such conversion. A sale of all or substantially all the assets of
the Company shall be deemed a consolidation or merger for the foregoing
purposes.
6.6. No Fractional Shares to be Issued. No fractional
---------------------------------
Conversion Shares shall be issued on any conversion.
6.7. Taxes on Conversion. The issuance of certificates for
-------------------
Conversion Shares upon the conversion of Preferred Stock and/or Warrants shall
be made without charge to the holders of Preferred Stock or Warrants converting
such Preferred Stock or Warrants for any issue or stamp tax in respect of the
issuance of such certificates, and such certificates shall be issued in
respective names of, or in such names as may be directed by, the holders of the
Preferred Stock or the holders of the Warrants so converted.
6.8. Notice to Holders of Preferred Stock or Warrants. In case
------------------------------------------------
at any time
(a) the Company shall take any action which would require
an adjustment in the Conversion Price, the Floor Price, the Cap Price or the
Exercise Price pursuant to Section 6.4(a) or (c) hereof; or
(b) the Company shall authorize the granting to the
holders of its Common Stock of any Distribution on Common Stock as set forth in
Section 6.4(b) hereof; or
(c) there shall be any capital reorganization or
reclassification of the Common Stock of the Company (other than a change in par
value or from par value to no par value or from no par value to par value of the
Common Stock), or any consolidation or merger to which the Company is a party
and for which approval of any stockholders of the Company is required, or any
sale or transfer of all or substantially all of the assets of the Company; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in any one or more of said cases, the Company shall give written notice to
the holders of the Preferred Stock and the holders of the Warrants, not less
than 30 days before any record date or other date set for definitive action, of
the date on which such action, reorganization, reclassification, sale, transfer,
consolidation, merger, dissolution, liquidation or winding-up shall take place,
as the case may be. Such notice shall also set forth such facts as shall
indicate the effect of any such action (to the extent such effect
22
<PAGE>
may be known at the date of such notice) on the current Conversion Price and/or
Exercise Price and the kind and amount of the Shares and other securities and
property deliverable upon conversion of the Preferred Stock or Warrants. Such
notice shall also specify the date as of which the holders of record of Shares
shall be entitled to exchange their Shares for securities or other property
deliverable upon any such reorganization, reclassification, sale, transfer,
consolidation, merger, dissolution, liquidation or winding-up, as the case may
be.
6.9. Optional Redemption. At any time from the Closing Date
-------------------
through and including the first anniversary of the Closing Date, the Company may
at its option, and after the first anniversary of the Closing Date, the Company
may with the prior written consent of each Purchaser, upon not less than 30 days
prior written notice given by the Company to each Purchaser, redeem the
Outstanding shares of Preferred Stock in full or in part in amounts aggregating
not less than 1,000 shares of Preferred Stock at an optional redemption price
equal to $1,000 per share plus the amount of any accrued but unpaid dividends on
the shares of Preferred Stock to be so optionally redeemed to the date of
optional redemption. Each optional redemption of less than all Outstanding
shares of Preferred Stock shall be made pro rata in respect of Preferred Stock
then Outstanding.
SECTION 7. AFFIRMATIVE COVENANTS
The Company covenants and agrees as follows:
7.1. Use of Proceeds. The Company will use the proceeds realized
---------------
from the sale of the Preferred Stock and Warrants for working capital purposes.
7.2. Financial Information. So long as any of the Preferred Stock
---------------------
remains Outstanding, the Company will deliver to each holder of Preferred Stock:
(a) as soon as practicable, copies of all financial
statements, proxy material or reports sent to the Company's or any Subsidiary's
stockholders and of all reports or final registration statements filed with the
Commission pursuant to the Securities Act or the Securities Exchange Act; and
(b) with reasonable promptness, such other information as any
Purchaser may reasonably request from time to time.
All such financial statements shall be prepared in accordance with generally
accepted accounting principles consistently applied.
7.3. [Intentionally Omitted].
-----------------------
7.4. Inspection. So long as any of the Preferred Stock remains
----------
Outstanding, the Company will permit the holders of the Preferred Stock and
their authorized representatives, Andy Brown, Ernest Werlin and Peter Powers, to
attend
23
<PAGE>
meetings of the Company's Board of Directors, to visit and inspect any of the
properties of the Company and its Subsidiaries, if any, to examine their
respective books of account and, subject to compliance with all applicable
securities laws, to discuss their business, affairs, finances and accounts with
their officers, all at such reasonable times and as often as may be reasonably
requested.
7.5. Maintenance of Existence, Properties and Franchises;
----------------------------------------------------
Compliance with Law; Taxes; Insurance. So long as any of the Preferred Stock is
- -------------------------------------
Outstanding, the Company will, and will cause each Subsidiary, if any, to:
(a) maintain their respective corporate existence, rights and
other franchises in full force and effect;
(b) maintain their respective properties and assets in good
repair, working order and condition so far as necessary or advantageous to the
proper carrying on of their respective businesses;
(c) comply in all material respects with all applicable laws
and with all applicable orders, rules, rulings, certificates, licenses,
regulations, demands, judgments, writs, injunctions and decrees;
(d) pay promptly when due all taxes, governmental fees,
assessments and other charges imposed upon their respective properties, assets
or income which might, if unpaid, become a lien upon such properties or assets;
provided, however, that payment of any such tax, fee, assessment or charge
- -------- -------
shall not be necessary so long as the applicability or validity thereof shall be
contested in good faith by appropriate proceedings and a reserve, if
appropriate, shall have been established with respect thereto;
(e) pay all other claims or Indebtedness (including without
limitation, materialmen's, vendor's, workmen's and like claims) before the same
become a lien upon their respective properties, assets or income; and
(f) keep adequately insured, by financially sound and
reputable insurers, all their respective properties of a character customarily
insured by entities similarly situated, against loss or damage of the kinds and
in amounts customarily insured against by such entities and with such
deductibles or coinsurance as is customary.
7.6. Office for Exchange and Registration. So long as any of the
------------------------------------
Preferred Stock or Warrants is Outstanding, the Company will maintain an office
or agency where Preferred Stock or Warrants may be presented for exchange,
conversion or registration of transfer as provided in this Agreement. Such
office or agency initially shall be the office of the Company set forth in
Section 20 hereof, which place may thereafter from time to time be changed by
notice to the holders of all Preferred Stock and Warrants then Outstanding.
24
<PAGE>
7.7. Notices. So long as any of the Preferred Stock is
-------
Outstanding, the Company will give notice to all holders of the Preferred Stock
promptly after any of its officers or directors learns (other than by notice
from any of such holders) of the existence of any of the following:
(a) any Event of Noncompliance; and
(b) any material default under any evidence of Indebtedness or
under any indenture, mortgage or other agreement relating to any evidence of
Indebtedness in respect of which the Company or any Subsidiary is liable.
7.8. Reservation and Validity of Conversion Shares. The Company
---------------------------------------------
will take all such action as may be necessary to insure that all Conversion
Shares which may be issued upon conversion of Preferred Stock and/or Warrants
will, upon issuance, be legally and validly issued, fully paid, and non-
assessable and free from all taxes, liens and charges with respect to the issue
thereof. Without limiting the generality of the foregoing, the Company will from
time to time take all such action as may be required to insure that the par
value per Conversion Share is at all times equal to or less than the lowest of
the then applicable Conversion Price or then applicable Exercise Price. The
Company will at all times have authorized and reserved a sufficient number of
Conversion Shares to provide for the exercise of the rights represented by the
Outstanding Preferred Stock and Warrants.
7.9. Listing of Conversion Shares. If the Company shall list any
----------------------------
Shares on any national securities exchange, it will, subject to the provisions
of Section 18 hereof, take such action as may be necessary, from time to time,
to list the Shares issuable upon conversion of all Preferred Stock and Warrants
on such exchange (upon official notice of issuance, with respect to Conversion
Shares not then issued).
7.10. Securities Exchange Act Registration. The Company will
------------------------------------
maintain effective the registration of its common stock under the Securities
Exchange Act and will file all reports required thereunder on a timely basis.
7.11. Fiscal Year. The fiscal year of the Company and its
-----------
Subsidiaries, if any, for tax, accounting and any other purposes shall end at
the end of March of each calendar year.
SECTION 8. NEGATIVE COVENANTS
The Company further covenants and agrees, so long as any Preferred
Stock remains Outstanding, as follows:
8.1. Restricted Payments; Investments. Neither the Company nor any
--------------------------------
Subsidiary, if any, will declare or make or permit to be declared or made (i)
any Restricted Payment or (ii) any Investment in any Person; provided, however,
that the Company may make Investments not to exceed $1,000,000 in the aggregate.
25
<PAGE>
8.2. Sale of Substantial Portion of Assets. From and after the
-------------------------------------
Closing Date, unless the Preferred Stock and the Warrants shall then be
convertible into Conversion Shares, neither the Company nor any Subsidiary will
sell or transfer (or agree to sell or transfer) to any Person (other than the
Company or a Subsidiary, if any) assets which in the aggregate accounted for or
provided 50% or more of the total revenues of the Company and its Subsidiaries,
if any, for either the then preceding fiscal quarter or the then preceding
fiscal year.
8.3. No Change in Business; Subsidiary Assets. Unless the
----------------------------------------
Preferred Stock and the Warrants shall then be convertible into Conversion
Shares, the Company will not, and will not permit any Subsidiary to, change
substantially the character of its business as conducted on the date of this
Agreement.
8.4. Maintenance of Public Market. Unless such transaction
----------------------------
involves the acquisition by merger or otherwise of all of the Purchasers'
securities, the Company will not proceed with a program of acquisition of
Shares, initiate a corporate reorganization or recapitalization, or authorize or
consent to any action which would have the effect of:
(a) removing the Company from registration with the Commission
under the Securities Exchange Act, or
(b) reducing substantially or eliminating the public market
for Shares as such public market existed on the date of this Agreement.
8.5. Indebtedness. Neither the Company nor any Subsidiary will
------------
incur or be or remain liable on any long-term Indebtedness exceeding in the
aggregate at any one time 60% of the Company's total assets (determined in
accordance with generally accepted accounting principles).
8.6. Liens. Neither the Company nor any Subsidiary will create,
-----
incur, assume or suffer to exist, directly or indirectly any Lien on any of its
property now owned or hereafter acquired to secure any Indebtedness of the
Company or any such Subsidiary in the aggregate exceeding $500,000, other than:
(i) Liens existing on the date hereof and set out on Exhibit
-------
E hereto;
-
(ii) Liens for taxes not yet due or which are being
contested in good faith by appropriate proceedings and with respect to
which adequate reserves in accordance with generally accepted
accounting principles are being maintained;
(iii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, materialmen and other Liens imposed by law
created in the ordinary course of business for amounts not yet due
26
<PAGE>
or which are being contested in good faith by appropriate proceedings
and with respect to which adequate reserves are being maintained;
(iv) Liens (other than any Lien imposed by ERISA) incurred
or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of
social security, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed
money);
(v) easements, rights-of-way, restrictions and other similar
charges or encumbrances not interfering with the ordinary conduct of
the business of the Company or any of its Subsidiaries; and
(vi) Liens in favor of one or more financial institutions
securing working capital lines of credit.
8.7. Stock Options. From and after the Closing Date, the Company
-------------
shall not, in any single fiscal year (April 1 to March 31) issue or agree to
issue to any officer or employee of the Company or any Subsidiary any Shares, or
any options, warrants or other rights to purchase or otherwise acquire Shares,
in excess of (i) options to acquire 25,000 Shares of the Company's Common Stock
(including the 25,000 Shares issuable upon exercise of such options) to any
individual officer or employee of the Company or any Subsidiary, or (ii) options
to acquire 200,000 Shares of the Company's Common Stock (including the 200,000
Shares issuable upon exercise of such options) to all officers or employees of
the Company and any Subsidiary. Any non-qualified options issued from and after
the Closing Date shall not have an exercise price of less than the fair market
value of Shares on the date of grant. Options and warrants outstanding and duly
granted as of December 9, 1996 shall retain their original rights and terms,
including, but not limited to, vesting provisions. Provisions for accelerated
vesting at the discretion of the Board of Directors related to options granted
prior to December 9, 1996 shall remain in full force. This Section 8.7 shall not
apply to the issuance by the Company of Shares, or options, warrants or other
rights to purchase Shares, in connection with any Investment or any other
acquisition or similar transaction by the Company.
SECTION 9. CONDITIONS TO THE COMPANY'S OBLIGATIONS
Each Purchaser understands that the Company's obligation to sell the
Preferred Stock and Warrants to the Purchasers hereunder is subject to
satisfaction of the following conditions at the Closing:
9.1. Accuracy of Representations and Warranties. The
------------------------------------------
representations and warranties of each Purchaser herein or in any certificate or
document
27
<PAGE>
delivered hereto shall be true and correct on and as of the Closing Date with
the same effect as though made on and as of the Closing Date.
