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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
Commission file number 0-20462
CHATCOM, INC.
(Name of Small Business Issuer in Its Charter)
CALIFORNIA 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 TOPANGA CANYON BOULEVARD, CHATSWORTH, CALIFORNIA 91311
(Address of principal executive offices)
818/709-1778
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year: $9,103,000.
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Exhibit Index on Page 54
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As of June 30, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant computed by reference to The Nasdaq Stock
Market's closing price for the Registrant's Common Stock on June 30, 1997, was
approximately $13,054,000.
The number of shares outstanding of the Registrant's only class of common
stock, as of June 30, 1997, was 9,896,824.
Documents incorporated by reference:
Portions or registrant's Proxy Statement for its 1997 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within 120
days after the close of registrant's fiscal year, are incorporated herein by
reference in Part III of this Form 10-KSB.
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INDEX TO FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I
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Item 1: Description of Business.............................. 4
Item 2: Description of Property.............................. 20
Item 3: Legal Proceedings.................................... 20
Item 4: Submission of Matters to a Vote
of Security Holders.................................. 20
Part II
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Item 5: Market for Common Equity and
Related Shareholder Matters.......................... 21
Item 6: Management's Discussion and Analysis................. 22
Item 7: Financial Statements................................. 27
Item 8: Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 28
Part III
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Item 9: Directors, Executive Officers, Promoters, and
Control Persons; Compliance with Section 16(a)
of the Exchange Act.................................. 28
Item 10: Executive Compensation............................... 28
Item 11: Security Ownership of Certain
Beneficial Owners and Management..................... 28
Item 12: Certain Relationships and
Related Transactions................................. 28
Item 13: Exhibits and Reports on Form 8-K..................... 28
</TABLE>
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PART I
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ARE FORWARD LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO, ECONOMIC, COMPETITIVE,
GOVERNMENTAL AND TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S OPERATIONS,
MARKETS, PRODUCTS, SERVICES AND PRICES, AND OTHER FACTORS DISCUSSED IN ITEMS I
AND VI BELOW AND THE COMPANY'S VARIOUS OTHER FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION.
ITEM 1. DESCRIPTION OF BUSINESS
Overview
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During the past fiscal year, ChatCom, Inc. ("ChatCom" or the "Company") has
actively repositioned itself into the fast growing consolidated server market
and has recently won a major industry award for the excellence of its product
line in meeting consolidated server requirements (LAN Times - Best of Times
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Award for Consolidated Servers, February 1997). In recent years, the Company's
products had been geared primarily toward the remote control segment of the
remote access market. However, increased competition from alternative
technologies, lower demand and changes in access topology caused by increased
dominance of the Internet have led to declining revenues in the remote control
segment of the remote access market and increased operating losses that have
significantly impaired the Company's liquidity and capital resources, and caused
the Company to transition itself into the new and rapidly growing domain of the
consolidated server market.
The Company has taken significant steps to position itself as an
important force in the consolidated server, network simulation, clustering,
multi-user remote access and telecom Internet service markets, refocusing its
product development and marketing efforts to achieve this goal. The Company has
undergone major organizational changes to improve both its skills mix and modus
operandii. The Company believes that the quality and effectiveness of its sales
and marketing teams have been greatly improved, and the Company is taking steps
to increase gross margins through the use of outsourced "turn-key" manufacturing
of subassemblies for the Company's products and focusing a solutions approach on
the higher-end server marker.
The Company's primary product line is the well known ChatterBox(TM) family
of server consolidation and clustering platforms, a fully open OSI (Open Systems
Interconnect) architecture that supports all major network operating systems.
The Company's major strength is its proven ability to deliver high and ultra-
high density platforms, which deploy the latest in processor and bus technology.
Recognized by LAN Times as the benchmark for consolidated server performance,
---------
the Company's product line features a highly scaleable architecture,
unparalleled power efficiency, fully functioned management software and low
Mean-Time-To-Recover (MTTR).
The Company's top-down commitment to Open Standards and ISO9000 Quality and
a rededication to "Excellence by Design," have helped the Company in making the
transition to an emerging and technically challenging marketplace, while
supplying the bedrock on which revenue growths may be based. In furtherance of
the move into the consolidated server market, the Company has overhauled its
operations and procedures to comply with the requirements of ISO9000 Quality
Standards. The first round of internal audits were completed in June and the
formal approval process will be undertaken in the third quarter of this fiscal
year.
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In order to generate additional working capital to fund the Company's
marketplace transition, and its recent operating losses, the Company has
completed several private placements of its equity securities during the prior
fiscal year. Encouraged by both industry and customer reception of its
repositioned product offerings during the current fiscal year, the Company
anticipates that revenues can be significantly increased. However, there can be
no assurance that the Company will be able to generate increased revenues or
achieve profitability even if revenues do increase. Although the Company
currently has no debt, the Company at present has insufficient liquidity to
support its current level of operations or any significant 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 fiscal year.
Description of Products
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ChatterBox. With five different models in the family, the ChatterBox
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series has been designed to meet the needs of the consolidated server market,
and thereby satisfies the needs of the high-density applications server,
Internet server and network simulation markets as well. Each ChatterBox model
is built around a selection of common server modules, which makes the whole
product line both functionally compatible and fully scaleable. The ChatterBox
family exhibits the following significant advantages
. High to ultra-high platform density in compact industry-standard
enclosures. Current ultra-high density systems can support fully
configured Pentium(R) systems in one 19" rack enclosure. For high-end
server requirements, up to 28 dual SMP Pentium Pro(R) platforms can be
accommodated in one enclosure.
. State of the art power distribution using load balancing power supply
modules in a highly fault tolerant and efficient N+1 configuration
. High availability/low MTTR design with all system components being fully
hot-swappable and with no single point of system failure, achieved through
the deployment of a "multiple instance" architecture.
. Super scaleable fault tolerant clusters using advanced load-balancing
software to provide "processor bandwidth on demand" systems with near
linear efficiency.
. Systems management through ChatCom's Intelli-Management(TM) integrated
management system, which provides full monitoring and control capabilities
either locally or to a remote location using standards-based remote
management (SNMP).
. Ultra-high performance and data integrity is delivered through the
Company's ChatRAID(TM) Intelligent Disk Subsystem
The Company believes the clustering technology will permeate the networking
industry where mission critical applications are being deployed. The Company has
trademarked "RAINS" which stands for Redundant Array of Inexpensive Network
Servers and is partnered with Microsoft and Vinca Corporation ("Vinca") to
provide turnkey solutions.
The open architecture of ChatterBox server platforms supports the latest
Pentium and Pentium Pro technology of Intel Corporation ("Intel"), including the
recently introduced Dual SMP Pentium Pro, which provides the highest power to
density ratio yet achieved with this technology. Processor speeds up to 200MHz
and memory sizes up to 512MB in both single and dual processor designs are
available, making these platforms comparable to the most advanced stand-alone
servers available today.
Designed from the outset for mission-critical applications, the ChatterBox
family performs in an arena where system failures or unrecoverable loss of data
are considered unacceptable. The addition of the integrated ChatRAID level
7 disk storage architecture provides multiple server access to a self-healing,
fault-tolerant storage subsystem offering up to 1.1 Terabyte of high-
availability data across multiple redundant paths.
ChatterBox systems are in service worldwide supporting diverse applications
including Internet, intranet and web server functions, database and Groupware
(E-mail, etc.) server systems from Lotus Notes(R) and Microsoft(R) Exchange(TM)
to Oracle environments, file servers, applications servers, gateways, remote
access, Citrix servers
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and many more. They are also in service with a number of major peripheral
manufacturers in support of their various development and test programs.
Configurations range in price from approximately $5,000 up to approximately
$30,000 for the Office series, while the more powerful Corporate series range
from $7,500 to over $300,000.
Sources and Availability of Raw Materials. The Company purchases from
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various independent suppliers numerous parts, including computer chips, power
supplies, printed circuit boards, chassis, resistors, capacitors, and various
electronic components that the Company assembles into products. Although there
are at least dual suppliers for many of such parts, supplies and components, the
Company currently relies on single sources of supply for certain parts and
components, and the Company is vulnerable to product changes by and variances in
product quality from these suppliers. The Company's primary sources for these
items, which are readily available, are electronics distributors, including
Arrow Electronics, Inc., Bell Industries Inc., Hamilton/ Hallmark, and Intel.
The Company purchases certain components (the Cirrus VGA integrated
circuit, Intel processors, Opti integrated circuits, Omega power supply modules
and 3Com application specific integrated circuits), which contain technology
that is proprietary to its manufacturer and is therefore unavailable from other
manufacturers. The Company has no written supply agreements covering any of
these components. The Omega power supply module is purchased directly from
Omega Power Systems, Inc. ("Omega") and this module is an integral portion of
one of the power supply options offered by the Company.
The Company is required to carry significant amounts of inventory to meet
the rapid delivery requirements of its customers. Inventories held by the
Company are subject to obsolescence and the Company reports inventories net of a
reserve for obsolescence.
Markets and Marketing
- ---------------------
The Networking Market. Products that serve as the building blocks for
---------------------
data/voice networks have traditionally fallen into two categories -- those that
utilize the same underlying technology as standard desktop personal computers
("PCs"), and those that require specialized hardware and software. Included in
the former group are Internet/intranet servers, fileservers, database servers,
and E-mail gateways, while the latter group includes products such as routers,
bridges, remote access systems, and telephone switching systems.
Companies such as Compaq Computer Corporation ("Compaq"), Hewlett-Packard
Company ("HP"), IBM, Sun Microsystems, Inc., Dell Computer Corporation ("Dell")
and others have been the traditional leaders in providing hardware for the
server market, whereas companies such as Cisco Systems, Inc., 3Com Corporation,
Bay Networks, Inc., and Ascend Communications, Inc. have grown to multimillion
dollar or billion dollar corporations with products that address 'specialized'
networking functions.
The Marketing Approach. Today, with the extraordinary power of
----------------------
technologies utilizing Intel's Pentium processors and Digital Equipment
Corporation's Alpha(R) processors, virtually all networking functions can be
performed on PC-based hardware. Since ChatterBox integrates multiple server
modules that are based on such PC-based technology into compact, power
efficient, highly-reliable and highly-manageable systems for mission critical
applications, it is well-positioned to become an ideal platform for network
server consolidation. The advantages of having a common, low-cost 'engine' for
all networking applications are only now becoming apparent, and ChatCom believes
that it is poised to make significant inroads into this emerging market.
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The Company will continue to pursue its objective of providing
powerful, reliable, scalable, fault-tolerant and feature-rich products for the
mission critical market. While not the highest priced products of their kind,
the Company believes that ChatterBox systems will nonetheless rank among the
products with the best price/performance characteristics available, when the
ChatterBox's numerous value-added capabilities are considered.
Trade Shows and Advertising. The Company plans to exhibit at the following
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national trade shows during fiscal year 1998:
. NetWorld+InterOp, Las Vegas - April
. PC Expo, New York - June
. NetWorld+InterOp, Atlanta - September
. Comnet, Washington D.C. - January
These shows offer the opportunity for broad exposure of the Company's
products to both end-users and resellers, and are among the best-attended of the
numerous shows that now serve the networking industry. At these four large
shows, the Company will present its updated ChatterBox product line. In
addition, the Company will maintain some presence at certain regional trade
shows that address focused aspects of the industry, such as those put on by
Novell and Microsoft user groups.
In February 1997, the Company launched a new advertising campaign,
expanding its demographic coverage to address information technology (IT)
executives as well as the LAN management personnel covered in previous
campaigns. New solutions-oriented messages convey the benefits of deploying the
Company's products in several key markets, including remote access, Internet and
web servers and Microsoft NT/Backoffice(R) servers. LAN Times was selected as
---------
the core advertising vehicle based upon price, research and previous lead
generation performance.
Sales Channel Development. The Company has traditionally sold its products
-------------------------
through value-added resellers ("VAR"s), and will continue to do so for a
significant portion of its sales. However, the Company intends to continue to
evaluate its VAR network, attract larger and technically skilled VARs, and train
existing VARs to ensure high-quality service and response to end-users. The
Company perceives its VAR channel as a family of partners, and as such expects
to work in close cooperation with them.
Direct Sales. The Company has begun a direct sales program to large
------------
corporate users of ChatCom equipment as testing platforms for quality assurance.
Direct Sellers have the advantage of superior knowledge and control of what will
be a mission-critical application in a production environment.
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Engineering and Customer Service
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This new department has recently been created to help the Company pursue
its stated objective of providing superior quality in both its products and
service. A Vice President position has been created and filled to head-up the
department.
Engineering. Engineering reviews Marketing Requirement Documents to ensure
-----------
that the Company's products meet customer requirements. Engineering will
research component resources to ensure that the Company's products use state-of-
the-art components resulting in reliable, competitive and cost effective
products. Engineering will ensure all design processes follow established
procedures in conformance with ISO9000 requirements. The department will execute
designs using in-house engineering resources, as well as outsourcing engineering
workload to ISO9000 certified third-party development sources. Engineering will
transition products to Manufacturing and provide engineering support at the
onset of release through product end-to-life to ensure that the Company's
products are manufactured in strict comformance with specifications. Engineering
will also provide a high level of support to Customer Service to ensure that its
customer base receives full levels of support. Finally, Engineering will provide
documentation of all products to ensure embedded quality goes in before the name
goes on.
Customer Service. The Customer Service organization is responsible for
----------------
processing all incoming service calls, managing in-warranty and out-of-warranty
repair returns/shipments, and tracking all reported product problems. The
Company is in the process of building its Customer Service group into a premier
organization, capable of ensuring either immediate response to a call for
service, or a return call within two hours.
Sales and Distribution
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The Sales Organization. The Sales organization reports to the Company's
----------------------
President, and is currently divided into four regions - Eastern, Central,
Western and International. The Company has sales offices in New York, New
Jersey, Virginia, Chicago, Dallas, Ottawa, Seattle, Washington and
Chatsworth, California, each staffed by a regional sales representative. There
are also four sales staff located at headquarters who provide inside support for
the regions.
Significant Customers. During the fiscal year ended March 31, 1997 the
---------------------
Company received approximately 13% of its gross revenues from sales to US
Robotics Access Corp., an end-user of the Company's products. No other single
customer accounted for more than 10% of the Company's revenues for the fiscal
years ended March 31, 1996 and March 31, 1997.
Manufacturing
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The Company contracts for various electronic and mechanical components from
vendors and other manufacturers. Some are complete subassemblies, such as power
supplies or custom-built chassis, while others are individual items such as bare
circuit boards and chips. Rather than manufacture the actual electronic circuit
boards and mount the components used in its products, the Company subcontracts
the mounting and soldering of these assemblies and then performs assembly,
integration, and final testing.
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Because no heavy manufacturing such as wave soldering of circuit boards or
sheet metal fabrication is performed by the Company at its leased premises, the
Company would be able, if it became necessary, to quickly increase its
production levels with relatively little disruption to current operations. This
also allows the Company to incorporate the latest technology without having to
retool its manufacturing. The Company believes that it is capable of doubling
its present output with the addition of more assemblers and testers.
OEM Agreements. The Company currently has agreements with original
--------------
equipment manufacturers ("OEMs") to manufacture the Company's RAID subsystem
products and 3 Com Corporation to incorporate their chips into the Company's
products and to market failover (clustering) software in conjunction with its
consolidated servers under the ChatCom name. Other than the foregoing, the
Company does not have any significant agreements with OEMs.
Competition
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Products that are competitive with ChatterBox fall into two main
categories:
. 'Racked-and-stacked' stand-alone servers
. Integrated, purpose-designed rack-mounted systems (similar to
ChatterBox)
The racked and stacked stand-alone server category is comprised of many
stand-alone servers (e.g., from manufacturers such as Compaq, HP, IBM, Dell,
etc.) placed on custom metal racks. Metal rack systems are available from
numerous companies such as Wright Line, Ergotron, Inc., American Network
Products, Engineered Data Products (NetCom3), Kewaunee and others. While this
approach does allow a user to maintain some degree of order and a neat
appearance, it does not significantly reduce space requirements, nor does it
reduce power or cabling requirements. Furthermore, it does nothing to
consolidate the manageability of the separate systems. Nonetheless, the Company
considers its major competition to come from these 'racked-and-stacked' server
systems.
Among the second group of competitors (purpose-designed systems) is Cubix
Corporation ("Cubix"), a manufacturer that has been traditionally considered
among the Company's key competitors. Cubix is a strong player in managed
systems-level platforms for communications and application servers. Cubix
manufactures a platform with similar functionality to ChatCom's product line.
Cubix manufacturers proprietary motherboards whereas ChatCom use industry
standard motherboards in most of its products. The form factor of the two
product lines is different and the Company's believe that its product lines will
prevail due to the greater flexibility of its architecture.
In order to position itself as the superior choice in its marketplace,
ChatCom plans to increase its efforts to convey a consistent message regarding
those problems that the ChatterBox product line solves in ways that no other
manufacturer can. Additionally, ChatCom will embrace a philosophy of "Customer
Awareness." This philosophy combined with a clear, consistent message of product
and service superiority will enable ChatCom to reclaim its deserved recognition
among potential users.
New Product Development
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The Computer Industry. The Company's business is, as is the business of
---------------------
all of the computer hardware and software industry, extremely competitive and
rapidly changing. Without continued refinement of existing products, and the
development of new products, the Company could easily lose any competitive
advantage it may possess. It is therefore essential that substantial resources
be devoted to research and new product development.
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Recent Developments. As described previously, the Company is in the
-------------------
process of repositioning its products as a family of systems, rather than a
collection of building blocks. In creating the Corporate and Office Series
product lines, significant new system management features have been introduced.
These are composed of ChatCom's Intelli-Management monitoring and control
system, coupled with a major new version of the Company's ChatView(TM)
management software. Version 3 of this software operates in Microsoft's Windows
NT environment, and allows a ChatterBox system to be managed through industry-
standard SNMP-based products such as HP's OpenView(R) or IBM's Netview (TM).
Pentium Pro 200(R) -- A line of servers featuring the Intel Pentium Pro
CPU was introduced by the Company in March 1997 and is positioned for high-
speed, high-bandwidth applications, such as Internet/intranet/web servers,
groupware applications and traditional file serving.
Pentium ChatTwin(TM) -- In fiscal year 1996, the Company introduced its
ChatTwin line of server modules. The ChatTwin contains two complete processing
units on a single board, and fourteen such boards can be housed in a single card
cage. The Corporate Series Model 2040 can house up to four card cages, which
provides capacity for up to 112 processors in a six and a half foot tall cabinet
that occupies approximately five square feet of floor space. In March 1997, the
Company introduced significant performance enhancements to its ChatTwin server
module. The ChatTwin server module is now available with two fully functional,
completely independent Pentium servers integrated on a single card. This
configuration has proven useful and is expected to generate significant revenue
within the manufacturing sector that requires non-simulated network load and
network product test/measurement equipment.
