<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 September 30, 1997
Commission file number 0-20462
CHATCOM, INC.
(Exact name of Registrant 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
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 October 31, 1997, there were 12,275,594 shares of the Registrant's
common stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
Page 1 of 17
Exhibit Index on Page 16
<PAGE>
CHATCOM, INC.
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS.
BALANCE SHEETS (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, MARCH 31,
ASSETS NOTES 1997 1997
----- ------------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 446 $ 1,169
Accounts receivable, net of allowances of $577,000
(September 30, 1997) and $109,000 (March 31, 1997) 2,902 1,334
Inventories 2 3,120 2,721
Prepaid expenses and other
current assets 152 108
-------- --------
Total current assets 6,620 5,332
EQUIPMENT AND FIXTURES, Net 3 678 651
DEPOSITS 24 24
-------- --------
TOTAL $ 7,322 $ 6,007
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 4 $ 3,560 $ 1,427
Accrued expenses 566 687
Current portion of capital lease
obligations 28 23
-------- --------
Total current liabilities 4,154 2,137
CAPITAL LEASE OBLIGATIONS
-less current portion 24 12
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
authorized 1,000,000 shares; 4
Series D Preferred Stock, $1,000 stated value per
share,
authorized 5,000 shares, issued and outstanding
2,496 shares at March 31, 1997 1,407
Series E Preferred Stock, $1,000 stated value per
share,
authorized 2,000 shares, issued and outstanding 5 940
1,100 shares at September 30, 1997
Common stock, no par value; authorized,
25,000,000 shares; issued and outstanding
12,275,594 shares at September 30, 1997 and
9,826,892 shares at March 31, 1997 6,7 12,111 10,090
Additional paid-in capital 2,404 2,404
Accumulated deficit (12,311) (10,043)
-------- --------
Total shareholders' equity 3,144 3,858
-------- --------
TOTAL $ 7,322 $ 6,007
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 2 of 17
<PAGE>
CHATCOM, INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SALES $ 2,407 $ 2,208 $ 6,866 $ 4,893
COST OF GOODS SOLD 1,486 1,519 4,342 3,334
---------- ---------- ---------- ----------
GROSS PROFIT 921 689 2,524 1,559
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling 822 834 1,890 1,576
General and administrative 1,087 697 1,546 1,204
Research and development 568 256 1,168 453
Severance expense 61
---------- ---------- ---------- ----------
Total operating expenses 2,477 1,787 4,604 3,294
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (1,556) (1,098) (2,080) (1,735)
INTEREST INCOME 2 12 (4) 28
INTEREST EXPENSE (16) 2 (17) (11)
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (1,570) (1,088) (2,093) (1,718)
PROVISION FOR INCOME TAXES (1)
---------- ---------- ---------- ----------
NET LOSS $ (1,570) $ (1,088) $ (2,094) $ (1,718)
---------- ---------- ---------- ----------
DIVIDENDS ON PREFERRED
STOCK (113) (99) (175) (824)
---------- ---------- ---------- ----------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (1,683) $ (1,187) $ (2,269) $ (2,542)
========== ========== ========== ==========
LOSS PER SHARE:
Primary and fully diluted
loss per share $ (0.17) $ (0.14) $ (0.23) $ (0.31)
========== ========== ========== ==========
Weighted average number of
common shares and common
share equivalents (primary and :
fully diluted) 9,961,238 8,553,457 9,894,814 8,139,945
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 3 of 17
<PAGE>
CHATCOM, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
- --------------------------------------------------------------------
SIX MONTHS ENDED
SEPTEMBER 30,
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(2,094) $(1,718)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 179 114
Provision for losses on accounts receivable 559 143
Interest on subordinated debt 15
Changes in operating assets and liabilities:
Restricted cash 500
Accounts receivable (2,127) 364
Inventories (399) 307
Prepaid expenses and other current assets (44) (22)
Deposits (2)
Accounts payable 2,133 (782)
Accrued expenses (46) (236)
------- -------
Net cash used in operating activities (1,824) (1,332)
------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES-
Capital expenditures (176) (100)
------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments of notes payable (939)
Principal payments on capital leases (13) (19)
Proceeds from sale of preferred stock 940 1,325
Payment of dividends on preferred stock (10)
Issuance of convertible subordinated debt 350
Exercise of stock options and warrants 850
------- -------
Net cash provided by financing activities 1,277 1,207
------- -------
NET DECREASE IN CASH (723) (225)
CASH, BEGINNING OF PERIOD 1,169 1,067
------- -------
CASH, END OF PERIOD $ 446 $ 842
======= =======
(CONTINUED
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 4 of 17
<PAGE>
STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the six months ended September 30, 1997 and 1996, the Company paid
interest of $2,336 and $10,473, respectively, and taxes of $8,253 and $425,
respectively.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended September 30, 1997 and 1996, the Company entered
into capital lease agreements for equipment with costs of $29,541 and $21,588,
respectively.
During the six months ended September 30, 1997, the Company accrued dividends
payable on preferred stock of $175,000 and paid dividends of $175,000 through
the issuance of 156,564 shares of common stock which resulted in an increase
in common stock of $175,000 and a decrease in accrued expenses of $175,000.
During the six months ended September 30, 1996, the Company accrued dividends
on preferred stock of $67,072. Dividends of $10,495 were paid in cash,
dividends of $33,786 were paid through the issuance of 24,194 shares of the
Company's common stock and dividends of $22,792 were accrued but unpaid at
September 30, 1996.
During the six months ended September 30, 1997, the Company exchanged 2,496
shares of Series D preferred stock ($1,407,000) for 2,000,000 shares of
common stock (see Note 6), which resulted in an increase in common stock of
$1,407,000 and a decrease in preferred stock of $1,407,000.
During the six months ended September 30, 1997, the Company converted $350,000
of convertible subordinated debt (received by the Company during May 1997),
plus $15,173 in accrued interest, into 292,138 shares of common stock (see
Note 6), which resulted in an increase in common stock of $365,173 and a
decrease in convertible subordinated debt of $350,000 and a decrease in
accrued expenses of $15,173.
(CONCLUDED)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 5 of 17
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CHATCOM, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements of ChatCom, Inc. (the
"Company") have been prepared in accordance with instructions to Form 10-
QSB and, in the opinion of management, include all material adjustments
(consisting only of normal recurring accruals) which are necessary for the
fair presentation of results of operations for the interim periods. These
unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1997. The
results of operations for the six month period ended September 30, 1997 are
not necessarily indicative of the results to be expected for the full
fiscal year ending March 31, 1998.
Certain prior year amounts have been reclassified to conform with current
year classifications.
2. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
September 30,
1997
-------------
<S> <C>
Raw materials $ 782,000
Work in process 1,249,000
Finished goods 1,751,000
----------
Inventory at cost 3,782,000
Less: reserve for obsolescence 662,000
----------
$3,120,000
==========
</TABLE>
3. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
September 30,
1997
-------------
<S> <C>
Equipment $1,193,000
Software 138,000
Furniture and fixtures 185,000
Leasehold improvements 88,000
----------
1,604,000
Less: accumulated depreciation (926,000)
----------
Equipment and fixtures, net $ 678,000
==========
</TABLE>
Page 6 of 17
<PAGE>
4. CONVERSION OF UNSECURED DEBT
On September 30, 1997, the Company executed a letter of intent ("LOA") with
Vermont Research Products, Inc. ("Vermont"), a major supplier of certain
products (which are resold by the Company), for the conversion of the amount
owed by the Company to Vermont at that time (approximately $2.0 million at
September 30, 1997) into $1,300,000 of convertible redeemable preferred stock
(the "Series F Preferred Stock") and a $750,000 convertible debenture (the
"Debenture"). The Series F Preferred Stock would contain certain features
including a dividend rate of 6% payable in preferred stock; convertible to
Common Stock on the basis of $1.375 per share; liquidation rights of equal
preference with other preferred shareholders; dividend restrictions;
registration rights; and anti-dilution provisions. The Debenture would contain
certain features including an interest coupon rate based on prime; convertible
to Common Stock on the basis of $1.375 per share; secured by all of the
Company's foreign accounts receivable (excluding those in North America); and be
automatically reduced by payments of foreign accounts receivable (excluding
North America) on the basis of 40% to Vermont and 60% to the Company. The LOA is
subject to the execution of a definitive agreement prior to November 19, 1997.
No assurances can be given that the Company's debt to Vermont will be
converted based on the terms contained in the LOA or on any other terms
satisfactory to the Company.
5. ISSUANCE OF SERIES E PREFERRED STOCK
On September 26, 1997, the Company entered into Stock Purchase Agreements
(the "Agreements") whereby the Company agreed to sell to two accredited
investors up to 1,700 shares of Series E Convertible Redeemable Preferred Stock,
$1,000 stated value per share (the "Series E Preferred Stock"), and warrants to
purchase 432,727 shares of Common Stock at a price of $1.25 per share (the
"Series E Warrants"). Pursuant to the Agreements, a total of 1,100 shares of
Series E Preferred Stock and 254,545 of the Series E Warrants were sold by the
Company on September 26, 1997 for gross proceeds of $1,100,000. The sale of the
Series E Preferred Stock and the Series E Warrants were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Regulation D promulgated thereunder. The Company received various
representations and warranties from the investors, including a representation
that the investors are "accredited investors" within the meaning of Regulation
D. Offering costs of $160,000, consisting primarily of cash finders' fees and
legal fees, were incurred by the Company. The sale of the additional 600 shares
of Series E Preferred Stock and 178,182 Series E Warrants ($600,000 of gross
offering proceeds) is scheduled to occur within five days following the
Company's satisfaction of certain conditions which include, among others, a
registration statement covering the sale of the shares issuable upon conversion
of the Series E Preferred Stock and upon the exercise of the Series E Warrants
is declared effective; the market price of the Company's Common Stock for the
ten trading days preceding the additional closing date exceeds $1.00 per share;
and the funding from a strategic investor of at least $1,000,000 from the sale
of equity securities of the Company. One-half of the Series E Preferred Stock is
convertible at the election of the holder into shares of the Company's Common
Stock commencing on the 51st day after the closing date and all of the Series E
Preferred Stock is convertible commencing on the 91st day after such closing
date. The conversion value to determine the number of shares of Common Stock
into which the Series E Preferred Stock is convertible is the lesser of $1.375
or 75% of the average of the closing bid prices of the Common Stock during the
five trading days immediately preceding the conversion date. The Series E
Warrants are exercisable for five years commencing January 1, 1998. The Company
has agreed to register the shares issuable upon the conversion of the Series E
Preferred Stock and upon the exercise of the Series E Warrants.
No assurance can be given that the Company will be able to satisfactorily
meet the conditions required for the sale of the additional 600 shares of Series
E Preferred Stock.
Page 7 of 17
<PAGE>
6. CONVERSION OF CONVERTIBLE SUBORDINATED DEBT AND SERIES D PREFERRED
STOCK AND SETTLEMENT
On September 11, 1997, the Company, together with a majority of its Board
of Directors, were sued by The High View Fund and The High View Fund, L.P.
(collectively, "High View"), holders of 2,498 shares of the Company's Series D
Preferred Stock and lenders of a $350,000 convertible subordinated loan made to
the Company in May 1997 (the "$350,000 Loan"). The lawsuits, filed in U.S.
Federal District Court, Southern District of New York and in the State Court of
New York, sought damages from the defendants for alleged wrongful actions
relating to securities fraud and not informing High View regarding the extent of
the Company's financial problems.
On September 25, 1997, the parties entered into settlement agreements
(comprised principally of a Stock Exchange Agreement, Registration Rights and
Lock-up Agreement and Warrant agreements) related to both cases whereby High
View agreed to exchange their 2,498 shares of Series D Preferred Stock
(representing the entire Series D Preferred Stock issued by the Company) for a
total of 2,000,000 shares of the Company's Common Stock and to convert the
$350,000 Loan, plus $15,173 of accrued interest, into 292,138 shares of the
Company's Common Stock. The settlement also included the exchange of High View's
warrants to purchase 400,000 shares of Common Stock, exercisable at $3.125 per
share, issued in connection with the Series D Preferred Stock in exchange for a
warrant to purchase 1,000,000 shares of the Company's Common Stock at an
exercise price of $1.75 per share (the "New Warrants"). The New Warrants are
exercisable in whole or in part effective September 25, 1997 and expire December
13, 2001. The Company is also required to register the shares issued in
connection with the Stock Exchange Agreement (2,000,000); the shares underlying
the New Warrants (1,000,000); the shares issued upon conversion of the $350,000
Loan plus accrued interest (292,138); and the dividend shares issued in
connection with the Series D Preferred Stock (156,564) (collectively, the
"Shares"); such registration statement to become effective on or before March
15, 1998. In the event the registration statement does not become effective by
March 15, 1998, the Company is required to issue 50,000 shares of Common Stock
to High View for each 30 day period after March 15, 1998 (prorated for partial
periods) that such registration is not declared effective. As part of the
settlement, High View is entitled to sell a maximum of 50,000 Shares per month
during the period from December 15, 1997 through March 15, 1998. The settlement
also required the Company to reimburse High View $15,000 for legal expenses
incurred in connection with the settlement.
7. SUBSEQUENT EVENT
On November 6, 1997, the Company executed a letter of intent with Macon
Holdings (S) PTE LTD. ("Macon") for the issuance of 666,666 shares of the
Company's Common Stock ($1,000,000 in the aggregate) to Macon. The letter of
intent provides for the execution of a formal stock subscription agreement
evidencing that the shares being acquired by Macon are for investment purposes
and may not be sold by Macon for a period of one year from date of issuance. In
the event funds are not received by the Company within five days after receipt
of a subscription agreement executed by Macon, the stock purchase offer and
agreements shall terminate on the sixth day. Macon, headquartered in Singapore,
is the Company's master distributor for Southeast Asia.
No assurance can be given that a stock subscription agreement will be
executed by Macon or that the $1,000,000 in funds, or any portion thereof, will
be received by the Company.
Page 8 of 17
<PAGE>
CHATCOM, INC.
8. RELATED PARTY TRANSACTIONS
The Assistant Secretary of the Company is also a shareholder of a law firm
that provides legal consultation to the Company. At September 30, 1997 and
1996, the Company owed this law firm $12,889 and $8,525, respectively. During
the six months ended September 30, 1997 and 1996, fees relating to services
provided by this law firm in the amounts of $23,102 and $30,788, respectively,
were included in general and administrative expenses in the accompanying
statements of operations.
Page 9 of 17
<PAGE>
CHATCOM, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters
discussed in this quarterly report are forward-looking statements, which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's various filings
with the Securities and Exchange Commission, including without limitation the
Company's Form 10-KSB for the fiscal year ended March 31, 1997, as amended.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
The Company continued to invest heavily in product development during the
three months ended September 30, 1997 (the "second quarter of fiscal 1998").
Significant new account penetrations for Rains(TM) (or completely integrated
consolidated server/storage) systems, which have long and large follow on sales
potential, have continued to dominate the Company's activities. However, the
Company is investing ahead of its anticipated future profitability in order to
position itself at the forefront of the market which it competes in.
Sales during the second quarter of fiscal 1998 ($2.4 million) increased
$199,000 or 9% compared to the second quarter of fiscal 1997 primarily as a
result of an increase in international shipments (primarily the Pacific Rim).
The increase in sales is a result of the redirection of the Company's marketing
efforts towards the server consolidation and network emulation markets. The
Company believes that its penetration into these new markets will continue to
positively affect revenue levels during the remainder of the fiscal year ending
March 31, 1998. International customers accounted for 25% of sales during the
second quarter of fiscal 1998 compared to 21% during the second quarter of
fiscal 1997.
The Company believes that sales may fluctuate on a quarterly basis as a
result of a number of factors, including the status of world economic
conditions, fluctuations in foreign currency exchange rates and the timing of
system shipments (the current U.S. list price of the Company's most powerful
system, for example, exceeds $300,000; thus the acceleration or delay of a small
number of shipments from one quarter to the another can significantly affect the
results of operations for the quarters involved).