9.2. Purchase of all Preferred Stock and Warrants. The
--------------------------------------------
Purchasers shall purchase in the aggregate all of the shares of Preferred Stock
and Warrants set forth in Exhibit A hereto. The Purchasers shall deliver good
---------
funds as payment in full of the amount equal to the purchase price of all shares
of Preferred Stock and Warrants.
SECTION 10. CONDITIONS TO PURCHASERS' OBLIGATIONS
Your several and not joint obligations to purchase the Preferred Stock
and Warrants hereunder is subject to satisfaction of the following conditions at
the Closing:
10.1. Accuracy of Representations and Warranties; No
----------------------------------------------
Noncompliance. The representations and warranties of the Company herein or in
- -------------
any certificate or document delivered pursuant hereto shall be true and correct
on and as of the Closing Date with the same effect as though made on and as of
the Closing Date. On the Closing Date there shall be no Event of Noncompliance
or Potential Noncompliance.
10.2. Officers' Certificate. Each Purchaser shall have received a
---------------------
certificate dated the Closing Date and signed by the Chief Executive Officer and
by the Chief Financial Officer of the Company, to the effect that, to the best
knowledge of such officers, the conditions of Section 10.1 hereof have been
satisfied.
10.3. Closing with Other Purchasers. All Purchasers identified on
-----------------------------
Exhibit A hereto as purchasing Preferred Stock and Warrants shall complete their
- ---------
Closing simultaneously pursuant to this Agreement.
10.4. Proceedings. All corporate and other proceedings in
-----------
connection with the transactions contemplated by the Purchase Documents, and all
documents incident thereto, shall be in form and substance satisfactory to you
and your special counsel, and you shall have received all such originals or
certified or other copies of such documents as you or they may reasonably
request.
10.5. Opinion of Company Counsel. Each Purchaser shall have
--------------------------
received an opinion dated the Closing Date of Troy & Gould Professional
Corporation counsel for the Company, in substantially the form set forth on
Exhibit F hereto.
- ---------
10.6. Other Documents and Opinions. You shall have received such
----------------------------
other documents and opinions, in form and substance satisfactory to you and your
special counsel, relating to matters incident to the transactions contemplated
by the Purchase Documents as you may reasonably request.
28
<PAGE>
SECTION 11. AMENDMENT AND WAIVER
This Agreement may be amended (or any provision hereof or thereof
waived) with the consent of a Majority in Interest of Outstanding Preferred
Stock and the Company; provided, however, that no such amendment or waiver shall
-------- -------
change the time of payment of dividends on the Preferred Stock or the
registration rights under Section 17 hereof, without the consent of the holder
of the Preferred Stock or Conversion Shares so affected. The Company agrees
that all holders of Preferred Stock shall be notified by the Company in advance
of any proposed amendment or waiver, but failure to give such notice shall not
in any way affect the validity of any such amendment or waiver. The Company and
each holder of Preferred Stock then or thereafter Outstanding shall be bound by
any amendment or waiver effected in accordance with the provisions of this
Section 11, whether or not the certificates evidencing such Preferred Stock
shall have been marked to indicate such modification, but any Preferred Stock
issued thereafter shall bear a notation as to any such modification (but the
failure to bear any such notation shall not affect the validity of any such
subsequently issued Preferred Stock, which shall be enforceable in accordance
with its terms subject to any such modification). Promptly after obtaining the
written consent of a Majority in Interest of Outstanding Preferred Stock, the
Company shall transmit a copy of such modification to all of the holders of
Preferred Stock then Outstanding. If such modification affects registration
rights under Section 17 hereof, the Company shall also give a copy of such
modification to the holders of Conversion Shares issued upon conversion of any
of the Preferred Stock.
SECTION 12. EXCHANGE OF PREFERRED STOCK AND WARRANTS; CANCELLATION OF
SURRENDERED PREFERRED STOCK AND WARRANTS
(a) Subject to Section 16 hereof, at any time at the request of any
holder of Preferred Stock or Warrants to the Company at its office provided
under Section 7.6 hereof, the Company at its expense will issue and deliver to
or upon the order of the holder in exchange therefor (i) new Preferred Stock
registered in the name of such person or persons as may be designated by such
holder for the same aggregate number of shares as the Preferred Stock
surrendered and substantially in the form thereof, dated the date of the
Preferred Stock so surrendered or (ii) new Warrants convertible into the same
aggregate number of Conversion Shares as the Warrant or Warrants surrendered and
substantially in the form thereof, dated the date of the Warrant or Warrants so
surrendered. Any such new Preferred Stock shall bear any notation required by
Section 11 hereof.
(b) Upon the conversion in whole or in part of any Preferred Stock or
any Warrant, if only a portion of the Preferred Stock or only a fraction of the
number of Conversion Shares subject to the Warrant is used in such conversion,
then the Company shall execute and deliver to or upon the order of the holder
thereof, at the expense of the Company, a new Preferred Stock certificate or
Preferred Stock certificates evidencing the unused portion of such Preferred
Stock or a new Warrant or Warrants convertible into the unused number of
Conversion Shares.
29
<PAGE>
(c) All Preferred Stock certificates and all Warrants or portions
thereof which have been converted shall be canceled by the Company and no
Preferred Stock certificates shall be issued in lieu of the portion of the
Preferred Stock, and no Warrants shall be issued in lieu of the portion of the
Warrant, so converted.
SECTION 13. REPLACEMENT OF PREFERRED STOCK CERTIFICATES AND WARRANTS
Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of any Preferred Stock certificate or Warrant
and, in the case of any such loss, theft or destruction, upon delivery of an
indemnity reasonably satisfactory to the Company (if requested by the Company),
or in the case of any such mutilation, upon surrender and cancellation of such
Preferred Stock certificate or Warrant, the Company will issue a new Preferred
Stock certificate or Warrant of like tenor in lieu of such lost, stolen,
destroyed or mutilated Preferred Stock or Warrant as if the lost, stolen,
destroyed or mutilated Preferred Stock certificate or Warrant were then
surrendered for exchange. No Purchaser shall be required to furnish an
indemnity bond in connection with any such loss, theft or destruction.
SECTION 14. EVENTS OF NONCOMPLIANCE
If any of the following events (each herein called an "Event of
--------
Noncompliance") shall occur and be continuing:
- -------------
(a) If the Company shall default in the payment of any Preferred Stock
dividend, when the same shall become due and payable, and such default shall
remain unremedied for thirty (30) days after written notice thereof shall have
been given to the Company by a Purchaser; or
(b) If the Company shall fail to pay any other amount payable
hereunder when due, and such default shall remain unremedied for thirty (30)
days after written notice thereof shall have been given to the Company by a
Purchaser; or
(c) If the Company shall default in the performance of any agreement
or covenant contained in Section 8, and, if capable of being remedied, such
default shall remain unremedied for thirty (30) days after written notice
thereof shall have been given to the Company by a Purchaser; or
(d) If the Company shall default in any material respect in the
performance of any agreement or covenant, other than those referred to in
clauses (a) and (b) of this Section 14, contained in this Agreement or in any of
the other Purchase Documents, and, if capable of being remedied, such default
shall remain unremedied for thirty (30) days after the earlier of (i) the
Company's obtaining actual knowledge thereof, or (ii) written notice thereof
shall have been given to the Company by a Purchaser; or
30
<PAGE>
(e) If the Company or any of its Subsidiaries shall fail to make any
payment of principal of or interest on any Indebtedness of the Company or such
Subsidiary exceeding $500,000 in the aggregate when due (whether at stated
maturity, by acceleration, on demand or otherwise) after giving effect to any
applicable grace period provided for in the agreement(s) or instrument(s)
creating or evidencing such Indebtedness; or
(f) If the Company or any of its Subsidiaries shall fail to observe or
perform any covenant or agreement contained in any agreement or instrument
relating to any Indebtedness in excess of $500,000 in the aggregate within any
applicable grace period provided for in the agreement(s) or instrument(s)
creating or evidencing such Indebtedness, or any other event shall occur if the
effect of such failure or other event is to accelerate the maturity of such
Indebtedness and such Indebtedness is accelerated by the holder thereof; or any
such Indebtedness shall be required to be prepaid (other than by a regularly
scheduled required prepayment) in whole or in part prior to its stated maturity;
or
(g) If a judgment which, either alone or together with other
outstanding judgments against the Company and its Subsidiaries, if any,
exceeding an aggregate of $500,000 shall be rendered against the Company or any
Subsidiary and such judgment shall have continued undischarged or unstayed for
45 days after entry thereof unless such judgment has been fully bonded by the
Company; or
(h) If a Plan shall fail to maintain the minimum funding standard
required by Section 412 of the Code for any plan year or a waiver of such
standard is sought or granted under Section 412(d), or a Plan is, shall have
been or is likely to be, terminated or the subject of termination proceedings
under ERISA, or the Company or an ERISA Affiliate has incurred or is likely to
incur a liability to or on account of a Plan under Section 4062, 4063, 4064,
4201 or 4204 of ERISA, and there shall result from any such event or events
either a liability or a material risk of incurring a liability to the PBGC or a
Plan which, in the opinion of the Purchasers, will have a material adverse
effect upon the business, financial condition, results of operations or
prospects of the Company and its Subsidiaries, taken as a whole; or
(i) If the Company or any Subsidiary shall make an assignment for the
benefit of creditors, or shall admit in writing its inability to pay its debts
or if a receiver or trustee shall be appointed for the Company or any Subsidiary
or for substantially all of its assets and, if appointed without its consent,
such appointment is not discharged or stayed within 60 days; or if proceedings
under any law relating to bankruptcy, insolvency or the reorganization or relief
of debtors are instituted by or against the Company or any Subsidiary, and, if
contested by it, are not dismissed or stayed within 60 days; or if any writ of
attachment or execution or any similar process is issued or levied against the
Company or any Subsidiary or any significant part of its property and is not
released, stayed, bonded or vacated within 60 days after its issue or levy; or
if the Company or any Subsidiary takes corporate action in furtherance of any of
the foregoing;
31
<PAGE>
then and in each event a Majority in Interest of Outstanding Preferred Stock may
at any time at its or their option, by written notice or notices to the Company,
call a special meeting of stockholders at which the Preferred Stock shall have
the right to elect a majority of the entire Board of Directors of the Company
until such time, if any as all Events of Noncompliance shall have been cured.
SECTION 15. REMEDIES
(a) In case any one or more Events of Noncompliance shall occur and be
continuing, the holders of Preferred Stock then Outstanding may proceed to
protect and enforce the rights of such holders by an action at law, suit in
equity or other appropriate proceeding, whether for the specific performance of
any agreement contained herein, or for an injunction against a violation of any
of the terms hereof or thereof, or in aid of the exercise of any power granted
hereby or thereby or by law or for any other remedy (including, without
limitation, damages).
(b) In case of a default in the observance of any other agreement or
covenant of the Company in any Purchase Document, the Company will pay to the
holder thereof or party thereto such further amount as shall be sufficient to
cover any and all costs and expenses of enforcement and collection, including,
without limitation, reasonable attorneys' fees, expenses and disbursements. No
course of dealing and no delay on the part of any holder of any Preferred Stock
in exercising any rights or remedies shall operate as a waiver thereof or
otherwise prejudice such holder's rights. No right or remedy conferred hereby
shall be exclusive of any other right or remedy referred to herein or therein or
available at law, in equity, by statute or otherwise.
(c) You shall, in addition to other remedies provided by law, have the
right and remedy to have the provisions of this Agreement (including, without
limitation, Sections 6 and 17 hereof) specifically enforced by any court having
equity jurisdiction, it being acknowledged and agreed that any breach or
threatened breach of the provisions of this Agreement (including, without
limitation, Sections 6 and 17 hereof) will cause irreparable injury to you and
that money damages will not provide an adequate remedy. Nothing contained
herein shall be construed as prohibiting you from pursuing any other remedies
available to you for such breach or threatened breach, including the recovery of
damages from the Company.
(d) The provisions of this Agreement shall survive the conversion of
all Preferred Stock and Warrants, but the representations and warranties made by
the Company herein shall only survive for three years from the Closing Date.
SECTION 16. RESTRICTIONS ON TRANSFER
(a) Each holder of Preferred Stock and each holder of a Warrant by
acceptance thereof agrees that it will not sell or otherwise dispose of any of
the Preferred Stock, Warrants or Conversion Shares issuable upon conversion
thereof unless (i) such Preferred Stock, Warrants or Conversion Shares, as the
case may be,
32
<PAGE>
have been registered under the Securities Act, or (ii) such Preferred Stock,
Warrants or Conversion Shares, as the case may be, are sold in accordance with
the applicable requirements and limitations of Rule 144 under the Securities Act
(or any successor rule, regulation or statute to Rule 144), or (iii) the Company
has been furnished with an opinion or opinions reasonably satisfactory to the
Company's counsel to the effect that registration under the Securities Act is
not required for the transfer as proposed (which opinion may be conditioned upon
the transferee's assuming the obligations of a holder of Preferred Stock,
Warrants or Conversion Shares under this Section 16), or (iv) the Company has
been furnished with a letter from the Division of Corporate Finance of the
Commission to the effect that such Division would not recommend any action to
the Commission if such proposed transfer were effected without a registration
statement effective under the Securities Act. The Company agrees that within 3
Business Days after receipt of any opinion referred to in (iii) above, it will
notify the holder supplying such opinion whether such opinion is satisfactory to
the Company.