In fiscal year 1996, the Company also introduced the ChatPowerPlus(TM)
redundant, hot-swappable module power supply unit for its processing systems.
The ChatPowerPlus unit is based on the "N+1" concept, whereby the user populates
the unit with the number of power modules needed to provide power to the
processor units plus an additional power module. As the power modules can be
exchanged without powering down other power modules, a power module failure does
not result in the failure of any processing units and the failed power module
may be replaced without the interruption of any processing. Because the
ChatPowerPlus holds up to four power modules that are individually exchangeable,
the user may obtain true fault tolerance and redundancy by employing power
modules with 133% of the user's maximum power needs, as opposed to the 200%
required by most redundant power systems. The Company knows of no systems
offered by its competitors that provide the processing power density of its
systems utilizing the ChatTwin and ChatPowerPlus units.
Future Developments The Company has and will continue to develop products
-------------------
for the server consolidation and remote applications markets, with emphasis on
those products that involve hardware as well as software. The Company feels that
with its current server module designs, the introduction of the next generation
of processor chips can be accommodated into certain of the Company's products
with little or no redesign required. The Company expects this characteristic of
the Company's products to reduce the time to market for future technology
upgrades. The Company believes that its server products are elements of a total
consolidated server solution consisting of hardware and software, which it
intends to develop internally or acquire under OEM agreements.
Research and Development The Company has spent approximately $1,246,000,
------------------------
$914,000 and $877,000 on company-sponsored research and development activities
during the fiscal years ended March 31, 1997, 1996, and 1995, respectively.
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Environmental Laws
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Compliance with federal, state and local provisions that have been enacted
or adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, likely will not have a
significant effect upon the capital expenditures, earnings, or competitive
position of the Company.
Organization and Business Development
- -------------------------------------
The Company was incorporated under the laws of the State of California in
March 1982. The Company originally was named "Astro Systems and Engineering,
Inc." and changed to "Astro Sciences Corporation" in 1985. On February 9, 1996,
the Company changed its name to "ChatCom, Inc."
Originally an engineering and technical consulting services company, the
Company acquired the assets of J&L Information Systems, Inc., a California
corporation ("J&L") in 1988. From 1982 (prior to J&L's incorporation) through
late 1985, J&L's primary activity consisted of the manufacturing and marketing
of remote access products for TeleVideo Systems, Inc.'s multi-user systems. As
the use of personal computer-based local area networks ("LANs") increased in
1986, J&L expanded its line of remote user access products to include
Novell(R) networks and networks of other emerging vendors. At the same time,
J&L evolved into a publisher of asynchronous communications software for LANs.
After the acquisition of J&L, the Company terminated its engineering
services business and concentrated completely on the J&L product business.
Currently, the Company's primary business activity is developing, integrating,
manufacturing and marketing highly-efficient centralized servers and storage
management systems.
Employees
- ---------
The Company currently employs approximately 78 full-time employees, of
which 21 are in manufacturing, 18 are in sales, 12 are in research and product
development, nine are classified as officers, general and administrative, eight
are in technical support, five are in quality assurance, three are in sustaining
engineering and two are in marketing.
RISK FACTORS
- ------------
Documents and press releases prepared by the Company, including this report on
Form 10-KSB, may from time to time contain forward looking statements. The
Company, its assets, operations, and financial condition and such forward
looking statements made by the Company are subject to various risks and
uncertainties, including without limitation, the following:
Ability to Continue as a Going Concern
--------------------------------------
As a result of the Company's net losses in recent periods and the Company's
negative cash flow from operating activities in recent periods, the Company's
independent auditors have included in their report on the Company's March 31,
1997 financial statements an explanatory paragraph regarding the ability of the
Company to continue as a going concern. The Company has obtained conditional
commitments for equity funds in one or more private placements in order to
obtain the funds necessary to meet its immediate working capital needs. There
can be no
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assurance that the Company will be able to successfully complete the private
placements or otherwise obtain the necessary funds to continue operations or
fund the Company's projected growth.
Liquidity
---------
The Company's continuing losses and negative cash flow from operations have
created a liquidity problem for the Company. As of March 31, 1997, the Company
had working capital of $3,195,000, as compared to working capital of $3,501,000
as of March 31, 1996. Notwithstanding the Company's working capital position as
of March 31, 1997, 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
Company, which currently does not have any bank debt, has received a conditional
commitment for a credit line and is in the process of finalizing the
implementation of the credit line and is negotiating an equity investment from
one of several strategic partners. The Company has not received a firm
commitment for any of the foregoing debt or equity financing, and there can be
no assurance that it will be able to obtain these commitments for a sufficient
amount of financing. If the Company does not raise sufficient financing to meet
its short term needs, it intends to implement a plan, pursuant to which it will
significantly reduce its current advertising and marketing activities, and make
significant reductions in its sales, engineering, customer service and
manufacturing work force. Although the Company believes that it should be able
to maintain operations at a reduced level under the contingency plan for the
foreseeable future, it may be required to raise capital to continue operations
at this reduced level and it would be necessary to raise additional capital to
restore operations to their prior level. There can be no assurance that the
Company would be able to obtain this financing.
The Company has incurred operating losses in each of its last three fiscal
years. Even if the Company successfully completes the debt and equity financings
it is currently attempting to place, 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 Company's Common Stock (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 Common Stock. No assurance can be given
that additional financing will be available or that, if available, it will be
available on terms favorable to the Company or its shareholders. Any increase in
the outstanding number of shares of Common Stock or options and warrants may
have an adverse effect on the market price of the Common Stock and may hinder
efforts to arrange future financing. If adequate funds are not available to
satisfy capital requirements, the Company may be required to curtail its
operations significantly or to obtain funds through arrangements with strategic
partners or others that may require the Company to relinquish material rights to
certain of its technologies or potential markets.
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Prior Operating Losses; Fluctuations in Operating Results
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The Company has reported net losses of $4,601,000 and $1,968,000 for the
fiscal years ended March 31, 1997 ("fiscal 1997") and 1996 ("fiscal 1996"),
respectively, due primarily to a decrease in revenue during fiscal 1997, flat
revenues during fiscal 1996 and increases in operating expenses and cost of
goods sold, including inventory obsolescence reserves. The Company also
incurred an operating loss for the three-month period ended June 30, 1997.
There can be no assurance that the Company's operations will be profitable in
the future.
The Company's reported results of operations are subject to considerable
fluctuations due to changes in demand for the Company's products and other
factors, and there can be no assurance that the Company will be profitable in
any particular period. Demand for the Company's products in each of the markets
it serves can vary significantly from quarter to quarter due to revisions in
budgets or schedules for customer projects requiring the Company's products,
changes in demand for systems that incorporate the Company's products, general
business and economic factors and other factors beyond the control of the
Company.
Dependence on New Product Development
-------------------------------------
The markets served by the Company are characterized by rapid technological
advances, downward price pressure in the marketplace as technologies mature,
changes in customer requirements, frequent new product introductions and
enhancements, and price erosion. The Company's business requires substantial
ongoing research and development efforts and expenditures, and its future
success will depend on its ability to enhance its current products, reduce
product costs and develop and introduce new products that both keep pace with
technological developments in response to evolving customer requirements and
that also achieve market acceptance.
The consolidated server market in particular is characterized by the
continuing advancement of technology, including technologies relating to the
increased efficiency of systems level management and the speed and efficiency of
microprocessors. The Company's strategy is to update its products to
accommodate new technologies; however, there can be no assurance that the new
technologies will not render the Company's products obsolete. The Company
believes that it must continue to respond quickly to the needs of its customers
for broad product functionality and must respond to advances in hardware,
generic operating system software, applications software, and emerging
technologies and markets, such as Internet services, groupware services,
enterprise-wide remote communications and the test measurement and emulation
markets. There can be no assurance that the Company will be able to respond
effectively to technological changes or product announcements by its
competitors. If the Company is unable, for technological or other reasons, to
develop and introduce products and applications in a timely manner in response
to changing market conditions or customer requirements, the Company's operating
results and financial condition could be materially, adversely affected.
Additionally, the marketability of the Company's products is influenced to
a significant degree by the management capabilities and efficiency of
proprietary software that is an integral component of the remote access
solutions that are offered by the Company. The Company's strategy is to
continually update its consolidated server product line and technology to
increase its capabilities and efficiency as well as to maintain its
compatibility with application and operating software and network protocols that
proliferate in the marketplace. There can be no
Page 13 of 57
<PAGE>
assurance that the Company's competitors will not introduce functionally similar
consolidated server platforms or proprietary management software that could
render the Company's products obsolete or that the Company will be able to
improve and advance its consolidated server technology and management software
so that it is compatible with applications software, operating software and
network protocols and market demands that may be introduced in the future or
that the Company's technology and products will continue to be accepted in the
marketplace. If the Company is unable to develop new, or improve its current,
products and technology in response to changes in its operating environment or
customer requirements, the Company's operating results and financial condition
could be materially, adversely affected.
Need to Manage Product Transitions
----------------------------------
The introduction of new and enhanced products requires the Company to
manage the transition from older products in order to minimize disruption in
customer ordering patterns, avoid excessive levels of older product inventories
and ensure that adequate supplies of new products can be delivered to meet
customer demand. There can be no assurance that the Company will successfully
manage the transition to selling new products, and the failure to do so could
have a materially adverse effect on the Company's operating results and
financial condition.
Highly Competitive Environment
------------------------------
The market for consolidated servers, including PC-based server technology
is highly competitive. The Company competes with leading vendors who provide
both desktop PCs and high-end server products. Such competitors, including but
not limited to HP, Compaq, Dell, and to a lesser extent, Cubix, who offers a
functionally similar consolidated server solution, have greater financial,
marketing, technical, and other resources than the Company. In the future, the
Company expects several of these companies to enter the consolidated server
market, or increase their presence, with their own additional consolidated
server products and solutions, and such competitive products and solutions could
have a materially adverse effect on the Company's results of operations.
In July 1995, the Company changed its pricing strategy for commodity-type
subassemblies (e.g. disk drives, fax servers, and random access memory)
purchased by the Company and incorporated into its products. Sales prices and
published list prices on these items were lowered by the Company in order to
discourage resellers and end-users from purchasing such products elsewhere and
installing them on systems provided by the Company. The installation of
components purchased from other vendors into systems sold by the Company had
caused compatibility problems in certain cases, potentially impacting the
Company's reputation for marketing reliable products. This change in pricing
strategy has resulted in lower margins on such subassemblies.
Increased competition could result in price reductions and loss of market
share, which would adversely affect the Company's results of operations. Many
of the Company's current and potential competitors have greater financial,
marketing, technical and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully with its
existing competitors or any new competitors.
Page 14 of 57
<PAGE>
Reliance on Consolidation Server Market; Early Stage of Market
--------------------------------------------------------------
The Company currently devotes a majority of its product development,
manufacturing, marketing and sales resources to providing product and services
to the enterprise consolidated server market. Although the Company believes
that its concentrated focus provides it with certain competitive advantages in
this market, this focus may also leave the Company more vulnerable to any future
decline in the demand for the Company's consolidated servers. In addition, the
Company's future financial performance will depend in large part on continued
growth of the consolidated server market, which in turn will depend in part on
the number of organizations utilizing such products and the number of
applications developed for use with those products. There can be no assurance
that these markets will continue to grow or that the Company will be able to
respond effectively to the evolving requirements of these markets. Any
significant decline in, or significant decrease in the growth rate of, the
consolidated server market could have a materially adverse effect on the
Company's results of operations and financial condition. Additionally, many of
the Company's customers do not yet have a standard consolidated server solution,
and there can be no assurance that the Company's products will be the standard
adopted by its customers.
Product Defects
---------------
New products, when first released by the Company, may contain undetected
design faults and software errors, or "bugs" that, despite testing by the
Company, are discovered only after a product has been installed and used by
customers. There can be no assurance that faults or errors in the Company's
existing products or in new products introduced by the Company will not be
discovered in the future, causing delays in product introductions and shipments
or requiring design modifications that could adversely affect the Company's
competitive position and results of operations. In addition, there can be no
assurance that new products or product enhancements developed by the Company
will achieve market acceptance or, if successful, will not adversely impact the
sales of the Company's existing products. On several occasions, the Company has
discovered minor design defects in its products that have caused delays in the
introduction of products. To date, however, the Company has not experienced any
significant problems in this regard and has not recalled products as a result of
a product defect.
Dependence on Key Personnel
---------------------------
The Company's future success depends in large part on the continued service
of its key marketing, sales and management personnel. The Company is dependent
upon its ability to identify, hire, train, retain and motivate high quality
personnel, especially highly skilled engineers involved in the ongoing hardware
and software development required to refine the existing products to introduce
enhancements for future applications and to develop new products. The Company
is particularly dependent on the skills and contributions of certain of its
management personnel, although the Company does not have long-term employment
agreements within many of these individuals. Competition for personnel in the
Company's industry, as well as in the computer hardware and software industry,
is characterized by a high level of employee mobility and aggressive recruiting
of skilled personnel. There can be no assurance that the Company's current
employees will continue to work for the Company or that the Company will be able
to obtain the services of additional personnel necessary for the Company's
growth.
Page 15 of 57
<PAGE>
Dependence on Timely Receipt of Acceptable Components
-----------------------------------------------------
The Company depends on the timely receipt of non-defective components to
meet its manufacturing schedule. The Company's operating results or financial
condition could be adversely affected by the receipt of a significant number of
defective components or a delay in component delivery, an increase in component
prices or the inability of the Company to obtain lower component prices in
response to competitive pressures on the pricing of the Company's products.
Reliance on Certain Suppliers
-----------------------------
The Company purchases from various independent suppliers numerous parts,
supplies and other components, which the Company assembles into products.
Although there are at least dual suppliers for many of such parts, supplies and
components, the Company currently relies on single sources of supply for certain
parts and components, and the Company is vulnerable to product changes by and
variances in product quality from these suppliers. Although the Compant believes
that such changes and quality fluctuations could be accommodated by it, they may
necessitate changes in the Company's product design or manufacturing methods,
and the Company could experience temporary delays or interruptions in supply
while such changes are incorporated or a new source of supply is procured. Any
future disruptions in supply of suitable parts and components from the Company's
principal suppliers could have a materially adverse effect on the Company's
operating results and financial condition.
The Company purchases certain components (the Cirrus VGA integrated
circuits, Intel processors, Opti integrated circuits, Omega power supply modules
and 3Com application specific integrated circuits), which contain technology
that is proprietary to its manufacturer and is therefore unavailable from other
manufacturers. The Company has no written supply agreements covering any of
these components. Although the Company purchases the components manufactured by
Cirrus, Opti and 3Com from only a single distributor each, and these components
are available through numerous distributors, the Company could experience
additional development costs and production delays while developing alternate
solutions should any of these manufacturers cease to produce the components.
The Omega power supply module is purchased directly from Omega and this
module is an integral portion of one of the power supply options offered by the
Company. Should Omega cease its production of this component or cease sales of
the component to the Company, a total redesign of the particular power supply in
which the component is utilized would be required. While the Company's processor
units may be sold with other power supply systems, the sales of the affected
model, and possibly a portion of the Company's sales of other products, would be
lost or delayed during the redesign and production start-up period.
The Company licenses remote access related software from Symantec
Corporation ("Symantec"). Although the software licensed from Symantec contains
proprietary features, other companies offer similar software that is compatible
with the Company's products. Accordingly, the Company believes that termination
of the Company's ability to license software directly from Symantec would not
have a material adverse effect upon the Company's operations.
Page 16 of 57
<PAGE>
Management of Inventory; Risk of Inventory Obsolescence
-------------------------------------------------------
The marketplace dictates that many of the Company's products be shipped
very quickly after an order is received. Since purchased component and
manufacturing lead times are typically much longer than the short order
fulfillment times allowed by the marketplace, the Company is required to
maintain adequate inventories of both components and finished goods, and must
accurately forecast demand for finished products. Historically, the Company has
been unable to accurately forecast specific future demand, requiring it to
maintain relatively large inventory levels, which has had an adverse effect on
its financial condition. The relatively high levels of inventories have also
contributed to the Company experiencing costs relating to obsolescence of
inventories, which has had an adverse effect on the Company's results of
operations and financial condition.
Engineering refinements to the Company's new hardware and software products
are relatively common. These changes can result in the disruption of the
manufacturing operation and delays in delivery dates. These changes also can
cause the finished goods inventory to enjoy a relatively short shelf life or may
require the Company to incur additional costs to rework the finished goods or
work-in-process inventories that were produced prior to the engineering change.
These and other circumstances, including inaccurate forecasts of customer
demand, poor availability of purchased components, supplier quality problems,
allocation limitations of key components by their manufacturer, carrier strikes
or damage to products during manufacture could result in a buildup of excess
components of finished goods on the one hand or an inability to deliver product
on a timely basis on the other hand, either of which could have a materially
adverse effect on the Company's operating results and financial condition.
The Company has incurred inventory writedowns in the past. While the
Company maintains valuation allowances for excess and obsolete inventories,
which it believes to be adequate, significant changes in the technology
prevailing in the industry could require the Company to record additional
valuation reserves. During fiscal 1997 and fiscal 1996, the Company recorded
additions to its valuation allowance for obsolete and excess inventories in the
amounts of $794,000, and $162,000, respectively, which adversely affected gross
profit and net income in the periods in which additional valuation allowances
were recorded. The Company believes that its allowance for obsolete and excess
inventories that are currently recorded are sufficient to properly state
inventories at their net realizable value. Material additions to such allowance
might be required in the future if market conditions affecting the Company's
product sales mix change significantly. Should future writedowns become
necessary, such writedowns could have a materially adverse effect on the
Company's operating results and financial condition.
Dependence on Proprietary Technology
------------------------------------
The Company's future success and competitive position is dependent partly
upon its proprietary technology, and the Company relies to a limited degree on
trademark and copyright law and, may in the future rely on patent law to
protect its intellectual property. There can be no assurance that any patent
owned by the Company will not be invalidated, circumvented or challenged, that
the rights granted thereunder will provide competitive advantages to the Company
or that any of the Company's future patent applications will be issued within
the scope of the claims sought by the Company, if at all. Furthermore, there
can be no assurance that others will not develop technologies that are similar
or superior to the Company's technology, duplicate the Company's technology or
design around the patents owned by the Company. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
Page 17 of 57
<PAGE>
foreign countries. The Company has been issued two patents for its "Phone Busy
Circuit" and "Hardware Remote Reset Circuit." Although products marketed by
third parties may infringe on these patents, the Company may not proceed to
enjoin the marketing of those products by others in light of technological
changes that are on-going and the substantial expense that the Company may be
required to incur to enforce these patents with no certainty of success.