Cost of goods sold decreased to $1,486,000 or 62% of sales in the second
quarter of fiscal 1998 from $1,519,000 or 69% of sales in the second quarter of
fiscal 1997. The increase in gross margins during the second quarter of fiscal
1998 compared to the second quarter of fiscal 1997 (38% vs. 31%, respectively)
was primarily the result of lower prices of certain components (i.e.
microprocessors and random access memory components); lower manufacturing
overhead (including indirect labor) as a result of a cost reduction program
initiated during the second quarter of fiscal 1998; and increased manufacturing
efficiencies and greater absorption of overhead as a result of increased
production due to greater demand for the Company's products. The gross margins
in the second quarter of fiscal 1997 was adversely affected by increased
inventory reserves ($90,000) which was partially related to product
repositioning. The Company's gross margins are affected by several factors
including, among others, sales mix and distribution channels and, therefore, may
vary in future periods from those experienced during the second quarter of
fiscal 1998.
Selling expenses decreased $12,000 or 2% in the second quarter of fiscal
1998 compared to the second quarter of fiscal 1997, primarily as a result of
decreased advertising expenses ($132,000) and decreased marketing salaries due
to certain cost reductions implemented during the second quarter of fiscal 1998.
The decreases in fiscal 1998 were substantially offset by increased personnel
costs as a result of additional sales personnel; increased commissions due to
the increase in domestic sales; and increased expenses associated with
international sales.
General and administrative expenses during the second quarter of fiscal
1998 increased by $390,000 or 56% compared to the second quarter of fiscal 1997.
The increase was primarily the result of an increase in bad debt expense, as a
result of the establishment of a reserve ($500,000) during the second
Page 10 of 17
<PAGE>
CHATCOM, INC.
quarter of fiscal 1998 related to the delinquency of a significant international
account, as well as increased incentive compensation expense, salary expense and
investor relations expenses during the second quarter of fiscal 1998. These
increases were partially offset by reductions in consulting expenses ($90,000)
during the second quarter of fiscal 1998.
Research and development ("R&D") expenses during the second quarter of
fiscal 1998 increased $312,000 or 12% compared to the second quarter of fiscal
1997. The increase was primarily attributable to increased expenditures for
prototypes and consultants due to the Company's concerted effort to decrease
product development time and increase pre-production product testing.
The operating loss as a percentage of sales for the second quarter of 1998
and 1997 was 65% and 49%, respectively. The decrease in the percentage of
operating loss to total sales during fiscal 1998 was primarily attributable to
the increase in gross margin percentage in 1998 and the decrease in general and
administrative expenses in 1998, as described above.
Interest income decreased to $2,000 during the second quarter of fiscal
1998 from $12,000 during the second quarter of fiscal 1997 as a result of lower
investment balances due primarily to cash used for operating activities during
fiscal 1998.
Interest expense increased to $16,000 during the second quarter of fiscal
1998 from $2,000 in the second quarter of fiscal 1997 primarily as a result of
interest associated with a $350,000 loan received by the Company during May 1997
(see Note 6 of Notes to Financial Statements).
Page 11 of 17
<PAGE>
CHATCOM, INC.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 1996
Sales during the six months ended September 30, 1997 (the "first half of
fiscal 1998") were $6.9 million, an increase of $2.0 million or 40% over the
$4.9 million recorded during the six months ended September 30, 1996 (the "first
half of fiscal 1997). The increase was due primarily to increased international
shipments (primarily the Pacific Rim), the majority of which occurred during the
first quarter of fiscal 1998. International customers accounted for 55% of
sales during the first half of fiscal 1998 compared to 17% during the first half
of fiscal 1997.
Cost of goods sold increased to $4.3 million or 63% of sales in the first
half of fiscal 1998 from $3.3 million or 68% of sales in the first half of
fiscal 1997. The increase in gross margins during the first half of fiscal 1998
compared to the first half of fiscal 1997 (37% vs. 32%, respectively) was
primarily the result of lower prices of certain components (i.e. microprocessors
and random access memory components); lower manufacturing overhead (including
indirect labor) as a result of a cost reduction program initiated during the
second quarter of fiscal 1998; increased manufacturing efficiencies and greater
absorption of overhead as a result of increased production due to greater demand
for the Company's products; and a decrease in inventory obsolescence reserves
($106,000) during the quarter ended June 30, 1997 (due to the sale of certain
inventory previously reserved for) as compared to an increase inventory reserves
($100,000) during the first half of fiscal 1997 which was partially related to
product repositioning.
Selling expenses increased $314,000 or 20% in the first half of fiscal
1998 compared to the first half of fiscal 1997, primarily as a result of
increased personnel costs as a result of additional sales personnel; increased
commissions due to the increase in domestic sales; and increased expenses
associated with international sales. The increases in the first half of fiscal
1998 were partially offset by decreased advertising expenses and decreased
consulting expenses.
General and administrative expenses during the first half of fiscal 1998
increased by $342,000 or 28% compared to the first half of fiscal 1997. The
increase was primarily the result of an increase in bad debt expense, as a
result of the establishment of a reserve ($500,000) during the second quarter of
fiscal 1998 related to the delinquency of a significant international account,
as well as increased salary expense, incentive compensation expense, and
investor relations expenses during the first half of fiscal 1998. These
increases were partially offset by reductions in consulting expense ($99,000)
during the first half of fiscal 1998.
Research and development expenses during the first half of fiscal 1998
increased $715,000 or 158% compared to the first half of fiscal 1997. The
increase was primarily attributable to increased salaries due to additional
personnel and expenditures for prototypes and consultants due to the Company's
concerted effort to decrease product development time and increase pre-
production product testing.
The operating loss as a percentage of sales for the first half of fiscal
1998 and 1997 was 30% and 35%, respectively. The decrease in the percentage of
operating loss to total sales during fiscal 1998 was primarily attributable to
the increase in gross margin percentage in 1998, as described above.
Interest income decreased to $4,000 during the first half of fiscal 1998
from $28,000 during the first half of 1997 as a result of lower investment
balances due primarily to cash used for operating activities during fiscal 1998.
Interest expense increased to $17,000 during the first half of fiscal 1998
from $11,000 in the first half of fiscal 1997 primarily as a result of interest
associated with a $350,000 loan received by the Company during May 1997 (see
Note 6 of Notes to Financial Statements).
Page 12 of 17
<PAGE>
CHATCOM, INC.
LIQUIDITY AND CAPITAL RESOURCES
The Company recorded a net loss of $1,570,000 and $2,094,000 during the
three and six months ended September 30, 1997, respectively. During the six
months ended September 30, 1997, cash decreased $723,000 primarily due to
negative cash flow from operations of $1,824,000. The negative cash flow from
operations during the first half of fiscal 1998 was comprised primarily of the
net loss ($1.9 million) and an increase in accounts receivable ($2.1 million),
primarily as a result of a significant portion of system shipments occurring
later in the second fiscal quarter of 1998 compared to the second fiscal quarter
of 1997. These decreases were partially offset by an increase in accounts
payable ($2.1 million), an increase in bad debt expense, as a result of the
establishment of a reserve ($500,000) during the second quarter of fiscal 1998
related to the delinquency of a significant international account, and by non
cash depreciation and amortization ($179,000).
Net cash used for investing activities during the first half of fiscal 1998
($176,000) was the result of expenditures related to computers and manufacturing
equipment.
Net cash provided by financing activities during the first half of fiscal
1998 ($1.3 million) was primarily the result of the issuance of 1,100 shares of
Series E Preferred Stock ($940,000) and the receipt of $350,000 in connection
with a subordinated debt agreement.
As of September 30, 1997, the Company had working capital of $2.5
million, as compared to working capital of $3.2 million as of March 31, 1997.
Approximately $2.7 million of working capital at September 30, 1997 is provided
by accounts receivable owed to the Company by Macon, of which $2.2 million are
delinquent in payment by more than 90 days for which a reserve for doubtful
accounts of $500,000 has been established. The Company must provide additional
liquidity to support its current level of operations or any significant future
increase in revenues and is actively seeking additional financing to meet its
immediate needs as well as its anticipated requirements for the balance of the
current fiscal year. The purchasers of $1,100,000 of the Series E Preferred
Stock have agreed to purchase an additional $600,000 of such shares but such
purchase is subject to certain conditions which include, among others, a
registration statement covering the resale of the shares issuable upon
conversion of the Series E Preferred Stock and upon the exercise of the Series E
Warrants is declared effective; the market price of the Company's Common Stock
for the ten trading days preceding the additional closing date exceeds $1.00 per
share; and the receipt of at least $1,000,000 from the sale of equity securities
of the Company. Although the Company has also received a letter of agreement
from a supplier for the conversion of approximately $2.0 million in unsecured
debt into $1,250,000 in preferred stock and $750,000 in convertible debt and a
letter of intent from Macon to invest $1.0 million in exchange for 666,666
shares of Common Stock of the Company, no assurances can be given that these
financings will be consummated. Furthermore, there can be no assurance that the
Company will be able to obtain additional commitments for sufficient financing.
The Company has incurred operating losses in each of its last three fiscal
years and has experienced operating losses for four consecutive fiscal quarters.
Even if the Company successfully completes the debt and equity financings it is
currently attempting to consummate, if the Company continues to experience
operating losses in the future that results in a significant utilization of its
liquid resources, the Company's liquidity and its ability over the long-term to
sustain operations at current levels could be materially adversely affected.
The Company may seek additional public or private financing to meet its
longer term capital needs if market conditions are favorable. If additional
funds are raised through the issuance of equity securities, it is likely that
the Company will be required to sell such securities at a substantial discount
to the current market price for the Common Stock, the percentage ownership of
the then current shareholders of the Company will be reduced, and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. No assurance can be given that
additional
Page 13 of 17
<PAGE>
CHATCOM, INC.
financing will be available or that, if available, it will be available on terms
favorable to the Company or its shareholders. Any increase in the outstanding
number of shares of the Common Stock or options and warrants may have an adverse
effect on the market price of the Common Stock and may hinder efforts to arrange
future financing.
The Company has no material commitments for capital expenditures as of
September 30, 1997.
Page 14 of 17
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On September 11, 1997, the Company, together with a majority of its Board
of Directors, were sued by The High View Fund and The High View Fund, L.P.
(collectively, "High View"), holders of 2,498 shares of the Company's Series D
Preferred Stock and lenders of a $350,000 convertible subordinated loan made to
the Company in May 1997 (the "$350,000 Loan"). The lawsuits, filed in U.S.
Federal District Court, Southern District of New York and in the State Court of
New York, sought damages from the defendants for alleged wrongful actions
relating to securities fraud and not informing High View regarding the extent of
the Company's financial problems.
On September 25, 1997, the parties entered into settlement agreements
(comprised principally of a Stock Exchange Agreement, Registration Rights and
Lock-up Agreement and Warrant agreements) related to both cases whereby High
View agreed to exchange their 2,498 shares of Series D Preferred Stock
(representing the entire Series D Preferred Stock issued by the Company) for a
total of 2,000,000 shares of the Company's Common Stock and to convert the
$350,000 Loan, plus $15,173 of accrued interest, into 292,138 shares of the
Company's Common Stock. The settlement also included the exchange of High View's
warrants to purchase 400,000 shares of Common Stock, exercisable at $3.125 per
share, issued in connection with the Series D Preferred Stock in exchange for a
warrant to purchase 1,000,000 shares of the Company's Common Stock at an
exercise price of $1.75 per share (the "New Warrants"). The New Warrants are
exercisable in whole or in part effective September 25, 1997 and expire December
13, 2001. The Company is also required to register the shares issued in
connection with the Stock Exchange Agreement (2,000,000); the shares underlying
the New Warrants (1,000,000); the shares issued upon conversion of the $350,000
Loan plus accrued interest (292,138); and the dividend shares issued in
connection with the Series D Preferred Stock (156,564) (collectively, the
"Shares"); such registration statement to become effective on or before March
15, 1998. In the event the registration statement does not become effective by
March 15, 1998, the Company is required to issue 50,000 shares of Common Stock
to High View for each 30 day period after March 15, 1998 (prorated for partial
periods) that such registration is not declared effective. As part of the
settlement, High View is entitled to sell a maximum of 50,000 Shares per month
during the period from December 15, 1997 through March 15, 1998. The settlement
also required the Company to reimburse High View $15,000 for legal expenses
incurred in connection with the settlement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On September 26, 1997, the Company entered into Stock Purchase Agreements
(the "Agreements") whereby the Company agreed to sell to two accredited
investors up to 1,700 shares of Series E Convertible Redeemable Preferred Stock,
$1,000 stated value per share (the "Series E Preferred Stock") and warrants to
purchase 432,727 shares of Common Stock at a price of $1.25 per share (the
"Series E Warrants"). Pursuant to the Agreement, a total of 1,100 shares of
Series E Preferred Stock and 254,545 of the Series E Warrants were sold by the
Company on September 26, 1997 for gross proceeds of $1,100,000. The sale of the
Series E Preferred Stock and the Series E Warrants were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Regulation D promulgated thereunder. The Company received various
representations and warranties from the investors including a representation
that the investors are "accredited investors" within the meaning of Regulation
D. Offering costs of $160,000, consisting primarily of cash finders' fees and
legal fees, were incurred by the Company. The sale of the additional 600 shares
of Series E Preferred Stock and 178,182 Series E Warrants ($600,000 of gross
offering proceeds) is scheduled to occur within five days following the
Company's satisfaction of certain conditions which include, among others, a
registration statement covering the resale of the shares issuable upon
conversion of the Series E Preferred Stock and upon the exercise of the Series E
Warrants is declared
Page 15 of 17
<PAGE>
CHATCOM, INC.
effective; the market price of the Company's Common Stock for the ten trading
days preceding the additional closing date exceeds $1.00 per share; and the
funding from a strategic investor of at least $1,000,000 from the sale of equity
securities of the Company. One-half of the Series E Preferred Stock is
convertible at the election of the holder into shares of the Company's Common
Stock commencing on the 51st day after the closing date and all of the Series E
Preferred Stock is convertible commencing on the 91st day after such closing
date. The conversion value to determine the number of shares of Common Stock
into which the Series E Preferred Stock is convertible is the lesser of $1.375
or 75% of the average of the closing bid prices of the Common Stock during the
five trading days immediately preceding the conversion date. The Series E
Warrants are exercisable for five years commencing January 1, 1998. The Company
has agreed to register the shares issuable upon the conversion of the Series E
Preferred Stock and upon the exercise of the Series E Warrants.
No assurance can be given that the Company will be able to satisfactorily
meet the conditions required for the sale of the additional 600 shares of Series
E Preferred Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
The following exhibits are filed with this Form 10-QSB:
3.1 Certification of Determination of Series E Convertible Redeemable
Preferred Stock
10.1 Letter of Agreement between the Company and Vermont Research
Products, Inc. dated September 30, 1997
10.2 Stock Exchange and Settlement Agreement between the Company and
The High View Fund and The High View Fund, L.P. dated September
25, 1997
10.3 Form of Warrant to purchase Common Stock issued to The High View
Fund and The High View Fund, L.P.
10.4 Form of Stock Purchase Agreement between the Company and the
purchaser of the Series E Preferred Stock dated September 26,
1997
10.5 Letter of Intent between the Company and Macon Holdings (S) PTE
LTD. dated November 6, 1997
27 Financial Data Schedule
b. Reports on Form 8-K.
None.
No other information is required to be filed under Part II of this Form 10-QSB.
Page 16 of 17
<PAGE>
CHATCOM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHATCOM, INC.,
a California corporation
Date: November 18, 1997 By: /s/ James B. Mariner
------------------------------------
James B. Mariner, President and
Chief Executive Officer
By: /s/ Gordon L. Almquist
------------------------------------
Gordon L. Almquist, Vice President,
Finance and Chief Financial Officer
Page 17 of 17
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF DETERMINATION
OF
CHATCOM, INC.