(b) The Company may endorse on all Preferred Stock certificates, on
all Warrants and on all certificates evidencing Conversion Shares a legend
stating or referring to the transfer restrictions contained in paragraph (a)
above; provided that no such legend shall be endorsed on any Preferred Stock
certificates or Warrants or Conversion Share certificates which, when issued,
are no longer subject to the restrictions of this Section 16, and provided,
--------
further, that if a transfer is made pursuant to clause (i), (ii) or (iv) of
- -------
paragraph (a) or if an opinion of counsel provided pursuant to clause (iii) of
paragraph (a) concludes that the legend is no longer necessary, the Company will
deliver upon transfer Preferred Stock Certificates, Warrants or certificates
evidencing Conversion Shares without such legends.
SECTION 17. REGISTRATION RIGHTS
17.1. Registration at the Request of Holders.
--------------------------------------
(a) The Company agrees that from time to time after the
earlier to occur of (i) the first anniversary of the Closing Date and (ii) any
Conversion Date, upon receipt of a Registration Demand satisfying the conditions
under Section 17.1(b) hereof, the Company will (A) promptly (at least 30 days
prior to the filing date) give written notice of the proposed registration to
each holder of Preferred Stock, Warrants or Conversion Shares and (B) with
reasonable promptness, and in any case not later than 75 days after receipt by
the Company of the Registration Demand, file a registration statement with the
Commission relating to all Conversion Shares as to which registration is
requested in the Registration Demand and use its best efforts to make such
registration statement become effective and to qualify the same under the Blue
Sky laws of such states as may be reasonably requested in the Registration
Demand. The Company shall also include under such registration statement any
Conversion Shares requested to be so included by any other holder of Preferred
Stock, Warrants or Conversion Shares by written notice delivered to the Company
within 30 days after the sending of the notice provided for in (A) above, and
may include under such registration statement Shares to be sold directly by the
Company or others; provided, however, that
-------- -------
33
<PAGE>
the Company may not include any Shares to be sold directly by the Company or
others to the extent that the underwriter or underwriters of such securities
shall determine in good faith that the inclusion of such Shares would interfere
with the prompt effectiveness of the registration statement or the successful
sale of all Conversion Shares proposed to be sold by the holders of Preferred
Stock, Warrants or Conversion Shares.
(b) A "Registration Demand" shall be a written notice from one or more
-------------------
holders of Preferred Stock, Warrants or Conversion Shares stating that such
holder or holders desire to sell Conversion Shares under circumstances requiring
registration under the Securities Act and requesting that the Company effect
registration with respect to the Conversion Shares held or to be held after
conversion by such holder or holders, provided that such holder or holders
--------
giving such notice either (i) hold Preferred Stock, Warrants or Conversion
Shares representing, or entitling the holder thereof to obtain upon conversion,
in the aggregate not less than 25% of the sum of (A) the number of Conversion
Shares then obtainable upon conversion of all Preferred Stock and Warrants then
Outstanding and (B) the number of Conversion Shares then Outstanding from the
previous conversion of Preferred Stock and Warrants or (ii) in the case of a
registration statement on Form S-3 under the Securities Act (or any successor
form), either (A) hold Preferred Stock, Warrants or Conversion Shares
representing, or entitling the holder thereof to obtain upon conversion, in the
aggregate not less than 100,000 Conversion Shares or (B) hold at least 500
shares of Preferred Stock; provided, further, that any such proposed sale of
-------- -------
Conversion Shares must involve gross offering proceeds (before underwriting fees
and commission) of at least $500,000 in the case of the preceding clause (i) and
at least $250,000 in the case of the preceding clause (ii); provided, further,
-------- -------
that if a holder of Preferred Stock, Warrants or Conversion Shares gives one
Registration Demand under the preceding clause (i), if such Registration Demand
is not withdrawn under Section 17.1(c) hereof and if the Company provides the
registration rights with respect to such Registration Demand which the Company
is required to provide under this Section 17, then such holder may not give a
second Registration Demand under the preceding clause (i) but may participate,
upon the terms of this Section 17, in any registration resulting from one or
more other holders giving a Registration Demand.
(c) The Company shall be obligated to effect registration and
qualification pursuant to Section 17.1(a) once with respect to a demand under
clause (i) of Section 17.1(b) hereof unless, in the opinion of the lead
underwriter for the offering, all of the Conversion Shares should not be
included in the first registration statement, in which event the Company shall
be obligated to effect a second registration and qualification pursuant to
Section 17.1(a) with respect to the Conversion Shares not included in the first
registration statement, and twice with respect to a demand under clause (ii) of
Section 17.1(b) hereof; provided, however, that the Company shall not be
-------- -------
obligated to effect registration and qualification more than once in any twelve
month period; and provided, further, that if the holders who have requested a
-------- -------
filing of a registration statement under Section 17.1 inform the Company by
written notice that they are withdrawing the request and agree to pay all of the
Company's out-of-pocket expenses (including reasonable legal fees) with respect
to such registration and
34
<PAGE>
qualification incurred to the date of the notice under this proviso, then the
registration statement need not be filed and the whole effort will not count as
a registration and qualification to be provided by the Company pursuant to
Section 17.1(a).
17.2. Piggyback Rights. If the Company shall at any time after the
----------------
earlier to occur of (i) the first anniversary of the Closing Date and (ii) any
Conversion Date propose to file a registration statement under the Securities
Act for any underwritten sales of Shares (or any warrants, units, convertibles,
rights or other securities related or linked to any Shares), the Company shall
give written notice of such registration no later than 30 days before its filing
with the Commission to all holders of Preferred Stock, Warrants or Conversion
Shares issued upon conversion thereof. If any such holders of Preferred Stock,
Warrants or Conversion Shares so request within 15 days after the giving of such
notice, the Company shall include in any such registration the Conversion Shares
then held, or to be held after conversion of Preferred Stock and/or Warrants by
such holders, but the Company shall not be obligated to so include the
Conversion Shares to the extent the underwriter or underwriters of such
securities being otherwise registered by the Company shall determine in good
faith that the inclusion of such Conversion Shares would interfere with the
successful sale of such other securities proposed to be sold by such underwriter
or underwriters, in which case such holders of Preferred Stock, Warrants and
Conversion Shares shall be entitled to participate in any such reduced number of
Conversion Shares (if any) which may be included in such registration in
proportion to their relative holdings of Conversion Shares (whether such
Conversion Shares are held directly or through the right to obtain such
Conversion Shares upon the conversion of Preferred Stock or Warrants held
by such holders); provided, however, that in any case other than a primary
-------- -------
offering in which no selling stockholders participate, the holders of Preferred
Stock, Warrants or Conversion Shares shall have the right to have at least 25%
of the Conversion Shares then Outstanding or underlying Outstanding Preferred
Stock and Warrants included in the first registration statement which is filed
by the Company after the Closing Date and which meets the requirements of the
first sentence of this Section 17.2; provided, further, that the holders of
-------- -------
Preferred Stock, Warrants and Conversion Shares desiring to participate in the
registration shall be entitled to participate in such 25% pro rata in proportion
--- ----
to their relative holdings of Conversion Shares (whether such Conversion Shares
are held directly or through the right to obtain such Conversion Shares upon the
conversion of Preferred Stock or Warrants held by such holders). The
obligations and rights of the Company and the holders under this Section 17.2
shall not affect in any way their obligations and rights under Section 17.1.
Any holder of Preferred Stock, Warrants or Conversion Shares shall, as a
condition to the Company's obligation to include securities held by such holder
in any such registration, agree to execute an underwriting agreement in
customary form as selling shareholders. Notwithstanding the provisions of
Sections 17.1, in the event that the Company shall file a registration statement
under the Securities Act as described in this Section 17.2, the right of the
holders of Preferred Stock, Warrants or Conversion Shares to give a Registration
Demand shall be suspended until the date 90 days following the effective date of
such registration statement (or until such earlier date as the Company shall
have completed the sale and distribution of all shares to be sold pursuant to
such registration).
35
<PAGE>
17.3. Expenses. Subject to the limitations contained in this
--------
Section 17.3 and except as otherwise specifically provided in this Section 17,
the entire costs and expenses of only the first of the registrations and
qualifications demanded pursuant to clause (i) of Section 17.1(b) hereof, all of
the registrations and qualifications demanded pursuant to clause (ii) of Section
17.1(b) hereof and of all registrations and qualifications pursuant to Section
17.2 hereof shall be borne by the Company. A proportionate share (based on the
number of Shares included therein) of all costs and expenses of other
registrations and qualifications demanded pursuant hereto shall be borne by the
selling shareholders making such demands. Such costs and expenses shall include,
without limitation, the reasonable fees and expenses of counsel for the Company
and of its accountants, all other costs, fees and expenses of the Company
incident to the preparation, printing and filing under the Securities Act of the
registration statement and all amendments and supplements thereto, the cost of
furnishing copies of each preliminary prospectus, each final prospectus and each
amendment or supplement thereto to underwriters, dealers and other purchasers of
the Shares and the costs and expenses (including fees and disbursements of
counsel) incurred in connection with the qualification of the Shares under the
Blue Sky laws of various jurisdictions, except that the holders of the Shares
shall bear all selling fees and commissions of any underwriter applicable to
such Shares.
17.4. Procedures.
----------
(a) In the case of each registration or qualification
pursuant to Section 17.1 or 17.2 hereof, the Company will keep all holders of
Preferred Stock, Warrants or Conversion Shares advised in writing as to the
initiation of proceedings for such registration and qualification and as to the
completion thereof, and will advise any such holder, upon request, of the
progress of such proceedings.
(b) At its expense, the Company will keep each registration
and qualification under this Section 17 effective (and in compliance with the
Securities Act) by such action as may be necessary or appropriate for a period
of 180 days after the effective date of such registration statement (or until
such earlier date as each holder of Conversion Shares shall have completed the
sale and distribution of all Conversion Shares to be sold pursuant thereto),
including, without limitation, the filing of post-effective amendments and
supplements to any registration statement or prospectus necessary to keep the
registration statement current and the further qualification under any
applicable Blue Sky or other state securities laws to permit such sale or
distribution, all as requested by such holder or holders. The Company will
immediately notify each holder on whose behalf Conversion Shares have been
registered pursuant to this Section 17 at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the happening
of an event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing and each holder shall refrain from selling any Conversion Shares until
he has received an updated Prospectus from the Company.
36
<PAGE>
(c) The Company will furnish to each holder on whose behalf Conversion
Shares have been registered pursuant to this Section 17 a signed counterpart,
addressed to such holder, of (i) an opinion of counsel for the Company, dated
the effective date of such registration statement, and (ii) a so-called "cold
comfort" letter signed by the independent public accountants who have certified
the Company's financial statements included in such registration statement, and
such opinion of counsel and accountants' letter shall cover substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in connection with underwritten public offerings of securities.
(d) Without limiting any other provision hereof, in connection with
any registration of Shares under this Section 17, the Company will use its best
efforts to comply with the Securities Act, the Securities Exchange Act and all
applicable rules and regulations of the Commission, and will make generally
available to its securities holders, as soon as reasonably practicable, an
earnings statement covering a period of at least twelve months, beginning with
the first month of the first fiscal quarter after the effective date of such
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) and Rule 158 of the Securities Act.
(e) In connection with any registration of Conversion Shares under
this Section 17, the Company will provide, if appropriate, a transfer agent and
registrar for the Shares not later than the effective date of such registration
statement.
(f) In connection with any registration of Conversion Shares under
this Section 17, the Company will, if requested by the underwriters for any
Conversion Shares included in such registration, enter into an underwriting
agreement with such underwriters for such offering, such agreement to contain
such representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, indemnities.
(g) If the Company at any time proposes to register any of its
securities under the Securities Act, other than pursuant to a request made under
Section 17.1 hereof, whether or not for sale for its own account, and such
securities are to be distributed by or through one or more underwriters, then
the Company will make reasonable efforts, if requested by any holder of
Preferred Stock, Warrants or Conversion Shares who requests registration of
Conversion Shares in connection therewith pursuant to Section 17.2 hereof, to
arrange for such underwriters to include such Conversion Shares among the
securities to be distributed by or through such underwriters. The holders on
whose behalf Conversion Shares are to be distributed by such underwriters shall
be parties to any such underwriting agreement, and the representations and
warranties by, and the other agreements on the part of, the Company
37
<PAGE>
to and for the benefit of such underwriters shall also be made to and for the
benefit of such holders of Conversion Shares.