Potential Erosion of Profit Margins
-----------------------------------
As a result of competitive pressures and technological changes, the sales
price of the Company's current products may decrease over time. As markets
develop for the Company's products, the Company expects that the average selling
price will decrease, which will adversely affect gross profit margins to the
extent that such decreases are not offset by new higher-margin products or
product cost reductions. In addition, certain of the Company's competitors have
significantly greater resources than the Company, and the market for the
Company's primary products is relatively new and undeveloped. There can be no
assurance that a competitor will not enter the Company's markets and devote
substantial resources to the introduction of competing products at lower prices,
which could require the Company to reduce the price of its products. Such a
price reduction could have an adverse effect on the Company's profit margins,
and accordingly, on its operating results and financial condition.
Dividends on Common Stock Unlikely
----------------------------------
The Company has never declared or paid dividends on its Common Stock. The
provisions of the Company's Series D Preferred Stock (the "Series D Preferred
Stock") prohibit the payment of dividends on the Common Stock while shares of
the Series D Preferred Stock are outstanding. The Company does not currently
intend to pay dividends in the foreseeable future so that it may reinvest its
earnings, if any, in the development of its business. The payment of dividends
in the future will be at the discretion of its Board of Directors.
Possible Dilutive Effect of Outstanding Options, Warrants and Preferred
-----------------------------------------------------------------------
Stock
- -----
AS OF JUNE 30, 1997, there were 5,832,967 shares of Common Stock
reserved for issuance upon exercise of stock options and warrants that have been
granted or issued. 1,886,683 of the outstanding options and all of the
3,131,284 warrants are currently exercisable at exercise prices ranging from
$0.60 to $5.00 per share. An additional 337,817 shares of Common Stock are
reserved for issuance upon the exercise of options available for future grant
under the Company's 1994 Stock Option Plan, and 1,700,000 shares of Common Stock
are reserved for issuance upon the conversion or redemption of the 2,496
outstanding shares of the Company's Series D Preferred Stock and the accrued but
unpaid dividends related thereto that may be paid in shares of Common Stock.
Because the Company anticipates that the trading price of Common Stock at the
time of exercise of any such options or warrants will exceed the exercise price,
such exercise will have a dilutive effect on the Company's shareholders. As the
number of shares issuable upon the conversion or redemption of the Series D and
dividends related thereto may increase based on a decline in the market price of
the Common Stock on the date of conversion or redemption, such conversions or
redemptions may have a dilutive effect on the Company's shareholders.
Market Price Fluctuations and Effect of Registration of Shares
--------------------------------------------------------------
The trading price of the Common Stock has from time to time fluctuated
widely and in the future may be subject to similar fluctuations in response to
quarter-to-quarter variations in
Page 18 of 57
<PAGE>
the Company's operating results, announcements of innovations or new products by
the Company or its competitors, general conditions in the computer or computer
network industries and other events or factors. In addition, in recent years
broad stock market indices, in general, and the securities of technology
companies, in particular, have experienced substantial price fluctuations. Such
broad market fluctuations may adversely affect the future trading price of the
Common Stock.
The Company has filed registration statements that became effective in
February 1996 and June 1996, respectively, covering the potential public resale
of a number of shares of its Common Stock that were issued in connection with
private placements by the Company or that may be publicly resold upon the
conversion or exercise of outstanding options, warrants or other convertible
securities. The Company anticipates filing additional registration statements
in the future covering the Company's 1994 Stock Option Plan and shares of Common
Stock issuable upon conversion of the Series D Preferred Stock or upon exercise
of warrants issued in connection with the sale of the Series D Preferred Stock
and may also file registration statements from time to time in the future
covering the public resale of Common Stock issued or issuable upon conversion of
securities issued in any future private placements by the Company. Sales, or
even the possibility of sales, of a substantial number of shares of Common Stock
by the holders thereof could adversely affect the market price of the Common
Stock and could impair the Company's ability to raise capital through the sales
of equity securities.
The warrants to purchase Common Stock that were issued in conjunction with
the Company's 1994 private placement of Common Stock and the Company's 1995
private placement of Common Stock provide the Company the ability to force the
exercise of the warrants if the Common Stock underlying the warrants has been
registered and if the market price of the Common Stock equals or exceeds a
specified level for a period of ten consecutive business days. Should these
conditions be satisfied and should the Company elect to exercise its right to
force the warrants to be exercised, there is a possibility that the warrant
holders may sell some or all of the Common Stock that they purchased during the
private placements in order to obtain the funds necessary to exercise the
warrants. The Company cannot predict what effect, if any, such actions would
have on the market price of the Company's Common Stock.
Loss on Liquidation and Dissolution
-----------------------------------
In the event of a dissolution and termination of the Company, distribution
of the proceeds realized from liquidation will be made according to the relative
priority on liquidation of the Company's creditors. The Company anticipates
that any line of credit it may obtain will be secured by the Company's accounts
receivable and inventory and, therefore, the lender will have a claim to the
Company's assets on liquidation, which is prior to that of the Company's
shareholders. Additionally, holders of the Series D Preferred Stock have
liquidation preference over holders of Common Stock, whereby any proceeds from
liquidation or dissolution remaining after repayment of creditors would be used
to repay holders of Series D Preferred Stock their entire initial investment
plus any accrued but unpaid dividends prior to distributing excess proceeds, if
any, among holders of Common Stock. Accordingly, the ability of a shareholder to
recover all or a portion of his investment under such circumstances will depend
on the net amount of funds available after senior creditors and holders of
Series D Preferred Stock are satisfied.
Page 19 of 57
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's present office and manufacturing facility is located at 9600
Topanga Canyon Boulevard, Chatsworth, California, and comprises approximately
25,000 square feet. This space was leased by the Company for a five-year term
that expires on November 30, 1998, with rental payments of approximately
$153,000 for fiscal year 1997. This facility is devoted to the Company's
corporate, administrative and manufacturing and assembly activities.
Approximately 50% of the space is allocated to production, 15% to sales and
marketing, 15% to administration, and 20% to engineering and product support
laboratories.
The Company currently rents sales offices on a month-to-month basis in New
York City, Seattle, Washington, and West Orange, New Jersey at monthly rentals
ranging from approximately $300 to $3,000.
The Company does not intend to acquire real estate, interests in real
estate, or real estate mortgages, for investment. It has been and will continue
to be for the foreseeable future, the Company's policy to reinvest its earnings,
if any, in its business to increase the working capital and to expand the
production capacity of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding, the outcome of
which it believes could have a materially adverse effect on the Company. The
Company is not aware of any proceeding contemplated by a governmental authority.
From time to time the Company may be a party to legal actions arising in the
ordinary course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended March 31, 1997.
Page 20 of 57
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock (the "Common Stock") currently trades on The
Nasdaq Stock Market, listed under SmallCap issues, and is quoted under the
symbol "CHAT." The Common Stock began trading on The Nasdaq Stock Market in
February 1993 under the symbol "AOSC." On February 23, 1996, the Company's
Common Stock began trading under the symbol "CHAT" as a result of the change of
the name of the Company from Astro Sciences Corporation to ChatCom, Inc.
The following table presents the range of the high and low bid prices for
the Common Stock for the periods indicated. The information has been
obtained from the Nasdaq Stock Market Summary of Activity. There are currently
more than 20 known market makers for the Common Stock The bid prices reflect
inter-dealer prices, do not reflect any retail mark-up, mark-down, commissions
or transaction costs, and may not represent any actual transactions
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996
------------------------------------------
Quarter High Bid Low Bid High Bid Low Bid
-------------- ------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $4.4375 $ 1.75 $ 5.50 $3.125
Second Quarter $ 3.125 $1.625 $3.875 $2.875
Third Quarter $ 3.219 $ 2.25 $ 3.25 $ 1.50
Fourth Quarter $3.5625 $2.375 $2.625 $1.625
</TABLE>
AS OF JUNE 30, 1997, THERE WERE 628 STOCKHOLDERS OF RECORD OF THE COMMON
STOCK.
No dividends have been declared or paid on the Common Stock by the Company.
The provisions of the Company's Series D Preferred Stock prohibit the payment of
dividends on the Common Stock while shares of the Series D Preferred Stock are
outstanding. The Company does not intend to pay any cash dividends on the
Common Stock in the foreseeable future. Instead, it is anticipated that the
Company will retain earnings, if any, to finance its operations and growth.
Page 21 of 57
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
- --------
During the past fiscal year, the Company has actively repositioned itself
into the fast growing consolidated server market and has recently won a major
industry award for the excellence of its product line in meeting consolidated
server requirements (LAN Times - Best of Times Award for Consolidated Servers,
---------
February 1997). In recent years, the Company's products had been geared
primarily toward the remote control segment of the remote access market.
However, increased competition from alternative technologies, lower demand and
changes in access topology caused by increased dominance of the Internet have
led to declining revenues in the remote control segment of the remote access
market and increased operating losses that have adversely affected the Company's
liquidity and capital resources, and caused the Company to transition itself
into the new and rapidly growing domain of the consolidated server market.
The Company has taken significant steps to position itself as an
important force in the consolidated server, network simulation, clustering,
multi-user remote access and telecom Internet service markets, refocusing its
product development and marketing efforts to achieve this goal. The Company has
undergone major organizational changes to improve both its skills mix and modus
operandii. The Company believes that the quality and effectiveness of its sales
and marketing teams have been greatly improved, and the Company is taking steps
to increase gross margins through the use of outsourced "turn-key" manufacturing
of subassemblies for the Company's products and focusing a solutions approach on
the higher-end server market.
The Company's primary product line is the well known ChatterBox family of
server consolidation and clustering platforms, a fully open OSI (Open Systems
Interconnect) architecture that supports all major network operating systems.
The Company's major strength is its proven ability to deliver high and ultra-
high density platforms, which deploy the latest in processor and bus technology.
Recognized by LAN Times as the benchmark for consolidated server performance,
----------
the Company's product line features a highly scaleable architecture,
unparalleled power efficiency, fully functioned management software and low
Mean-Time-To-Recover (MTTR).
The Company's top-down commitment to Open Standards and ISO9000 Quality and
a rededication to "Excellence by Design," have helped the Company in making the
transition to an emerging and technically challenging marketplace, while
supplying the bedrock on which revenue growths may be based. In furtherance of
the move into the consolidated server market, the Company has overhauled its
operations and procedures to comply with the requirements of ISO9000 Quality
Standards. The first round of internal audits were completed in June and the
formal approval process will be undertaken in the third quarter of this fiscal
year.
In order to generate additional working capital to fund the Company's
marketplace transition, and its recent operating losses, the Company has
completed several private placements of its equity securities during the prior
fiscal year. Encouraged by both industry and customer reception of its
repositioned product offerings during the current fiscal year, the Company
anticipates that revenues can be significantly increased. However, there can be
no assurance that the Company will be able to generate increased revenues or
achieve profitability even if revenues do increase. Although the Company
currently has no debt, the Company at present has insufficient liquidity to
support its current level of operations or any significant 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 fiscal year.
Page 22 of 57
<PAGE>
Results of Operations for the Fiscal Year Ended March 31, 1997 Compared to the
- ------------------------------------------------------------------------------
Fiscal Year Ended March 31, 1996
- --------------------------------
The Company recorded a net loss of $4,601,000 for the fiscal year ended
March 31, 1997 ("fiscal 1997"), on revenues of $9,103,000 as compared to a net
loss of $1,968,000 on revenues of $14,790,000 for the year ended March 31, 1996
("fiscal 1996").
Sales and Costs of Goods Sold
-----------------------------
Sales decreased $5,687,000, or 39%, from $14,790,000 to $9,103,000. The
Company believes that the decrease in revenues was attributable in part to a
constraint on the number of Pentium Pro chips allocated by Intel (which problem
is now corrected), a large volume of orders received late in the fiscal year,
which could not be manufactured in time to ship during the fiscal year, and
delays in foreign government orders, a declining demand for remote control type
remote access solutions, decreased marketing efforts during the last quarter of
fiscal 1996 due to cash flow constraints and the redirection of marketing
efforts toward the server consolidation and network emulation markets during
fiscal 1997. The Company believes that its efforts to penetrate these new
markets will begin to positively affect revenue levels during the first half of
the fiscal year ending March 31, 1998 ("fiscal 1998").
Cost of goods sold decreased $2,988,000, or 30%, from $9,882,000 to
$6,894,000. The decrease was attributable to decreased product sales. The
percentage decrease in cost of sales was less than the percentage decrease in
revenues due to fixed costs contained in cost of sales that did not decrease
proportionately with revenues and a $632,000 increase in additions to inventory
reserves for product obsolescence. The Company is in the process of attempting
to improve its margins and intends to try to obtain higher margins on its new
product offerings, however competitive market forces and new product
introductions by competitors may hamper the Company's attempts.
Rapidly changing technology and engineering refinements to the Company's
hardware and software products are relatively common. These changes can cause
the finished goods inventory to enjoy a relatively short shelf life. The
Company has incurred inventory writedowns in the past. While the Company
maintains valuation allowances for excess and obsolete inventories, which it
believes to be adequate, significant changes in the technology prevailing in the
industry could require the Company to record additional valuation reserves.
During fiscal 1997 and fiscal 1996, the Company recorded additions to its
valuation allowance for obsolete and excess inventories in the amounts of
$794,000 and $162,000, respectively, which adversely affected gross profit and
net income in the periods in which additional valuation allowances were
recorded. The Company believes that its allowance for obsolete and excess
inventories that are currently recorded are sufficient to properly state
inventories at their net realizable value. However, material additions to such
allowance might be required in the future if technology or market conditions
affecting the Company's product sales mix change significantly.
Selling Expense
---------------
Selling expense decreased $167,000, or 5%, from $3,429,000 to $3,262,000.
The decrease was attributable to a decrease in sales department salaries of
$93,000, a decrease in sales commissions of $38,000 and a decrease in
advertising expenditures of $172,000. These decreases were partially offset by
an increase in marketing salary of $85,000. The decrease in sales salaries
was attributable to the resignations of the Vice President of Sales and a
regional
Page 23 of 57
<PAGE>
sales manager during the first two quarters of fiscal 1997. The decrease in
sales commissions was primarily attributable to the decrease in revenues.
Advertising expense decreased as a result of cash flow constraints during the
last quarter of fiscal 1996 and the Company's lack of a marketing director
during the first quarter of fiscal 1997. Marketing department salaries
increased as a result of the hiring of a marketing director and a marketing
communications manager in the first quarter of fiscal 1997. The Company
anticipates that the sales department salaries and advertising expense levels
experienced in fiscal 1997 will increase during fiscal 1998 as the Company
expects to generate increased revenues and has increased its sales staff to
provide increased sales coverage and customer support and has launched a
marketing campaign to penetrate the server consolidation market.
General and Administrative Expense
----------------------------------
General and administrative expense increased $335,000, or 17%, from
$2,004,000 to $2,339,000. The increase consisted of a $139,000 increase in
salaries, an $84,000 increase in officers' travel, a $112,000 increase in bad
debt expense and the recording of $62,000 in restructuring expenses related to
the elimination of certain positions during August 1996. These increases were
partially offset by a $92,000 decrease in legal fees. The increase in salaries
was primarily attributable to the creation of an "Office of the President" that
involved the hiring of a Senior Vice President for Business Development and the
transfer of the Senior Vice President of Technology from the research and
development cost center to the general and administrative cost center. The
increase in officers' travel was attributable to an increased number of officers
and a concerted effort by the Company to keep its executive officers in close
contact with its customers. The increase in bad debts was primarily attributable
to the financial failure of a large reseller of the Company's products.
Severance Expense
-----------------
During fiscal 1996, the Company recorded a severance expense of $322,000
related to the payments that the Company has agreed to pay to former executive
officers of the Company pursuant to the remaining terms of their employment
contracts. There were no terminations during fiscal 1997 that involved similar
agreements.
Research and Development Expense
--------------------------------
Research and development expense increased $332,000, or 36%, from $914,000
for fiscal 1996 to $1,246,000 for fiscal 1997. The increase was primarily
attributable to a concerted effort by the Company to decrease development time
and increase pre-production product testing. The increase included net workforce
increases in the Company's engineering staff and a $178,000 increase in
prototyping and consulting expenses.
Interest Expense
----------------
Interest expense decreased $171,000, or 93%, from $183,000 to $12,000, due
to the retirement of virtually all of the Company's debt financing during the
first quarter of fiscal 1997.
Page 24 of 57
<PAGE>
Results of Operations for the Fiscal Year Ended March 31, 1996 Compared to the
- ------------------------------------------------------------------------------
Fiscal Year Ended March 31, 1995
- --------------------------------
The Company recorded a net loss of approximately $1,968,000 for fiscal
1996, on revenues of approximately $14,790,000 as compared to net loss of
$1,928,000 on revenues of $14,962,000 for the fiscal year ended March 31, 1995
("fiscal 1995").
Sales and Costs of Goods Sold
-----------------------------
Sales decreased $172,000, or 1%, from $14,962,000 to $14,790,000. The
decrease in sales was entirely due to decreased fourth quarter sales. Sales for
the quarter ended March 31, 1996 were $2,383,000 as compared to $5,163,000 for
the quarter ended March 31, 1995, which represents a $2,780,000, or 54%,
decrease. The Company believes that the decrease was due at least in part to
decreased marketing expenditures in the third and fourth quarters of fiscal 1996
due to cash constraints, the lack of a federal budget during that period, which
slowed government purchases of durable goods and the proliferation of alternate
remote access solutions that offer lower performance at a lower cost.
Cost of goods sold increased $214,000, or 2%, from $9,668,000 to
$9,882,000. The increase was due entirely to an increase in manufacturing labor
and overhead of $220,000. The manufacturing labor and overhead increased
primarily due to increased volume of production that was experienced during the
first nine months of the fiscal year.
Selling Expense
---------------
Selling expenses increased $199,000, or 6%, from $3,230,000 to $3,429,000.
The increase was primarily attributable to an increase of $140,000 in
advertising and business promotion related expenses and a $42,000 increase in
marketing consulting.
General and Administrative Expense
----------------------------------
General and administrative expense increased $551,000, or 38%, from
$1,453,000 to $2,004,000. The increase was attributable to the consulting
expenses of $85,000 related to the utilization of an interim president and chief
executive officer from July 1995 to March 1996, approximately $100,000 related
to officers' and directors' liability insurance premiums for a policy that was
initiated in June 1995, approximately $120,000 in management consulting fees
related to the restructuring of the Company's management and the search for the
Company's permanent president and chief executive officer, an increase of
approximately $93,000 in legal and accounting fees relating to transition costs
for the change in corporate counsel and the filing of registration statements,
an increase of consulting fees of $43,000 related to financial public relations
and a $40,000 increase in sales tax expense that resulted from an audit of
fiscal 1992, 1993 and 1994 sales taxes.