A CALIFORNIA CORPORATION
The undersigned, James B. Mariner and James R. Spievak, hereby certify
that:
a. They are the duly elected and acting President and Assistant
Secretary, respectively, of ChatCom, Inc., a California corporation (the
"Company").
b. All shares of Series B Preferred Stock that had been outstanding
previously have been converted into shares of the Company's Common Stock (the
"Common Stock"), there currently are no shares of Series B Preferred Stock
outstanding, and the decrease in the number of shares constituting that Series
is 1,000, which was the entire number of authorized shares of that Series. The
Company's board of directors adopted the following resolution for this purpose:
RESOLVED FURTHER, that the number of authorized shares of the
Company's Series B Preferred Stock is hereby reduced from 1,000 to 0, the
certificate of determination whereby the Series B Preferred Stock was
established is no longer in force and the Series B Preferred Stock is no
longer authorized as a series of the Company's preferred stock;
c. All shares of Series C Preferred Stock that had been outstanding
previously have been converted into shares of the Company's Common Stock, there
currently are no shares of Series C Preferred Stock outstanding, and the
decrease in the number of shares constituting that Series is 1,000, which was
the entire number of authorized shares of that Series. The Company's board of
directors adopted the following resolution for this purpose:
RESOLVED FURTHER, that the number of authorized shares of the
Company's Series C Preferred Stock is hereby reduced from 1,000 to 0, the
certificate of determination whereby the Series C Preferred Stock was
established is no longer in force and the Series C Preferred Stock is no
longer
<PAGE>
authorized as a series of the Company's preferred stock;
d. The number of shares of Series D Convertible Preferred Stock is 5,000,
of which 2,496 shares are issued and outstanding.
e. The number of shares of Series E Convertible Redeemable Preferred
Stock of the Company is 2,000, none of which have been issued.
f. Pursuant to authority given by the Company's Articles of
Incorporation, as amended, the Board of Directors of the Company has duly
adopted the following recitals and resolutions:
WHEREAS, the Articles of Incorporation, as amended, of the Company provide
for a class of shares known as Preferred Stock, issuable from time to time in
one or more series; and
WHEREAS, the Board of Directors of the Company is authorized to determine
or alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock, to fix the number
of shares constituting any such series and to determine the designation thereof,
or any of them; and
WHEREAS, the Company has 5,000 authorized shares of Series D Preferred
Stock, of which 2,496 shares are outstanding and, except for shares of Series E
Preferred Stock, no other shares of any series of Preferred Stock authorized or
outstanding; and
WHEREAS, the Company has 2,000 authorized shares of Series E Convertible
Redeemable Preferred Stock, of which none are outstanding and, except for shares
of Series D Preferred Stock, no other shares of any series of Preferred Stock
are authorized or outstanding;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes
and determines the designation of, the number of shares constituting, and the
rights, preferences, privileges and restrictions relating to, a series of
Preferred Stock as follows:
1. Designation of Series; Rank of Series. The designation of such
-------------------------------------
series of Preferred Stock is Series E Convertible Redeemable Preferred Stock
("Series E Preferred Stock"). The number of shares constituting such series is
2,000, with a stated value of $1,000 per share. Shares of Series E Preferred
Stock converted, redeemed or purchased by the Company shall be canceled and
shall revert to authorized but unissued shares of Preferred Stock undesignated
as to series. Shares of the Series E Preferred Stock shall rank pari passu
2.
<PAGE>
and share in dividends and other distributions on a pro rata basis with the
Series D Preferred Stock and with shares of any other series of preferred stock
hereafter issued by the Company with substantially equivalent rights,
preferences, privileges and limitations as those of this Series.
2. Dividends. Each holder of the outstanding Series E Preferred Stock
---------
shall be entitled to receive, in cash or shares of the Common Stock, at the
Company's option, cumulative dividends at the annual rate of 8.0% of the stated
value of the Series E Preferred Stock per share of Series E Preferred Stock,
payable semiannually on September 30 and March 31 of each year after the Closing
Date (as defined below) on which such shares were issued, without any further
action or declaration by the Company's Board of Directors or shareholders of the
Company, out of funds legally available therefor. Such dividends shall be
cumulative so that if such dividends shall not have been declared and paid for
all shares of Series E Preferred Stock at the time outstanding, the deficiency
shall be declared and paid for such shares before the Company makes any
Distribution (as hereinafter defined) to the holders of Common Stock or
Preferred Stock of any other series junior to the Series E Preferred Stock.
Accrued but unpaid dividends shall not bear interest. "Distribution" in this
paragraph 2 means the transfer of cash or property without consideration,
whether by way of dividend or otherwise (except a dividend in shares of the
Company) or the purchase or redemption of shares of the Company for cash or
property (except for an exchange of shares of the Company or shares acquired by
the Company from employees pursuant to the terms of any employee incentive plan,
agreement or arrangement) including any such transfer, purchase or redemption by
a subsidiary of the Company. The time of any distribution by way of dividend
shall be the date of declaration thereof and the time of any distribution by
purchase or redemption of shares shall be the day cash or property is
transferred by the Company, whether or not pursuant to a contract of an earlier
date; provided that where a negotiable debt security is issued in exchange for
shares the time of the distribution is the date when the Company acquires the
shares in such exchange. The Board of Directors may fix a record date for the
determination of holders of Series E Preferred Stock entitled to receive
payment of a dividend declared thereon, which record date shall be no more than
sixty (60) days prior to the date fixed for the payment thereof. Upon notice of
conversion or redemption, if not previously declared, the Board of Directors
shall declare, out of funds legally available therefor, dividends on the Series
E Preferred Stock in shares of Common Stock, or at the Company's option if
permitted by law, in cash, at the annual rate of 8.0% of the stated value of the
Series E Preferred Stock from the date of issuance to the date of conversion or
redemption of such shares of Series E Preferred Stock. If upon redemption or
conversion of shares of Series E Preferred Stock the Company elects to pay
accrued
3.
<PAGE>
dividends on such shares in shares of Common Stock, the number of shares of
Common Stock shall be determined by dividing the amount of such accrued
dividends as of the redemption date or the Conversion Date (as defined below) by
the Conversion Price (as defined below) on the applicable redemption date or
Conversion Date.
3. Voting Rights. The holders of Series E Preferred Stock shall not be
-------------
entitled to vote upon any matters presented to the stockholders, except as
provided by law and except that without the approval of holders of a majority of
the outstanding shares of Series E Preferred Stock, the Company shall not (a)
authorize, create or issue any shares of any class or series ranking senior to
the Series E Preferred Stock as to liquidation rights, (b) amend, alter or
repeal, by any means, the Articles of Incorporation if the powers, preferences,
or special rights of the Series E Preferred Stock would be adversely affected,
or (c) become subject to any restriction on the Series E Preferred Stock, other
than restrictions arising under the General Corporation Law of the State of
California or existing under the Articles of Incorporation as in effect on
September 10, 1997; provided, however, that the creation of additional series of
Preferred Stock with substantially equivalent rights, preferences, privileges
and limitations as those of this Series E Preferred Stock shall not be a
violation of this Section 3.
4. Liquidation, Dissolution or Winding Up. In the event of a voluntary
--------------------------------------
or involuntary liquidation, dissolution or winding up of the Company, the
holders of Series E Preferred Stock shall be entitled to receive out of the
assets of the Company, whether such assets are capital or surplus of any nature,
an amount per share of Series E Preferred Stock equal to the stated value of
such share of Series E Preferred Stock and a further amount equal to any
dividends accrued and unpaid thereon, as provided in paragraph 2 hereof, to the
date that payment is made available to the holders of Series E Preferred Stock,
whether earned or declared or not, and no more, before any payment shall be made
or any assets distributed to the holders of shares of stock of the Company
junior in rank to the Series E Preferred Stock.
If upon such liquidation, dissolution or winding up, the assets thus
distributed among the holders of the Series E Preferred Stock and other series
of preferred stock that upon liquidation, dissolution or winding up share pari
passu with the Series E Preferred Stock shall be insufficient to permit the
payment to all such holders of the full preferential amounts aforesaid, then the
entire assets of the Company to be distributed shall be distributed ratably
among the holders of Series E Preferred Stock and such other series of Preferred
Stock.
4.
<PAGE>
A consolidation or merger of the Company with or into any other corporation
or corporations, or a sale of all or substantially all of the assets of the
Company, shall not be deemed to be a liquidation, dissolution or winding up
within the meaning of this paragraph 4.
5. Conversion Rights. (a) Each holder of Series E Preferred Stock
-----------------
shall have the right, exercisable at the option of such holder at any time after
the dates set forth below, to convert, subject to the terms and provisions set
forth herein, the shares of Series E Preferred Stock into duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock at the
Conversion Price (as defined below) on the applicable Conversion Date (as
defined below). The shares of Series E Preferred Stock may be issued at one or
more dates (each a "Closing Date") to one or more holders. No shares of Series
E Preferred Stock may be converted during the first 50 days after the Closing
Date on which such shares were issued. Commencing on the 51st day after a
Closing Date and continuing until the close of business on the 90th day after a
Closing Date, an aggregate cumulative total of one-half of all shares issued to
all holders of the Series E Preferred Stock on the applicable Closing Date may
be converted into shares of Common Stock. Commencing on the 91st day after the
Closing Date for any shares of Series E Preferred Stock, all shares of Series E
Preferred Stock issued on the Closing Date shall thereafter be convertible into
Common Stock.
(b) The Company shall have the right to redeem the Series E Preferred
Stock, in whole or in part, as provided in paragraph 13.
6. Conversion Price. Each share of Series E Preferred Stock shall be
----------------
converted into a number of shares of Common Stock determined by dividing $1,000
and accrued dividends by an amount equal to the lesser of (a) $1-3/8 (the "First
Market Price"), or (b) 75% of the Market Price on the Conversion Date (the
"Variable Price"). The lesser of the First Market Price and the Variable Price
is herein referred to as the "Conversion Price." For purposes of determining
the Variable Price, the "Market Price" shall be (i) if the Common Stock is
listed or admitted to trade on a national securities exchange, on the Nasdaq
National Market ("NNM"), or on the Nasdaq SmallCap Market ("SmallCap"), the
average of the last closing bid prices of the Common Stock for the five (5)
trading days immediately preceding the Conversion Date (in the case of the
Variable Price), on the composite tape of the principal national securities
exchange on which the Common Stock is so listed or admitted to trade or on the
NNM or SmallCap markets, as the case may be; or (ii) if the Common Stock is not
listed or admitted to trade on an exchange or a system that publishes daily
closing prices, the average closing bid prices as reported by such other inter-
dealer quotation system as may list the Common Stock. The First Market Price
shall be subject to further adjustment as set forth in paragraph 8.
5.
<PAGE>
7. Conversion Procedure. The holder of any shares of the Series E
--------------------
Preferred Stock may exercise its rights to convert such shares into shares of
Common Stock by surrendering the share certificates for the Series E Preferred
Stock to be converted to the Company, at its principal office or at such other
office or agency maintained by the Company for that purpose, with the conversion
certificate (provided by the Company to the holder of such shares) executed by
the holder thereof, or a specified portion of such shares (as provided in the
conversion certificate, but for not less than $50,000 aggregate stated value of
Series E Preferred Stock), and accompanied, if required by the Company, by
proper assignment in blank. The date of execution of such certificate and
delivery by facsimile to the Company at (818) 822-1424 (or such other facsimile
number as shall be given to the holder by the Company) shall be defined as the
"Conversion Date," provided share certificates are delivered within three (3)
business days to the Company or its transfer agent.
If the holder of such certificate wishes the certificate or certificates
for the shares of Common Stock to be issued in another name, the holder shall
specify the name or names in which such shares of Common Stock are to be issued.
In case such Conversion Certificate shall specify a name or names other than
that of such holder, such notice shall be accompanied by payment of all transfer
taxes payable upon the issuance of shares of Common Stock in such name or names.
As promptly as practicable, and in any event within five business day after the
surrender of such certificates and the receipt of such notice relating thereto
and, if applicable, payment of all transfer taxes, the Company shall deliver or
cause to be delivered (i) certificates representing the number of validly
issued, fully paid and nonassessable shares of Common Stock to which the holder
of the Series E Preferred Stock so converted shall be entitled and (ii) if less
than the full number of shares of the Series E Preferred Stock evidenced by the
surrendered certificate or certificates are being converted, a new certificate
or certificates, of like tenor, for the number of shares evidenced by such
surrendered certificate or certificates less the number of shares converted.
Such conversions shall be deemed to have been made at the close of business on
the date of giving of such notice and of such surrender of the certificate or
certificates representing the shares of the Series E Preferred Stock to be
converted so that the rights of the holder thereof shall cease except for the
right to receive Common Stock in accordance herewith, and the converting holder
shall be treated for all purposes as having become the record holder of such
Common Stock at such time.
Shares of the Series E Preferred Stock may be converted at any time up to
but not after the close of business on the fifth business day of the ten day
redemption notice period for such shares pursuant to paragraph 13.
6.
<PAGE>
8. First Market Price Adjustments. The First Market Price shall be
------------------------------
subject to adjustment from time to time upon the occurrence of certain events as
follows:
(a) Reclassifications or Combinations. If the Company shall combine
---------------------------------
or reclassify the outstanding Common Stock into a smaller number of shares, the
First Market Price in effect at the time of the record date of such combination
or reclassification shall be proportionately adjusted by multiplying such price
by a fraction, the numerator of which is the number of shares being surrendered
to the Company and the denominator of which is the number of shares being issued
by the Company in such combination or reclassification (i.e. in the case of a 2-
for-5 reverse stock split the First Market Price would be multiplied by five and
divided by two). If such combination or reclassification shall occur during the
five-trading-day period used to calculate the Variable Price, a similar
adjustment shall be made to the closing prices for the trading days during such
period prior to such combination or reclassification.
(b) Rounding of Calculations; Minimum Adjustment. All calculations
--------------------------------------------
under this paragraph 8 shall be made to the nearest cent. No adjustment in the
First Market Price shall be made if the amount of such adjustment would be less
than $0.01, but any such amount shall be carried forward and an adjustment with
respect thereto shall be made at the time of and together with any subsequent
adjustment which, together with such amount and any other amount or amounts so
carried forward, shall aggregate $0.01 or more.
(c) Adjustments for Consolidation, Merger, etc. 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 Series E Preferred Stock shall thereafter be entitled to receive,
upon the conversion of the shares of Series E Preferred Stock, the securities or
property to which a holder of the number of shares of Common Stock then
deliverable upon the conversion thereof would have been entitled upon such
consolidation or merger had such holder converted immediately prior to such
consolidation or merger (subject to subsequent adjustments under paragraph 8
hereof), and the Company shall take such steps in connection with such
consolidation or merger as may be reasonably necessary to assure such holder
that the provisions of this Certificate of Determination, shall thereafter be
applicable in relation to any securities or property thereafter deliverable upon
the conversion of the Series E Preferred Stock, 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 of the assets of the Company shall be deemed a
consolidation or merger for the foregoing purposes.
7.
<PAGE>
9. Voluntary Adjustment. The Company may make, but shall not be
--------------------
obligated to make, such decreases in the First Market Price and the Variable
Price so as to increase the number of shares of Common Stock into which the
Series E Preferred Stock may be converted, in addition to those required by
paragraph 8, as it considers to be advisable in order to avoid federal income
tax treatment as a dividend of stock or stock rights.
10. Reservation of Shares of Common Stock for Conversion. The Company
----------------------------------------------------
shall at all times reserve and keep available out of its authorized and unissued
shares of Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all shares of Series E
Preferred Stock that are then outstanding. The Company shall use its reasonable
best efforts to take the action necessary to increase the number of reserved
shares from time to time if needed, and to increase the number of authorized
shares of Common Stock if such an increase should become necessary to effect
conversion of all shares of Series E Preferred Stock that are then outstanding.