(h) Each registration statement, prospectus, amendment, supplement or
any other document filed with respect to a registration under this Section 17
shall be subject to review and, with respect to information concerning the
Purchasers, approval, by the holders registering Shares in such registration and
by their counsel. Each holder of Preferred Stock, Warrants or Conversion Shares
participating in any registration described in this Section 17 will provide the
Company with such information as may reasonably be requested by the Company in
connection with such registration, and will promptly notify the Company of any
changes in such information required to be disclosed in such registration.
17.5. Provision of Documents. The Company will, at the expense of
----------------------
the Company, furnish to each holder of Preferred Stock, Warrants or Conversion
Shares with respect to which registration has been effected, such number of
registration statements, prospectuses, offering circulars and other documents
incident to any registration or qualification referred to in Sections 17.1 or
17.2 hereof as such holder from time to time may reasonably request.
17.6. Indemnification.
---------------
(a) The Company will indemnify and hold harmless each holder
of Conversion Shares and any underwriter (as defined in the Securities Act) for
such holder and each Person, if any, who controls the holder or underwriter
within the meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several, and expenses (including reasonable attorneys'
fees and expenses and reasonable costs of investigation) to which the holder or
underwriter or such controlling Person may be subject, under the Securities Act
or otherwise, insofar as any thereof arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement under which such Conversion Shares were registered under
the Securities Act pursuant to Sections 17.1 or 17.2 hereof, any prospectus or
preliminary prospectus contained therein, or any amendment or supplement
thereto, or arise out of or are based upon 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, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or alleged untrue statement or omission or alleged omission based upon
information furnished to the Company in writing by such holder or by any
underwriter for such holder expressly for use therein.
(b) Each Purchaser will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities, joint or several,
and expenses (including reasonable attorneys' fees and expenses and reasonable
costs of investigation) to which the Company may be subject, under the
Securities Act or otherwise, insofar as any thereof (i) arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in any registration statement
38
<PAGE>
under which Conversion Shares were registered under the Securities Act pursuant
to Sections 17.1 or 17.2 hereof, any prospectus or preliminary prospectus
contained therein, or any amendment or supplement thereto, or (ii) arise out of
or are based upon 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, in each case only to the extent that such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or alleged untrue statement or omission or alleged omission based upon
information furnished to the Company in writing by such Purchaser expressly for
use therein.
(c) Promptly after receipt by an indemnified party under this
Section 17.6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 17.6, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 17.6. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
- -------- -------
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties. After notice from the indemnified party, the indemnifying
party will not be liable to such indemnified party under this Section 17.6 for
any legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless: (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances); or (ii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, unless such indemnified party
waived its rights under this Section 17.6, in which case the indemnified party
may effect such a settlement without such consent.
17.7. Denial of Registration Rights. The Company shall have the
-----------------------------
right to deny to any holder of Preferred Stock, Warrants or Conversion Shares
the registration rights granted under this Section 17 if such holder of
Preferred Stock,
39
<PAGE>
Warrants or Conversion Shares is at the time able to sell all of the Conversion
Shares sought to be registered without registration or qualification under the
Securities Act or any other applicable securities law over a three month period
pursuant to Rule 144 under the Securities Act. If the Company in good faith
believes that such condition has been satisfied and that the Company is
therefore entitled to deny to a holder the registration rights granted under
this Section 17, then the Company may give notice of such conclusion to such
holder and such registration rights shall thereupon be denied to such holder
unless Moses & Singer LLP or other special counsel for such holder (which other
special counsel shall be reasonably satisfactory to the Company) delivers its
opinion to the Company (within 30 days following such holder's receipt of such
notice of denial from the Company) to the effect that such counsel believes that
the foregoing conditions for denial of the registration rights under this
Section 17 have not been satisfied, in which case all such registration rights
under this Section 17 shall remain available to such holder.
SECTION 18. CERTAIN FEES AND EXPENSES
(a) The Company will pay on demand all reasonable costs and expenses
of the Purchasers in connection with the preparation, execution and delivery of,
preservation of rights under and enforcement of this Agreement and the other
Purchase Documents (including, without limitation, the reasonable fees and
expenses of Moses & Singer LLP, special counsel to the Purchasers, and of any
certified public accountants retained by the Purchasers).
(b) The Company represents and warrants to the Purchasers that there
is no liability for (and the Company will pay and indemnify the Purchaser
against) any fees or expenses (or claims therefor) of any investment banker,
finder or broker employed by the Company in connection with the Purchase
Documents or any of the transactions contemplated thereby, except that the
Company will pay $125,000 and warrants to purchase 100,000 Shares at an exercise
price of $3.125 per Share to Strategic Growth International, Inc. upon the
closing of the sale of 2,496 shares of Preferred Stock to the Purchasers. The
Purchasers each represent that such Purchaser's have not employed any investment
banker, broker-dealer or finder in connection with the Purchase Documents or any
of the transactions contemplated thereby, and such Purchaser will pay and
indemnify the Company against any fees or expenses (or claims therefore) of any
such Person.
SECTION 19. HOME OFFICE PAYMENTS
As long as any Purchaser or any institutional holder which is a direct
or indirect transferee from any Purchaser, shall be the holder of any Preferred
Stock, the Company will make payments in respect of Preferred Stock by check
payable to the order of the holder of any such Preferred Stock duly mailed or
delivered to a Purchaser at the address of such Purchaser specified in Exhibit
-------
A, or at such other address as such Purchaser or such other holder may designate
- -
in writing, or, if requested by any Purchaser or such other holder, by wire
transfer to its (or its nominee's) account at any
40
<PAGE>
bank or trust company in the United States of America, notwithstanding any
contrary provision herein with respect to the place of payment. All such
payments shall be made in immediately available funds.
SECTION 20. NOTICES
Unless otherwise expressly specified or permitted by the terms hereof,
all notices, requests, demands, consents and other communications hereunder or
with respect to any Preferred Stock, Warrant or Conversion Share shall be in
writing and shall be hand delivered or shall be sent by telecopier (confirmed by
registered or certified mail, postage prepaid), to the following addresses:
(a) If to you or your nominee, at your respective addresses as set
forth in Exhibit A hereto, or at such other addresses as may have been furnished
---------
to the Company by you in writing; or
(b) If to any other holder of Preferred Stock, at such address as
the registered holder thereof shall have designated to the Company by a written
notice stating that such holder has acquired such Preferred Stock and
designating such address; or
(c) If to any other holder of a Warrant, at such address as the
registered holder thereof shall have designated to the Company by a written
notice stating that such holder has acquired such Warrant and designating such
address; or
(d) If to the Company, at 9600 Topanga Canyon Boulevard,
Chatsworth, California 91311, or at such other address as may have been
furnished in writing by the Company to you and to the other holders of Preferred
Stock or Warrants or Conversion Shares.
Whenever any notice is required to be given hereunder, such notice shall be
deemed given and such requirement satisfied only when such notice is delivered
or, if sent by telecopier, when received, unless otherwise expressly specified
or permitted by the terms hereof.
SECTION 21. MISCELLANEOUS
21.1. Entire Agreement. The Purchase Documents contain the
----------------
entire agreement between you and the Company, and supersede any prior oral or
written agreements, commitments, terms or understandings, regarding the subject
matter hereof.
21.2. Survival. All agreements, representations and warranties
--------
contained in the Purchase Documents or any document or certificate delivered
pursuant thereto shall survive, and shall continue in effect following, the
execution and delivery
41
<PAGE>
of the Purchase Documents, any investigation at any time made by you or on your
behalf or by any other Person, the issuance, sale and delivery of the Preferred
Stock, the Warrants, any disposition thereof, any conversion of the Preferred
Stock or Warrants into Conversion Shares and any disposition thereof. All
statements contained in any certificate or other document delivered by or on
behalf of the Company pursuant to any of the Purchase Documents shall constitute
representations and warranties by the Company hereunder.
21.3. Counterparts. This Agreement may be executed by the
------------
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument, and all signatures need not appear on
any one counterpart.
21.4. Headings. The headings and captions in this Agreement and
--------
the table of contents are for convenience of reference only and shall not
define, limit or otherwise affect any of the terms or provisions hereof.
21.5. Binding Effect and Assignment.
-----------------------------
(a) The terms of this Agreement shall be binding upon, and
inure to the benefit of, the parties and their respective successors and
permitted assigns whether so expressed or not.
(b) The Company may not assign any of its obligations, duties
or rights under this Agreement, or under the Preferred Stock or the Warrants
issued hereunder, except with your consent.
(c) In addition to any assignment by operation of law, each
of you may assign, in whole or in part, any or all of your respective rights
(and/or obligations) under the Purchase Documents to any permitted transferee of
any or all of your Preferred Stock, Warrants or Conversion Shares, and (unless
such assignment expressly provides otherwise) any such assignment shall not
diminish the rights each of you would otherwise have under the Purchase
Documents.
21.6. Severability. Any provision of any of the Purchase Documents
------------
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
thereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
21.7. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of New York (other than any
conflict of laws rule which might result in the application of the laws of any
other jurisdiction).
42
<PAGE>
21.8. Jurisdiction and Venue. Without limiting the jurisdiction or
----------------------
venue of any other court, the Company and each Purchaser (i) agrees that any
suit, action or proceeding arising out of or relating to any of the Purchase
Documents or the Conversion Shares may be brought in the courts of the State of
New York or of the United States of America located in the City of New York;
(ii) consents to the jurisdiction of any such court in any suit, action or
proceeding relating to or arising out of any of the Purchase Documents or the
Conversion Shares; (iii) waives any objection which it may have to the laying of
venue in any such suit, action or proceeding in any such court; and (iv) agrees
that service of any court paper may be made in such manner as may be provided
under applicable laws or court rules governing service of process. Effective on
the date of this Agreement, the Company hereby appoints CT Corporation System as
its authorized agent upon which process may be served on its behalf (with a copy
of such service to the Company as set forth above) by any Purchaser or any
subsequent holder of Preferred Stock, Warrants or Conversion Shares in any suit,
action or proceeding arising out of or based upon any of the Purchase Documents
or the Conversion Shares. Such appointment shall be irrevocable as long as any
rights survive hereunder in favor of the Purchasers unless and until the
appointment of a successor authorized agent reasonably acceptable to the
Purchasers as such authorized agent, and such successor's acceptance of such
appointment and written notice thereof, shall have been given to the Purchasers.
The Company shall take any and all action, including the filing of any and all
documents and instruments that may be necessary to continue such appointment or
appointments in full force and effect as aforesaid.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
43
<PAGE>
If the foregoing correctly sets forth our understanding, please sign
below on the enclosed counterpart of this Agreement and return the same to the
undersigned, whereupon this Agreement shall become a binding contract between
you and the Company as of December 9, 1996.
Very truly yours,
CHATCOM, INC.
By: /s/ James B. Mariner
-----------------------------
Name: James B. Mariner
Title: President and Chief
Executive Officer
ACCEPTED AND AGREED:
THE HIGH VIEW FUND, L.P.
By: High View Capital Corporation,
general partner
By: /s/ Andrew Brown
------------------------------
Title: Managing Director
THE HIGH VIEW FUND
By: High View Asset Management Corp.,
its attorney-in-fact
By: /s/ Andrew Brown
------------------------------
Title: Managing Director
44
<PAGE>
EXHIBIT A
---------
CONVERTIBLE PREFERRED STOCK AND
WARRANTS PURCHASED BY EACH PURCHASER
------------------------------------
<TABLE>
<CAPTION>
SERIES D WARRANTS (NO. OF AGGREGATE
PURCHASER'S NAME PREFERRED STOCK SHARES INTO WHICH PURCHASE
AND ADDRESS (NO. OF SHARES) CONVERTIBLE) PRICE
- --------------------------- ---------------- ------------------ ----------
<S> <C> <C> <C>
The High View Fund, L.P. 1,248 200,000 $1,250,000
805 Third Avenue
14th Floor
New York, NY 10022
Attention: Andrew Brown
The High View Fund 1,248 200,000 $1,250,000
805 Third Avenue
14th Floor
New York, NY 10022
Attention: Andrew Brown
</TABLE>
<PAGE>
EXHIBIT B-1
-----------
Incorporated under the Laws of California March 22, 1992
SERIES D PREFERRED
REDEEMABLE CONVERTIBLE
VOTING
CHATCOM, INC.
Preferred Stock 1,000,000 shares Common Stock 25,000,000 shares
This Certifies that [name] is the record holder of Series D
------ --------
Preferred Shares of the Capital Stock of
ChatCom, Inc.
transferrable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed or
assigned.