Compensation Expense due to Stock Options
-----------------------------------------
Compensation expense recorded in connection with the extension of stock
options decreased $929,000, or 98%, from $949,000 to $20,000. The compensation
expense recorded in
Page 25 of 57
<PAGE>
fiscal 1996 related to options granted to directors pursuant to the formula
option provision of the 1994 Stock Option Plan, which then provided for the
grant of options at 75% of the market price. Subsequent to that grant the
formula option provision of the 1994 Stock Option Plan was amended, whereby
future grants of options will be exercisable at market price as of the date of
grant. The compensation expense recorded in fiscal 1995 related to the
extension of the exercise terms of options to purchase 744,000 shares of common
stock.
Severance Expense
-----------------
The Company recorded a severance expense of $322,000 related to payments
that the Company agreed to pay to former executive officers of the Company
pursuant to the remaining terms of their employment contracts.
Research and Development Expense
--------------------------------
Research and development expense increased $38,000, or 4%, from $876,000 to
$914,000. The increase was primarily due to salary increases awarded to
employees and an increase in materials for prototypes.
Interest Expense
----------------
Interest expense decreased $175,000, or 49%, from $358,000 to $183,000, due
to the lower levels of debt financing throughout the year, which was made
possible by the proceeds of a private placement of common stock and warrants at
the end of fiscal 1995.
Income Taxes
------------
Income taxes decreased $352,000, or 99%, from $356,000 to $4,000. The
decrease was due to an addition to the valuation reserve for deferred tax assets
in the fiscal year ended March 31, 1995, which effectively reserved all amounts
previously recorded as deferred tax assets.
Financial Condition as of March 31, 1997
- ----------------------------------------
Liquidity and Capital Resources
-------------------------------
During fiscal 1997, the Company had a negative cash flow from operations of
$3,573,000. Additionally, $343,000 of cash was expended for the purchase of
capital assets that are used in operations. The negative operating cash flow
was primarily the result of the net loss of $4,601,000, which was partially
mitigated by noncash charges for accounts receivable and inventory obsolescence
reserves, which comprised part of the net loss, and by a decrease in accounts
receivable. Financing activities provided a positive cash flow of $4,018,000
primarily due to the private placement of Series C 6% Convertible Preferred
Stock, $20,000 stated value per share (the "Series C Preferred Stock") in the
amount of $1,325,000, the private placement of Series D 10% Voting Convertible
Preferred Stock, $1,000 stated value per share(the "Series D Preferred Stock")
and warrants for net proceeds of $2,322,000, and the exercise of stock options
and stock purchase warrants that resulted in proceeds to the Company of
$850,000.
The proceeds from the sale of securities was partially offset by the
repayment of $938,000 of outstanding borrowings under a line of credit agreement
that was terminated in the first quarter of fiscal 1997.
Page 26 of 57
<PAGE>
Liquidity
---------
As of March 31, 1997, the Company had working capital of $3,195,000, as
compared to working capital of $3,501,000 as of March 31, 1996. Notwithstanding
the Company's working capital position as of March 31, 1997, 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 Company, which currently does
not have any long-term or bank debt, has received a conditional commitment for a
credit line and is in the process of finalizing the implementation of the credit
line and is negotiating an equity investment from one of several strategic
partners. The Company has not received a firm commitment for any of the
foregoing debt or equity financing, and there can be no assurance that it will
be able to obtain these commitments for a sufficient amount of financing. If the
Company does not raise sufficient financing to meet its short term needs, it
intends, within the next few weeks, to implement a restructuring plan, pursuant
to which it will reduce its future product development efforts, significantly
reduce its current advertising and marketing activities, and make significant
reductions in its sales, engineering, customer service and manufacturing work
force. Although the Company believes that it should be able to maintain
operations at a reduced level under the restructuring plan for the foreseeable
future, it may be required to raise capital to continue operations at this
reduced level and it would be necessary to raise additional capital to restore
operations to their prior level.
The Company has incurred operating losses in each of its last three fiscal
years and in the first quarter of its current fiscal year. Even if the Company
successfully completes the debt and equity financings it is currently attempting
to place, 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 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 the
date hereof. The Company anticipates, however, acquiring additional equipment
and fixtures from time to time as considered necessary by the Company's
management
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements appear on pages 34 to 53 of this Annual
Report on Form 10-KSB, following Part IV.
Page 27 of 57
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company hereby incorporates by reference the information contained
under the headings "Election of Directors" and "Compliance With Section 16(a) of
the Securities Exchange Act of 1934" from its definitive Proxy Statement to be
delivered to the shareholders of the Company in connection with the 1997 Annual
Meeting of Shareholders, to be held on September 10, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information contained
under the headings "Executive Compensation" from its definitive Proxy Statement
to be delivered to the shareholders of the Company in connection with the 1997
Annual Meeting of Shareholders, to be held on September 10, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates by reference the information contained
under the headings "Security Ownership of Principal Stockholders and Management"
from its definitive Proxy Statement to be delivered to the shareholders of the
Company in connection with the 1997 Annual Meeting of Shareholders, to be held
on September 10, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference the information contained
under the headings "Certain Transactions with Management" from its definitive
Proxy Statement to be delivered to the shareholders of the Company in connection
with the 1997 Annual Meeting of Shareholders, to be held on September 10, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements are included as part of this
Annual Report on Form 10-KSB:
Independent Auditors' Report
Balance Sheets as of March 31, 1997, and 1996.
Page 28 of 57
<PAGE>
Statements of Operations for the Years Ended March 31, 1997,
1996, and 1995.
Statements of Cash Flows for the Years Ended March 31, 1997,
1996, and 1995.
Statements of Stockholders' Equity for the Years Ended March 31,
1997, 1996, and 1995.
Notes to Financial Statements.
The following exhibits are filed with this Form 10-KSB or are
incorporated herein by reference to the document described:
3.1 Articles of Incorporation of Astro Systems and Engineering,
Inc., filed March 22, 1982 are incorporated by reference to
Exhibit 3(a) to the Company's Form 10 Registration Statement
as amended by Form 8, Amendment No. 2, dated January 22,
1993 (the "Company's Form 10").
3.2 Certificate of Amendment of Articles of Incorporation filed
March 26, 1984, is incorporated by reference to Exhibit 3(b)
to the Company's Form 10.
3.3 Certificate of Amendment of Articles of Incorporation filed
May 28, 1985, is incorporated by reference to Exhibit 3(c)
to the Company's Form 10.
3.4 Certificate of Amendment of Articles of Incorporation filed
January 10, 1991, is incorporated by reference to Exhibit
3(d) to the Company's Form 10.
3.5 Certificate of Determination filed with the California
Secretary of State on January 10, 1991, is incorporated by
reference to Exhibit 3(e) to the Company's Form 10.
3.6 Restated and Amended Bylaws, as of February 1, 1997, is
incorporated by reference to Exhibit 3(f) to the Company's
Form 10-QSB for the quarter ended December 31, 1996, as
filed with the Commission on February 11, 1997.
3.7 Certificate of Amendment of Articles of Incorporation filed
with the California Secretary of State on December 6, 1993,
is incorporated by reference to the Company's 1994 Form 10-
KSB.
3.8 Certificate of Amendment of Articles of Incorporation filed
Determination filed with the California Secretary of State
on February 14, 1996, is incorporated by reference to
Exhibit 3.9 to the Company's 1996 Form 10-KSB, as filed with
the Commission on July 1, 1996.
3.9 Certificate of Determination and Decrease for Series B
Preferred Stock filed with the California Secretary of State
on March 19, 1996, is incorporated by reference to Exhibit
4(b) to the Company's Registration
Page 29 of 57
<PAGE>
Statement on Form S-3 (Registration No. 333-3792), as
amended by Amendment No. 1 dated June 3, 1996 (the
"Registration Statement").
3.10 Certificate of Determination for Series C Preferred Stock
filed with the California Secretary of State on April 15,
1996, is incorporated by reference to Exhibit 4(d) to the
Registration Statement.
3.11 Certificate of Determination for Series D Preferred Stock
filed with the California Secretary of State on December
6, 1996
10.1 Indemnification Agreement between the Company and A.
Charles Lubash, dated February 1, 1992, is incorporated by
reference to Exhibit 10(k) to the Company's Form 10.
10.2 Indemnification Agreement between the Company and George
L. Lazik, dated February 1, 1992, is incorporated by
reference to Exhibit 10(l) to the Company's Form 10.
10.3 Indemnification Agreement between the Company and Richard
F. Gordon, Jr., dated February 1, 1992, is incorporated by
reference to Exhibit 10(m) to the Company's Form 10.
10.4 Indemnification Agreement between the Company and Charles
Conrad, Jr., dated February 1, 1992, is incorporated by
reference to Exhibit 10(n) to the Company's Form 10.
10.5 Indemnification Agreement between the Company and James R.
Spievak, dated February 1, 1992, is incorporated by
reference to Exhibit 10(o) to the Company's Form 10.
10.6 Option Agreement between the Company and A. Charles
Lubash, dated May 8, 1992, is incorporated by reference to
Exhibit 10(v) to the Company's 1993 Form 10-KSB.
10.7 Option Agreement between the Company and George L. Lazik,
dated May 8, 1992, is incorporated by reference to Exhibit
10(w) to the Company's 1993 Form 10-KSB.
10.8 Lease between HWL Properties, a California partnership,
and the Company, dated May 5, 1993, as amended June 1,
1993, is incorporated by reference to Exhibit 10(x) to the
Company's 1993 Form 10-KSB.
10.9 $3,500,000 Business Financing Agreement with Deutsche
Financial Services Corporation (formerly ITT Commercial
Finance Corporation), dated May 16, 1995, is incorporated
by reference to Exhibit 10(y) to the Company's 1995 Form
10-KSB, as filed with the Commission on June 26, 1995.
10.10 1994 Stock Option Plan, dated August 31, 1994, as amended,
is incorporated by reference to Exhibit 10.3 to the
Company's Quarterly
Page 30 of 57
<PAGE>
Report on Form 10-QSB for the fiscal quarter ended
December 31, 1996, as filed with the Commission on
February 11, 1997.
10.11 Employment Agreement between A. Charles Lubash and the
Company, dated April 1, 1995, is incorporated by reference
to Exhibit 10(dd) to the Company's 1995 Form 10-KSB, as
filed with the Commission on June 26, 1995.
10.12 Consulting Agreement between George L. Lazik and the
Company, dated March 11, 1996, is incorporated by
reference to Exhibit 10.12 to the Company's 1996 Form 10-
KSB, as filed with the Commission on July 1, 1996.
10.13 Amended and Restated Employment Agreement between Russell
Jackson and the Company, effective April 1, 1993, is
incorporated by reference to Exhibit 10(ff) to the
Company's 1995 Form 10-KSB, filed with the Commission on
June 26, 1995.
10.14 Form of Stock Purchase Agreement for Series B Preferred
Stock and Series C Preferred Stock, entered into by the
Company and Julie Nordlicht, A. Ziskind, Tail Wind Fund,
Ltd., Cassolette, David Freund and Legong Investments N.V.
is incorporated by reference to Exhibit 10.14 to the
Company's 1996 Form 10-KSB, as filed with the Commission
on July 1, 1996.
10.15 Employment Agreement between the Company and James B.
Mariner dated as of April 1, 1997.
10.16 Form of Warrant Agreement, dated December 13, 1996,
entered into by ChatCom, Inc. and Maximum Partners, Ltd.
is incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended June 30, 1996, as filed with the Commission
on August 14, 1996.
10.17 Purchase Agreement, dated as of December 9, 1996,
regarding the sale of Series D Preferred Stock and
Warrants to purchase Common Stock, is incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-QSB for the fiscal quarter ended
December 31, 1996, as filed with the Commission on
February 11, 1997.
10.18 Form of Warrant Agreement, dated December 13, 1996,
entered into by ChatCom, Inc. and Strategic Growth
International, Inc. relating to warrants to purchase
100,000 shares of Common Stock of ChatCom, Inc., is
incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter
ended December 31, 1996, as filed with the Commission on
February 11, 1997.
10.19 Indemnification Agreement between the Company and Gerald
R. Sayer, dated as of August 14, 1995.
Page 31 of 57
<PAGE>
10.20 Indemnification Agreement between the Company and James D.
Edwards, dated as of October 9, 1995.
10.21 Indemnification Agreement between the Company and Sanford
C. Sigoloff, dated as of February 8, 1996.
10.22 Indemnification Agreement between the Company and Philip
B. Smith, dated as of February 8, 1996.
10.23 Indemnification Agreement between the Company and John R.
Grady, dated as of January 3, 1994.
10.24 Indemnification Agreement between the Company and James B.
Mariner, dated as of March 5, 1996.
10.25 Indemnification Agreement between the Company and Richard
L. Picheny, dated as of March 10, 1997.
10.26 Indemnification Agreement between the Company and Andrew
M. Brown, dated as of May 14, 1997.
10.27 Indemnification Agreement between the Company and Russell
Jackson, dated as of February 8, 1996.
10.28 OEM Agreement between the Company and Vinca Corporation,
dated June 17, 1997.
23 Consent of Deloitte & Touche, L.L.P., dated July 14,
1997, to the incorporation by reference in the
Registration Statements (Forms S-3, Nos. 333-3792 and 33-
99668) and the related prospectuses, with respect to the
Financial Statements of ChatCom, Inc. included in the
Annual Report (Form 10-KSB) for the years ended March 31,
1997, 1996 and 1995.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
The Company did not file any reports on Form 8-K during the
fourth quarter of its fiscal year ended March 31, 1997.
Page 32 of 57
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CHATCOM, INC.
a California corporation
Dated: July 15, 1997 By: /s/ James B. Mariner
____________________________________
James B. Mariner, President,
Chief Executive Officer, Chief
Financial Officer
By: /s/ Cheryl A. Smithey
___________________________________
Cheryl A. Smithey
Controller and Principal
Accounting Officer
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Dated: July 15, 1997 By: /s/ Richard F. Gordon, Jr.
____________________________________
Richard F. Gordon, Jr.,
Chairman of the Board
Dated: July 15, 1997 By: /s/ A. Charles Lubash
____________________________________
A. Charles Lubash, Director
Dated: July 15, 1997 By: /s/ George L. Lazik
____________________________________
George L. Lazik, Director
Dated: July __, 1997 By: ____________________________________
Gerald R. Sayer, Director
Dated: July 15, 1997 By: /s/ James D. Edwards
____________________________________
James D. Edwards, Director
Dated: July __, 1997 By: ____________________________________
Sanford C. Sigoloff, Director
Dated: July 15, 1997 By: /s/ Philip B. Smith
____________________________________
Philip B. Smith, Director
Dated: July 15, 1997 By: /s/ Andrew Brown
____________________________________
Andrew Brown, Director
Dated: July 15, 1997 By: /s/ James B. Mariner
____________________________________
James B. Mariner, Director
Page 33 of 57
<PAGE>
FINANCIAL STATEMENTS
Page 34 of 57
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors of
ChatCom, Inc.
Chatsworth, California:
We have audited the accompanying balance sheets of ChatCom, Inc., (the
"Company") as of March 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ChatCom, Inc. as of March 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses and negative cash flows
from operations raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Los Angeles, California
JUNE 20, 1997
Page 35 of 57
<PAGE>
CHATCOM, INC.
- -------------
<TABLE>
<CAPTION>
BALANCE SHEETS
MARCH 31, 1997 AND 1996 (in thousands)
- ----------------------------------------------------------------------------------------------
Notes 1997 1996
----- ---- ----
<S> <C> <C> <C>
ASSETS 5
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,169 $ 1,067
Restricted cash 5 500
Accounts receivable, net of allowances of
$109,000 (1997) and $262,000 (1996) 1,334 1,968
Inventories 2 2,721 3,481
Prepaid expenses and other current assets 108 202
-------- -------
Total current assets 5,332 7,218
EQUIPMENT AND FIXTURES, Net 3,6 651 539
DEPOSITS 24 21
-------- -------
TOTAL $ 6,007 $ 7,778
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 12 $ 1,427 $ 1,843
Accrued expenses 4 687 906
Short-term borrowings 5 938
Current portion of capital lease obligations 6 23 30
-------- -------
Total current liabilities 2,137 3,717
CAPITAL LEASE OBLIGATIONS -
less current portion 6 12 19
STOCKHOLDERS' EQUITY: 9
Preferred Stock, no par value, authorized 1,000,000 shares: 8
Series B Preferred Stock, $20,000 stated value per share,
authorized 1,000 shares, issued and outstanding
75 shares (1996) 1,294
Series D Preferred Stock, $1,000 stated value per share,
authorized 5,000 shares, issued and outstanding
2,496 shares (1997) 1,407
Common stock, no par value, authorized, 25,000,000 shares,
issued and outstanding, 9,826,892 (1997) and
7,536,629 (1996) shares 10,090 5,860
Additional paid-in capital 2,404 1,436
Accumulated deficit (10,043) (4,548)
-------- -------
Total stockholders' equity 3,858 4,042
-------- -------
TOTAL $ 6,007 $ 7,778
======== =======
</TABLE>
See notes to financial statements
Page 36 of 57
<PAGE>
CHATCOM, INC.
- -------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995 (in thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------
Notes 1997 1996 1995
----- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $ 9,103 $ 14,790 $ 14,962
COST OF GOODS SOLD 6,894 9,882 9,668
---------- ---------- ----------
GROSS PROFIT 2,209 4,908 5,294
---------- ---------- ----------
OPERATING EXPENSES: 12
Selling expense 3,262 3,429 3,230
General and administrative expense 2,339 2,004 1,453
Compensation expense related to stock options 9 20 949
Research and development expense 1,246 914 876
Severance expense 10 322
---------- ---------- ----------
Total operating expenses 6,847 6,689 6,508
---------- ---------- ----------
LOSS FROM OPERATIONS (4,638) (1,781) (1,214)
INTEREST INCOME 49
INTEREST EXPENSE 5, 12 12 183 358
---------- ---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (4,601) (1,964) (1,572)
PROVISION FOR INCOME TAXES 11 4 356
---------- ---------- ----------
NET LOSS (4,601) (1,968) (1,928)
DIVIDENDS ON PREFERRED STOCK 894
---------- ---------- ----------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (5,495) $ (1,968) $ (1,928)
========== ========== ==========
NET LOSS PER SHARE $(0.61) $(0.26) $(0.34)
========== ========== ==========
Weighted average number of common shares 8,965,743 7,536,629 5,675,999
</TABLE>
See notes to financial statements
Page 37 of 57
<PAGE>
<TABLE>
<CAPTION>
CHATCOM, INC.