11. Notice of Adjustment of First Market Price. Whenever the First Market
------------------------------------------
Price is adjusted as herein provided, the Company shall forthwith file with any
transfer agent or agents, if any, for the Series E Preferred Stock, and at the
principal office of the Company, a statement signed by the President or a Vice-
President and by the Chief Financial Officer or the Secretary or the Assistant
Secretary of the Company setting forth the adjusted First Market Price. The
statement so filed shall be open to inspection by any holder of record of shares
of Series E Preferred Stock. The Company shall also, at the time of filing any
such statement, mail notice to the same effect to the holders of shares of
Series E Preferred Stock at their addresses appearing on the books of the
Company or supplied by such holder to the Company for the purpose of notice.
12. Fractional Shares in Conversion. The Company shall not be required to
-------------------------------
issue fractions of shares of Common Stock on the conversion of Series E
Preferred Stock. If any fraction of a share of Common Stock would be issuable
upon the conversion of a share, except for the provisions hereof, the Company
shall purchase such fraction for an amount in cash equal to the Market Price at
the Conversion Date multiplied by such fraction. If more than one certificate
for shares of Series E Preferred Stock shall be presented for conversion at any
one time by the same registered holder, the number of shares of Common Stock
that shall be issuable upon conversion thereof shall be computed on the basis of
the aggregate number of shares of Common Stock issuable upon conversion of the
shares so presented. All calculations under this paragraph 12 shall be made to
the nearest one-hundredth of a share.
8.
<PAGE>
13. Redemption.
----------
(a) Mandatory Redemption. If on September 1, 1998 the resale of all
--------------------
of the shares of Common Stock issuable upon conversion of the then outstanding
shares of Series E Preferred Stock is not at that time duly registered with the
Securities and Exchange Commission on Form S-3, or on another appropriate form
for such registration (the "Registration Statement"), the Company, at the demand
of any holder, and subject to applicable California law, shall thereafter during
any period when a Registration Statement is not effective redeem such holder's
shares of Series E Preferred Stock for a total amount equal to the Market Price
times the number of shares of Common Stock into which such shares of Series E
Preferred Stock are convertible on the date of such demand, and shall also pay
to such holder accrued dividends on such shares of Series E Preferred Stock,
whether or not declared, to the redemption date.
(b) Voluntary Redemption. Shares of the Series E Preferred Stock may
--------------------
be redeemed, at the option of the Company by resolution of its Board of
Directors, in whole or in part, upon fifteen days written notice, at any time
after the later of January 31, 1998 or 50 days after the effective date of a
Registration Statement for a total amount equal to 133% of the stated value of
Series E Preferred stock, and shall also pay to such holder accrued dividends on
such shares of Series E Preferred Stock, whether or not declared, to the
redemption date. In case of the redemption of a part only of the outstanding
shares of Series E Preferred Stock, the shares to be redeemed shall be selected
pro rata from each record holder of such shares. During the first ten business
days of such fifteen-day period, each holder of shares of the Series E Preferred
Stock shall have the right to convert such shares as provided above.
At least fifteen days' previous notice by mail, postage prepaid, shall be
given to the holders of record of the shares of Series E Preferred Stock to be
redeemed, such notice to be addressed to each such stockholder at the address of
such holder appearing on the books of the Company or given by such holder to the
Company for the purpose of notice, or if no such address appears or is so given,
at the place where the principal office of the Company is located. Such notice
shall state the date fixed for redemption and the redemption price and shall
call upon such holder to surrender to the Company on said date at the place
designated in the notice such holder's certificate or certificates representing
the shares to be redeemed. On or after the date fixed for redemption and stated
in such notice, each holder of shares of Series E Preferred Stock called for
redemption shall surrender the certificate evidencing such shares to the Company
at the place designated in such notice and shall thereupon be entitled to
receive payment of the redemption price, together with accrued dividends to the
date fixed for redemption. If less than all the shares represented by any such
surrendered certificate are
9.
<PAGE>
redeemed, a new certificate shall be issued representing the unredeemed shares.
If such notice of redemption shall have been duly given, and if on the date
fixed for redemption funds necessary for the redemption shall be available
therefor, then, notwithstanding that the certificate evidencing any shares of
Series E Preferred Stock so called for redemption shall not have been
surrendered, the dividends with respect to the shares so called for redemption
shall forthwith after such date cease to accrue and all other rights pertaining
to such shares shall terminate, except only the right of the holders to receive
the redemption price, together with accrued and unpaid dividends to the date
fixed for redemption, without interest, upon surrender of their certificates
therefor. If such notice of redemption shall have been given, and if on the
date fixed for such redemption the Company shall fail for any reason (other than
force majeure) to redeem the shares of Series E Preferred Stock for which it
gave such notice, the Company shall no longer be entitled to redeem such shares.
RESOLVED FURTHER, that the President and Assistant Secretary of the Company
be, and hereby are, authorized and directed to prepare, execute, verify, and
file in the Office of the California Secretary of State, a Certificate of
Determination in accordance with this resolution and as required by law.
10.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: September 10, 1997 /s/ James B. Mariner
-------------------------------
James B. Mariner, President
11.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: September 10, 1997 /s/ James R. Spievak
-------------------------------
James R. Spievak,
Assistant Secretary
12.
<PAGE>
Exhibit 10.1
AGREEMENT TERMS
This agreement term sheet, between Vermont Research Products Inc., "Vermont" and
CharCom, Inc., "Char", is intended to outline the terms and conditions of
converting approximately $1,995,774 from a trade payable plus $54,226 interest
all owed and acknowledged by Char to Vermont to a combination of $1,300,000
preferred stock and $750,000 convertible debenture.
Preferred Stock
- ---------------
. Preferred stock cumulative 6% dividend in preferred stock with pro ration
for partial quarters.
. Stock to be registered on or before March 15, 1998.
. Conversion Price - $1,375 (Stated Price).
. Liquidation value is defined as stated price plus accrued dividends.
. Anti Dilution - If the price per share of common stock at the time of
conversion is less than $1,375, the company will adjust the amount of
shares by that difference. In no event will the price be adjusted below
$1.15 Holder will give five days notice of intent to convert.
. After 18 months or unless mutually agreed to an earlier date, buy back
option by issuer upon 15 days notice of intent to redeem in cash. Buy back
option terminates upon holder's conversion to common stock. Buy back is
calculated at 105% of the stated price. If called for buy back, holder has
right of immediate conversion to common stock in lieu of tendering for
redemption.
Other Features
Except as to Series E as to it's conversion to common stock and stated
accrued dividends, as long as Series F preferred stock (to be issued
to Vermont) is outstanding, company will not pay cash dividends,
redeem stock either common or preferred or make any other cash
disbursements related to stock.
Liquidation Rights
Preference stock would be entitled to, after trade creditors and
debenture holder, Vermont of equal preference with Series E preferred
stockholders over common stock shareholders in the event of
reorganization whether voluntary or involuntary. Should the company
issue additional series of Preferred Stock, Vermont has preference
pertaining only to liquidation.
<PAGE>
Debenture
- ---------
Convertible Debenture coupon prime rate, variable. The conversion to common
stock shall be calculated based upon $1,375 with the same dilution protection as
Series F Preferred. Debenture shall be secured by all foreign accounts
receivable except those specifically designated as North American. Payments on
the basis of 40% to Vermont and 60% to Chat from all receivables except those of
North American origin, until the total amount of debenture is satisfied. Upon
partial or full redemption, a proportional amount of the per share conversion
features will also terminate by that amount of dollar reduction divided by the
$1,375 conversion price. Example: $150,000 payment divided by $1,375 = 109,091
shares, conversion feature retired.
Debenture is to be further reduced by collections from Canadian Account
receivables by payment to for actual product shipment amounts made by Vermont to
ChatCom.
Merge or Sale of Company (Organic Change)
- ------------------------
Vermont has right of conversion to common stock or redemption at the stated
price plus accrued dividends of Preferred Stock by the company or its successor.
Additional Debts or Equity Offerings
- ------------------------------------
Prior to conversion of Preferred Stock, the holder shall have the right of
approval, not unreasonably withheld, of any debt offering, except commercial
------
bank line of credit or asset lending against North American accounts receivable
and furnished or assembled goods inventory or any Preferred Stock offering that
would have liquidation preference before Vermont.
Final documentation to be completed prior to November 19, 1997.
Agreed by: /s/ A.C. Lubash Date: September 30, 1997
---------------------- -----------------------
A.C. Lubash, Director
ChatCom, Inc.
Agreed by: /s/ Date: September 30, 1997
----------------------- -----------------------
Vermont Research Products, Inc.
<PAGE>
EXHIBIT 10.2
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT, dated as of September 25, 1997 (the
"Agreement"), is entered into by and among ChatCom Inc., a California
corporation (the "Company"), The High View Fund and The High View Fund, L.P.
(individually, a "Shareholder" and collectively, the "Shareholders").
RECITALS
--------
WHEREAS, each of the Shareholders owns 1,248 shares of the Company's Series
D Convertible Preferred Stock (the "Preferred Shares"); and
WHEREAS, the Shareholders desire to (i) exchange their Preferred Shares
for a total of 2,000,000 shares (the "Company Shares") of common stock, no par
value per share, of the Company (the "Common Stock"), and (ii) convert certain
advances previously made to the Company into a total of 292,138 shares of Common
Stock.
ARTICLE 1
EXCHANGE OF STOCK
-----------------
1.1 Exchange of Preferred Shares for the Company Shares. Upon the terms
---------------------------------------------------
and subject to the conditions contained herein, each Shareholder will
contribute, convey, transfer, assign and deliver to the Company at the Closing
(as defined), and the Company will accept from each Shareholder all of the
Preferred Shares owned by such Shareholder, and in exchange therefor (the
"Exchange"), the Company shall issue and deliver to each Shareholder 1,000,000
shares of duly authorized, validly issued, fully paid and nonassessable shares
of the Company Shares, which shares shall be free of preemptive rights.
1.2 Conversion of Advances. Upon the terms and subject to the conditions
----------------------
contained herein, at the Closing, the Shareholders shall convert (the
"Conversion") the advances, in the aggregate amount of $350,000, made by them in
May 1997 to the Company, together with $15,172.60 of accrued and unpaid interest
(the "Advances") into 292,138 shares of Common Stock. The issuance of the
292,138 shares of Common Stock shall constitute payment in full for the
Advances, and the Shareholders hereby agree that, upon the issuance of such
shares, all of the Company's further obligations under the Advances shall be
cancelled. The parties hereto acknowledge that the Advances are not evidenced
by any written instrument. However, the parties hereto further agree that, if
any written instrument evidencing the Advances does exist or is hereafter
1.
<PAGE>
created, they shall take any and all action necessary and proper at or after the
Closing to cancel such instrument.
ARTICLE 2
CLOSING
-------
2.1 Closing. The closing of the Exchange and the Conversion shall take
-------
place on the first business day following the date on which all of the
conditions set forth in Article 5 have been satisfied or waived, or at such
other time as the parties mutually agree. The date on which the Exchange is
effected is hereinafter referred to as the "Closing Date." At the closing, (i)
the Company will execute and deliver to each Shareholder or its representative,
a stock certificate dated as of the Closing Date, registered in the name of such
Shareholder, representing the 1,000,000 Company Shares being issued to such
Shareholder pursuant to the Exchange, and (ii) each Shareholder shall deliver to
the Company a stock certificate or certificates registered in the name of such
Shareholder, representing the 1,248 shares of Preferred Shares owned by such
Shareholder (which certificates shall be duly endorsed for transfer).
ARTICLE 3
REPRESENTATIONS AND WARRANTIES BY THE COMPANY
---------------------------------------------
The Company represents and warrants to each Shareholder that as of the date
hereof and again as of the Closing Date:
3.1 Organization, Good Standing. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
California, 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. No
proceeding has been commenced looking toward the dissolution of the Company or
the amendment of the Articles of Incorporation, as amended, in any regard, other
than the filing of the Certificate of Determination with respect to the new
Series E Convertible Redeemable Preferred Stock. The Company is not in
violation in any respect of the Articles of Incorporation, as amended (or
comparable document), or By-Laws. The Company has all requisite power,
authority and legal right to conduct its business as now being conducted.
3.2 Capital Stock. The authorized capital stock of the Company consists
-------------
of 25,000,000 shares of Common Stock, approximately 9,900,000 of which shares
are outstanding, and 1,000,000 shares of preferred stock. Of the authorized
shares
2.
<PAGE>
of preferred stock, 5,000 have been designated as Series D Convertible Preferred
Stock and 2,000 have been designated as Series E Convertible Redeemable
Preferred Stock. As of the date hereof, 2,496 shares of the Series D
Convertible Preferred Stock have been issued and are outstanding, and no shares
of the Series E Convertible Redeemable Preferred Stock have been issued or are
outstanding. Upon issuance and delivery in the manner herein described, the
Company Shares will be duly authorized and validly issued, fully paid and
nonassessable and free of preemptive rights.
3.3 Authority Relative to this Agreement. The execution, delivery and
------------------------------------
performance of, and compliance with, this Agreement and the issuance of the
Company Shares in exchange for the Preferred Shares have been duly authorized by
all necessary corporate action on the part of the Company, and this Agreement is
a valid and binding agreement of the Company enforceable in accordance with its
terms, except as such enforcement is subject to any applicable bankruptcy,
insolvency, reorganization or other law relating to or affecting creditors'
rights generally and general principles of equity.
3.4 Subsidiaries. The Company has no subsidiaries.
------------
3.5 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.
3.6 No Conflicts or Defaults.
------------------------
(a) The Company is not in violation or default in any material
respect (or in default in any respect regarding any material indebtedness) under
any material indenture, agreement or instrument to which it is a party or by
which it or its properties may be bound.
(b) None of the execution, delivery or performance by the Company of
this Agreement, the Warrant to purchase 1,000,000 shares of Common Stock that is
being issued to the Shareholder concurrently with the closing of the transaction
contemplated by this Agreement (the "Warrant"), the Registration Rights and
Lock-Up Agreement, dated as of the date hereof (including, without limitation,
the issuance of the Company Shares, as contemplated herein and in the Warrant)
(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 material 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
3.
<PAGE>
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, 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 the Agreement or the
transactions contemplated hereby.
3.7 Financial Statements; Other Information.
---------------------------------------
(a) The Company has furnished to each Shareholder financial
statements of the Company consisting of (i) the Company's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1997 and all amendments thereto filed
through the date hereof, (ii) the Company's Quarterly Report on form 10-QSB for
the quarterly period ended June 30, 1997, and (iii) the Form 8-K filed on June
30, 1997. 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 June 30, 1997.
(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 3.7(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 Shareholder 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.
3.8 Litigation. Other than the lawsuits initiated by the Shareholders
----------
against the Company, 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 this Agreement or any
action taken or to be taken pursuant thereto, or (ii) might adversely affect the
right, title or interest of the
4.
<PAGE>
Shareholders to the Company Shares or the Warrants 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.
3.9 Taxes. The Company has filed, or received extensions to file, 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.
3.10 ERISA.
-----
(a) Each multiemployer or single employer plan maintained by the
Company under ERISA (a "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 Internal Revenue 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 this Agreement and the
consummation of the transactions contemplat ed hereby (including without
limitation, the offer, issue and sale by the Company, and the purchase by the
Shareholders, of the Company Shares and the Warrants) 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.
3.11 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).
5.
<PAGE>
(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.
3.12 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.
3.13 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.
3.14 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 thereof 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 Shareholder or any "affiliated
person" of any Shareholder.
3.15 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.
3.16 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.
6.
<PAGE>
3.17 No Margin Violation. No portion of the proceeds from the exercise of
-------------------
the 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.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES BY THE SHAREHOLDERS
--------------------------------------------------
Each Shareholder hereby represents and warrants to the Company that as of
the date hereof and again as of the Closing Date:
4.1 Authority Relative to this Agreement. The execution, delivery and
------------------------------------
performance of, and compliance with, this Agreement and the terms of the
Exchange have been duly authorized by all necessary action on the part of such
Shareholder, and each of this Agreement and the Registration Rights and Lock-Up
Agreement is a valid and binding agreement of such Shareholder enforceable in
accordance with its terms, except as such enforcement is subject to any
applicable bankruptcy, insolvency, reorganization or other law relating to or
affecting creditors' rights generally and general principles of equity.