A statement of the rights, preferences and restrictions granted to or imposed
upon th repsective classes or series of shares of stock of the Corporation
authorized to be issued and upon the holders thereof may be obtained by any
stockholder, upon request and without charge, at the principal office of the
Corporation. All Series D Preferred Shares may be convertible immediately after
the date of issuance until 12/12/97 at the election of the corporation and from
12/13/97 to 12/12/98 at the election of the holders thereof.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate to be hereunto affixed
this 13th day of December A.D. 1996.
Secretary President
- ---------------------- --------------------
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 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.
[Corporate Seal]
-2-
<PAGE>
EXHIBIT B
---------
THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("1933 ACT"), AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE 1933 ACT COVERING SUCH SECURITIES OR SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE 1933 ACT.
-------------------------------
VOID AFTER 5:00 P.M. NEW YORK TIME,
December __, 2001
No. Warrants
--------- ---------
CHATCOM, INC.
(Incorporated Under the Laws of the State of California)
WARRANT CERTIFICATE REPRESENTING WARRANTS TO
PURCHASE COMMON STOCK, NO PAR VALUE,
AT $3.125 PER SHARE
This certifies that, for value received, CHATCOM, INC., a California
corporation (the "Company"), upon the surrender of this Warrant Certificate to
the Company as provided in the Purchase Agreement referred to below, provided,
and only if, this Warrant Certificate shall be so surrendered after 9:00 A.M.,
New York time, on May 1, 1997 and prior to 5:00 P.M., New York time, on December
9, 2001 (such date after which the Warrants represented by this Warrant
Certificate are no longer exercisable being referred to herein as the
"Expiration Date"), will sell and deliver, or cause to be sold and delivered, to
_________________________ or registered assigns, subject to the terms and
conditions herein set forth, a certificate for fully paid and non-assessable
shares of Common Stock, no par value ("Common Stock"), of the Company upon
payment of the Warrant
<PAGE>
Price, as defined below, for each of the Warrants represented hereby which is
then exercised. Subject to adjustment as provided in the Purchase Agreement, the
Warrant Price payable on the exercise of each Warrant (referred to herein as the
"Warrant Price") shall be $3.125 per share of Common Stock until 5:00 P.M. New
York time on the Expiration Date. The Warrant Price shall be payable in cash or
by certified check.
This Warrant is one of a duly authorized issue of Warrants,
aggregating Warrants to purchase up to 400,000 shares of Common Stock, issued
pursuant to the Purchase Agreement dated as of December 9, 1996, between the
Company and the Purchasers named in such Purchase Agreement. Such Purchase
Agreement is herein referred to as the "Purchase Agreement".
This Warrant is subject to the provisions of and is entitled to the
benefits of the Purchase Agreement. The Purchase Agreement provides, inter
-----
alia, for the meeting of certain covenants by the Company and for certain
- ----
registration rights, in each case upon the terms and conditions set forth in the
Purchase Agreement. Reference is hereby made to the Purchase Agreement for a
more complete statement of the rights and limitations of rights of the
registered holder hereof and the rights and obligations of the Company
thereunder. A copy of the Purchase Agreement is on file at the principal office
of the Company in Chatsworth, California. Each holder of this Warrant, by
accepting the same, agrees to and shall be bound by the provisions of the
Purchase Agreement.
This Warrant is convertible into Common Stock in the manner, and upon
the terms and conditions, including, without limitation, anti-dilution
provisions, provided in the Purchase Agreement.
This Warrant is delivered in and shall be construed and enforced in
accordance with and governed by the laws of the State of New York (other than
any conflict of laws rule which might result in the application of the laws of
any other jurisdiction).
The Company may treat the person in whose name this Warrant is
registered as the owner and holder of this Warrant for all purposes whatsoever,
and the Company shall not be affected by any notice to the contrary (except that
the Company shall comply with the provisions of Section 12 of the Purchase
Agreement regarding the issuance of a new Warrant or Warrants to permitted
transferees).
-2-
<PAGE>
IN WITNESS WHEREOF, CHATCOM, INC. has caused this Warrant to be dated
and to be executed and issued on its behalf by its officer thereto duly
authorized and its corporate seal to be hereunto duly affixed.
Dated: Chatsworth, California
December __, 1996
CHATCOM, INC.
(Corporate Seal] By:_______________________
Title:
Attested:
_____________________
-3-
<PAGE>
Exhibit C
---------
SCHEDULE OF OPTIONS, WARRANTS AND COMMON STOCK RESERVES
<TABLE>
<CAPTION>
Shares
Underlying Average Exercise
Option or Exercise Price
Warrant Price Range
--------------------------------------------------------------------------------------------
Stock Options
-------------
<S> <C> <C> <C>
Granted to Officers 870,500 $2.23 $1.88-$5.00
Directors:
Pursuant to Employment
Agreements 400,000 $0.60 $ 0.60
As Consideration for Loan
Guarantees 300,000 $0.60 $ 0.60
As Consideration for
Service as
Interim President & CEO 40,000 $2.54 $1.75-$3.69
For Service as Outside
Directors 273,000 $1.99 $0.60-$4.03
For Service as Committee
Chairmen 125,000 $2.56 $ 2.56
------------------------------------------------------------------------------------
Total Director Options 1,138,000 $1.22 $0.60-$4.03
Total Officers & Directors 2,008,500 $1.65 $0.60-$5.00
Consulting Options 200,000 $1.50 $ 1.50
Employee Options 183,850 $2.25 $2.13-$2.70
------------------------------------------------------------------------------------
TOTAL OPTIONS 2,392,350 $1.69 $0.60-$5.00
Stock Warrants
--------------
1992 Private Placement
Warrants 666,667 $0.75 $ 0.75
1994 Private Placement
Warrants 213,904 $1.87 $ 1.87
Warrants Granted for
Extension of Debt 29,465 $2.80 $ 2.80
1995 Private Placement
Warrants 1,721,248 $2.80 $ 2.80
Finders' Fee Warrants 30,000 $3.00 $ 3.00
------------------------------------------------------------------------------------
TOTAL WARRANTS 2,661,284 $2.21 $0.80-$3.00
TOTAL OPTIONS AND WARRANTS 5,053,634 $1.96 $0.60-$5.00
RESERVES FOR ISSUANCE OF COMMON STOCK
Outstanding Options and
Warrants 5,053,634
Reserve for Ungranted
Options under
the 1994 Stock Option Plan 587,150
Reserve for Conversion of
Series D
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Preferred Stock (High View
Placement) 1,666,667
High View Warrants 400,000
Strategic Growth Warrants 100,000 *
----------------------
TOTAL RESERVES 7,807,450
Common Shares Outstanding 9,826,893
----------------------
Total Outstanding and
Reserved 17,634,343
Total Authorized 25,000,000
----------------------
Balance Available 7,365,657
</TABLE>
* Represents warrants to be issued to Strategic Growth International, Inc.
pursuant to a finders' fee agreement related to the private placement of Series
D Preferred Stock. The finders' agreement also provides for cash finders' fee of
$125,000.
-2-
<PAGE>
EXHIBIT D
---------
DISCLOSURE SCHEDULE
-------------------
Exceptions to representations and warranties:
4.1. (a) The Company is authorized to conduct business in Illinois.
However, the Company is delinquent in the filing of its annual report so it is
not considered to be in good standing at this time. The Company has completed
the annual report for the State of Illinois and is in the process of filing the
report. The Company expects to be in good standing in the State of Illinois by
December 11, 1996. The Company's authorization to conduct business will be
suspended if the annual report is not filed by February 1, 1997.
The Company has allowed its qualification to conduct business in Virginia
to expire in June 1996 as it has not had an employee in Virginia since August,
1994. On December 1, 1996, the Company rehired a regional sales manager for the
East Coast region that resides in Virginia. The Company has not yet determined
whether the hiring of this employee will require the Company to be qualified to
conduct business in the Commonwealth of Virginia and the Company is currently
evaluating those requirements. The Company expects to determine whether
qualification is required by December 15, 1996 and should it be determined that
it is required, the Company will immediately begin the process for
reinstatement.
4.5 (a) The Company has contemplated and has conducted internal discussions
regarding the securing of a working capital line-of-credit at some time in the
future. The Company has not determined that it will seek such a line-of-credit
and there can be no assurance that the Company would be successful in securing
the financing on terms that would be acceptable to the Company should it decide
to seek such financing.
4.5. (c) The following outstanding warrants contain provisions for
decreasing the exercise price and increasing the number of shares of common
stock issuable upon the exercise of such warrants in the event that the Company
issues common stock below the current Market Price* or securities convertible
into common stock for consideration per share of common stock initially
deliverable upon conversion or exchange of such securities less than Market
Price*:
* See definition of Market Price in (1) and (2) below.
<TABLE>
<CAPTION>
NO. OF SHARES
ISSUABLE EXERCISE
UPON PRICE
WARRANT EXERCISE OF PER
DESCRIPTION WARRANTS SHARE
<S> <C> <C>
1992 Private Placement Warrants (1) 666,667 $0.75
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
1994 Private Placement Warrants (2) 213,904 $1.87
Debt Extension Warrants (2) 27,500 $2.80
1995 Private Placement Warrants (2) 1,721,248 $2.80
</TABLE>
(1) The Warrant Agreement defines the "Market Price" as the average of the
closing prices for the 30 trading days immediately preceding the date that
the price was set.
(2) The Warrant Agreements defines the "Market Price" as the average of the
closing prices for the 10 trading days immediately preceding the date that
the price was set.
The placement of Series D Preferred Stock may cause the exercise price of the
warrants listed above to decrease and the number of shares issuable upon
exercise of such warrants to increase if the average closing price of the
Company's common stock for the applicable measurement period defined in the
warrant agreements (see (1) and (2) above) is less than the market price of the
common stock on the date the stock purchase agreement for the Series D Preferred
Stock is executed.
To the extent any portion of the purchase price of the Preferred Stock to be
sold to the Purchasers is deemed to constitute payment of the purchase price of
the Warrants to be sold hereunder, notwithstanding the stated value of the
Preferred Stock and the purchase price to be paid for the Warrants pursuant to
the Purchase Agreement, the antidilution provisions of the outstanding warrants
listed above may affect the exercise price and the number of shares issuable
upon exercise of such outstanding warrants.
-2-
<PAGE>
EXHIBIT E
---------
LIENS AND INDEBTEDNESS
As of October 31, 1996, ChatCom, Inc. was a lessee under the following capital
lease agreements:
<TABLE>
<CAPTION>
Original Balance @ Lease Term
------------------
Lessor Balance 10/31/96 Beginning End Assets under lease
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commworld $52,998 $ 21,296 Jul-93 Jul-98 Copy Machine
Tokai Financial $21,588 $ 18,762 May-96 Apr-99 Copy Machine
Mita $15,056 $ 3,495 Jul-94 Jun-96 Copy Machine
Copleco $16,636 $ 2,970 Apr-93 May-98 Copy Machine
Eaton $25,217 $ 417 Nov-91 Nov-96 Phone System
Xerox $ 2,533 $ 91 Dec-93 Nov-96 Copy Machine
Total Capital Leases $ 47,031
</TABLE>
<PAGE>
EXHIBIT F
---------
FORM OF OPINION
OF COMPANY COUNSEL
------------------
December ___, 1996
AST 5.1
To Each of the Purchasers Named in the
Purchase Agreement Referred to Below:
Gentlemen:
We have acted as special counsel to ChatCom, Inc., a California corporation
(the "Company"), in connection with the Purchase Agreement dated as of December
4, 1996 between the Company and each of you (the "Purchase Agreement"). This
opinion is being rendered pursuant to Section 10.5 of the Purchase Agreement.
Terms not otherwise defined herein are used as defined in the Purchase
Agreement.
In such capacity, we have examined, among other things, executed originals or
copies satisfactory to us of the following "Purchase Documents":
(i) the Purchase Agreement;
(ii) the certificates evidencing Preferred Stock issued to each of you
(the "Preferred Stock"); and
(iii) the Warrants issued to each of you (the "Warrants").
In connection with the foregoing, we have also examined originals or copies
satisfactory to us of all such corporate records and other documents and have
made such examinations of law as we have deemed relevant and necessary as a
basis for the opinions hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures (other than signatures on behalf of
the Company), the authenticity of all documents submitted to us as originals and
the conformity with the original
<PAGE>
documents of all documents submitted to us as copies. As to any facts material
to such opinions, we have, to the extent that such facts were not independently
established by us, relied upon certificates of public officials or certificates
or opinions of officers or other representatives of the Company and other
Persons and the representations and covenants of each Purchaser in the Purchase
Agreement.