- -------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31, 1997, 1996 AND 1995 (in thousands, except share data)
- --------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
--------------- ------------
Number of Number of
Notes Shares Amount Shares Amount
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE, April 1, 1994 5,429,629 $ 2,162
Extension of convertible
subordinated debt 7 27,500 55
Options granted for services
Extension of stock options 9
Issuance of common stock and 9
warrants 2,077,500 3,642
Net loss
----- ------ ------ ---------- -------
BALANCE, March 31, 1995 7,534,629 5,859
Exercise of stock options 9 2,000 1
Grant of stock options
Payment of subscription receivable
Issuance of Series B Preferred Stock 8 75 $ 1,294
Net loss
------ ------ ---------- -------
BALANCE, March 31, 1996 75 1,294 7,536,629 5,860
Issuance of Series C Preferred Stock 8 75 1,277
Issuance of Series D Preferred Stock 8 2,496 1,407
Issuance of stock purchase warrants 8
Conversion of Series B Preferred Stock 8 (75) (1,294) 1,024,768 1,294
Conversion of Series C Preferred Stock 8 (75) (1,277) 907,098 1,277
Preferred Stock dividends 38,041 809
Exercise of stock options 9 30,000 37
Exercise of stock purchase warrants 9 290,356 813
Net loss
------ ------ ---------- -------
BALANCE, March 31, 1997 2,496 $ 1,407 9,826,892 $10,090
====== ====== ========== =======
</TABLE>
<TABLE>
<CAPTION>
Additional
Subscription Paid-in Accumulated Stockholders'
Receivable Capital Deficit Equity
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, April 1, 1994 $ 348 $ (652) $ 1,858
Extension of convertible
subordinated debt 55
Options granted for services 119 119
Extension of stock options
Issuance of common stock and 949 949
warrants $(100) 3,542
Net loss (1,928) (1,928)
------------ ---------- ----------- ------------
BALANCE, March 31, 1995 (100) 1,416 (2,580) 4,595
Exercise of stock options 1
Grant of stock options 20 20
Payment of subscription receivable 100 100
Issuance of Series B Preferred Stock 1,294
Net loss (1,968) (1,968)
------------ ---------- ----------- ------------
BALANCE, March 31, 1996 1,436 (4,548) 4,042
Issuance of Series C Preferred Stock 1,277
Issuance of Series D Preferred Stock 1,407
Issuance of Stock Purchase Warrants 968 968
Conversion of Series B Preferred Stock
Conversion of Series C Preferred Stock
Preferred Stock dividends (894) (85)
Exercise of stock options 37
Exercise of stock purchase warrants 813
Net loss (4,601) (4,601)
------------ ---------- ----------- ------------
BALANCE, March 31, 1997 $2,404 $(10,043) $3,858
============ ========== =========== ============
</TABLE>
See notes to financial statments
Page 38 of 57
<PAGE>
<TABLE>
<CAPTION>
CHATCOM, INC.
- -------------
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995 (in thousands)
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------- ------- -------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C>
Net loss $(4,601) $(1,968) $(1,928)
Adjustments to reconcile net loss
to net cash used in operating activities:
Grant/extension of stock options 20 949
Depreciation and amortization 253 312 309
Loss on disposal of assets 57 7
Deferred income taxes 354
Provision for losses on accounts receivable 166 37 57
Provision for inventory obsolescence 794 162 324
Changes in operating assets and liabilities:
Accounts receivable 468 1,455 (1,368)
Inventories (34) (521) (763)
Prepaid expenses and other current assets 94 119 (201)
Deposits (3) (1) (1)
Accounts payable (416) (768) 1,144
Accrued expenses (294) 171 213
------- ------- -------
Net cash used in operating
activities (3,573) (925) (904)
------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES - Capital expenditures (343) (190) (192)
------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from short-term borrowings 938
Repayments of short-term borrowings (938) (1,075) (875)
Change in restricted cash 500 (500)
Principal payments on capital leases (35) (33) (28)
Payment of preferred stock dividends (10)
Proceeds from issuance of common stock and
warrants 3,242
Collection of subscription receivable 100
Proceeds from issuance of Series B Preferred Stock 1,294
Proceeds from issuance of Series C Preferred Stock 1,325
Proceeds from issuance of Series D Preferred Stock 2,322
Proceeds from issuance of stock purchase warrants 4
Proceeds from issuance of convertible subordinated
debt 550
Repayment of convertible subordinated debt (250)
Repayment of notes payable to officers (88)
Proceeds from exercise of stock purchase warrants 813
Proceeds from exercise of stock options 37 1
------- ------- -------
Net cash provided by financing
activities 4,018 725 2,551
------- ------- -------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 102 (390) 1,455
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,067 1,457 2
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 1,169 $ 1,067 $ 1,457
======= ======= =======
See notes to financial statements
(Continued)
</TABLE>
Page 39 of 57
39
<PAGE>
CHATCOM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ------
<S> <C> <C> <C>
Cash paid (refunded) for income taxes $ $ 2 $(65)
Cash paid for interest $12 $196 $292
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended March 31, 1997 and 1995, the Company acquired office
equipment under capital leases in the amount of $22,000 and $15,000,
respectively.
During fiscal 1997, the Company accrued dividends related to the Series D
Preferred stock of $75,000.
During fiscal 1997, 75 shares of Series B Preferred Stock and 75 shares of
Series C Preferred Stock were converted into 1,024,768 and 907,098 shares
of the Company's Common Stock (the "Common Stock"), respectively.
During fiscal 1997, the Company issued 38,041 shares of Common Stock in
payment of accrued dividends of $59,000 relating to Series B Preferred
Stock and Series C Preferred Stock.
During fiscal 1997, the Company recognized preferred stock dividends of
$750,000 as a result of the beneficial conversion features of the Series B
Preferred Stock and Series C Preferred Stock, which resulted in an increase
in accumulated deficit of $750,000 and an increase in Common Stock of
$750,000. (See note 8).
During fiscal 1997, the Company granted warrants to purchase 100,000 shares
of Common Stock to SGI International, Inc. as partial compensation pursuant
to a finders fee agreement in connection with the placement of the Series D
preferred Stock. The transaction resulted in an increase in additional
paid-in capital of $1,000 and a decrease in Series D Preferred Stock of
$1,000.
During fiscal 1996, the Company granted 15,000 options to purchase the
Common Stock to directors at an exercise price of $4.03 per share. The
market price on the date of grant was $5.37. The grant of the options
resulted in the recording of compensation expense and additional paid-in
capital of $20,000.
During March 1995, the Company issued Common Stock and warrants in exchange
for the receipt of a personal check in the amount of $100,000. Subsequent
to the issuance of the securities, the check proved to be drawn on an
account with insufficient funds. During fiscal 1996, the Company received
the $100,000 subscription receivable.
During March 1995, convertible subordinated debt with a principal balance
of $300,000 was converted into 150,000 shares of Common Stock and warrants
to purchase 150,000 shares of Common Stock.
During December 1994, the Company agreed to issue 27,500 shares of Common
Stock and warrants to purchase 27,500 shares of Common Stock as
consideration for the extension of the due dates of the convertible
subordinated debt. Interest expense for the year ended March 31, 1995, and
Common Stock at March 31, 1995, each contain an amount of $55,000 related
to this transaction.
During November 1994, the Company granted options to purchase 200,000
shares of Common Stock to a consulting firm in exchange for investor
relations services for the period from November 15, 1994, through November
14, 1995. The granting of the options resulted in an increase of
additional paid-in capital of $119,000. The balance of prepaid expenses as
of March 31, 1995, included $74,000 in prepaid consulting fees and general
and administrative expense for the years ended March 31, 1996 and 1995,
included amounts of $74,000 and $45,000, respectively, related to this
transaction.
During August 1994, the Company extended the exercise terms of all non-
qualified stock options then outstanding resulting in the recording of
compensation expense and additional paid-in capital in the amount of
$949,000.
See notes to financial statements.
Page 40 of 57
<PAGE>
CHATCOM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
- -----------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - ChatCom, Inc., a California corporation, is engaged in the
--------
business of developing, integrating, manufacturing and marketing highly-
efficient centralized server and storage management systems.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. During the years ended March 31,
1997, 1996 and 1995 the Company incurred net losses of $4,601,000,
$1,968,000 and $1,928,000, respectively, and negative cash flows from
operations of $3,573,000, and $925,000 and $904,000, respectively, which
raise substantial doubt about its ability to continue as a going concern.
Additionally, revenues during the fourth quarter of fiscal 1997 were lower
than that of the fourth quarter of the previous year and of the first three
quarters of fiscal 1997. As of March 31, 1997, the Company had working
capital of $3,195,000, as compared to working capital of $3,501,000 as of
March 31, 1996. Notwithstanding the Companys working capital position as
of March 31, 1997, 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 Company, which currently does not have any bank
debt, has received a conditional commitment for a credit line and is in the
process of finalizing the implementation of the credit line and is
negotiating an equity investment from one of several strategic partners.
The Company has not received a firm commitment for any of the foregoing
debt or equity financing, and there can be no assurance that it will be
able to obtain these commitments for a sufficient amount of financing. If
the Company does not raise sufficient financing to meet its short term
needs, it intends to implement a contingency plan, pursuant to which it
will reduce its future product development efforts, significantly reduce
its current advertising and marketing activities, and make significant
reductions in its sales, engineering, customer service and manufacturing
work force. Although the Company believes that it should be able to
maintain operations at a reduced level under the contingency plan for the
foreseeable future, it may be required to raise capital to continue
operations at this reduced level and it would be necessary to raise
additional capital to restore operations to their prior level. There can be
no assurance that the Company would be able to obtain this financing. The
financial statements do not include any adjustments that might result
should the Company be unable to continue as a going concern.
Use of Estimates - The preparation of financial statements in conformity
----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents - The Company considers cash on hand, demand
-------------------------
deposits and short-term investments with original maturities of 90 days or
less to be cash
Page 41 of 57
<PAGE>
equivalents. At March 31, 1997 and 1996, the balance of cash and cash
equivalents consisted of cash on hand, demand deposits, and a certificate
of deposit.
Financial Instruments - The carrying value of cash and cash equivalents,
---------------------
restricted cash, accounts receivable, accounts payable and short-term
borrowings approximate fair value due to the short maturities of such
instruments.
The Companys financial instruments that are exposed to concentration of
credit risk consist primarily of its cash and cash equivalents, restricted
cash and accounts receivables. The Company restricts its investment of
cash and cash equivalents and restricted cash to financial institutions
with high credit standing. Credit risk on accounts receivables is
minimized to a certain extent as a result of the large number and
geographic dispersion of the Companys nationwide customer base. The
Company performs ongoing credit evaluations of its customers financial
condition and maintains an allowance for potential credit losses.
Inventories - Inventories are stated at the lower of cost (first-in, first-
-----------
out) or market. The Company reviews its inventories and assesses the
reserve for obsolete and excess inventories required to state inventories
at the lower of cost or market approximately quarterly. The charges to
cost of sales for the valuation of obsolete and excess inventories were
$794,000, $162,000 and $324,000 for the years ended March 31, 1997, 1996
and 1995, respectively.
Equipment and Fixtures - Equipment and fixtures are stated at cost.
----------------------
Depreciation and amortization are computed on the straight-line method over
the following estimated useful lives of the assets:
Equipment 5 years
Software 3 years
Furniture and fixtures 5 years
Leasehold improvements Lesser of lease
term or 5 years
Software Costs - The Company capitalizes the cost of purchased software.
--------------
These costs are amortized over three years.
Research and Development - All research and development costs are expensed
------------------------
as incurred.
Revenue Recognition - The Company records revenue for sales of hardware
-------------------
and software products at the time the title to the product is transferred
to the customer. The Company does not have significant obligations to
provide hardware or software upgrades or service beyond a standard warranty
period of one year. The cost to provide standard warranty services for
previously sold products is estimated quarterly and accrued.
At the time an extended warranty agreement is sold, the proceeds are
recorded as deferred revenue and amortized to income on a straight-line
basis over the extended warranty period. Sales of extended warranty
agreements began in February 1994. Extended warranty agreements in the
amounts of $139,000, $94,000 and $44,000 were sold during the years ended
March 31, 1997, 1996 and 1995, respectively. Deferred revenue related to
extended warranty agreements of $147,000 and $91,000 was included in
accrued expenses at March 31, 1997 and 1996, respectively.
Page 42 of 57
<PAGE>
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of -
-----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,"
on April 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicates that the carrying amount of the asset
may not be recoverable. Recoverability of assets to be held and used in the
future is measured by a comparison of the carrying amount of the asset to
future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of this
statement did not have a material impact on the Companys financial position
or results of operations.
Major Customers - The Company had sales to individual customers in the
---------------
amounts of $1,177,000, $853,000 and $3,055,000 during the years ended March
31, 1997, 1996 and 1995, respectively.
Income Taxes - Deferred income tax assets and liabilities are computed
------------
annually for differences between the financial statement and income tax
bases of assets and liabilities. Such deferred income tax asset and
liability computations are based on enacted tax law and rates applicable in
periods in which the differences are expected to reverse. If necessary, a
valuation allowance is established to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the year and the change in deferred income tax assets and
liabilities during the year.
Earnings per Share - Earnings per share are computed based on the weighted
------------------
average number of common shares and dilutive common share equivalents
(consisting of convertible preferred stock, stock warrants and stock
options) outstanding during the periods. The computation of fully diluted
loss per share was antidilutive; therefore the amounts reported for primary
and fully diluted earnings per share were the same.
Reclassification - Certain amounts in the accompanying 1996 and 1995
----------------
financial statements have been reclassified to conform with the 1997
presentation.
Stock Options - The Company adopted SFAS No. 123, "Accounting for Stock-
-------------
Based Compensation," on April 1, 1996. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on
fair value of the equity instrument awarded. Companies are permitted,
however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company continues to apply APB Opinion No. 25 to its stock-
based compensation awards to employees and has disclosed the required pro
forma effect on net loss and loss per share. (See note 9).
Page 43 of 57
<PAGE>
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Raw materials $1,508,000 $1,548,000
Work-in process 1,056,000 1,004,000
Finished goods 1,121,000 1,320,000
---------- ----------
Inventory at cost 3,685,000 3,872,000
Less: Reserve for obsolescence 964,000 391,000
---------- ----------
$2,721,000 $3,481,000
========== ==========
</TABLE>
3. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
March 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Equipment $1,006,000 $ 755,000
Software 137,000 84,000
Furniture and fixtures 181,000 154,000
Leasehold improvements 74,000 40,000
---------- ----------
1,398,000 1,033,000
Less accumulated depreciation
and amortization 747,000 494,000
---------- ----------
$ 651,000 $ 539,000
========== ==========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
March 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Accrued payroll and related expenses $252,000 $219,000
Accrued bonuses and commissions 29,000 32,000
Accrued dividends on preferred stock 75,000
Reserve for severance 54,000 317,000
Reserve for stock registration 36,000
Accrued royalties 35,000 35,000
Deferred rent 26,000 39,000
Deferred revenue 147,000 91,000
Accrued warranty expense 15,000 15,000
Other liabilities 54,000 122,000
-------- --------
$687,000 $906,000
======== ========
</TABLE>
Page 44 of 57
<PAGE>
5. SHORT TERM BORROWINGS
On May 26, 1995, the Company entered into a $3,500,000 working capital
line-of-credit facility with a commercial finance corporation that bore
interest at the prime rate (8.25% at March 31, 1996) plus 1.75%. The line-
of-credit was collateralized by substantially all of the assets of the
Company and contained covenants requiring the Company to maintain a
prescribed level of earnings and certain financial ratios. The maximum
amount of borrowing that was allowed under the line-of-credit agreement was
equal to 80% of eligible accounts receivable.
The Company failed to comply with the maintenance of earnings covenant
contained in the line-of-credit agreement for the fiscal quarters ended
September 30, 1995 and December 31, 1995. The lender waived compliance
with the covenant for the quarter ended September 30, 1995 upon the Company
securing the facility with a $500,000 six-month irrevocable standby letter
of credit. The lender waived compliance with the covenant for the quarter
ended December 31, 1995 upon the agreement by the Company to repay all
amounts owing under the line by May 3, 1996. On May 2, 1996, the Company
repaid all amounts then outstanding and all accrued interest owed under the
line-of-credit agreement and the agreement was terminated.
6. LEASE OBLIGATIONS
The Company leases its primary operating facility in Chatsworth, California
under an operating lease expiring on November 30, 1998. The Company leases
sales offices in Seattle, New York City, San Francisco and West Orange, New
Jersey under operating lease agreements that expire at various times during
fiscal year 1998 and a vehicle and certain equipment under operating lease
agreements that expire at various times during the fiscal year ending March
31, 2000. Rent expense under such lease agreements in fiscal years 1997,
1996 and 1995 was $172,000, $153,000 and $136,000, respectively.
The Company has financed the purchase of office equipment through
capital lease agreements. The obligations are collateralized by the leased
equipment, which had a net book value of $41,000 and $42,000 at March 31,
1997 and 1996, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending Operating Capital
March 31, Leases Leases
------------- ---------- --------
<S> <C> <C>
1998 $183,000 $25,000
1999 99,000 12,000
2000 2,000 1,000
-------- -------
$284,000 38,000
========
Less interest 3,000
Less current portion 23,000
-------
$12,000
=======
</TABLE>
Page 45 of 57
<PAGE>
7. CONVERTIBLE SUBORDINATED DEBT
On May 4, 1994, the Company issued 9% convertible subordinated debt with
principal of $550,000, maturing on November 4, 1994. Upon maturity, the
Company negotiated extensions of the due dates of the convertible
subordinated debt until March 4, 1995. During the extension period,
interest at the rate of 12% per annum was paid by the Company. As
additional consideration for the extension, the noteholders were issued
27,500 shares of common stock and warrants to purchase 27,500 shares of
common stock at an exercise price of $3.00 per share. In March 1995, the
Company repaid $250,000 of the convertible subordinated debt and the
remaining $300,000 was converted into 150,000 shares of common stock and
warrants to purchase 150,000 shares of Common Stock at an exercise price of
$3.00 per share.
8. PREFERRED STOCK
In March 1996, the Company sold 75 shares of Series B Preferred Stock,
$20,000 stated value per share (the "Series B Preferred Stock"), for gross
proceeds of $1,500,000. Offering costs of $206,000, consisting of finders
fees, legal fees, accounting fees, listing fees and registration costs,
were incurred by the Company. Dividends were payable in cash or common
stock, at the option of the Company, at a rate of 6% per annum. The shares
were convertible into Common Stock with a conversion price equal to the
lesser of the average closing bid price for the five trading days prior to
the date of sale or 75% of the average closing bid price for the five
trading days prior to the date of conversion or redemption. As a result of
this beneficial conversion feature, $375,000 was charged to additional
paid-in capital and reflected as a preferred stock dividend during fiscal
1997. During fiscal 1997, the holders of the Series B Preferred Stock
converted all of the outstanding shares into 1,024,768 shares of Common
Stock. The Company paid dividends of $10,000 and 15,535 shares of Common
Stock related to the Series B Preferred Stock.