4.2 Investment Intent. The Company Shares being acquired by such
-----------------
Shareholder hereunder are being acquired for such Shareholder's own account and
not with the view to, or for resale in connection with, any distribution other
than resales made in compliance with the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended (the "Act"), or the rules
promulgated thereunder. Such Shareholder understands that the Company Shares
have not been registered under the Act by reason of available exemptions from
the registration and prospectus delivery requirements of the Act, that as such
the Company Shares must be held indefinitely unless such the Company Shares are
registered under the Act or unless any transfer is exempt from registration,
and that the reliance of the Company upon these exemptions is predicated in
part upon these representations and warranties by such Shareholder.
7.
<PAGE>
4.3 Qualification as an Investor.
----------------------------
(a) Such Shareholder has reviewed the Company's publicly disclosed
reports and filings and has made such investigation of the Company as it deems
necessary for the purpose of its evaluation of its investment in the Company.
Furthermore, such Shareholder has had a full opportunity to discuss with the
Company all material aspects of an investment in the Company Shares, including
the opportunity to ask, and to receive answers to his full satisfaction,
regarding such questions as it has deemed necessary to evaluate this opportunity
to invest.
(b) Such Shareholder has had full opportunity to seek the advice of
independent counsel respecting this investment and the tax risks and
implications thereof.
4.4 Legend. Such Shareholder acknowledges and agrees that the
------
certificates representing the Company Shares shall bear the following (or
substantially equivalent) legend on the face or reverse side thereof:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER SAID ACT OR UNLESS, IN THE OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATIS FACTORY TO THE ISSUER OF
THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION PROVISIONS OF SAID
ACT.
Any stock certificate issued at any time in exchange or substitution for any
certificate bearing such legend shall also bear such (or substantially
equivalent) legend unless, in the opinion of counsel for the Company, the
securities represented thereby need no longer be subject to restrictions
pursuant to the Act or applicable state securities laws. The Company shall not
be required to transfer on its books any certificate for securities in violation
of the provisions of such legend.
4.5 Title to the Preferred Shares. Such Shareholder owns of record and
-----------------------------
beneficially all of the 1,248 shares of Preferred Shares, free and clear of all
pledges, security interests, liens, charges, encumbrances, equities, claims and
options of whatever nature. No Shareholder nor any individual, corporation,
entity or person having or claiming any interest in, or with respect to, any of
the Preferred Shares owned by such Shareholder will, at or after the Closing
Date, have any such claim or interest, or have any right to claim or receive any
other payment or consideration with respect to
8.
<PAGE>
such Preferred Shares against or from the Company at or after the Closing Date.
ARTICLE 5
CLOSING CONDITIONS
------------------
5.1 Conditions to the Obligations of the Shareholders to Effect the
---------------------------------------------------------------
Transactions Contemplated Hereby. The obligations of the Shareholders to effect
- --------------------------------
the transactions contemplated hereby shall be subject to the fulfillment at or
prior to the Closing Date of the following conditions, which may be waived only
by the approval of each Shareholder:
(a) The Company shall have performed and complied in all material
respects with the covenants and agreements contained in this Agreement required
to be performed and complied with by it at or prior to the Closing Date, and the
representations and warranties of the Company set forth in this Agreement shall
be true and correct in all material respects as of the date of this Agreement
and as of the Closing Date as though made at and as of the Closing Date.
(b) The Company shall have issued to each Shareholder a warrant to
purchase 1,000,000 shares of the Company's Common Stock at a purchase price of
$1.75 per share.
(c) The Company shall have entered into that certain Stipulation of
Settlement with each of the Shareholders.
(d) The Company shall have issued 292,138 shares of its Common Stock
to the Shareholders as payment in full for those certain advances made by the
Shareholders to the Company in May 1997 in the aggregate amount of $350,000,
plus interest.
(e) The Company shall have entered into that certain Registration
Rights and Lock-Up Agreement, dated as of the date hereof.
5.2 Conditions to the Obligations of the Company to Effect the
----------------------------------------------------------
Transactions Contemplated Hereby. The obligations of the Company to effect the
- --------------------------------
transactions contemplated hereby shall be subject to the fulfillment at or prior
to the Closing Date of the following conditions, any one or more of which may be
waived by the Company:
(a) The Shareholders shall have performed and complied in all
material respects with the covenants and agreements contained in this Agreement
and required to be performed and complied with by them at or prior to the
Closing Date, and the representations and warranties of the Sharehold-
9.
<PAGE>
ers set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as though
made at and as of the Closing Date.
(b) The warrants to purchase a total of 400,000 shares of the
Company's Common Stock currently held by the Shareholders shall have been
surrendered to the Company for cancellation.
(c) Each of the Shareholders shall have entered into that certain
Registration Rights and Lock-Up Agreement.
(d) Each of the Shareholders shall have entered into that certain
Stipulation of Settlement and the lawsuits filed by the Shareholders against the
Company and the Company's directors shall have been dismissed with prejudice.
ARTICLE 6
MUTUAL RELEASES; TERMINATION OF PRIOR AGREEMENTS
------------------------------------------------
6.1 Mutual Releases.
---------------
(a) Except with respect to breaches of representations contained in
this Agreement or obligations created by or arising out of this Agreement or the
Registration Rights and Lock-Up Agreement, which shall survive the releases
contained herein, the Company, on the one hand, does hereby release, acquit and
forever discharge the Shareholders and each of their officers, directors,
shareholders, employees, agents, attorneys, representatives, successors and
assigns, and any affiliates of each of the foregoing, and the Shareholders on
the other hand, do hereby release, acquit and forever discharge the Company,
and each of its directors, officers, employees agents, attorneys, heirs,
representatives, succes sors and assigns, in each case, of and from all debts,
demands, actions, causes of action, suits, accounts, covenants, contracts,
promises, agreements (oral or written), damages, and any and all claims
(including without limitation claims for attorneys' fees and costs), and
liabilities whatsoever of every name and nature, which said parties ever had,
now may have, or hereafter can, shall or may have, by reason of any matter
relating to (i) the Purchase Agreement, dated as of December 9, 1996, entered
into by the parties hereto (the "Purchase Agreement"), or any of the agreements
executed, transactions consummated, in connection with the Purchase Agreement or
(ii) the Advances made by the Shareholders to the Company in May 1997.
(b) The Shareholders hereby waive their right to (i) seek
indemnification under the terms of the Purchase Agreement, or (ii) declare an
Event of Noncompliance under the
10.
<PAGE>
Purchase Agreement or the Certificate of Determination for the Series D
Convertible Preferred Stock.
(c) This Agreement and the releases contained herein are not to be
construed as an admission on the part of any party of the validity of any
contention made or position taken by any of the parties of any unlawful or
wrongful conduct, or of any liability, or lack thereof, to any other party, all
of which is expressly denied. The parties intend that this Agreement shall be
effective as a full and final accord and satisfaction of each and every released
matter. In furtherance of this intention, they acknowledge they are familiar
with Section 1542 of the Civil Code of the State of California, which provides
as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release which if known by him must
have materially affected his settlement with the debtor."
The releasing parties respectively waive and relinquish to the fullest extent
possible every right or benefit which they have or may have under Section 1542
and under any similar or analogous law of any other applicable jurisdiction with
regard to the subject matter of this Agreement. The parties acknowledge they
are aware they may hereafter discover facts in addition to or different from
those which they now know or believe to be true with respect to the subject
matter of this Agreement.
6.2 Termination of Prior Agreements. The parties hereto hereby agree
-------------------------------
that, upon the consummation of the Ex change, the Purchase Agreement and Warrant
Certificate Nos. D-1 and D-2 shall automatically and without any further action
on the part of any of the parties thereto be cancelled and terminated.
ARTICLE 7
MISCELLANEOUS PROVISIONS
------------------------
7.1 Amendment and Modification. This Agreement may be amended, modified
--------------------------
or supplemented only by a written agreement executed by the Company and each
Shareholder.
7.2 Waiver of Compliance; Consents. Except as otherwise provided in this
------------------------------
Agreement, any failure of any of the parties to comply with any obligation,
covenant, agreement or condition herein may be waived by the party or parties
entitled to the benefits thereof only by a written instrument signed by the
party granting such waiver, but such waiver or failure to
11.
<PAGE>
insist upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. Whenever this Agreement requires or permits
consent by or on behalf of any party hereto, such consent shall be given in
writing in a manner consistent with the requirements for a waiver of compliance
as set forth in this Section 6.2.
7.3 Notices. All notices, requests, consents and other communications
-------
hereunder to any party shall be deemed to be sufficient if contained in a
written instrument delivered in person or by telecopy or sent by nationally-
recognized overnight courier or first class registered or certified mail, return
receipt requested, postage prepaid, addressed to such party at the address set
forth below or at such other address as may hereafter be designated in writing
by such party to the other parties:
(a) if to the Company, to:
ChatCom, Inc.
9600 Topanga Canyon Blvd.
Chatsworth, CA 91311
Attn: President
Tel: (818) 709-1778
FAX: (818) 882-1424
with a copy to:
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, CA 90067
Attn: Sanford J. Hillsberg, Esq.
Tel: (310) 553-4441
FAX: (310) 201-4746
(b) if to a Shareholder, to the address set forth on the signature
page below with a copy to:
Brock Fensterstock
Silverstein McAuliffe & Wade LLC
One Citicorp Center
56th Floor
New York, NY 10022-4611
Tel: (212) 371-2000
Fax: (212) 371-5500
Attn: Jorn Holl, Esq.
All such notices, requests, consents and other communications shall be
deemed to have been delivered (a) in the case of personal delivery or delivery
by telecopy, on the date of such delivery, (b) in the case of dispatch by
nationally-recognized overnight courier, on the next business day
12.
<PAGE>
following such dispatch and (c) in the case of mailing, on the third business
day after the posting thereof.
7.4 Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, provided, however, that (i) neither this
-------- -------
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto without the prior written consent of the
other parties, and (ii) that the rights granted to the Shareholders pursuant to
Section 7.11 hereof may not be assigned to any unaffiliated purchaser or
transferee of the Company's securities owned by the Shareholders.
7.5 Governing Law. This Agreement shall be governed by the laws of the
-------------
State of New York (regardless of the laws that might otherwise govern under
applicable principles of conflicts of law).
7.6 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
7.7 Entire Agreement. This Agreement, together with the agreements and
----------------
documents referred to in Article 5 embody the entire agreement and understanding
of the parties hereto in respect of the transactions contemplated by this
Agreement. There are no restrictions, promises, representations, warranties,
covenants or undertakings, other than those expressly set forth or referred to
herein or therein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such transactions.
7.8 Jurisdiction and Forum. The Company and the Shareholders hereby
----------------------
consent to the exclusive jurisdiction of any court of the State of New York or
the United States located in the City of New York over all actions or
proceedings with respect to this Agreement, and agree that all such actions or
proceedings may be instituted and maintained only in such a forum. The Company
hereby agrees that CT Corporation System shall be its authorized agent upon
which process may be served on its behalf by any of the Shareholders or any
subsequent holder of the Preferred Shares in any action, suit or proceeding
arising out of or based upon this Agreement or any document executed pursuant to
Article 5 hereof. The parties further agree that service of legal process in the
manner specified herein for the providing of notice for purposes of this
Agreement shall constitute valid service of process for all purposes with
respect to any such action or proceeding.
13.
<PAGE>
7.9 Termination. In the event that the Closing does not occur by
-----------
September 30, 1997, this Agreement shall terminate and the transactions
contemplated hereby shall be abandoned, without further action by any of the
parties hereto. If this Agreement is terminated as provided herein, no party
hereto shall have any liability or further obligation under this Agreement to
any other party hereto.
7.10 Fees and Expenses. All legal and other fees, costs and expenses
-----------------
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such fees, costs or expenses.
Notwithstanding the foregoing, in the event that the transactions contemplated
hereby are consummated, the Company hereby agrees to pay up to a total of
$15,000 of legal fees actually incurred by the Shareholders in the preparation
of this Agreement and the documents related hereto. Such legal fees shall be
promptly paid upon the presentation to the Company of an invoice issued by
Shareholders' counsel.
7.11 Financial Information; Inspection. So long as any Shareholder owns
---------------------------------
250,000 or more shares of Common Stock, the Company will (A) deliver to each
such Shareholder (i) as soon as practicable,k copies of all financial
statements, proxy materials or reports sent to the Company's stockholders and of
all reports or final registration statements filed by the Company with the
Commission pursuant to the Securities Exchange Act of 1934, and (ii) with
reasonable promptness, such other information as any such Shareholder may
reasonably request from time to time, and (B) will permit the authorized
representatives of such Shareholder to visit and inspect any of the properties
of the Company, to inspect the Company's books of account, and subject to
compliance with all applicable securities laws, to discuss the Company's
business, affairs, finances and accounts with the Company's officers, all at
such reasonable times and as often as may reasonably be requested. All
financial statements delivered to the Shareholders pursuant to this Section
7.11 shall be prepared in accordance with generally accepted accounting
principles consistently applied.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or have
caused this Agreement to be duly executed on their respective behalf by their
respective officers thereunto duly authorized, as of the day and year first
above written.
14.
<PAGE>
CHATCOM, INC.
By: /s/ James B. Mariner
--------------------------------
Name:
Title:
THE HIGH VIEW FUND
/s/
-----------------------------------
Name:
Address:
THE HIGH VIEW FUND, L.P.
/s/
-----------------------------------
Name:
Address:
15.
<PAGE>
EXHIBIT 10.3
WARRANT TO PURCHASE COMMON STOCK
OF
CHATCOM, INC.
THIS IS TO CERTIFY THAT, for value received, The High View Fund or
permitted transferees or assigns (in each case, "Holder"), upon due exercise of
this Warrant, is entitled to purchase, subject to the terms and conditions
hereinafter set forth, from ChatCom, INC., a California corporation
("Corporation"), on or before the Expiration Date (as that term is hereinafter
defined), 500,000 fully paid and non assessable shares of Corporation's
authorized common stock ("Common Stock"), at a purchase price of $1.75 per
share. The number of shares of Common Stock to be received upon the exercise of
this Warrant and the price to be paid therefor may be adjusted from time to time
as hereinafter set forth.
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT
OR UNLESS SOLD PURSUANT TO RULE 144 PROMULGATED UNDER SAID ACT, OR UNLESS, IN
THE OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE ISSUER
OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION PROVISIONS OF SAID ACT.
1. Definitions. As used in this Warrant, the following terms shall mean:
-----------
"Aggregate Exercise Price" - The Exercise Price times the number of
shares to be issued, from time to time, upon exercise of this Warrant.
"Capital Stock" - The Common Stock and all other outstanding shares of
capital stock of the Corporation, including all classes of the Corporation's
preferred stock.
"Common Stock" - The common stock, no par value, of Corporation.
"Convertible Securities" - Any rights or options for the purchase of,
or stock or other securities convertible into, Common Stock (whether initially
or through a series of exercises and/or conversions).
"Effective Price" - The Effective Price for an issuance of Common
Stock shall mean the quotient determined by dividing (x) the total number of
shares of Common Stock which were issued or sold, or deemed to have been issued
or sold assuming full exercise or conversion of Convertible
1.
<PAGE>
Securities, by Corporation under Section 4.4 hereof into (y) the aggregate
consideration (including the minimum consideration payable to fully exercise or
convert all Convertible Securities) received or to be received by Corporation
for such issued, or deemed issued, Common Stock under Section 4.4 hereof.
"Exercise Price" - The price to be paid per share of Common Stock upon
the exercise of this Warrant. The initial Exercise Price, shall be $1.75 per
share, subject to changes that may hereafter be effected from time to time
pursuant to Section 4.