We are opining herein only as to the effect on the subject transaction of the
federal laws of the United States and the internal laws of the State of
California, and we express no opinion with respect to the applicability thereto,
or the effect thereon, of the laws of any other jurisdiction, including without
limitation any matters of municipal law or the laws of any other local agencies
within any state. In rendering the opinions expressed herein, (i) we have
assumed with your permission that all courts of competent jurisdiction would
enforce such Purchase Documents as written but would apply the internal laws of
the State of California without giving effect to any choice of law provisions
contained therein or any choice of law principles which would result in
application of the internal laws of any other state, and (ii) to the extent that
any questions of legality or legal construction have arisen in connection with
our review, we have applied the laws of the State of California in resolving
such questions.
Whenever a statement herein is qualified by "to the best of our knowledge" or
a similar phrase, it is intended that those attorneys in this firm who have
rendered legal services in connection with the Purchase Documents do not have
current actual knowledge of the inaccuracy of such statement. However, except
as otherwise expressly indicated, we have not undertaken any independent
investigation to determine the accuracy of any such statement, and no inference
that we have any knowledge of any matters pertaining to such statement should be
drawn from our representation of the Company.
Based upon and subject to the foregoing, we are of the opinion that:
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all requisite
corporate power and authority to own and operate its properties, to carry on its
business as now conducted and to execute, deliver and perform the Purchase
Documents (including, without limitation, the issuance of the Preferred Stock,
the Warrants and the Conversion Shares). Except for the States of Illinois and
Virginia, as to which we render no opinion, the Company has duly qualified and
is in good standing in each other jurisdiction where the failure to so qualify
would have a material adverse effect on the business, financial condition or
results of operations of the Company on a consolidated basis.
The capital stock of the Company consists of (i) 25,000,000 authorized
shares of Common Stock, of which 9,826,893 shares have been duly authorized and
are validly
-2-
<PAGE>
issued and outstanding and fully paid and non-assessable, and (ii) 1,000,000
shares of Preferred Stock, none of which are outstanding other than the shares
of Preferred Stock being issued to you. Except as disclosed in the Purchase
Agreement including the exhibits thereto, to the best of our knowledge, there
are no outstanding options, warrants, rights, convertible securities or other
agreements under which the Company may become obligated to issue, sell or
transfer shares of its capital stock or other securities, other than the
conversion, redemption and exercise rights granted under the Purchase Agreement
with respect to the Preferred Stock and the Warrants.
The execution, delivery and performance by the Company of the Purchase
Documents (including, without limitation, the issuance of the Preferred Stock,
the Warrants and the Conversion Shares as contemplated by the Purchase
Agreement) have been duly authorized by all required corporate and other
actions. The Purchase Documents have been duly executed and delivered by the
Company and constitute the legal, valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
subject to (i) any applicable bankruptcy, reorganization, insolvency, moratorium
or other similar laws affecting the enforcement of creditors' rights generally,
(ii) the effect of the limitations imposed by California or federal law or
equitable principles upon the availability of specific performance, injunctive
relief or other equitable remedies, (iii) the effect of California law, which
provides that a court may refuse to enforce or may limit the application of, a
contract or any clause thereof which the court finds as a matter of law to have
been unconscionable at the time it was made or contrary to public policy, (iv)
the unenforceability of any forum selection clause by a federal court, and (v)
the availability of other equitable remedies. The foregoing opinion does not
cover any portion of the voting shift provisions of subparagraph 3(b) of the
Certificate of Determination and Decrease pursuant to which the Preferred Stock
is authorized, except upon an event of noncompliance described in subparagraph
3(b)(i) thereof. However, nothing has come to our attention in our review of
California law that deals directly with voting shift provisions such as those
contained in clauses (ii) through (ix) of subparagraph 3(b) of said Certificate
of Determination and Decrease or that would cause us to conclude that the voting
shift provisions would not be a binding obligation of the Company or would be
unenforceable in accordance with their terms upon any event of noncompliance
described in said clauses (ii) through (ix).
-3-
<PAGE>
To the best of our knowledge, there is no action, suit, proceeding,
investigation or claim pending or threatened in law, equity or otherwise before
any court, administrative agency or arbitrator which either (i) questions the
validity of any of the Purchase Documents or any action taken or to be taken
pursuant thereto, or (ii) might adversely affect the right, title or interest of
the Purchasers to the Preferred Stock, the Warrants or the Conversion Shares or
(iii) might result in a material adverse change in the assets, properties,
liabilities, business, results of operations or financial or other condition of
the Company. To the best of our knowledge, there are no adverse orders,
judgments, writs, injunctions, decrees or demands of any court or administrative
body, domestic or foreign, or of any other governmental agency or
instrumentality, domestic or foreign, outstanding against the Company.
Neither the execution, delivery nor performance by the Company of any of
the Purchase Documents or any of the transactions contemplated thereby
(including, without limitation, the issuance of the Preferred Stock, the
Warrants and the Conversion Shares as contemplated by the Purchase Agreement)
(i) violates or conflicts or will violate or conflict with, with or without the
giving of notice or the passage of time or both, any provision of (A) the
Articles of Incorporation or By-Laws, both as amended, of the Company or (B) any
law, rule, regulation, or, to the best of our knowledge, any order, judgment,
writ, injunction, decree, material agreement, material indenture or other
material instrument applicable to the Company or any of its properties (or to
which the Company is a party or by which it or its properties may be bound),
(ii) to the best of our knowledge, results or will result in the creation of any
security interest or lien upon any of the Company's properties, assets or
revenues, (iii) to the best of our knowledge, requires or will require the
consent, waiver, approval, order or authorization of, or declaration,
registration, qualification or filing with, any Person (whether or not a
governmental authority and including, without limitation, any stockholder
approval), or (iv) to the best of our knowledge, causes or will cause anti-
dilution clauses of any outstanding securities to become operative, except as
disclosed in the exhibits to the Purchase Agreement. To the best of our
knowledge, no such provision does or will materially adversely affect the
assets, properties, liabilities, business, results of operations or financial or
other condition of the Company or the ability of the Company to perform the
Purchase Documents or the transactions contemplated thereby.
-4-
<PAGE>
To the best our knowledge, all taxes, duties, imposts or other
governmental charges, if any, payable in connection with the execution, delivery
and performance by the Company of each of the Purchase Documents, and the
continued validity of each of said instruments, have been duly paid.
The Shares of Common Stock reserved for issuance in accordance with the
Purchase Agreement have been validly authorized and reserved for such purpose,
and upon issuance thereof upon conversion of the Preferred Stock or the exercise
of Warrants, as the case may be, as provided in the Purchase Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any presently existing pre-emptive or, to the best of our
knowledge, similar rights.
The offer, sale, purchase, issue and delivery of the Preferred Stock,
the Warrants and the Conversion Shares pursuant to the Purchase Agreement
constitute exempted transactions under the Securities Act of 1933, as amended.
The registration of the Preferred Stock, the Warrants and the Conversion Shares
under such Act is not required in connection with any such offer, sale,
purchase, issue or delivery of the Preferred Stock, the Warrants or the
Conversion Shares.
The Company is not a "public utility company" or a "holding company," or
a "subsidiary company" of a "holding company" or an "affiliate" of a "holding
company" or an "affiliate" of such a "subsidiary company," as such terms are
defined in the Public Utility Holding Company Act of 1935, as amended, or an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
The offer, sale, purchase, issue and delivery of the Preferred Stock and
the Warrants pursuant to the Purchase Agreement does not violate Regulations G,
T, U or X of the Board of Governors of the Federal Reserve System.
This opinion is rendered only to you and is solely for your benefit in
connection with the transactions covered hereby. This opinion may not be relied
upon by you for any other purpose, or quoted to or relied upon by any other
person, firm, corporation or entity for any purpose, without our prior written
consent.
Very truly yours,
-5-
<PAGE>
CHATCOM, INC.
EXHIBIT 10.2
------------
Void after 5:00 p.m. Pacific Standard Time, on December 13, 2001
Warrant to Purchase One Hundred Thousand (100,000) Shares of Common Stock
WARRANT TO PURCHASE COMMON STOCK
OF
CHATCOM, INC.
a California corporation
This is to certify that, for value received, Strategic Growth International,
Inc. ("Holder"), is entitled to purchase, subject to the provisions of this
Warrant, from ChatCom, Inc., a California corporation ("Company"), one hundred
thousand (100,000) fully paid, validly issued and nonassessable shares of common
stock, no par value, of the Company ("Common Stock"), at a price of $3.125 per
share at any time or from time to time during the period from May1, 1997, to
December 13, 2001.
The number of shares of Common Stock to be received upon the exercise of
this Warrant and the price to be paid for each share of Common Stock may be
adjusted from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Shares" and the exercise price of
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "Exercise Price".
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time from time to time on or after May 1, 1997, and until December 13,
2001; provided however, that if either such day is a day on which banking
institutions in the State of California are authorized by law to close, then on
the next succeeding day which shall not be such a day. This Warrant may be
exercised by presentation and surrender hereof to the Company at its principal
office, with the Purchase Form annexed hereto duly executed, with signature
guaranteed, and accompanied by payment of the Exercise Price for the number of
Warrant Shares specified in such form. As soon as practicable after each
exercise of the Warrants, but not later than twenty (20) days from the date of
such exercise, the Company shall issue and deliver to the Holder a certificate
or certificates for the Warrant Shares issuable upon such exercise, registered
in the name of the Holder or its designee.
If this Warrant should be exercised in part only, the Company shall, upon
surrender of this Warrant for cancellation, execute and deliver a new Warrant
evidencing the rights of the Holder hereof to purchase the balance of the
Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant at its office, in proper form for exercise, the Holder shall be deemed
to be the holder of
<PAGE>
CHATCOM, INC.
record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then by physically delivered to the Holder.
2. Reservation of Shares. The Company shall at all time reserve for
---------------------
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrants.
3. Fractional Shares. No fractional shares or script representing
-----------------
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of a share, determined as follows:
3.1. If the Common Stock is listed on a National Securities Exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on the NASDAQ system, the current market value shall be the last reported sale
price of the Common Stock on such exchange or system on the last business day
prior to the date of exercise of the Warrant or if no such sale is made on such
day, the average closing bid and asked prices for such day on such exchange or
system; or
3.2. If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau, Inc.,
on the last business day prior to the date of the exercise of this Warrant; or
3.3. If the Common Stock is not so listed or admitted to unlisted
trading privileges and did and asked prices are not so reported, the currant
market value shall be an amount, not less than book value thereof as at the end
of the most recent fiscal year of the Company ending prior to the date of the
exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
4. Loss of Warrant. Upon receipt by the Company of evidence satisfactory to
---------------
it of the loss, theft, destruction or mutilation of this Warrant, and (in the
case of loss, theft or destruction) of reasonably satisfactory indemnification,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
<PAGE>
CHATCOM, INC.
6. Anti-Dilution Provisions. The Exercise Price in effect at any time and
------------------------
the number and kind of securities purchasable upon the exercise of the Warrants
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
6.1. In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock; (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares; or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the Holder of this Warrant exercised after such
date shall be entitled to receive the aggregate number and kind of shares which,
if this Warrant had been exercised by such Holder immediately prior to such
date, he would have owned upon such exercise and been entitled to receive upon
such dividend, subdivision, combination or reclassification.
6.2. In case the Company shall hereafter distribute to the holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and dividends or distributions referred to in
Subsection 6.1 above) or subscription rights or warrants, then in each such case
the Exercise Price in effect thereafter shall be determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock (as defined in
Subsection 6.7 below), less the fair market value (as determined by the
Company's Board of Directors) of said assets or evidences of indebtedness so
distributed or of such rights or warrants, and the denominator of which shall be
the total number of shares of Common Stock outstanding multiplied by such
current market price per share of Common Stock. Such adjustment shall be made
whenever any such distribution is made and shall become effective immediately
after the record date for the determination of shareholders entitled to receive
such distribution.
6.3 Whenever the Exercise Price payable upon exercise of each Warrant
is adjusted pursuant to Subsections 6.1 and 6.2 above, the number of shares
purchasable upon exercise of this Warrant shall simultaneously be adjusted by
multiplying the number of shares initially issuable upon exercise of this
Warrant by the Exercise Price in effect on the date hereof and dividing the
product so obtained by the Exercise Price, as adjusted.
6.4. For the purposes of any computation under Subsection 6.2 above, the
current market price per share of Common Stock at any date shall be deemed to be
the average of the daily closing prices for ten (10) consecutive business days
before
<PAGE>
CHATCOM, INC.
such date. The closing price for each day shall be the last sale price regular
way or, in case no such reported sale takes place on such day, the average of
the last reported bid and asked prices regular way, in either case on the
principal national securities exchange on which the Common Stock is admitted to
trading or listed, or if not listed or admitted to trading on such exchange, the
average of the highest reported bid and lowest reported asked prices as reported
by NASDAQ, or other similar organization, if NASDAQ is no longer reporting such
information, or if not so available, the fair market price as determined by the
Board of Directors.