In May 1996, the Company sold 75 shares of Series C Preferred Stock,
$20,000 stated value per share (the "Series C Preferred Stock"), for gross
proceeds of $1,500,000. Offering costs of $175,000, consisting of finders
fees, legal fees, accounting fees, listing fees and registration costs,
were incurred by the Company. Dividends were payable in cash or Common
Stock, at the option of the Company, at a rate of 6% per annum. The shares
were convertible into Common Stock with a conversion price equal to the
lesser of the average closing bid price for the five trading days prior to
the date of sale or 75% of the average closing bid price for the five
trading days prior to the date of conversion or redemption. As a result of
this beneficial conversion feature, $375,000 was charged to additional
paid-in capital and reflected as a preferred stock dividend during fiscal
1997. During fiscal 1997, the holders of the Series C Preferred Stock
converted all of the outstanding shares into 907,098 shares of Common
Stock. The Company paid dividends of 22,506 shares of Common Stock related
to the Series C Preferred Stock.
In December 1996, the Company sold 2,496 shares of Series D Voting
Convertible Preferred Stock, $1,000 stated value per share (the "Series D
Preferred Stock") and warrants to purchase 400,000 shares of common stock
(the "Warrants"), for gross proceeds of $2,500,000. Offering costs of
$178,000, consisting of cash finders fees, warrants issued as finders fees,
legal fees, accounting fees, listing fees and registration costs, were
incurred by the Company. Dividends are payable in cash or Common Stock, at
the option of the Company, at a rate of 10% per annum. The Company can
require the holders of the Series D Preferred Stock to convert these shares
into shares of Common Stock at any time prior to December 14, 1997. The
Series D Preferred Stock is also convertible at the election of the holders
into shares of Common Stock during the one-year period commencing on
December 14,
Page 46 of 57
<PAGE>
1997. The actual number of shares of Common Stock into which of the Series
D Preferred Stock and any dividends that are payable in shares of Common
Stock are convertible is variable, with the conversion value of the shares
being equal to the market price of the Common Stock (determined based on
the closing sale price of the Common Stock for the ten trading days
preceding the date of conversion). The conversion value of the Common Stock
will have a cap of $4.50 per share and, commencing on December 14, 1997,
will have a floor of $1.50 per share. The Company has agreed to register
the shares issuable upon conversion of Series D Preferred Stock or upon
exercise of the Warrants. The purchasers of the Series D Preferred Stock
have voting rights for each share of the Series D preferred Stock
outstanding equivalent to that of 380 shares of Common Stock. Holders of
the Series D Preferred Stock also have the right to elect a majority of the
Company's directors in the event of default by the Company in the payment
of dividends on the Series D Preferred Stock or upon certain other defined
events of default.
9. STOCK OPTIONS AND WARRANTS
Stock Options
-------------
The Company applies APB Opinion 25 in accounting for its Stock Options
Plans (the "Plans"). Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123,
the Companys net loss would have increased to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Net loss As reported $(4,601,000) $(1,968,000)
per share $ (0.61) $ (0.26)
Pro Forma $(6,209,000) $(2,546,000)
per share $ (0.69) $ (0.34)
</TABLE>
Pro forma net loss reflects only options granted subsequent to March 31,
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
vesting period of up to 4 years and compensation cost for options granted
prior to April 1, 1995 is not considered.
The Company had an incentive stock option plan that expired in April 1995
(the "1985 Plan"), under which options to purchase 400,000 shares of Common
Stock could be granted to officers and employees. Options granted were at
100% of the estimated fair market value on the dates of grant. On November
22, 1994, the shareholders of the Company approved and adopted the Companys
1994 Stock Option Plan (the "1994 Plan") to replace the expiring 1985 Plan.
Under the 1994 Plan, options to purchase up to 2,000,000 shares of the
Common Stock may be granted to officers, employees, directors and
consultants of the Company. On February 8, 1996, and on November 21, 1996
the shareholders of the Company approved and adopted amendments to the 1994
Plan, which revised the provision for the granting of formula options to
non-employee directors of the Company. The following summarizes the
transactions relating to stock options granted pursuant to the terms of the
stock option plans:
Page 47 of 57
<PAGE>
<TABLE>
<CAPTION>
Weighted
Shares Average
Under Price Price
Option Per Share Range
------ --------- -----
<S> <C> <C> <C>
Balance at April 1, 1994 153,000 $2.47 $0.45-$5.00
Granted 186,100 $2.16 $1.67-$2.22
---------
Balance at March 31, 1995 339,100 $2.30 $0.45-$5.00
Granted 798,750 $2.19 $1.75-$3.63
Exercised 2,000 $0.45 $ 0.45
Canceled and expired 132,250 $2.27 $0.45-$3.63
---------
Balance at March 31, 1996 1,003,600 $2.22 $1.67-$5.00
Granted 392,500 $2.33 $2.19-$2.63
Canceled and expired 151,750 $2.20 $2.13-$2.63
---------
Balance at March 31, 1997 1,244,350 $2.26 $1.67-$5.00
=========
</TABLE>
The fair value of the options granted during the year ended March 31, 1997
was estimated using the Black-Scholes option pricing model based on groups
of options with identical terms (including actual contractual lives ranging
from 3 to 10 years) assuming a volatility rate of 93% and zero dividend
yield, and a discount rate of 6 to 6.5%.
At March 31, 1997 and 1996, 767,600 and 419,600 stock options,
respectively, were exercisable under the 1994 Plan, and 35,500 and 40,000
employee incentive stock options were exercisable under the 1985 Plan at
March 31, 1997 and 1996, respectively. Pursuant to the terms of the 1994
Stock Option Plan, the options granted to employees have an exercise price
equal to the market value of the Common Stock on the date of grant.
Accordingly, no compensation expense was recorded with respect to the
granting of employee options. The 541,250 options that were not exercisable
at March 31, 1997 consist of 31,250 options granted to directors, 360,000
options granted to an officer and 150,000 options granted to two key
employees. All of the options granted to directors become exercisable
during the fiscal year ending March 31, 1998. The options granted to an
officer become exercisable over six years, the timing of which is dependent
upon the Company achieving certain performance criteria. 120,000 of such
options vested as of March 31, 1997. During each of the years ending March
31, 1998, 1999 and 2000, 50,000 of the options granted to employees become
exercisable.
In November 1994, the Company granted options to purchase 200,000 shares of
common stock for $1.50 per share to a group of consultants as consideration
for investor relations consulting services for the period from November 15,
1994 through November 14, 1995. The options expire November 15, 1997.
Although the closing market price for Common Stock on the date of grant
exceeded the exercise price of the options, as the optionees were not
employees or directors of the Company, the Company recorded a prepaid
consulting fee and additional paid-in capital in the amount of $119,000
based on an estimate of fair market value of the options. The prepaid
expense was amortized to consulting expense on a straight line basis over
the term of the agreement.
In August 1994, the Company extended the exercise terms of 744,000 non-
qualified options (which consisted of 44,000 options granted to directors
in fiscal 1992 for service
Page 48 of 57
<PAGE>
on the Board of Directors, 400,000 options granted to officers of the
Company in fiscal 1992 pursuant to the terms of their employment
agreements, and 300,000 options that were granted to directors in fiscal
1991 in connection with loan guarantees) to expire at a date ten years from
the original grant date. All of the options were originally granted to
directors and officers, some of whom are major shareholders, of the Company
prior to the end of fiscal 1992. As the market price of the Common Stock on
the date that the option terms were extended exceeded the exercise price of
the options, the Company recorded compensation expense of $949,000 relating
to the extension of the exercise terms.
In fiscal 1993, the Company granted options to purchase 30,000 shares of
Common Stock to a consultant, which were exercisable at a price of $1.25
per share. On April 15, 1996, the consultant exercised all of the options.
In fiscal 1992, the Board of Directors authorized the Company to grant
options to purchase 99,000 shares of Common Stock to three directors
(33,000 for each director) for $0.60 per share. One third of the options
become exercisable after each of the three fiscal year-ends following the
date of grant, provided that the Company's income before taxes exceeded
$200,000 for the fiscal year then ended. As of March 31, 1996, 22,000 of
these options had been exercised, 33,000 had been canceled and 44,000 of
these options were exercisable. These options originally were to expire on
March 31, 1995. As described above, in August 1994, the Company extended
the exercise terms of 44,000 options then outstanding to expire on March 5,
2002. The Company recorded $56,100 in compensation expense related to the
extension of the exercise terms of these options.
In fiscal 1992, the Board of Directors granted options to purchase 400,000
shares of Common Stock for $0.60 per share to two of the officers of the
Company pursuant to their employment agreements. The timing of the vesting
of the stock options was dependent on the achievement of specified net
income goals. At March 31, 1996, all of the options were exercisable and
outstanding. These options were originally to expire on January 31, 1997.
As described above, in August 1994, the Company extended the exercise terms
of these options to expire on January 31, 2002. The Company recorded
$510,000 in compensation expense related to the extension of the exercise
terms of these options.
In fiscal 1991, the Company granted major stockholders and directors stock
options to purchase 350,000 shares of Common Stock at exercise prices of
$0.60 per share. These options were originally to expire on February 1,
1996. As described above, in August 1994, the Company extended the exercise
terms of the 300,000 of these options then outstanding to expire on January
1, 2002. The Company recorded $382,500 in compensation expense related to
the extension of the exercise terms of these options. The stock options
were granted in connection with loan guarantees on the Company's borrowings
provided by the stockholders and directors. As of March 31, 1997, 50,000 of
these options had been exercised and the remaining 300,000 options were
exercisable.
Stock Purchase Warrants
-----------------------
In connection with the private placement of Series D Preferred Stock, the
Company issued warrants to purchase 400,000 shares of Common Stock at a
price of $3.125 per share and the Company issued warrants to purchase
100,000 shares of Common Stock at a price of $3.125 per share pursuant
to a finders fee agreement. All of the foregoing warrants expire on
December 21, 2001.
In connection with the private placement of Series C Preferred Stock, the
Company issued warrants to purchase 30,000 shares of Common Stock at a
price of $3.00 per share pursuant to a finders fee agreement The warrants
expire on May 31, 2000.
From December 1994 through March 1995, the Company sold units consisting of
Common Stock and warrants through a private placement. In conjunction with
this offering, warrants to purchase 1,877,500 shares at an exercise price
of $3.00 per share were issued. The warrants expire on December 31, 1997
and may be called by the
Page 49 of 57
<PAGE>
Company if certain conditions are met in the future. The warrants become
callable by the Company after the Common Stock underlying the warrants is
registered and the Common Stock has had a closing bid price of at least
$3.60 for the most recent ten consecutive trading days. In May 1996, a
private placement of preferred stock by the Company caused the exercise
price and the number of shares subject to such warrants to be adjusted
pursuant to the antidilution provisions contained in the warrant
agreements. The adjustments increased the number of shares subject to the
warrants to 2,011,604 and decreased the exercise price to $2.80 per share.
Subsequent to the adjustment pursuant to the antidilution provisions,
290,356 warrants were exercised.
In December 1994, the Company issued warrants to purchase 27,500 shares of
Common Stock at an exercise price of $3.00 per share in connection with the
negotiation of the extension of maturity dates for the convertible
subordinated debt that was outstanding for a portion of fiscal 1995. The
warrants expire on December 31, 1997. The warrants become callable by the
Company after the Common Stock underlying the warrants is registered and
the Common Stock has had a closing bid price of at least $3.60 for the most
recent ten consecutive trading days. In May 1996, a private placement of
preferred stock by the Company caused the exercise price and the number of
shares subject to such warrants to be adjusted pursuant to the antidilution
provisions contained in the warrant agreements. The adjustments increased
the number of shares subject to the warrants to 29,465 and decreased the
exercise price to $2.80 per share.
In December 1994, the Company sold units consisting of Common Stock and
warrants through a private placement. In conjunction with this offering,
warrants to purchase 200,000 shares at an exercise price of $2.00 per share
were issued. The warrants expire on January 1, 1998. The warrants become
callable by the Company after June 30, 1995 if the Common Stock has had a
closing bid price of at least $4.00 for the most recent five consecutive
trading days. In May 1996, a private placement of preferred stock by the
Company caused the exercise price and the number of shares subject to such
warrants to be adjusted pursuant to the antidilution provisions contained
in the warrant agreements. The adjustments increased the number of shares
subject to the warrants to 213,904 and decreased the exercise price to
$1.87 per share.
In fiscal 1992, the Company issued warrants to purchase 625,000 shares of
common stock at $0.80 per share in connection with the private placement of
1,250,000 shares of Common Stock. The warrants expire on March 5, 1999. In
May 1996, a private placement of preferred stock by the Company caused the
exercise price and the number of shares subject to such warrants to be
adjusted pursuant to the antidilution provisions contained in the warrant
agreements. The adjustments increased the number of shares subject to the
warrants to 666,667 and decreased the exercise price to $0.75 per share.
Page 50 of 57
<PAGE>
10. SEVERANCE EXPENSE
During the fourth quarter of fiscal 1996, the Company recorded severance
expense in the amount of $322,000 relating to a change in the executive
officers of the Company. The amount charged as severance expense relates
to the required payments remaining on the contracts of the former executive
officers of the Company.
11. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $0 $ 0 $ 0
State 0 4,000 1,000
-- ------ --------
Total current 0 4,000 1,000
-- ------ --------
Deferred:
Federal 0 0 287,000
State 0 0 68,000
-- ------ --------
Total deferred 0 0 355,000
-- ------ --------
Total income tax expense $0 $4,000 $356,000
== ====== ========
</TABLE>
The reasons for the differences between income tax expense and the amount
computed by applying the federal statutory income tax rate to income before
income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Tax expense at federal
statutory rate 35% 35% 35%
State franchise tax, net of
federal income tax benefit 7 7 7
Extension of stock options (24)
Addition of deferred income tax asset
valuation reserves (42) (42) (39)
Other (2)
--- --- ---
Actual tax expense 0% 0% (23)%
=== === ===
</TABLE>
Page 51 of 57
<PAGE>
The components of deferred income tax assets (liabilities) at March 31 are
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deductible:
Net operating loss carryforward $ 2,498,000 $ 974,000
Reserve for severance 0 109,000
Alternative minimum tax credits 21,000 21,000
Uniform capitalization rules 33,000 33,000
Reserve for bad debts 37,000 49,000
Inventory reserves 328,000 133,000
Vacation accrual 29,000 38,000
Warranty reserves 5,000 5,000
State taxes (net of federal taxes) 479,000 237,000
----------- -----------
$ 3,430,000 $ 1,599,000
=========== ===========
1997 1996
---- ----
Taxable:
Depreciation $ (9,000) $ (28,000)
State taxes (net of federal taxes) (2,000) (7,000)
----------- -----------
$ (11,000) $ (35,000)
=========== ===========
The net deferred tax asset at March 31 are as follows:
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets $ 3,430,000 $ 1,599,000
Deferred tax liabilities (11,000) (35,000)
----------- -----------
3,419,000 1,564,000
Valuation allowance (3,419,000) (1,564,000)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
The deferred tax asset valuation allowance increased $1,855,000, $761,000
and $609,000 in the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
At March 31, 1997, the Company had net operating loss carryforwards of
approximately $7,348,000 and $3,879,000 for federal income tax and state
franchise tax purposes, respectively. The federal net operating loss
carryforwards expire in the fiscal years ending March 31, 2004 through
2012, and state net operating loss carryforwards expire in the fiscal years
ending March 31, 1997 through 2002.
12. RELATED PARTY TRANSACTIONS
A former director of the Company is also a principal in a law firm that
provides legal consultation to the Company, and was a principal in another
law firm, which has been dissolved, that provided services to the Company.
At March 31, 1997 and 1996, the Company owed the current law firm $3,000
and $10,000, respectively, and $74,000 and $10,000 of legal fees relating
to this firm were included in general and administrative
Page 52 of 57
<PAGE>
expense for the years ended March 31, 1997 and 1996, respectively. In
fiscal 1996 and 1995 legal fees relating to the dissolved law firm in the
amounts of $237,000 and $199,000, respectively, were included in general
and administrative expense. Additionally, in fiscal 1995, legal expenses
for the dissolved law firm related to the private placement of securities
in the amount of $40,000 were offset against the proceeds of the placement.
In fiscal 1996, the Company paid Maximum Partners, Ltd. a finders fee in
the amount of $150,000 related to the placement of the Series B Preferred
Stock. The son of the Companys then-Vice Chairman is a principal of Maximum
Partners, Ltd. In fiscal 1997, Maximum Partners, Ltd. also received
$150,000 and warrants to purchase 30,000 shares of Common Stock at an
exercise price of $3.00 per share as a finders fee for the placement of the
Series C Preferred Stock.
13. RESTATEMENT OF QUARTERLY NET LOSS PER SHARE
Quarter Ended
-------------
June 30, September 30, December 31
1996 1996 1996
---- ---- ----
Net loss per share as
previously reported $(0.08) $(0.13) $(0.06)
As restated $(0.18) $(0.14) $(0.06)
Net loss per share for the fiscal quarters ended June 30, September 30, and
December 31, 1996, has been restated to reflect the amortization as
preferred stock dividends of the beneficial conversion features of the
Series B Preferred Stock and the Series C Preferred Stock as discussed in
note 8.
14. SUBSEQUENT EVENTS
During May 1997, the Company was advanced $350,000 by an investor upon the
Companys agreement to issue shares of a to be authorized Series E Preferred
Stock (the "Series E Preferred Stock") or a 10% convertible subordinated
note. Although the terms of the Series E Preferred Stock have not been
finalized, the Company anticipates that the Series E Preferred Stock, if
issued, is likely to have terms similar to the Series D Preferred Stock,
but with different conversion and repurchase options and different
conversion and exercise prices.
Page 53 of 57
<PAGE>
EXHIBIT INDEX
Page No.
3.1 Articles of Incorporation of Astro Systems and
Engineering, Inc., filed March 22, 1982 are
incorporated by reference to Exhibit 3(a) to the
Company's Form 10 Registration Statement as
amended by Form 8, Amendment No. 2, dated January 22,
1993 (the "Company's Form 10").
3.2 Certificate of Amendment of Articles of Incorporation
filed March 26, 1984, is incorporated by reference to
Exhibit 3(b) to the Company's Form 10.
3.3 Certificate of Amendment of Articles of Incorporation
filed May 28, 1985, is incorporated by reference to
Exhibit 3(c) to the Company's Form 10.