"Expiration Date" - December 13, 2001; if the Expiration Date shall
be, in the State of California, a holiday or a day on which banks are authorized
to close, then the Expiration Date shall be the next following date which, in
the State of California, is not a holiday or a day on which banks are authorized
to close.
"Shares" - The shares of Common Stock of Corporation for which this
Warrant may be exercised.
2. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time, or from time to time, up to 5:00 p.m. New York time on the
Expiration Date, by presentation and surrender hereof at the principal office of
Corporation, or at such other office as shall have theretofore been designated
by Corporation by notice pursuant hereto, or at the office of Corporation's
stock transfer agent, if any, with the Purchase Form attached hereto duly
executed and accompanied by payment of the Aggregate Exercise Price. Payment of
the Aggregate Exercise Price may be made by a check payable to the order of the
Corporation.
Promptly after the receipt of the Aggregate Exercise Price, the Corporation
shall cause to be issued and delivered to the Holder a certificate or
certificates, registered in the name of the Holder and dated as of the date of
exercise, representing the aggregate number of full shares of Common Stock for
which this Warrant is being exercised. Such shares, when issued, shall be
validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale
(except as specified in this Warrant) and free and clear of all preemptive
rights. If this Warrant should be exercised in part only, Corporation shall,
upon surrender of this Warrant for cancellation, execute and deliver to the
Holder a new Warrant (in the same form and content as this Warrant) evidencing
the rights of the holder thereof to purchase the balance of the shares of Common
Stock purchasable hereunder.
2.
<PAGE>
Corporation shall not issue fractional shares of Common Stock or scrip
representing fractional shares of Common Stock upon any exercise of this
Warrant. For any fractional share of Common Stock which the Holder hereof would
otherwise be entitled to purchase from Corporation upon such exercise,
Corporation shall purchase from the Holder such fractional share at a price
equal to an amount calculated by multiplying the fractional share (calculated to
the nearest .001 of a share) by the Exercise Price calculated as of the date of
the Purchase Form. Payment of such amount shall be made in cash or by check
payable to the order of the Holder at the time of delivery of any certificate or
certificates issuable upon such exercise.
3. Reservation of Shares; Maintenance of Registration Books. Corporation
--------------------------------------------------------
hereby agrees that, at all times, there shall be reserved and duly authorized
for issuance and delivery a sufficient number of shares of its Common Stock as
shall from time to time be issuable upon the exercise of this Warrant and the
exercise of all other warrants which have been or will have been issued by
Corporation. Corporation shall keep at its principal office a register in
which, subject to such reasonable regulations as it may prescribe, Corporation
shall provide for the registration, transfer and exchange of this Warrant.
4. Protection Against Dilution.
---------------------------
4.1 Adjustment for Stock Splits and Combinations. If Corporation at
--------------------------------------------
any time or from time to time after the date of this Warrant files an amendment
to its Articles of Incorporation effecting a subdivision or combination of the
outstanding Common Stock, the Exercise Price then in effect immediately before
such subdivision or combination shall be multiplied by a fraction: (a) the
numerator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the subdivision or combination, and (b) the
denominator of which shall be the total number of shares of Common Stock issued
and outstanding immediately after the subdivision or combination. Any
adjustment under this Section 4.1 shall become effective as of the date and time
that the Corporation files an amendment to its Articles of Incorporation
effecting the subdivision or combination.
4.2 Adjustment for Certain Dividends and Distributions. In the
---------------------------------------------------
event Corporation at any time or from time to time after the date of this
Warrant makes, or fixes a record date for the determination of holders of
Capital Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock or Convertible Securities, then and in each
such event the Exercise Price then in effect shall be decreased as of the time
of such issuance or, in the event such a record date is fixed, as of the close
of
3.
<PAGE>
business on such record date, by multiplying the Exercise Price then in effect
by a fraction: (a) the numerator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date; and (b) the denominator
of which shall be the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock
(including Common Stock issuable upon the exercise of any Convertible Securities
so distributed) issuable in payment of such dividend or distribution; provided,
however, that if such record date is fixed and such dividend is not fully paid,
or if such distribution is not fully made on the date fixed therefor, the
Exercise Price shall be recomputed to reflect that such dividend was not fully
paid or that such distribution was not fully made as of the close of business on
such record date and thereafter the Exercise Price shall be adjusted pursuant to
this Section 4.2 as of the time of actual payment of such dividends or
distributions. Notwithstanding the foregoing, the provisions of this Section 4.2
shall not apply to shares of Common Stock or Convertible Securities issued by
Corporation to holders of its preferred stock in lieu of cash otherwise payable
as a periodic dividend under any series of its preferred stock.
4.3 Adjustments for Other Dividends and Distributions. In the event
--------------------------------------------------
Corporation at any time or from time to time after the date of this Warrant
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
Corporation other than shares of Common Stock or Convertible Securities, or
payable in property or other assets of the Corporation (including stock of any
subsidiary), then and in each such event provision shall be made so that the
Holder shall receive upon exercise of this Warrant, in addition to the number of
shares of Common Stock receivable thereupon, the amount of securities, property,
or other assets of Corporation which the Holder would have received had this
Warrant been fully exercised for Common Stock on the date of such event and had
it thereafter, during the period from the date of such event to and including
the date of exercise, retained such securities, property, or other assets
receivable by it as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 4 with respect to
the rights of the Holder.
4.
<PAGE>
4.4 Adjustments for Issuances or Sales of Common Stock at Less than
---------------------------------------------------------------
Exercise Price.
- --------------
(a) In the event that the Corporation at any time or from time to
time after the date of this Warrant issues Common Stock or Convertible
Securities, other than (i) as a dividend or other distribution on any class of
stock as provided in Section 4.2 above, (ii) upon a subdivision or combination
of shares of Common Stock as provided in Section 4.1 above, (iii) upon the
exercise or conversion of a Convertible Security for which an appropriate
adjustment has already been made, or (iv) a Permitted Security (as defined
below), for an Effective Price less than the Exercise Price, then and in each
such case the then existing Exercise Price shall be reduced as of the opening of
business on the date of such issue or sale (or such deemed issue or sale) to a
price equal to the then existing Exercise Price multiplied by a fraction, the
numerator of which shall be (i) the number of shares of Common Stock outstanding
or deemed outstanding immediately before that issue or sale, plus (ii) the
number of shares of Common Stock which the aggregate consideration, if any,
received (or by the express provisions hereof, deemed to have been received) by
Corporation on that issue or sale would purchase at the then current Exercise
Price, and the denominator of which shall be the number of shares of
Corporation's Common Stock outstanding or deemed outstanding immediately after
the issue or sale. For the purposes of this Section 4.4, a "Permitted Security"
shall mean the Series E Convertible Redeemable Preferred Stock of the Company
and the Common Stock issued upon the conversion of such preferred stock.
(b) For the purpose of making any adjustment required under this
Section 4.4, the consideration received by Corporation for any issue or sale of
securities shall: (i) to the extent it consists of cash, be computed at the
aggregate sales price paid in cash; (ii) to the extent it consists of property
other than cash, be computed at the fair value of that property as determined in
good faith by Corporation's board of directors; and (iii) if Common Stock,
Convertible Securities or other rights or options to purchase either Common
Stock, Convertible Securities or other rights or options are issued or sold
together with other stock or securities or other assets of Corporation for a
consideration which covers both, be computed as the portion of the consideration
so received that may be reasonably determined in good faith by Corporation's
board of directors to be allocable to such Common Stock, Convertible Securities
or other rights or options.
(c) For the purpose of the adjustments required under this
Section 4.4, if Corporation issues or sells any Convertible Securities, then in
each such case if
5.
<PAGE>
the Effective Price of the Common Stock underlying such Convertible Securities
is less than the prevailing Exercise Price, Corporation shall be deemed to have
issued at the time of the issuance of such Convertible Securities the maximum
number of shares of Common Stock (determined without regard to adjustment
provisions similar to those contained in this Section 4) issuable upon exercise
or conversion of the total amount of Convertible Securities and to have received
as consideration for the issuance of such shares of Common Stock an amount equal
to the amount of consideration, if any, received by Corporation for the issuance
of such Convertible Securities, plus the minimum amount of consideration, if
any, payable to Corporation (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) upon exercise or
conversion of the Convertible Securities.
4.5 Adjustment for Reclassification, Exchange and Substitution. If
----------------------------------------------------------
the Common Stock issuable upon the exercise of this Warrant is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets, provided for elsewhere in this Section 4), then
and in such event each Holder shall have the right thereafter, upon exercise of
this Warrant to receive the kind and amount of stock and other securities and
property receivable upon such reorganization or other change in an amount equal
to the amount that the Holder would have been entitled to have had it
immediately prior to such reorganization, reclassification or change exercised
this Warrant, but only to the extent this Warrant is actually exercised, all
subject to further adjustment as provided herein.
4.6 Reorganization, Mergers, Consolidations or Sales of Assets. If
----------------------------------------------------------
at any time or from time to time there is a capital reorganization of the Common
Stock (other than a recapitalization, subdivision, combination, reclassification
or exchange of the Common Stock provided for elsewhere in this Section 4) or
merger or consolidation of Corporation with or into another corporation, or the
sale of all or substantially all of Corporation's properties and assets to any
other person, then, as a part of such reorganization, merger, consolidation or
sale, provision shall be made so that the Holder shall thereafter be entitled to
receive upon exercise of this Warrant (and only to the extent this Warrant is
exercised), the number of shares of stock or other securities or property of
Corporation, or of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of Common Stock, or other securities,
deliverable upon the exercise of this Warrant would otherwise have been entitled
on such capital reorganization, merger, consolidation
6.
<PAGE>
or sale. In any such case, appropriate adjustments shall be made in the
application of the provisions of this Section 4 (including adjustment of the
Exercise Price then in effect and number of Shares purchasable upon exercise of
this Warrant) which shall be applicable after such events; provided, however,
that any such adjustments shall be made so as to ensure that the provisions of
this Section 4 applicable after such events shall, to the extent practicable, be
equivalent to the provisions of this Section 4 applicable before such events.
4.7 Reversal of Adjustment. Upon the expiration of any rights,
----------------------
options, warrants or conversion or exchange privileges, if any thereof shall not
have been exercised, the Exercise Price and the number of Shares purchasable
upon the exercise of this Warrant shall, upon such expiration, be readjusted and
shall thereafter be such as it would have been had it been originally adjusted
(or had the original adjust adjustment not been required, as the case may be) as
if the only shares of Common Stock so issued were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such rights, options, warrants
or conversion or exchange rights; provided, however, that no such readjustment
shall have the effect of increasing the Exercise Price by an amount in excess of
the amount of the adjustment initially made in respect to the issuance, sale or
grant of such rights, options, warrants or conversion or exchange rights.
4.8 Certificate of Adjustment. In any case of an adjustment or
-------------------------
readjustment of the Exercise Price or the number of shares of Common Stock, or
other securities issuable upon exercise of this Warrant, Corporation's chief
financial officer (or other officer designated by Corporation's board of
directors) shall compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and shall mail such certificate, by first class mail, postage
prepaid, to the Holder at the Holder's address as shown in Corporation's books.
The certificate shall set forth such adjustment or readjustment, showing in
detail the facts upon which such adjustment or readjustment is based.
4.9 Adjustment in Number of Shares. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Article 4, the number of
Shares issuable upon the exercise of this Warrant shall be adjusted, to the
nearest full Share, by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Shares issuable
upon exercise of this Warrant immediately prior to such adjustment and dividing
the product so obtained by the adjusted Exercise Price.
7.
<PAGE>
5. Restriction on Transfer. This Warrant and the Common Stock to be
-----------------------
received upon exercise has been or will be, as the case may be, acquired for
investment and not with a view to distribution. The holder of the underlying
Common Stock agrees that he will not sell or transfer the underlying Common
Stock unless (i) the underlying Common Stock and the sale thereof are the
subject of a Registration Statement filed under the Securities Act of 1933, as
amended ("Act"), with the Securities and Exchange Commission ("Commission"),
which shall have become effective, or (ii) the holder shall have furnished the
Corporation with an opinion of counsel, which opinion and counsel are reasonably
satisfactory to counsel for the Corporation, to the effect that the proposed
transfer, without registration as aforesaid, may be effected without a violation
of Section 5 of the Act or any applicable state securities law. The underlying
Common Stock certificates shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE PLEDGED OR HYPOTHECATED, AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER
THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL OF THE CORPORATION THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR ANY APPLICABLE STATE
SECURITIES LAW."
In the event that the underlying Common Stock is so registered pursuant to
the Act, or such a satisfactory opinion of counsel is obtained with respect to a
public distribution, then, the holder of the underlying Common Stock shall be
entitled to exchange its Common Stock certificates for certificates without the
foregoing legend.
6. Additional Rights of Warrant Holder. This Warrant, prior to its
-----------------------------------
exercise, shall not entitle its holder to any rights of a shareholder of the
Corporation, including without limitation, the right to vote, to receive
dividends or other distributions, to exercise any preemptive rights, and to
receive any notice of any proceedings of the Corporation, except as provided for
in this Warrant. If, at any time, or from time to time, while this Warrant
remains outstanding, Corporation shall (i) dissolve, liquidate or wind up;
reorganize, reclassify or effect some other change of the Common Stock; effect a
consolidation or merger where the Corporation is not the surviving entity; sell,
lease, transfer or convey substantially all of the Corporation's assets
(collectively, the "Corporate Changes"); or (ii) declare any dividend, authorize
any distribution, or offer any rights, either in securities, property, assets,
or cash, upon its Common Stock, then Corporation shall cause notice thereof to
be mailed to the holder of this Warrant, at least twenty (20)
8.
<PAGE>
calendar days prior to (i) the date of the Corporate Change or (ii) the date as
of which holders of Common Stock who shall participate in such dividend,
distribution, or offer of rights are to be determined, as the case may be. Such
notice shall also specify the date as of which holders of Common Stock who shall
participate in such dividend, distribution, or offer of rights are to be
determined.
7. Loss, Theft, Destruction or Mutilation. Upon receipt by Corporation
--------------------------------------
of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant and, in case of loss, theft or destruction, of
indemnity reasonably satisfactory to it and, in case of mutilation, upon
surrender and cancellation hereof, Corporation will execute and deliver, in lieu
thereof, a new Warrant of like tenor, in lieu of this Warrant.
8. Taxes, Costs and Expenses. Corporation will pay all taxes, costs and
-------------------------
expenses incident to the performance of its obligations under this Warrant,
including all taxes, costs and expenses incident to the issuance of this Warrant
and the shares of Common Stock issuable upon the exercise hereof.
9. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be delivered by personal service or
telegram, telecopy or registered or certified mail, postage prepaid and, if to
the Holder of this Warrant, addressed to him at the address furnished to
Corporation in writing by such Holder and, if to Corporation, addressed to it at
9600 Topanga Canyon Boulevard, Chatsworth, California 91311, or to such other
address as may have been furnished to the Holder of this Warrant in writing by
Corporation. Any notice sent by registered or certified mail will be deemed to
have been given three (3) days after the date on which it is mailed. All other
notices will be deemed given when received.
10. Binding Obligation. All terms and conditions contained in this
------------------
Warrant shall bind and inure to the benefit of the respective heirs,
transferees, assignees, and successors of the Holder of this Warrant and
Corporation.
11. Law Governing. This Warrant shall be construed and enforced in
-------------
accordance with the laws of the State of California. The Company hereby consents
to the exclusive jurisdiction of any court of the State of New York or the
United States located in the City of New York over all actions or proceedings
with respect to this Warrant, and agrees that all such actions or proceedings
may be instituted and maintained only in such a forum.
9.
<PAGE>
12. Titles. The titles of the sections contained in this Warrant are for
------
convenience of reference only, and are not to be considered in construing this
Warrant. When the context so requires in this Warrant, the masculine gender
includes the feminine or neuter, and the singular number includes the plural.