6.8 No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($0.05)
in such price. All calculations under this Section 6 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
7. Reclassification, Reorganization or Merger. In case of any
------------------------------------------
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation, or in case of any sale, lease or
conveyance to another corporation of the property of the Company as an entirety,
the Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter by
exercising this Warrant at anytime prior to the expiration of the Warrant, to
purchase the kind and amount of shares of stock and other securities and
property receivable upon such reclassification, capital reorganization and other
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased upon the exercise of this
Warrant, immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance.
Dated: December 13, 1996 CHATCOM, INC.,
a California corporation
By:
-------------------------------------
James B. Mariner
President and Chief Executive Officer
<PAGE>
CHATCOM, INC.
PURCHASE FORM
-------------
Dated: _______________________, 19___
The undersigned hereby irrevocably elects to exercise the within Warrant to
the extent of purchasing _________________ shares of Common Stock and hereby
makes payment of __________________ in payment of the actual exercise price
hereof.
-------------------------------
Name Printed:
------------------
Warrant holder
INSTRUCTIONS FOR REGISTRATION OF STOCK
--------------------------------------
Name:
---------------------------------------------------------------
(Please typewrite or print in block letters)
Address:
---------------------------------------------------------------
Signature:
-----------------------------------------------------------------
<PAGE>
CHATCOM, INC.
EXHIBIT 10.3
------------
ASTRO SCIENCES CORPORATION
1994 STOCK OPTION PLAN
1. Purpose; Effectiveness of the Plan
----------------------------------
1.1 The purpose of the Plan is to advance the interests of the Company
and its stockholders by helping the Company obtain and retain the service of
employees, officers, consultants, and directors, upon whose judgment, initiative
and efforts the Company is substantially dependent, and to provide those persons
with further incentives to advance the interests of the Company.
1.2 The Plan will become effective on the date of its adoption by the
Board, provided the Plan is approved by the stockholders of the Company
(excluding holders of shares of Stock issued by the Company pursuant to the
exercise of options granted under this Plan) within twelve (12) months before or
after that date. If the Plan is not so approved by the stockholders of the
Company, any options granted under this Plan will be rescinded and will be void.
This Plan will remain in effect until it is terminated by the Board (or the
Committee, as defined hereafter), under Section 9 hereof, or September 1, 2004,
whichever is earlier. This Plan will be governed by, and construed in accordance
with, the laws of the State of California.
2. Certain Definitions
-------------------
Unless the context otherwise requires, the following defined terms (together
with other capitalized terms defined elsewhere in this Plan) will govern the
construction of this Plan, and of any stock option agreements entered into
pursuant to this Plan:
2.1 "10% Stockholder" means a person who owns, either directly or
indirectly by virtue of the ownership attribution provisions set forth in
Section 424(d) of the Code at the time he or she is granted an Option, stock
possessing more than 10 percent (10%) of the total combined voting power or
value of all classes of stock of the Company and/or of its subsidiaries.
2.2 "1993 Act" means the federal Securities Act of 1933, as amended.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Called for under an Option," or words to similar effect, means
issuable pursuant to the exercise of an Option.
<PAGE>
CHATCOM, INC.
2.5 "Code" means the Internal Revenue Code of 1986, as amended
(references herein to Sections of the Code are intended to refer to Sections of
the Code as enacted at the time of this Plan's adoption by the Board and as
subsequently amended, or to any substantially similar successor provisions of
the code resulting from recodification, renumbering or otherwise).
2.6 "Committee" means a committee of two or more Non-Employee Directors
(as defined in Rule 16b-3 or its successors under the Exchange Act) appointed by
the Board, to administer and interpret this Plan; provided that the term
"Committee" will refer to the Board during such times as no Committee is
appointed by the Board.
2.7 "Company" means Astro Sciences Corporation, a California
corporation.
2.8 "Disability" has the same meaning as "permanent and total
disability," as defined in Section 22(e)(3) of the Code.
2.9 [Reserved]
2.10 "Eligible Participants" means persons who, at a particular time,
are employees, officers, consultants, or directors of the Company or its
subsidiaries.
2.11 "Fair Market Value" means, with respect to the Stock and as of the
date an ISO is granted hereunder, the market price per share of such Stock
determined by the Committee, consistent with the requirements of Section 422 of
the Code and to the extent consistent therewith, as follows:
(a) If the Stock was traded on a stock exchange on the date in
question, then the Fair Market Value will be equal to the closing price
reported by the applicable composite-transactions report for such date;
(b) If the Stock was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair Market
Value will be equal to the last-transaction price quoted by the NASDAQ
system for such date;
(c) If the Stock was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value will be equal to the average of the last reported
representative bid and asked prices quoted by the NASDAQ system for such
date; and
(d) If none of the foregoing provisions is applicable, then the
Fair
<PAGE>
CHATCOM, INC.
Market Value will be determined by the Committee in good faith on such basis
as it deems appropriate.
2.12 "[Reserved]
2.13 "ISO" has the same meaning as "incentive stock option," as defined
in Section 422 of the Code.
2.14 "Just Cause Termination" means a termination by the Company of an
Optionee's employment by and/or service to the Company (or if the Optionee is a
director, removal of the Optionee from the Board by action of the stockholders
or, if permitted by applicable law and the Bylaws of the Company, the other
directors), in connection with the good faith determination of the Company's
Board of Directors (or of the Company's stockholders if the Optionee is a
director and the removal of the Optionee from the Board is by action of the
stockholders, but in either case excluding the vote of the Optionee if he or she
is a director or a stockholder) that the Optionee has engaged in any acts
involving dishonesty or moral turpitude or in any acts that materially and
adversely affect the business, affairs or reputation of the Company or its
subsidiaries.
2.15 "NSO" means any option granted under this Plan whether designated
by the Committee as a "non-qualified stock option," a "non-statutory stock
option" or otherwise, other than an option designated by the Committee as an ISO
or any option so designated but which, for any reason, fails to qualify as an
ISO pursuant to Section 422 of the Code and the rules and regulations
thereunder.
2.16 "Option" means an option granted pursuant to this Plan entitling
the option holder to acquire shares of Stock issued by the Company pursuant to
the valid exercise of the option;
2.17 "Option Agreement" means an agreement between the Company and an
Optionee, in form and substance satisfactory to the Committee or the Board in
its sole discretion, consistent with this Plan.
2.18 "Option Price" with respect to any particular Option means the
exercise price at which the Optionee may acquire each share of the Option Stock
called for under such Option.
2.19 "Option Stock" means Stock issued or issuable by the Company
pursuant to the valid exercise of an Option.
2.20 "Optionee" means an Eligible Participant to whom Options are
granted hereunder, and any transferee thereof pursuant to a Transfer authorized
under this Plan.
2.21 "Plan" means this 1994 Stock Option Plan of the Company.
<PAGE>
CHATCOM, INC.
2.22 "QDRO" has the same meaning as a "qualified domestic relations
order" as defined in Section 414(p) of the Code.
2.23 "Stock" means shares of the Company's Common Stock, no par value.
2.24 "Subsidiary" has the same meaning as "Subsidiary Corporation" as
defined in Section 424(f) of the Code.
2.25 "Transfer," with respect to Option Stock, includes, without
limitation, a voluntary or involuntary sale, assignment, transfer, conveyance,
pledge, hypothecation, encumbrance, disposal, loan, gift, attachment or levy of
such Option Stock, including without limitation an assignment for the benefit of
creditors of the Optionee, a transfer by operation of law, such as a transfer by
will or under the laws of descent and distribution, an execution of judgment
against the Option Stock or the acquisition of record or beneficial ownership
thereof by a lender or creditor, a transfer pursuant to a QDRO, or to any decree
of divorce, dissolution or separate maintenance, any property settlement, any
separation agreement or any other agreement with a spouse (except for estate
planning purposes) under which a part or all of the shares of Option Stock are
transferred or awarded to the spouse of the Optionee or are required to be sold;
or a transfer resulting from the filing by the Optionee of a petition for
relief, or the filing of an involuntary petition against such Optionee, under
the bankruptcy laws of the United States or of any other nation.
3. Eligibility
-----------
The Company may grant Options under this Plan only to persons who are
Eligible Participants as of the time of such grant. Subject to the provisions of
Section 4.4, 5 and 6 hereof, there is no limitation on the number of Options
that may be granted to an Eligible Participant.
4. Administration
--------------
4.1 Committee. The Committee, if appointed by the Board, will
---------
administer this Plan. If the Board, in its discretion, does not appoint such a
Committee, the Board itself will administer this Plan and take such other
actions as the Committee is authorized to take hereunder; provided that the
Board may take such actions hereunder in the same manner as the Board may take
other actions under the Company's Articles of Incorporation and Bylaws
generally.
4.2 Authority and Discretion of Committee. The Committee will have
-------------------------------------
full and final authority in its discretion, at any time and from time to time,
subject
<PAGE>
CHATCOM, INC.
only to the express terms, conditions and other provisions of the Company's
Articles of Incorporation, Bylaws and this Plan, and the specific limitations on
such discretion set forth herein:
(a) to select and approve the persons who will be granted Options
under this Plan from among the Eligible Participants, and to grant to any
person so selected one or more Options to purchase such number of shares of
Option Stock as the Committee may determine;
(b) to determine the period or periods of time during which
Options may be exercised, the Option Price and the duration of such Options
and other matters to be determined by the Committee in connection with
specific Option grants and Option Agreements as specified under this Plan;
(c) to interpret this Plan, to prescribe, amend and rescind rules
and regulations relating to this Plan, and to make all other determinations
necessary or advisable for the operation and administration of this Plan;
and
(d) to delegate all or a portion of its authority under
subsections (a) and (b) of this Section 4.2 to one or more directors of the
Company who are executive officers of the Company, but only in connection
with Options granted to Eligible Participants who are not subject to the
reporting and liability provisions of Section 16 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder, and subject to such restrictions and limitations (such as the
aggregate number of shares of Option Stock called for by such Options that
may be granted) as the Committee may decide to impose on such delegate
directors.
4.3 [Reserved]
--------
4.4 Designation of Options. Except as otherwise provided herein, the
----------------------
Committee will designate any Option granted hereunder either as an ISO or as an
NSO. To the extent that the Fair Market Value (determined at the time the Option
is granted)of Stock with respect to which all ISOs are exercisable for the first
time by any individual during any calendar year (pursuant to this Plan and all
other plans of the Company and/or its subsidiaries) exceeds $100,000, such
option will be treated as an NSO. Notwithstanding the general eligibility
provisions of Section 3 hereof, the Committee may grant ISOs only to persons who
are employees of the Company and/or its subsidiaries.
4.5 Option Agreements. Options will be deemed granted hereunder only
-----------------
upon the execution and delivery of an Option Agreement by the Optionee and a
duly authorized officer of the Company. Options will not be deemed granted
hereunder merely upon the authorization of such grant by the Committee.
<PAGE>
CHATCOM, INC.
5. Shares Reserved for Options
---------------------------
5.1 Option Pool. The aggregate number of shares of Option Stock
-----------
that may be issued pursuant to the exercise of Options granted under this Plan
will not exceed two million (2,000,000) (the "Option Pool"), provided that such
number will be increased by the number of shares of Option Stock that the
Company subsequently may reacquire through repurchase or otherwise. Shares of
Option Stock that would have been issuable pursuant to Options, but that are no
longer issuable because all or part of those Options have terminated or expired,
will be deemed not to have been issued for purposes of computing the number of
shares of Option Stock remaining in the Option Pool and available for issuance.
5.2 Adjustments Upon Changes in Stock. In the event of any change
---------------------------------
in the outstanding Stock of the Company as a result of a stock split, reverse
stock split, stock dividend, recapitalization, combination, or reclassification,
appropriate proportionate adjustments will be made in: (i) the aggregate number
of shares of Option Stock in the Option Pool that may be issued pursuant to the
exercise of Options granted hereunder; (ii) the Option Price and the number of
shares of Option Stock called for in each outstanding Option granted hereunder;
and (iii) other rights and matters determined on a per share basis under this
Plan or any Option Agreement hereunder. Any such adjustments will be made only
by the Board, and when so made will be effective, conclusive and binding for all
purposes with respect to this Plan and all Options then outstanding. No such
adjustments will be required by reason of the issuance or sale by the Company
for cash or other consideration of additional shares of its Stock or securities
convertible into or exchangeable for shares of its Stock.