3.4 Certificate of Amendment of Articles of Incorporation
filed January 10, 1991, is incorporated by reference to
Exhibit 3(d) to the Company's Form 10.
3.5 Certificate of Determination filed with the California
Secretary of State on January 10, 1991, is incorporated
by reference to Exhibit 3(e) to the Company's Form 10.
3.6 Restated and Amended Bylaws, as of February 1, 1997, is
incorporated by reference to Exhibit 3(f) to the
Company's Form 10-QSB for the quarter ended December 31,
1996, as filed with the Commission on February 11, 1997.
3.7 Certificate of Amendment of Articles of Incorporation
filed with the California Secretary of State on December
6, 1993, is incorporated by reference to the Companys
1994 Form 10-KSB.
3.8 Certificate of Amendment of Articles of Incorporation
filed Determination filed with the California Secretary
of State on February 14, 1996, is incorporated by
reference to Exhibit 3.9 to the Companys 1996 Form 10-
KSB, as filed with the Commission on July 1, 1996.
3.9 Certificate of Determination and Decrease for Series B
Preferred Stock filed with the California Secretary of
State on March 19, 1996, is incorporated by reference to
Exhibit 4(b) to the Companys Registration Statement on
Form S-3 (Registration No. 333-3792), as amended by
Amendment No. 1 dated June 3, 1996 (the "Registration
Statement").
3.10 Certificate of Determination for Series C Preferred
Stock filed with the California Secretary of State on
April 15, 1996, is incorporated by reference to Exhibit
4(d) to the Registration Statement.
3.11 Certificate of Determination for Series D Preferred
Stock filed with the California Secretary of State on
December 6, 1996
Page 54 of 57
<PAGE>
10.1 Indemnification Agreement between the Company and A.
Charles Lubash, dated February 1, 1992, is incorporated
by reference to Exhibit 10(k) to the Company's Form 10.
10.2 Indemnification Agreement between the Company and George
L. Lazik, dated February 1, 1992, is incorporated by
reference to Exhibit 10(l) to the Company's Form 10.
10.3 Indemnification Agreement between the Company and
Richard F. Gordon, Jr., dated February 1, 1992, is
incorporated by reference to Exhibit 10(m) to the
Company's Form 10.
10.4 Indemnification Agreement between the Company and
Charles Conrad, Jr., dated February 1, 1992, is
incorporated by reference to Exhibit 10(n) to the
Company's Form 10.
10.5 Indemnification Agreement between the Company and
James R. Spievak, dated February 1, 1992, is
incorporated by reference to Exhibit 10(o) to
the Company's Form 10.
10.6 Option Agreement between the Company and A. Charles
Lubash, dated May 8, 1992, is incorporated by
reference to Exhibit 10(v) to the Companys 1993
Form 10-KSB.
10.7 Option Agreement between the Company and George L.
Lazik, dated May 8, 1992, is incorporated by reference
to Exhibit 10(w) to the Companys 1993 Form 10-KSB.
10.8 Lease between HWL Properties, a California partnership,
and the Company, dated May 5, 1993, as amended June 1,
1993, is incorporated by reference to Exhibit 10(x)
to the Companys 1993 Form 10-KSB.
10.9 $3,500,000 Business Financing Agreement with
Deutsche Financial Services Corporation (formerly
ITT Commercial Finance Corporation), dated May 16,
1995, is incorporated by reference to Exhibit 10(y) to
the Companys 1995 Form 10-KSB, as filed with the
Commission on June 26, 1995.
10.10 1994 Stock Option Plan, dated August 31, 1994, as
amended, is incorporated by reference to Exhibit 10.3
to the Companys Quarterly Report on Form 10-QSB for
the fiscal quarter ended December 31, 1996, as filed
with the Commission on February 11, 1997.
10.11 Employment Agreement between A. Charles Lubash and the
Company, dated April 1, 1995, is incorporated by
reference to Exhibit 10(dd) to the Companys 1995 Form
10-KSB, as filed with the Commission on June 26, 1995.
10.12 Consulting Agreement between George L. Lazik and the
Company, dated March 11, 1996, is incorporated by
reference to Exhibit 10.12 to the Companys 1996 Form
10-KSB, as filed with the Commission on July 1, 1996.
Page 55 of 57
<PAGE>
10.13 Amended and Restated Employment Agreement between
Russell Jackson and the Company, effective April 1,
1993, is incorporated by reference to Exhibit 10(ff)
to the Companys 1995 Form 10-KSB, filed with the
Commission on June 26, 1995.
10.14 Form of Stock Purchase Agreement for Series B
Preferred Stock and Series C Preferred Stock, entered
into by the Company and Julie Nordlicht, A. Ziskind,
Tail Wind Fund, Ltd., Cassolette, David Freund and
Legong Investments N.V. is incorporated by reference
to Exhibit 10.14 to the Companys 1996 Form 10-KSB, as
filed with the Commission on July 1, 1996.
10.15 Employment Agreement between the Company and James B.
Mariner dated as of April 1, 1997.
10.16 Form of Warrant Agreement, dated December 13, 1996,
entered into by ChatCom, Inc. and Maximum Partners,
Ltd. is incorporated by reference to Exhibit 10.2 to
the Companys Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1996, as filed with the
Commission on August 14, 1996.
10.17 Purchase Agreement, dated as of December 9, 1996,
regarding the sale of Series D Preferred Stock and
Warrants to purchase Common Stock, is incorporated
by reference to Exhibit 10.1 to the Companys Quarterly
Report on Form 10-QSB for the fiscal quarter ended
December 31, 1996, as filed with the Commission on
February 11, 1997.
10.18 Form of Warrant Agreement, dated December 13, 1996,
entered into by ChatCom, Inc. and Strategic Growth
International, Inc. relating to warrants to purchase
100,000 shares of Common Stock of ChatCom, Inc., is
incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-QSB for the
fiscal quarter ended December 31, 1996, as filed with
the Commission on February 11, 1997.
10.19 Indemnification Agreement between the Company and
Gerald R. Sayer, dated as of August 14, 1995.
10.20 Indemnification Agreement between the Company and
James D. Edwards, dated as of October 9, 1995.
10.21 Indemnification Agreement between the Company and
Sanford C. Sigoloff, dated as of February 8, 1996.
10.22 Indemnification Agreement between the Company and
Philip B. Smith, dated as of February 8, 1996.
10.23 Indemnification Agreement between the Company and
John R. Grady, dated as of January 3, 1994.
10.24 Indemnification Agreement between the Company and
James B. Mariner, dated as of March 5, 1996.
Page 56 of 57
<PAGE>
10.25 Indemnification Agreement between the Company and
Richard L. Picheny, dated as of March 10, 1997.
10.26 Indemnification Agreement between the Company and
Andrew M. Brown, dated as of May 14, 1997.
10.27 Indemnification Agreement between the Company and
Russell Jackson dated as of February 8, 1996.
10.28 OEM Agreement between the Company and Vinca Corporation,
dated June 17, 1997.
23 Consent of Deloitte & Touche, L.L.P., dated July
14, 1997, to the incorporation by reference in
the Registration Statements (Forms S-3, Nos. 333-3792
and 33-99668) and the related prospectuses, with
respect to the Financial Statements of ChatCom, Inc.
included in the Annual Report (Form 10-KSB) for the
years ended March 31, 1997, 1996 and 1995.
27 Financial Data Schedule.
Page 57 of 57
<PAGE>
EXHIBIT 3.11
[STATE OF CALIFORNIA LETTERHEAD]
SECRETARY OF STATE
I, BILL JONES, Secretary of State of the State of California, hereby
certify:
That the annexed transcript has been compared with the corporate record on
file in this office, of which it purports to be a copy, and that same is full,
true and correct.
IN WITNESS WHEREOF, I execute this
certificate and affix the Great Seal
of the State of California this
December 13, 1996
----------------------------------------
[SEAL] /s/ BILL JONES
Secretary of State
<PAGE>
CERTIFICATE OF DETERMINATION
AND DECREASE 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 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.
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.
d. The number of shares of Series D Convertible Redeemable Preferred
Stock of the Company is 5,000, none of which have been issued.
e. 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 ("Board") 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 no outstanding shares of any series of Preferred
Stock;
<PAGE>
NOW, THEREFORE, BE IT RESOLVED, that no shares of Series B Preferred Stock
are outstanding, all of the previously issued shares of Series B Preferred Stock
having been converted into shares of Common Stock;
RESOLVED FURTHER, that no shares of Series C Preferred Stock are
outstanding, all of the previously issued shares of Series C Preferred Stock
having been converted into shares of Common Stock;
RESOLVED FURTHER, that in accordance with Section 401(c) of the California
Corporations Code, the number of authorized shares of Series B Preferred Stock,
set forth in the Certificate of Determination and Decrease filed on March 19,
1996, is hereby reduced to zero and the Series B Preferred Stock is no longer an
authorized series of Preferred Stock of the Company;
RESOLVED FURTHER, that in accordance with Section 401(c) of the California
Corporations Code, the number of authorized shares of Series C Preferred Stock,
set forth in the Certificate of Determination filed on April 15, 1996, is hereby
reduced to zero and the Series C Preferred Stock is no longer an authorized
series of Preferred Stock of the Company;
RESOLVED FURTHER, 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. (a) Designation of Series. The designation of such series of
---------------------
Preferred Stock is Series D Convertible Preferred Stock ("Series D Preferred
Stock"). The number of shares constituting such series is 5,000, with a stated
value of $1,000 per share. Shares of Series D 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.
(b) Certain Definitions. For purposes of this Certificate of
-------------------
Determination and Decrease, the following definitions shall apply:
(i) "Affiliate", when used with respect to any Person, means (1) if
---------
such Person is a corporation, any officer or director thereof and any Person
(other than any Series D Preferred Stock Holder) which is, directly or
indirectly, the beneficial owner of more than 10% of any class of any equity
security (as defined in the Securities Exchange Act of 1934, as amended)
thereof, and, if such beneficial owner is a partnership, any partner thereof, or
if such beneficial owner is a corporation, any Person controlling, controlled by
or under common control with such beneficial owner, or any
2.
<PAGE>
officer or director of such beneficial owner or of any corporation occupying any
such control relationship, (2) if such Person is a partnership, any partner
thereof, and (3) any other Person (other than any Series D Preferred Stock
Holder) which, directly or indirectly, controls or is controlled by or is under
common control with such Person. For purposes of this definition, "control"
(including the correlative terms "controlling", "controlled by" and "under
common control with"), with respect to any Person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities or by contract or otherwise.
(ii) "Capitalized Leases" means any lease to which the Company or a
------------------
Subsidiary is a party as lessees, or by which it is bound, under which it leases
any property (real, personal or mixed) from any lessor other than the Company or
a Subsidiary, and which either is required to be capitalized in accordance with
generally accepted accounting principles, or, even if not so required to be
capitalized, shall have (or have had), at the time first entered into, an
initial term of greater than five years (including leases of shorter duration
which are or were extendible to a total term greater than five years at the
option of the lessor). The value of Capitalized Leases, as of the time of any
determination thereof, shall mean the sum of the then present values, determined
as hereinafter provided, of future obligations of lessees under then existing
Capitalized Leases. To compute the value of any Capitalized Lease, the
following methods shall be used, as applicable:
(A) values of leases required to be capitalized in accordance
with generally accepted accounting principles (whether or not the initial
term or total term thereof is greater than five years) shall be computed in
accordance such principles; and
(B) values of other capitalized leases shall be computed by
discounting, to the date of determination, at an assigned interest rate of
ten percent (10%) per annum, the minimum amount of future rental payments
that will be due under the related leases, including rental payments that
may be during extensions which are at the lessor's option, but excluding
any amounts in respect of insurance on, taxes on and/or maintenance of the
properties subject to such leases, provided that such amounts are owed and
paid only to the extent actually incurred.
(iii) "Closing Date" shall mean the date of the initial closing of
------------
the purchase and sale of shares of the Series D Preferred Stock.
3.
<PAGE>
(iv) "ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time.
(v) "ERISA Affiliate" shall mean each trade or business (whether or
---------------
not incorporated) which together with the Company or a Subsidiary of the Company
would be deemed to be a "single employer" within the meaning of Section 4001 of
ERISA.
(vi) "Indebtedness" of any Person means and includes, without
------------
duplication, as of any date as of which the amount thereof is to be determined,
(1) all obligations of such Person to repay money borrowed (including, without
limitation, all notes payable and drafts accepted representing extensions of
credit, all obligations evidenced by bonds, debentures, notes or other similar
instruments and all obligations upon which interest charges are customarily
paid), (2) the value of all Capitalized Leases in respect of which such Person
is liable as lessee or as the guarantor of the lessee, (3) the principal amount
of all monetary obligations which are secured by any perfected lien or security
interest existing on property owned by such Person and (4) all guaranties of the
Indebtedness of any other Person.
(vii) "Investment" means, with respect to any Person, any loan,
----------
advance or extension of credit by such Person to, and any guaranty or other
contingent liability with respect to the capital stock, Indebtedness or other
obligations of, and any contributions to the capital of, any other Person, as
well as any ownership, purchase or other acquisition by such Person of any
interest in any capital stock or other securities of any such other Person as
well as any transfer or sale of property of such Person to any other Person
other than upon full payment, in cash, of not less than the agreed sale price or
the fair value of such property, whichever is higher.
(viii) "Lien" means any mortgage, pledge, security interest, financing
----
statement, encumbrance, lien, segregation, charge or deposit arrangement or
other arrangement having the practical effect of any of the foregoing and shall
include the interest of a vendor or lessor under any conditional sale agreement,
Capitalized Lease or other title retention agreement.
(ix) "Person" or "person" means an individual, corporation,
------ ------
partnership, firm, association, joint venture, trust, unincorporated
organization, government, governmental body, agency, political subdivision or
other entity.
(x) "Plan" shall mean any multiemployer plan or single employer plan,
----
as defined in Section 4001 and subject to Title IV of ERISA, which is
maintained, or at any time during the five calendar years preceding the date of
this
4.
<PAGE>
Agreement was maintained, for employees of the Company or a Subsidiary of the
Company or an ERISA Affiliate.
(xi) "Restricted Payment" means (1) every dividend or other
------------------
distribution paid, made or declared by the Company on or in respect of any class
of its capital stock, (2) every payment in connection with the redemption,
purchase, retirement or other acquisition by or on behalf of the Company or any
Subsidiary of any shares of the Company's or any Subsidiary's capital stock,
whether or not owned by the Company or any Subsidiary, (3) any optional
prepayments made on subordinated Indebtedness of the Company or a Subsidiary,
(4) every payment to or on behalf of any Affiliate of the Company or of any
Subsidiary on account of or with respect to any lease arrangements and (5) every
payment by or on behalf of the Company or any Subsidiary (whether as repayment
or prepayment of principal or as interest or otherwise) on or with respect to
(A) any obligation to repay money borrowed owing to any Affiliate of the Company
or any Subsidiary or (B) any obligation, to any Person, of any Affiliate of the
Company or of any Subsidiary, which obligation is assumed or guaranteed by the
Company or a Subsidiary; provided, however, (a) that the restrictions of the
foregoing clauses (1) and (2) shall not apply to any dividend, distribution or
other payment to the extent payable in shares of the capital stock of the
Company, (b) that none of the foregoing clauses shall apply to any payments from
a Subsidiary to the Company and (c) that none of the foregoing clauses shall
apply to any payments on or with respect to Series D Preferred Stock. For
purposes of this definition, "capital stock" shall also include warrants (other
than the Purchase Warrants (as defined below)) and other rights and options to
acquire shares of capital stock (other than the Series D Preferred Stock).
(xii) "Subsidiary" means any Person in which at least a majority of
----------
shares of each class of the capital stock, at the time as of which any
determination being made, is owned, beneficially and of record, by the Company
or one or more of its Subsidiaries, or both.
2. Dividends. Each holder of the outstanding shares of Series D
---------
Preferred Stock ("Series D Preferred Stock Holder" or collectively, "Series D
Preferred Stock Holders") shall be entitled to receive, in cash or shares of the
Common Stock (at the Company's option for payments on or before the first
anniversary of the Closing Date and at the option of the holders of a majority
of the outstanding shares of Series D Preferred Stock for payments after the
first anniversary of the Closing Date) cumulative dividends at the annual rate
of $100 per share of Series D Preferred Stock, payable semiannually on May 15
and November 15 of each year after the Closing Date (each, a "Dividend Payment
Date"), and upon conversion or redemption, as the case may be, for any unpaid
cumulative dividends (all of which unpaid cumulative dividends
5.
<PAGE>
from the next preceding Dividend Payment Date, at the Company's option, may be
paid in cash or shares of Common Stock), without any further action or
declaration by the Board of Directors or shareholders of the Company, out of
funds legally available therefor. If such dividends shall be paid in Common
Stock, the Common Stock shall be valued at the average of the Market Price (as
defined below) for the ten (10) consecutive trading dates immediately preceding
the Dividend Payment Date or the date of conversion or redemption, as the case
may be. Such dividends shall be cumulative so that if such dividends shall not
have been set apart for all shares of Series D Preferred Stock at the time
outstanding, the deficiency shall be set apart for such shares before the
Company makes any distribution to the holders of Common Stock or Preferred Stock
of any other series. Accrued but unpaid dividends shall not bear interest. The
Board of Directors may fix a record date for the determination of Series D
Preferred Stock Holders entitled to receive payment of a dividend thereon, which
record date shall be no more than sixty (60) days prior to the date fixed for
the payment thereof. If upon redemption or conversion of shares of Series D
Preferred Stock the Company elects to pay accrued dividends from the next
preceding Dividend Payment Date 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. (a) Voting Rights. The Series D Preferred Stock Holders shall be
-------------
entitled to vote together with the Common Stock holders as a single class upon
all matters presented to the Company's shareholders, with each share of Series D
Preferred Stock being entitled to a number of votes equal to the number of
shares of Common Stock such Series D Preferred Stock Holder would be holding on
the record date for the relevant shareholders meeting if such Series D Preferred
Stock Holder had converted such share of Series D Preferred Stock into shares of
Common Stock on the Closing Date and had continued to hold all shares of Common
Stock received upon such conversion, except that without the approval of holders
of a majority of the outstanding shares of Series D Preferred Stock, the Company
shall not (a) authorize, create or issue any shares of any class or series
ranking senior to the Series D 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 D Preferred Stock would be
adversely affected, or (c) become subject to any restriction on the Series D
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 the Closing Date; provided, however, that the creation of
additional series of Preferred Stock with substantially equivalent rights,
preferences,
6.
<PAGE>
privileges and limitations as those of the Series D Preferred Stock shall not be
a violation of this paragraph 3.