13. Severability. If, in any action before any court or agency legally
------------
empowered to enforce any provision contained herein, any provision hereof is
found to be unenforceable, then such provision shall be deemed modified to the
extent necessary to make it enforceable by such court or agency. If any such
provision is not enforceable as set forth in the preceding sentence, the
unenforceability of such provision shall not affect the other provisions of this
Warrant, but this Warrant shall be construed as if such unenforceable provision
had never been contained herein.
14. Amendment. This Warrant may not be modified or amended except by
---------
written agreement of Corporation and the holder hereof.
15. Attorneys' Fees. The Company and the Holder, by accepting this
---------------
Warrant, agree that if any action is brought to enforce this Warrant, then the
prevailing party shall be entitled, in addition to all other relief, to recover
its reasonable attorneys' fees and other costs and disbursements incurred by it
in connection therewith.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be duly
executed by its President and Secretary thereunto duly authorized.
Dated: September 25, 1997 CHATCOM, INC.
By: /s/ James B. Mariner
-------------------------
President
10.
<PAGE>
PURCHASE FORM
(To be executed only upon
exercise of the Warrant)
The undersigned registered holder of the Warrant to which this Purchase
Form is attached irrevocably exercises such Warrant for the purchase of _____
shares of Common Stock of ChatCom, Inc. purchasable on the date hereof, and
herewith makes payment therefor in the amount of $______ all at the price and
on the terms and conditions specified in such Warrant.
The undersigned hereby requests that a certificate (or _______
certificates in denominations of _______ shares) for the shares of Common Stock
of ChatCom, Inc. hereby purchased be issued in the name of and delivered to
(choose one) (a) the undersigned or (b) ________________ , whose address is
___________________________________________________
__________________.
Dated: ________________, 19__.
By:_____________________________
(Signature of Registered
Holder)
NOTICE: The signature to this Purchase Form must correspond with the name as
written upon the face if the Warrant to which this Purchase Form is
attached in every particular, without alteration or enlargement or any
change whatever.
11.
<PAGE>
ASSIGNMENT FORM
(To be executed only upon
the assignment of the Warrant)
FOR VALUE RECEIVED, the undersigned registered Holder of the Warrant to
which this Assignment Form is attached hereby sells, assigns and transfers unto
___________________________, whose address is ________________________________
______% of the rights of the undersigned under such Warrant, with respect to
shares of Common Stock of ChatCom, Inc., and does hereby irrevocable constitute
and appoint _________________________ its Attorney to register such transfer on
the books of ChatCom, Inc., maintained for the purpose, with full power of
substitution.
Dated: ______________, 19__.
By:__________________________
(Signature of Registered
Holder)
NOTICE: The signature to this Assignment Form must correspond with the name as
written upon the face of the Warrant to which this Assignment Form is
attached in every particular, without alteration or enlargement or any
change whatever.
12.
<PAGE>
EXHIBIT 10.4
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of the date of acceptance set forth
below, is entered into by and between CHATCOM, INC., a California corporation,
with headquarters located at 9600 Topanga Canyon Boulevard, Chatsworth,
California (the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon exemptions from securities registration afforded
under Regulation D ("Regulation D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act") and/or Sections 4(2) and 3(b) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, Series E Convertible Redeemable Preferred Stock,
no par value per share (the "Preferred Stock"), of the Company which will be
convertible into shares of Common Stock, no par value per share (the "Common
Stock"), of the Company upon the terms and subject to the conditions of such
Preferred Stock (the Common Stock and Preferred Stock sometimes referred to
herein as "Securities"), and subject to acceptance of this Agreement by the
Company;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. PURCHASE. The undersigned hereby agrees to purchase from the Company
Preferred Stock of the Company, in the amount set forth on the signature page of
this Agreement, out of a total offering of $1,700,000 of Preferred Stock, and
having the terms and conditions set forth in the Certificate of Determination
attached hereto as ANNEX I. The purchase price for the Preferred Stock shall be
$1,000 per share.
b. FORM OF PAYMENT. The Buyer shall pay the purchase price for the
Preferred Stock by delivering immediately available good funds in United States
Dollars to the escrow agent (the "Escrow Agent") identified in the Joint Escrow
Instructions attached hereto as Annex II (the "Joint Venture Instructions") as
set forth below. Promptly following payment by the Buyer to the Escrow Agent of
the purchase price of the Preferred Stock, the Company shall deliver a
Certificate for the Preferred Stock duly executed on behalf of the Company, to
the Escrow Agent. By signing this Agreement, the Buyer and the Company, and
subject to acceptance by the Escrow Agent, each agrees to all of the terms and
conditions of, and becomes a party to, the Joint Escrow Instructions, all of the
provisions of which are incorporated
1
<PAGE>
herein by this reference as if set forth in full.
c. METHOD OF PAYMENT. Payment into escrow of the purchase price for
the Preferred Stock shall be made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
or credit to the account of Krieger & Prager, Esqs.
Account No. 105-0036843
Not later than 1:00 p.m., New York time, on the date which is three (3) NASDAQ
trading days after the Company shall have accepted this Agreement and returned a
signed counterpart of this Agreement to the Escrow Agent by facsimile, the Buyer
shall deposit with the Escrow Agent the aggregate purchase price for the
Preferred Stock, in currently available funds. Time is of the essence with
respect to such payment, and failure by the Buyer to make such payment, shall
allow the Company to cancel this Agreement.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
a. The Buyer is purchasing the Preferred Stock and will be acquiring
the shares of Common Stock issuable upon conversion of the Preferred Stock for
its own account for investment only and not with a view towards the resale,
public sale or distribution thereof and not with a view to or for sale in
connection with any distribution thereof;
b. The Buyer is (i) an "accredited investor" as that term is defined
in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3), and (ii) experienced in making investments of the kind described
in this Agreement and the related documents, (iii) able, by reason of the
business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way by
the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its investment
in the Preferred Stock;
c. All subsequent offers and sales of the Preferred Stock and the
shares of Common Stock issuable upon conversion of, or issued as dividends on,
the Preferred Stock (the "Shares" and, together with the Preferred Stock, the
"Securities") by the Buyers shall be made pursuant to registration of the
Shares under the 1933 Act or with respect to the Preferred Stock pursuant to an
exemption from registration;
2
<PAGE>
D. The Buyer understands that the Preferred Stock is being offered
and sold, and the Shares are being offered, to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgements and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Preferred Stock and to receive an offer of the Shares;
E. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Preferred Stock and the offer of
the Shares which have been requested by the Buyer, including ANNEX V hereto. The
Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company and have received complete and satisfactory answers to
any such inquiries. Without limiting the generality of the foregoing, the Buyer
has also had the opportunity to obtain and to review the Company's (1) Annual
Report on Form 10-KSB for the fiscal year ended March 30, 1997, together with
all amendments filed thereto through the date hereof, (2) Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1997, together with all
amendments filed thereto through the date hereof, and (3) Form 8-K filed on June
30, 1997 (the "Company's SEC Documents").
F. The Buyer understands that its investment in the Securities
involves a high degree of risk;
G. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities;
H. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
I. Neither Buyer, nor any affiliate of Buyer, has any present
intention of entering into, or will enter into any put option, short position,
or other similar position with respect to the Preferred Stock or the Shares.
J. Notwithstanding the provisions hereof, in no event (except with
respect to an Event of Mandatory Conversion) shall the holder be entitled to
convert any Preferred Stock in excess of that number of shares upon conversion
of which the sum of (1) the number of shares of Common Stock beneficially owned
by the Buyer and its affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unconverted portion of
the Preferred Stock), and (2) the number of shares of Common Stock issuable upon
the
3
<PAGE>
conversion of the Preferred Stock with respect to which the determination of
this proviso is being made, would result in beneficial ownership by the Buyer
and its affiliates of more than 4.9% of the outstanding shares of Common Stock.
For purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation 13D-G
thereunder, except as otherwise provided in clause (1) of such proviso.
3. COMPANY REPRESENTATIONS, ETC.
Except as disclosed in Annex V, delivered in writing to the Buyer, the
Company represents and warrants to the Buyer that:
A. CONCERNING THE SHARES. The Shares have been duly authorized and,
when issued upon conversion of, or as dividends on, the Preferred Stock, will be
duly and validly issued, fully paid and non-assessable and will not subject the
holder thereof to personal liability by reason of being such holder. There are
no preemptive rights of any stockholder of the Company, as such, to acquire the
Common Shares.
B. REPORTING COMPANY STATUS. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of California and is duly qualified as a foreign corporation in all
jurisdictions other than New York and Illinois, in which the failure to so
qualify would have a material adverse effect on the business, condition
(financial or otherwise), properties or results of operations of the Company and
its subsidiaries taken as a whole. The Company has registered its Common Stock
pursuant to Section 12 of the Exchange Act, and the Common Stock is listed and
traded on the Nasdaq/Small Cap Market. The Company has timely filed all material
required to be filed pursuant to all reporting obligations under either Section
13(a) or 15(d) of the Exchange Act for a period of at least twelve (12) months
immediately preceding the offer or sale of the Preferred Stock, and has received
no notice, either oral or written, with respect to the continued eligibility of
the Common Stock for such listing.
C. AUTHORIZED SHARES. The Company has legally available sufficient
authorized and unissued Shares as may be reasonably necessary to effect the
conversion of the Preferred Stock, if the Preferred Stock were converted on the
date hereof.
D. STOCK PURCHASE AGREEMENT; REGISTRATION RIGHTS AGREEMENT AND STOCK.
This Agreement and the Registration Rights Agreement, the form of which is
attached hereto as ANNEX IV (the "Registration Rights Agreement"), have been
duly and validly authorized by the Company, this Agreement has been duly
executed and delivered by the Company and this Agreement is, and the
Registration Rights Agreement, when executed and delivered by the Company, will
be, valid and binding agreements of the Company enforceable in accordance with
their respective terms, subject as to enforceability to general principles of
equity, the indemnification provisions of the Registration Rights Agreement, and
to bankruptcy, insolvency, moratorium, and other similar laws affecting the
enforcement of creditors' rights generally; and the Securities will be duly and
validly issued, fully paid and non-assessable when delivered on behalf of the
Company upon payment therefor in accordance with this Agreement, subject to
general principles
4
<PAGE>
of equity and to bankruptcy, insolvency, moratorium, or other similar laws
affecting the enforcement of creditors' rights generally.
E. NON-CONTRAVENTION. The execution and delivery of this Agreement
and the Registration Rights Agreement by the Company, the issuance of the
Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and the
Preferred Stock do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under, the
articles of incorporation or by-laws of the Company, or any indenture, mortgage,
deed of trust, or other material agreement or instrument to which the Company is
a party or by which it or any of its properties or assets are bound, or any
material existing applicable law, rule, or regulation or any applicable decree,
judgment, or order of any court, United States federal or state regulatory body,
administrative agency, or other governmental body having jurisdiction over the
Company or any of its properties or assets, except such conflict, breach or
default which would not have a material adverse effect on the transactions
contemplated herein.
F. APPROVALS. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the Stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Securities to the Buyer as
contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained.
G. SEC FILINGS. None of the Company's SEC Documents with the
Securities and Exchange Commission since January 1, 1996 contained, at the time
they were filed, any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
made therein in light of the circumstances under which they were made, not
misleading. The Company has since January 1, 1997 timely filed all requisite
forms, reports and exhibits thereto with the Securities and Exchange Commission
(the "SEC").
H. ABSENCE OF CERTAIN CHANGES. Since January 1, 1997, there has been
no material adverse change and no material adverse development in the business,
properties, operations, financial condition, outstanding securities, or results
of operations of the Company, except as disclosed in the documents referred to
in Section 2(g) hereof.
I. FULL DISCLOSURE. There is no material fact known to the Company
(other than general economic conditions known to the public generally) that has
not been disclosed in writing to the Buyer (including through the publicly filed
documents of the Company) that (i) could reasonably be expected to have a
material adverse effect on the condition (financial or otherwise) or in the
earnings, business affairs, properties or assets of the Company or (ii) could
reasonably be expected to materially and adversely affect the ability of the
Company to perform its obligations pursuant to this Agreement.
J. ABSENCE OF LITIGATION. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board or body pending or
to the knowledge of the Company or any of its subsidiaries, wherein an
unfavorable decision,
5
<PAGE>
ruling or finding would have a material adverse effect on the properties,
business, condition (financial or otherwise), properties, or results of
operations of the Company and its subsidiaries taken as a whole or the
transactions contemplated by this Agreement or any of the documents contemplated
hereby or which would have a material adverse effect on the validity or
enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement or any of such other documents.
K. ABSENCE OF EVENTS OF DEFAULT. No Event of Default, as defined in
any agreement to which the Company is a party, and no event which, with the
giving of notice or the passage of time or both, would become an Event of
Default (as so defined), has occurred and is continuing, which would have a
material adverse effect on the Company's financial condition or results of
operations.
L. NO DEFAULT. The Company is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust or other material instrument
or agreement to which it is a party or by which it or its property may be bound,
and neither the execution, nor the delivery by the Company, nor the performance
by the Company of its obligations under this Agreement or the Preferred Stock,
other than the conversion provision thereof, will conflict with or result in the
breach or violation of any of the terms or provisions of, or constitute a
default or result in the creation or imposition of any lien or charge on any
assets or properties of the Company under, any material indenture, mortgage,
deed of trust or other material agreement or instrument to which the Company is
a party or by which it is bound or any statute or the articles of incorporation
or by-laws of the Company, or any decree, judgment, order, rule or regulation of
any court or governmental agency or body having jurisdiction over the Company or
its properties, or its listing agreement with respect to any securities exchange
or trading market on which the Common Stock is listed.
M. PRIOR ISSUES. During the twelve (12) months preceding the date
hereof, the Company has not issued any securities pursuant to Regulation S or
Regulation D under the Act, except as set forth on Exhibit 3(m).
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
A. TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the
Preferred Stock has not been and is not being registered under the provisions of
the 1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Securities under circumstances in which the
seller, or
6
<PAGE>
the person through whom the sale is made, may be deemed to be an underwriter, as
that term is used in the 1933 Act, may require compliance with some other
exemption under the 1933 Act or the rules and regulations of the SEC thereunder;
and (3) neither the Company nor any other person is under any obligation to
register the Securities (other than pursuant to the Registration Rights
Agreement) under the 1933 Act or to comply with the terms and conditions of any
exemption thereunder.
b. RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that the
Preferred Stock, and, until such time as the Shares have been registered under
the 1933 Act as contemplated by the Registration Rights Agreement and sold in
accordance with such Registration Statement, the certificate for the Shares
shall bear a restrictive legend in substantially the following form (and a stop-
transfer order may be placed against transfer of the Preferred Stock and the
shares of Common Stock):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE
"SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT AND SUCH LAWS. THE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR OFFERED
FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR
OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED.
c. REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter
into the Registration Rights Agreement, in the form attached hereto as ANNEX IV,
on or before the Closing Date.
d. FILINGS. The Company undertakes and agrees to make all necessary
filings in connection with the sale of the Preferred Stock to the Buyer as
required by United States laws and regulations, or by any domestic securities
exchange or trading market, and to provide a copy thereof to the Buyer and its
counsel promptly after such filing.
e. REPORTING STATUS. So long as the Buyer beneficially owns any of
the Preferred Stock or Common Stock issued on conversion thereof, the Company
shall file all reports required to be filed with the SEC pursuant to Section 13
or 15(d) of the Exchange Act, and the Company shall not terminate its status as
an issuer required to file reports under the 1934 Act even if the 1934 Act or
the rules and regulations thereunder would permit such termination. The Company
will take all action under its control to continue the listing and trading of
its Common Stock on the Nasdaq Stock Market and will comply in all respects with
the Company's reporting, filing and other obligations under the by-laws or rules
of the Nasd or Nasdaq.
f. USE OF PROCEEDS. The Company will use the proceeds from the sale
of the
7
<PAGE>
Preferred Stock (excluding amounts paid by the Company for legal fees and
finder's fees in connection with the sale of the Preferred Stock) for the
repayment of the Company's debt and internal working capital purposes and shall
not, directly or indirectly (except in any situation where the Company is
acquired by merger or otherwise by a third party) use such proceeds for any loan
to or investment in any other corporation, partnership enterprise or other
person.