6. Terms of Stock Option Agreements
--------------------------------
Each Option granted pursuant to this Plan will be evidenced by an
agreement (an "Option Agreement") between the Company and the person to whom
such Option is granted, in form and substance satisfactory to the Committee in
its sole discretion, consistent with this Plan. Without limiting the foregoing,
each Option Agreement (unless otherwise stated therein) will be deemed to
include the following terms and conditions:
6.1 Covenants of Optionee. At the discretion of the Committee, the
---------------------
person to whom an Option is granted hereunder, as a condition to the granting of
the Option, must execute and deliver to the Company a confidential information
agreement approved by the Committee. Nothing contained in this Plan, any Option
Agreement, or in any other agreement executed in connection with the granting of
an Option under this Plan will confer upon any Optionee any right with respect
to the continuation of his or her status as an employee of, consultant or
independent contractor to, or director of, the Company or its subsidiaries.
<PAGE>
CHATCOM, INC.
6.2 Vesting Periods. Except as otherwise provided herein, each
---------------
Option Agreement may specify the period or periods of time within which each
Option or portion thereof will first become exercisable (the "Vesting Period")
with respect to the total number of shares of Option Stock called for thereunder
(the "Total Award Option Stock"). Such Vesting Periods will be fixed by the
Committee in its discretion, and may be accelerated or shortened by the
Committee in its discretion.
6.3 Exercise of the Option.
----------------------
(a) Mechanics and Notice. An Option may be exercised to the
--------------------
extent exercisable:
(1) by giving written notice of exercise to the Company,
specifying the number of full shares of Option Stock to be purchased and
accompanied by full payment of the Option Price thereof and the amount of
withholding taxes pursuant to subsection 6.3(b) below; and
(2) by giving assurances satisfactory to the Company that
the shares of Option Stock to be purchased upon such exercise are being
purchased for investment and not with a view to resale in connection with
any distribution of such shares in violation of the 1933 Act; provided,
however, that in the event the Option Stock called for under the Option is
registered under the 1933 Act, or in the event resale of such Option stock
without such registration would otherwise be permissible, this second
condition will be inoperative if, in the opinion of counsel for the Company,
such condition is not required under the 1933 Act, or any other applicable
law, regulation or rule of any governmental agency.
(b) Withholding Taxes. As a condition to the issuance of the
-----------------
shares of Option Stock upon full or partial exercise of an NSO granted under
this Plan, the Optionee will pay to the Company in cash, or in such other
form as the Committee may determine in its discretion, the amount of the
Company's tax withholding liability required in connection with such
exercise. For purposes of this subsection 6.3(b), "tax withholding
liability" will mean all federal and state income taxes, social security
tax, and any other taxes applicable to the compensation income arising from
the transaction required by applicable law to be withheld by the Company.
6.4 Payment of Option Price. Each Option Agreement will specify
-----------------------
the Option Price with respect to the exercise of Option Stock thereunder, to be
fixed by the Committee in its discretion, but in no event will the Option Price
for an ISO granted hereunder be less than the Fair Market Value (or, in case the
Optionee is a 10% Stockholder, one hundred ten percent (110%) of such Fair
Market Value) of the Option Stock at the time such ISO is granted, and in no
event will the Option Price for
<PAGE>
CHATCOM, INC.
an NSO granted hereunder be less than 75% of Fair Market Value of the Option
Stock at the time such NSO is granted. The Option Price will be payable to the
Company in United States dollars in cash or by check, or such other legal
consideration as may be approved by the Committee, in its discretion.
(a) For example, the Committee, in its discretion, may permit
a particular Optionee to pay all or a portion of the Option Price, and/or
the tax withholding liability set forth in subsection 6.3(b) above, with
respect to the exercise of an Option either by surrendering shares of Stock
already owned by such Optionee or by withholding shares of Option Stock,
provided that the Committee determines that the Fair Market Value of such
surrendered Stock or withheld Option Stock is equal to the corresponding
portion of such Option Price and/or tax withholding liability, as the case
may be, to be paid for therewith.
(b) If the Committee permits an Optionee to pay any portion of
the Option Price and/or tax withholding liability with shares of Stock with
respect to the exercise of an Option (the "Underlying Option") as provided
in subsection 6.4(a) above, then the Committee, in its discretion, may grant
to such Optionee (but only if Optionee remains an Eligible Participant at
that time) additional NSOs, the number of shares of Option Stock called for
thereunder to be equal to all or a portion of the Stock so surrendered or
withheld (a "Replacement Option"). Each Replacement Option will be evidenced
by an Option Agreement. Unless otherwise set forth therein, each Replacement
Option will be immediately exercisable upon such grant (without any Vesting
Period) and will be coterminous with the Underlying Option. The Committee,
in its sole discretion, may establish such other terms and conditions for
Replacement Options as it deems appropriate.
6.5 Termination of the Option.
-------------------------
(a) Early Termination. Except as otherwise provided herein,
-----------------
each Option Agreement will specify the period of time, to be fixed by the
Committee in its discretion, during which the Option granted therein will be
exercisable, not to exceed ten (10) years from the date of grant in the case
of an ISO (the "Option Period"); provided that the Option Period will not
exceed five (5) years from the date of grant in the case of an ISO granted
to a 10% Stockholder. To the extent not previously exercised, each Option
will terminate upon the expiration of the Option Period specified in the
Option Agreement; provided, however, that each such Option will terminate,
if earlier: (i) ninety (90) days after the date that the Optionee ceases to
be an Eligible Participant for any reason, other than by reason of death or
disability or a Just Cause Termination; (ii) twelve (12) months after the
date that the Optionee ceases to be an Eligible Participant by reason of
such person's death or disability; or (iii) immediately as of the date that
the Optionee ceases to be an Eligible Participant by reason of a Just Cause
Termination.
<PAGE>
CHATCOM, INC.
(b) Corporate Transactions. In the event of a sale of all or
----------------------
substantially all of the assets of the Company, or a merger or consolidation
or other reorganization in which the Company is not the surviving
corporation, or in which the Company becomes a subsidiary of another
corporation, or a reverse merger in which the Company is the surviving
corporation but the shares of stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property (any of the
foregoing events, a "Corporate Transaction"), then notwithstanding anything
else herein, and unless the Board, in its sole discretion, determines
otherwise, the successor corporation must agree to assume the outstanding
Options or substitute therefor comparable options of such successor
corporation, or a parent or subsidiary of such successor corporation. If for
whatever reason the successor corporation does not assume the outstanding
Options or substitute therefor comparable options of such successor
corporation, or a parent or subsidiary of such successor corporation, then
in that event, the Board or the Committee shall notify each Optionee not
less than thirty (30) days prior thereto of the pendency of a Corporate
Transaction. Upon delivery of such notice, any Option outstanding shall be
exercisable in full and not only as to those shares with respect to
installments, if any, have been accrued; subject, however, to earlier
expiration or termination as provided elsewhere in this Plan.
6.6 Options Nontransferable. No Option will be transferable by the
-----------------------
Optionee otherwise than by will or the laws of descent and distribution, or in
the case of an NSO, pursuant to a QDRO. During the lifetime of the Optionee, the
Option will be exercisable only by him or her, or the transferee of an NSO if it
was transferred pursuant to a QDRO.
6.7 Qualification of Stock. The right to exercise an Option will
----------------------
be further subject to the requirement that if at any time the Board determines,
in its discretion, that the listing, registration or qualification of the shares
of Option Stock called for thereunder upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental regulatory
authority, is necessary or desirable as a condition of or in connection with the
granting of such Option or the purchase of shares of Option Stock thereunder,
the Option may not be exercised, in whole or in part, unless and until such
listing, registration, qualification, consent or approval is effected or
obtained free of any conditions not acceptable to the Board, in its discretion.
6.8 Additional Restrictions on Transfer. By accepting Options
-----------------------------------
and/or Option Stock under this Plan, the Optionee will be deemed to represent,
warrant and agree as follows:
(a) Securities Act of 1933. The Optionee understands that the
----------------------
shares of Option Stock have not been registered under the 1933 Act, and that
such shares are not freely tradeable and must be held indefinitely unless
such shares
<PAGE>
CHATCOM, INC.
are either registered under the 1933 Act or an exemption from such
registration is available. The Optionee understands that the Company is
under no obligation to register the shares of Option Stock.
(b) Other Applicable Laws. The Optionee further understands
---------------------
that Transfer of the Option Sock requires full compliance with the
provisions of all applicable laws.
(c) Investment Intent. Unless a registration statement is in
-----------------
effect with respect to the sale of Option Stock obtained through exercise of
Options granted hereunder. Upon exercise of any Option: (1) the Optionee
will purchase the Option Stock for his or her own account and not with a
view to distribution within the meaning of the 1933 Act, other than as may
be effected in compliance with the 1933 Act and the rules and regulations
promulgated thereunder; (2) no one else will have any beneficial interest in
the Option Stock; and (3) he or she has no present intention of disposing of
the Option Stock at any particular time.
6.9 Compliance with Laws. Notwithstanding any other provision of
--------------------
this Plan, Options may be granted pursuant to this Plan, and Option Stock may be
issued pursuant to the exercise thereof by an Optionee, only after there has
been compliance with all applicable federal and state laws, and all of the same
will be subject this overriding condition. The Company will not be required to
register or qualify Option Stock with the Securities and Exchange Commission or
any State agency, except that the Company will register with, or as required by
local law, file for and secure an exemption from such registration requirements
from, the applicable securities administrator and other officials of each
jurisdiction in which an Eligible Participant would be granted an Option
hereunder prior to such grant.
6.10 Stock Certificates. Certificates representing the Option
------------------
Stock issued pursuant to the exercise of Options will bear all legends required
by law and necessary to effectuate this Plan's provisions. The Company may place
a "stop transfer" order against shares of the Option Stock until all
restrictions and conditions set forth in this Plan and in the legends referred
to in this Section 6.10 have been complied with.
6.11 Notices. Any notice to be given to the Company under the
-------
terms of an Option Agreement will be addressed to the Company at its principal
executive office, Attention: Corporate Secretary, or at such other address as
the Company may designate in writing. Any notice to be given to an Optionee will
be addressed to the Optionee at the address provided to the Company by the
Optionee. Any such notice will be deemed to have been duly given if and when
enclosed in a properly sealed envelope, addressed as aforesaid, registered and
deposited, postage and registry fee prepaid, in a post office or branch post
office regularly maintained by the United States Government.
<PAGE>
CHATCOM, INC.
6.12 Other Provisions. The Option Agreement may contain such other
----------------
terms, provisions and conditions, including such special forfeiture conditions,
rights of repurchase, rights of first refusal and other restrictions on Transfer
of Option Stock issued upon exercise of any Options granted hereunder, not
inconsistent with this Plan, as may be determined by the Committee in its sole
discretion.
6.13 [Reserved]
--------
7. Proceeds From Sale of Stock
---------------------------
Cash proceeds from the sale of shares of Option Stock issued from time to
time upon the exercise of Options granted pursuant to this Plan will be added to
the general funds of the Company and as such will be used from time to time for
general corporate purposes.
8. Modification, Extension and Renewal of Options
----------------------------------------------
Subject to the terms and conditions and within the limitations of this Plan,
the Committee may modify, extend or renew outstanding Options granted under this
Plan, or accept the surrender of outstanding Options (to the extent not
theretofore exercised) and authorize the granting of new Options in substitution
therefor (to the extent not theretofore exercised). Notwithstanding the
foregoing, however, no modification of any Option will, without the consent of
the holder of the Option, alter or impair any rights or obligations under any
Option theretofore granted under this Plan.
9. Amendment and Discontinuance
----------------------------
The Board may amend, suspend or discontinue this Plan at any time or from
time to time; provided that no action of the Board will cause ISOs granted under
this Plan not to comply with Section 422 of the Code unless the Board
specifically declares such action to be made for that purpose. Moreover, no such
action may alter or impair any Option previously granted under this Plan without
the consent of the holder of such Option.
10. Plan Compliance with Rule 16b-3
-------------------------------
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
any provision of the Plan or action by the Plan Administrators fails so to
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Plan Administrators.
11. Copies of Plan
--------------
<PAGE>
CHATCOM, INC.
A copy of this Plan will be delivered to each Optionee at or before the time
he or she executes an Option Agreement.
Date Plan Adopted by Board of Directors: August 31, 1994
Date Plan Adopted by Stockholders: November 22, 1994
ASTRO SCIENCES CORPORATION,
a California corporation
By: /s/ A. Charles Lubash
----------------------------
A. Charles Lubash,
President
Attest:
/s/ James R. Spievak
- ---------------------------
James R. Spievak, Secretary
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997
<PERIOD-START> OCT-01-1996 APR-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 2,536,548 2,536,548
<SECURITIES> 0 0
<RECEIVABLES> 2,083,516 2,083,516
<ALLOWANCES> (226,094) (226,094)
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<PP&E> 1,248,690 1,248,690
<DEPRECIATION> (671,061) (671,061)
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<OTHER-EXPENSES> 1,635,203 4,929,828
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (10,019) (27,471)
<INCOME-PRETAX> (597,685) (2,315,904)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (597,685) (2,315,904)
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<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (597,685) (2,315,904)
<EPS-PRIMARY> $(0.06) $(0.27)
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