G. CERTAIN AGREEMENTS. The Company covenants and agrees that it
will not (i) enter into any subsequent or further offer or sale of common stock
or securities convertible into common stock with any third party until the
expiration of the earlier of one hundred eighty (180) days from the effective
date of the Registration Statement required to be filed under the Registration
Rights Agreement unless the purchaser of such Common Stock or securities enters
into an agreement not to sell such Common Stock or securities for a minimum
period of one (1) year from the Closing Date or Additional Closing Date, and
(ii) enter into any subsequent or further offer or sale of common stock or
securities convertible into Common Stock with any third party until December 31,
1998, without first offering The Tail Wind Ltd. the opportunity (which shall
remain open for a period of five business days from the date the Buyer receives
notice thereof) to purchase all of such additional securities (in the discretion
of the Buyer) on the terms and provisions on which the Company proposes to offer
such additional securities to such third party. In the event that the Buyer
declines to participate in any such investment, the Company shall provide the
Buyer with prompt written notice of the consummation of any such transaction
with a third party, specifying the material terms thereof. However, Clauses
4(g)(i) and 4(g)(ii) will not apply to (x) the issuance of securities (other
than for cash) in connection with a merger, consolidation, sale of assets,
disposition of a business, product or license by the Company, strategic
alliance, bank loan or agreement, (y) the issuance of securities in a public
offering, securities issued at or above the then current market price (as
determined in good faith by the Board of Directors), or the exercise of options,
or (z) the exchange of the capital stock of the Company for assets, stock or
joint venture interests. This Section 4(g) may be waived by the holders of two-
thirds of the outstanding shares of Preferred Stock (whether or not the Buyer
shall consent thereto).
H. ADDITIONAL CLOSING DATE. The Buyer unconditionally and
irrevocably agrees to release from escrow an additional $600,000 for the
purchase of Preferred Stock on the Additional Closing Date (the "Additional
Preferred Stock") (which shall occur not more than five (5) days after the
Effective Date), contingent only upon the satisfaction of the following
conditions: On the Additional Closing Date (i) the Registration Statement
required to be filed under the Registration Rights Agreement is effective, and
(ii) the representations and warranties of the Company contained in Section 3
are true and correct in all material respects, and a certificate of an executive
officer of the Company to such effect is delivered, (iii) the Market Price of
the Stock for the ten (10) trading days prior to the Additional Closing Date
exceeds $1.00 per share, and (iv) the additional financing set forth in (P)9(d)
shall have been funded.
I. WARRANTS. The Company agrees to issue to Buyer within ten (10)
days after the Closing Date and the Additional Closing Date, transferable
divisible warrants (the "Warrants") to purchase 254,545 shares of Common Stock,
and 178,182 shares of Common Stock respectively. Such Warrants shall bear an
exercise price per share of Common Stock equal
8
<PAGE>
to $1.25, and shall be exercisable commencing January 1, 1998 and for a period
of five (5) years thereafter, in the form annexed hereto as Annex VI, together
with piggy-back registration rights, and demand registration rights.
J. PUBLIC ANNOUNCEMENTS. The Company shall not make any public
announcements of the transactions contemplated hereunder, except as required by
law or under the Registration Rights Agreement without the prior written consent
of the Buyer.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the aggregate
purchase price for the Preferred Stock in accordance with Section 1(c) hereof,
the Company will irrevocably instruct its transfer agent to issue Common Stock
from time to time upon conversion of the Preferred Stock in such amounts as
specified from time to time by the Company to the transfer agent, bearing the
restrictive legend specified in Section 4(b) of this Agreement, registered in
the name of the Buyer or its nominee and in such denominations to be specified
by the Buyer in connection with each conversion of the Preferred Stock. The
Company warrants that no instruction other than such instructions referred to in
this Section 5, the Registration Rights Agreement, and stop transfer
instructions to give effect to Section 4(a) hereof prior to registration and
sale of the Shares under the 1933 Act will be given by the Company to the
transfer agent and that the Shares shall otherwise be freely transferable on the
books and records of the Company as and to the extent provided in this
Agreement, the Registration Rights Agreement, and applicable law. Nothing in
this Section 5 shall affect in any way the Buyer's obligations and agreement to
comply with all applicable securities laws upon resale of the Securities. If the
Buyer provides the Company with an opinion of counsel reasonably satisfactory to
the Company that registration of a resale by the Buyer of any of the Securities
in accordance with clause (1)(B) of Section 4(a) of this Agreement is not
required under the 1933 Act, the Company shall (except as provided in clause (2)
of Section 4(a) of this Agreement) permit the transfer of the Securities and, in
the case of the Shares, promptly instruct the Company's transfer agent to issue
one or more certificates for Common Stock in such name and in such denominations
as specified by the Buyer.
b. The Company will permit the Buyer to exercise its right to
convert the Preferred Stock by telecopying an executed and completed Notice of
Conversion in the form annexed hereto to the Company's Transfer Agent, with a
copy to the Company and delivering within three business days thereafter, the
original Notice of Conversion and the certificate for the Preferred Stock
representing the Shares to the Company by express courier. Each date on which a
Notice of Conversion is telecopied to and received by the Company (and confirmed
via telephonic notice) in accordance with the provisions hereof shall be deemed
a Conversion Date. The Company will transmit the certificates representing the
shares of Common Stock issuable upon conversion of any Preferred Stock (together
with the Preferred Stock representing the Shares not so converted) to the Buyer
via express courier, by electronic transfer or otherwise, within five business
days after receipt by the Company of the original Notice of Conversion and the
certificate for the Preferred Stock representing the Shares to be converted
(such fifth day after such receipt by the Company is herein referred to as the
"Delivery Date").
9
<PAGE>
c. The Company understands that a delay in the issuance of the
Shares of Common Stock beyond the Delivery Date could result in economic loss to
the Buyer. As compensation to the Buyer for such loss, the Company agrees to pay
late payments, not exceeding $500,000 in the aggregate, to the Buyer for late
issuance of Shares upon Conversion in accordance with the following schedule
(where "No. Business Days Late" is defined as the number of business days beyond
three (3) business days from Delivery Date:
<TABLE>
<CAPTION>
Late Payment For Each
$10,000 of Preferred Stock
No. Business Days Late Principal Amount Being Converted
---------------------- --------------------------------
<S> <C>
1 $50
2 $100
3 $150
4 $200
5 $250
6 $300
7 $350
8 $400
9 $450
10 $500
>10 $500 + $100 for each Business
Day Late beyond 10 days
</TABLE>
The Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Nothing herein shall limit a Buyer's right to
pursue actual damages for the Company's failure to issue and delivery Common
Stock to the Buyer. Furthermore, in addition to any other remedies which may be
available to the Buyer, in the event that the Company fails for any reason to
effect delivery of such shares of Common Stock within five business days after
the Delivery Date, the Buyer will be entitled to revoke the relevant Notice of
Conversion by delivering a notice to such effect to the Company whereupon the
Company and the Buyer shall each be restored to their respective positions
immediately prior to delivery of such Notice of Conversion (and in such event,
the late payments described above shall not be due and payable).
d. In lieu of delivering physical certificates representing the
Common Stock issuable upon conversion, provided the Company's transfer agent is
participating in the Depository Trust Company (ADTC) Fast Automated Securities
Transfer program, upon request of the Buyer and its compliance with the
provisions contained in this paragraph, so long as the certificates therefor do
not bear a legend and the Buyer thereof is not obligated to return such
certificate for the placement of a legend thereon, the Company shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Buyer by crediting the account of Buyer's
Prime Broker with DTC through its Deposit Withdrawal Agent Commission system.
6. DELIVERY INSTRUCTIONS.
The Preferred Stock shall be delivered by the Company to the Escrow
Agent pursuant to Section 1(b) hereof on a delivery against payment basis at the
closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Preferred Stock (the
"Closing Date") shall be the later of 12:00 noon, New York time or September 26,
1997 or such other mutually agreed to time, but not later than September 30,
1997 unless waived by the Company. The closing shall occur on the Closing Date
at the offices of the Escrow Agent. Notwithstanding anything to the contrary
contained herein, the Escrow Agent will be authorized to release the funds
representing the Purchase Price for the Preferred Stock, and the certificates
representing the shares of the Preferred Stock only upon
10
<PAGE>
satisfaction of the conditions set forth in Section 8 hereof.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the
Preferred Stock on the Closing Date and the Additional Preferred Stock on the
Additional Closing Date pursuant to this Agreement is conditioned upon:
a. The receipt and acceptance by the Company of Buyer's agreement,
as evidenced by its execution of this Agreement, to purchase at least One
Million ($1,000,000.00) Dollars in liquidation value Preferred Stock;
b. Delivery by the Buyer to the Escrow Agent of good funds as
bayment in full of an amount equal to the purchase price for the Preferred Stock
or Additional Preferred Stock (as the case may be) in accordance with Section
1(c) hereof;
c. The accuracy on the Closing Date or Additional Closing Date (as
the case may be) of the representations and warranties of the Buyer contained in
this Agreement as if made on such date, and the performance by the Buyer on or
before such date of all covenants and agreements of the Buyer required to be
performed on or before such date;
d. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Stock on the Closing Date and the Additional Preferred Stock on the
Additional Closing Date is conditioned upon:
a. Acceptance by the Company of this Agreement for the sale of
Preferred Stock, as indicated by execution of this Agreement, and Buyer's and
Company's execution of the Registration Rights Agreement;
b. Delivery by the Company to the Escrow Agent of the Preferred
stock or Additional Preferred Stock (as the case may be) in accordance with this
Agreement;
c. The accuracy in all material respects on the Closing Date or
Additional Closing Date (as the case may be) of the representations and
warranties of the Company contained in this Agreement as if made on such date,
and the performance by the Company on or before such date (as the case may be)
of all covenants and agreements of the Company required to be performed on or
before such date, as evidenced by a certificate of an executive officer of the
Company; and
11
<PAGE>
d. The Company shall have received a commitment from a strategic
investor acceptable to the Buyer for the purchase of at least $1,000,000 of
equity securities of the Company in the form annexed as Exhibit D.
e. On the Closing Date or Additional Closing Date, the Buyer having
received an opinion of counsel for the Company by such date, in form, scope
and substance reasonably satisfactory to the Buyer, to the effect set forth in
ANNEX III attached hereto.
10. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of Los Angeles or the state courts of the State of California sitting in
the City of Los Angeles in connection with any dispute arising under this
Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non coveniens, to the bringing
of any such proceeding in such jurisdictions. A facsimile transmission of this
signed Agreement shall be legal and binding on all parties hereto. This
Agreement may be signed in one or more counterparts, each of which shall be
deemed an original. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement. If any provision of this Agreement shall be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
11. NOTICES. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given upon personal delivery or seven business days after deposit in
the United States Postal Service, by (a) advance copy by fax, and (b) mailing by
express courier or registered or certified mail with postage an at such other
addresses as a party may designate by ten days advance written notice to each of
the other parties hereto.
COMPANY: CHATCOM, INC.
9600 Topanga Canyon Boulevard
Chatsworth, California
Telecopier No. (818) 882-1424
ATT: President
with a copy to:
Troy & Gould, Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067
Telecopier No. (310-201-4746)
12
<PAGE>
ATT: Sanford J. Hillsberg, Esq.
PURCHASER: At the address set forth on the signature page of this Agreement.
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Telecopier No. (212) 213-2077
ATT: Samuel M. Krieger, Esq.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each party's
representations and warranties shall survive the execution and delivery hereof
of this Agreement and the delivery of the Preferred Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
or one of its officers thereunto duly authorized as of the date set forth below.
NUMBER OF SHARES OF PREFERRED STOCK TO BE PURCHASED:
AGGREGATE PURCHASE PRICE OF SUCH PREFERRED STOCK: $__________
SIGNATURE(S) FOR INDIVIDUAL SUBSCRIBER(S)
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that he, she or they have executed this
Stock Purchase Agreement this ____ day of _________, 1997.
_____________________________ ______________________________
Printed Name Signature
_____________________________ ______________________________
Address
Telecopier No. ____________________
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Stock Purchase
Agreement to be duly executed on its behalf this ____ day of _________, 1997.
________________________________ ___________________________________
Address Printed Name of Subscriber
________________________________
By: ______________________________________
Telecopier No. _________________ (Signature of Authorized Person)
___________________________________________
________________________________ Printed Name and Title
Jurisdiction of Incorporation
or Organization : ________________
This Agreement has been accepted as of the date set forth below.
CHATCOM, INC.
By: _______________________________
Title: ____________________________
Date: ______________________________
14
<PAGE>
EXHIBIT 10.5
LETTER OF INTENT
Macon Holdings (S) PTE LTD. An exempt private limited liability company
organized under the laws of Singapore is desirous of making an investment in
ChatCom, Inc. a California Corporation; the board of Directors of ChatCom, Inc.
has approved the issuance of its' common stock for such monetary investment.
The common stock price to investor $1.50 per share
The number of shares of common stock being purchased is
666,666 for a total of $1,000,000 USD
Investor understands that the stock certificate will contain such legends
pursuant to the appropriate Rules of the Securities Exchange Commission.
Investor is acquiring the shares for investment purposes.
Investor agrees to a one year holding period of said shares after which at
investors request the shares shall be registered by ChatCom, Inc. and eligible
for resale after the effective date of registration.
Procedure for completion of this transaction is as follows:
1. Investor to execute and return signed Letter of Intent to the company.
2. The company's legal counsel will be instructed to prepare the subscription
agreement which will be in accordance with the provisions of this document.
3. A certificate for 666,666 shares of common stock will be prepared by the
company's transfer agent Continental Stock & Transfer Co.
4. Investor shall execute the subscription agreement, fax and mail the
original to the company; and investor shall wire transfer $1,000,000 U.S.
to the Trust account of the company's legal counsel, Troy & Gould. Should
funds not be received within 5 days after receipt of subscription agreement
by Troy & Gould the stock purchase offer and agreements shall terminate on
the sixth day.
<PAGE>
Page 2
5. Upon confirmation of receipt of funds Continental Stock transfer will be
instructed by ChatCom, Inc.'s counsel to forward the stock certificate for
666,666 common stock shares immediately to investor.
The Letter of Intent, unless executed shall expire on November 14, 1997. Any
changes or extensions must be in writing and executed by both parties.
Agreed: ChatCom, INC.
By: /s/ James B. Mariner Date: 6 Nov 1997
------------------------------
James B. Mariner-President/CEO
Agreed: Macon Holdings (S) PTE LTD
By: /s/ Date: 6 Nov 97
------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET STATEMENT OF OPERATIONS, STATEMENT OF CASH FLOW AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-START> JUL-01-1997 APR-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 446 446
<SECURITIES> 0 0
<RECEIVABLES> 3,479 3,479
<ALLOWANCES> (577) (577)
<INVENTORY> 3,120 3,120
<CURRENT-ASSETS> 6,620 6,620
<PP&E> 1,604 1,604
<DEPRECIATION> (926) (926)
<TOTAL-ASSETS> 7,322 7,322
<CURRENT-LIABILITIES> 4,154 4,154
<BONDS> 0 0
0 0
940 940
<COMMON> 12,111 12,111
<OTHER-SE> (9,907) (9,907)
<TOTAL-LIABILITY-AND-EQUITY> 7,322 7,322
<SALES> 2,407 6,866
<TOTAL-REVENUES> 2,407 6,866
<CGS> 1,486 4,342
<TOTAL-COSTS> 1,486 4,342
<OTHER-EXPENSES> 2,477 4,604
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14 13
<INCOME-PRETAX> (1,570) (2,093)
<INCOME-TAX> 0 1
<INCOME-CONTINUING> (1,570) (2,094)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,570) (2,094)
<EPS-PRIMARY> (0.17) (0.23)
<EPS-DILUTED> (0.17) (0.23)
</TABLE>