(b) Voting Shift. Notwithstanding subparagraph 3(a) above, upon the
------------
occurrence at any time or from time to time of any of the following events (an
"Event of Noncompliance"), the Series D Preferred Stock Holders, voting as a
separate class, thereafter shall be entitled to elect a majority of the
authorized number of directors of the Company and the holders of Common Stock
shall be entitled to elect the remaining directors as provided herein:
(i) If the Company shall default in the payment of any Series D
Preferred Stock dividend, when the same shall become due and payable, and such
default shall remain unremedied for thirty (30) days after written notice
thereof shall have been given to the Company by a Series D Preferred Stock
Holder; or
(ii) If the Company shall fail to pay any other amount payable to a
Series D Preferred Stock Holder under the Purchase Agreement dated as of the
Closing Date, among the Company and the initial Series D Preferred Stock Holders
(the "Purchase Agreement") when due, and such default shall remain unremedied
for thirty (30) days after written notice thereof shall have been given to the
Company by a Series D Preferred Stock Holder; or
(iii) If the Company shall default in the performance of any of the
following agreements or covenants, and, if capable of being remedied, such
default shall remain unremedied for thirty (30) days after written notice
thereof shall have been given to the Company by a Series D Preferred Stock
Holder:
(A) Neither the Company nor any Subsidiary of the Company will
declare or make or permit to be declared or made (i) any Restricted Payment
or (ii) any Investment in any Person; provided, however, that the Company
may make Investments not to exceed $1,000,000 in the aggregate.
(B) From and after the Closing Date, unless the Series D
Preferred Stock and the warrants issued to the initial Series D Preferred
Stock Holders pursuant to the Purchase Agreement (the "Purchase Warrants")
shall then be convertible into shares of Common Stock, neither the Company
nor any of its Subsidiary will sell or transfer (or agree to sell or
transfer) to any Person (other than the Company or a Subsidiary, if any)
assets which in the aggregate accounted for or provided 50% or more of the
total revenues of the Company and its Subsidiaries, if any, for
7.
<PAGE>
either the then preceding fiscal quarter or the then preceding fiscal year.
(C) Unless the Series D Preferred Stock and the Purchase
Warrants shall then be convertible into shares of Common Stock, the Company
will not, and will not permit any of its Subsidiaries to, change
substantially the character of its business as conducted on the Closing
Date.
(D) Unless such transaction involves the acquisition by merger or
otherwise of all of the Series D Preferred Stock Holders' securities, the
Company will not proceed with a program of acquisition of shares of Common
Stock, initiate a corporate reorganization or recapitalization, or
authorize or consent to any action which would have the effect of (i)
removing the Company from registration with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, or (ii)
reducing substantially or eliminating the public market for shares of the
Common Stock as such public market existed on the Closing Date.
(E) Neither the Company nor any of its Subsidiaries will incur or
be or remain liable on any long-term Indebtedness exceeding in the
aggregate at any one time 60% of the Company's total assets (determined in
accordance with generally accepted accounting principles).
(F) Neither the Company nor any of its Subsidiary will create,
incur, assume or suffer to exist, directly or indirectly any Lien on any of
its property owned on the Closing Date or thereafter acquired to secure any
Indebtedness of the Company or any of its Subsidiary in the aggregate
exceeding $500,000, other than (1) Liens existing on the Closing Date and
set forth in Exhibit E to the Purchase Agreement; (2) Liens for taxes not
yet due or which are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves in accordance with
generally accepted accounting principles are being maintained; (3)
statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other Liens imposed by law created in the
ordinary course of business for amounts not yet due or which are being
contested in good faith by appropriate proceedings and with respect to
which adequate reserves are being maintained; (4) Liens (other than any
Lien imposed by ERISA) incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government
8.
<PAGE>
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(5) easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering with the ordinary conduct of the business of
the Company or any of its Subsidiaries; and (6) Liens in favor of one or
more financial institutions securing working capital lines of credit.
(G) From and after the Closing Date, the Company shall not, in
any single fiscal year (April 1 to March 31), issue or agree to issue to
any officer or employee of the Company or any Subsidiary any shares of
Common Stock, or any options, warrants or other rights to purchase or
otherwise acquire shares of Common Stock, in excess of (1) options to
acquire 25,000 shares of Common Stock (including the 25,000 shares of
Common Stock issuable upon exercise of such options) to any individual
officer or employee of the Company or any Subsidiary, or (2) options to
acquire 200,000 shares of Common Stock (including the 200,000 shares of
Common Stock issuable upon exercise of such options) to all officers or
employees of the Company and any Subsidiary. Any non-qualified options
issued from and after the Closing Date shall not have an exercise price of
less than the fair market value of the shares of Common Stock on the date
of grant. Options and warrants outstanding and duly granted as of the
Closing Date shall retain their original rights and terms, including, but
not limited to, vesting provisions. Provisions for accelerated vesting at
the discretion of the Board of Directors related to options granted prior
to the Closing Date shall remain in full force. This subparagraph (G)
shall not apply to the issuance by the Company of shares of Common Stock,
or options, warrants or other rights to purchase shares of Common Stock, in
connection with any Investment or any other acquisition or similar
transaction by the Company; or
(iv) If the Company shall default in any material respect in the
performance of any agreement or covenant (other than those referred to in
clauses (i) and (ii) of this subparagraph 3(b)) contained in the Purchase
Agreement, in the certificates evidencing the Series D Preferred Stock, in the
Purchase Warrants or in any other instruments, documents and agreements referred
to therein or related thereto in favor of the Series D Preferred Stock Holders
(collectively, the "Purchase Documents"), and, if capable of being remedied,
such default shall remain unremedied for thirty (30) days after the earlier of
(A) the Company's obtaining actual knowledge thereof, or (B) written notice
thereof shall have been given to the Company by a Series D Preferred Stock
Holder; or
9.
<PAGE>
(v) If the Company or any of its Subsidiaries shall fail to make any
payment of principal of or interest on any Indebtedness of the Company or such
Subsidiary exceeding $500,000 in the aggregate when due (whether at stated
maturity, by acceleration, on demand or otherwise) after giving effect to any
applicable grace period provided for in the agreement or instrument creating or
evidencing such Indebtedness; or
(vi) If the Company or any of its Subsidiaries shall fail to observe
or perform any covenant or agreement contained in any agreement or instrument
relating to any Indebtedness in excess of $500,000 in the aggregate within any
applicable grace period provided for in the agreement or instrument creating or
evidencing such Indebtedness, or any other event shall occur if the effect of
such failure or other event is to accelerate the maturity of such Indebtedness
and such Indebtedness is accelerated by the holder thereof; or any such
Indebtedness shall be required to be prepaid (other than by a regularly
scheduled required prepayment) in whole or in part prior to its stated maturity;
or
(vii) If a judgment which, either alone or together with other
outstanding judgments against the Company and its Subsidiaries, if any,
exceeding an aggregate of $500,000 shall be rendered against the Company or any
of its Subsidiaries and such judgment shall have continued undischarged or
unstayed for 45 days after entry thereof unless such judgment has been fully
bonded by the Company; or
(viii) If a Plan shall fail to maintain the minimum funding standard
required by Section 412 of the Internal Revenue Code of 1986, as amended, for
any plan year or a waiver of such standard is sought or granted under Section
412(d), or a Plan is, shall have been or is likely to be, terminated or the
subject of termination proceedings under ERISA, or the Company or an ERISA
Affiliate has incurred or is likely to incur a liability to or on account of a
Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA, and there shall
result from any such event or events either a liability or a material risk of
incurring a liability to the Pension Benefit Guaranty Corporation, or any
successor thereto, or a Plan which, in the opinion of the Series D Preferred
Stock Holders, will have a material adverse effect upon the business, financial
condition, results of operations or prospects of the Company and its
Subsidiaries, taken as a whole; or
(ix) If the Company or any of its Subsidiaries shall make an
assignment for the benefit of creditors, or shall admit in writing its inability
to pay its debts or if a receiver or trustee shall be appointed for the Company
or any of its Subsidiary or for substantially all of its assets and, if
appointed without its consent, such appointment is not
10.
<PAGE>
discharged or stayed within 60 days; or if proceedings under any law relating to
bankruptcy, insolvency or the reorganization or relief of debtors are instituted
by or against the Company or any of its Subsidiaries, and, if contested by it,
are not dismissed or stayed within 60 days; or if any writ of attachment or
execution or any similar process is issued or levied against the Company or any
of its Subsidiaries or any significant part of its property and is not released,
stayed, bonded or vacated within 60 days after its issue or levy; or if the
Company or any of its Subsidiaries takes corporate action in furtherance of any
of the foregoing.
Upon the occurrence of any such Event of Noncompliance, and at any time
thereafter during the continuance of such event, the Series D Preferred Stock
Holders voting as a separate class shall have the right to elect the smallest
number of directors to the Board of Directors that shall constitute a majority
of the authorized number of directors of the Board; provided, however, that if
each such event has been cured, then the rights granted in this subparagraph
3(b) to the Series D Preferred Stock Holders herein shall terminate immediately.
Upon the occurrence of any Event of Noncompliance that is cured, such cure shall
have no effect on the continuing rights of the Series D Preferred Stock Holders
hereunder to, at any time thereafter, elect the smallest number of directors to
the Board that shall constitute a majority of the Board in the event of a
subsequent Event of Noncompliance. In order fully to carry out the intent of
this subparagraph 3(b), the Company shall use its best efforts to take all such
actions and do all such things necessary to effectuate the terms and provisions
hereof, including, but not limited to, any action required to amend the
Company's Articles of Incorporation, as amended, or the Company's By-laws, as
amended, and shall give all Series D Preferred Stock Holders prompt notice of
the occurrence of any Event of Noncompliance.
At any time when the right of the Series D Preferred Stock Holders voting
as a separate class to elect directors of the Company shall have vested as
provided in this subparagraph 3(b), a proper officer of the Company shall, upon
the written request of the holders of record of at least a majority of the
shares of Series D Preferred Stock then outstanding addressed to the Secretary
of the Company, call a special meeting of shareholders of the Company for the
purpose of electing directors of the Company. Such meeting shall be held at the
earliest practicable date at the place for the holding of annual meetings of
shareholders of the Company. Any Series D Preferred Stock Holder shall have
access to the stock books of the Company for the purpose of causing special
meetings of shareholders to be called pursuant to these provisions.
At any meeting held for the purpose of electing directors at which the
Series D Preferred Stock Holders shall have the
11.
<PAGE>
right voting separately as a class to elect directors as provided in this
subparagraph 3(b), the presence, in person or by proxy, of the holders of one-
third (1/3) of the shares of Series D Preferred Stock then outstanding shall
constitute a quorum of such class for the election of directors by the Series D
Preferred Stock Holders as a class. At any such meeting or adjournment thereof,
the absence of a quorum of Series D Preferred Stock shall not prevent the
election of directors other than those to be elected by the holders of Series D
Preferred Stock voting as a class, and the absence of a quorum for the election
of such other directors shall not prevent the election of directors to be
elected by the Series D Preferred Stock Holders voting as a class, and in the
absence of either or both such quorums, a majority of the holders present, in
person or by proxy, of the stock or stocks which lack a quorum shall have the
power to adjourn the meeting for the election of directors which they are
entitled to elect from time to time without notice (other than announcement at
the meeting) until a quorum shall be present. A vacancy in the directorships to
be elected by the Series D Preferred Stock Holders as provided in this
subparagraph 3(b) may be filled only by vote or written consent of at least a
majority of the voting power of the Series D Preferred Stock.
During any period when the Series D Preferred Stock Holders have the right
to vote separately as a class to elect directors as provided in this
subparagraph 3(b), each director so duly elected and qualified by the Series D
Preferred Stock Holders shall continue in office until the next annual meeting
of shareholders and until his successor shall have been duly elected by such
holders or until termination of the right of the Series D Preferred Stock
Holders to vote separately as a class for directors. At the first scheduled
meeting of the Board of Directors of the Company immediately following any
termination of the right of the Series D Preferred Stock Holders to vote
separately as a class for directors as provided in this subparagraph 3(b), which
shall be held at the earliest practicable date, the term of office of any
director then in office so elected by such holders shall terminate at that time.
The Board of Directors or the shareholders of the Company shall be entitled to
fill the vacancies on the Board created thereby in the manner permitted by the
Company's Bylaws.
4. Liquidation, Dissolution or Winding Up. In the event of a voluntary
--------------------------------------
or involuntary liquidation, dissolution or winding up of the Company, the Series
D Preferred Stock Holders shall be entitled to receive out of the assets of the
Company, whether such assets are capital or surplus of any nature, $1,000 per
share of Series D 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 Series D Preferred Stock Holders, whether
earned or declared or not, and no more,
12.
<PAGE>
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 D Preferred Stock.
If upon such liquidation, dissolution or winding up, the assets thus
distributed among the holders of the Series D Preferred Stock and other series
of preferred stock that upon liquidation, dissolution or winding up share pari
passu with the Series D 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 D Preferred Stock and such other series of Preferred
Stock.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, subject to the provisions of the Company's Articles
of Incorporation and to all of the preferential rights, on distribution or
otherwise, of the holders of Series D Preferred Stock and other series of
preferred stock that rank pari passu with the Series D Preferred Stock, the
holders of Common Stock shall be entitled to receive, ratably, all remaining
assets of the Company.
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 of Series D Preferred Stock Holders. Each Series D
-----------------------------------------------------
Preferred Stock Holder shall have the right, at the option of such holder, at
any time after the first anniversary of the Closing Date through and including
the second anniversary of the Closing Date to convert, subject to the terms and
provisions set forth herein, all or any portion of the outstanding shares of
Series D 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).
6. Conversion Price. The "Conversion Price" shall be the average of the
----------------
"Market Prices" (as defined below) for the ten (10) consecutive trading days
immediately preceding the Conversion Date (as defined below); provided, however,
that, in no event shall the Conversion Price be less than $1.50 (the "Floor
Price"), which Floor Price shall be subject to further adjustment as set forth
in paragraph 8, or greater than $4.50 (the "Cap Price"). The "Market Price" on
any date shall be the last sale price of the Common Stock (or if such
information is not provided by such exchange or the National Association of
Securities Dealers, Inc. Automated Quotation System, the average of the closing
bid and asked prices of the
13.
<PAGE>
Common Stock) as reported on the principal national securities exchange on which
the Common Stock of the Company is listed or admitted to trading, or if the
Common Stock of the Company is not listed or admitted to trading on any national
securities exchange, as furnished by the National Association of Securities
Dealers, Inc. Automated Quotation System, or comparable system, or in the
absence of the foregoing, the fair market value as reasonably determined by the
Board of Directors of the Company and the Series D Preferred Stock Holders.
7. Conversion Procedure. The Series D Preferred Stock Holder may
--------------------
exercise its rights to convert all or any portion of such holder's Series D
Preferred Stock into shares of Common Stock by surrendering the share
certificates for the Series D 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, accompanied by a written notice of the holder's election to
convert such shares, or a specified portion of such shares (as provided in the
notice), executed by such holder, which notice shall specify a Conversion Date
after the first anniversary of the Closing Date but not later than the second
anniversary of the Closing Date, and accompanied, if required by the Company, by
proper assignment in blank. The date specified in any conversion notice
delivered by any Series D Preferred Stock Holder, which date shall be no earlier
than the date of actual delivery of such notice, shall be defined as the
"Conversion Date."
As promptly as practicable after the surrender as herein provided of a
certificate evidencing shares of Series D Preferred Stock for conversion, the
Company shall deliver or cause to be delivered to or upon the written order of
the holder of the certificate evidencing the Series D Preferred Stock so
surrendered certificates representing the number of fully paid and non-
assessable shares of Common Stock into which the Series D Preferred Stock, or
such portion thereof, may be converted in accordance with the provisions herein.
Such number shall be determined by dividing the product of $1,000 times the
number of shares of Series D Preferred Stock to be converted (plus any unpaid
dividends on such shares of Series D Preferred Stock to be converted accrued
from the next preceding Dividend Payment Date, if such dividends are to be paid
in shares of Common Stock) by the Conversion Price on the applicable Conversion
Date, calculated to the nearest share of Common Stock (fractions of less than
1/2 being disregarded and fractions of 1/2 or greater being rounded up to the
next full share). If only a fraction of the number of shares of Series D
Preferred Stock is used in such conversion, the Company shall, concurrently with
the issuance of the shares of Common Stock issuable upon such conversion, take
the action described in paragraph 15 hereof.
14.
<PAGE>
Any conversion of the Series D Preferred Stock shall be deemed to have been
made at the close of business on the Conversion Date specified in the applicable
conversion notice, so that the rights of the holder of the Series D Preferred
Stock as a holder thereof, or such portion thereof, shall cease at such time and
the person or persons entitled to receive any of the shares of Common Stock upon
conversion of the Series D Preferred Stock shall be treated for all purposes as
having become the record holder or holders of such shares of Common Stock at
such time.
The Company shall pay all unpaid dividends on any Series D Preferred Stock
so converted which has accrued through and including the date upon which such
conversion is deemed to have been effected in accordance with this paragraph 7,
such payment to be made in cash or in shares of Common Stock (calculated at the
Conversion Price then in effect) at the Company's option.
The issuance of certificates for Common Stock upon the conversion of Series
D Preferred Stock shall be made without charge to the Series D Preferred Stock
Holders converting such shares for any issue or stamp tax in respect of the
issuance of such certificates, and such certificates shall be issued in the
respective names of, or in such names as may be directed by, the Series D
Preferred Stock Holders.
8. Conversion Price Adjustments. The Floor Price and Cap Price shall be
----------------------------
subject to adjustment, from time to time, as follows:
(a) Stock Dividends, Subdivision Etc. In case the Company shall,
--------------------------------
after the Closing Date, (i) pay a stock dividend or make a distribution in
shares of its capital stock (whether of shares of Common Stock or of capital
stock of any other class), (ii) subdivide its outstanding shares of Common
Stock, (iii) combine its outstanding shares of Common Stock into a smaller
number of such shares or (iv) issue by reclassification of its shares of Common
Stock, any shares of capital stock of the Company, the Floor Price and the Cap
Price of the Series D Preferred Stock shall be adjusted so that the Floor Price
and the Cap Price of the Series D Preferred Stock shall be appropriately
adjusted, and such Floor Price and Cap Price shall thereafter be subject to
further adjustments under this paragraph 8. An adjustment made pursuant to this
subparagraph 8(a) shall become effective retroactively immediately after the
record date in the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or reclassification.
(b) Distributions. In case the Company shall, after the Closing Date,
-------------
fix a record date for the making of a distribution to all holders of its shares
of Common Stock
15.
<PAGE>
(including any such distribution made in connection with a consolidation or
merger in which the Company is the continuing corporation) of (i) assets (other
than dividends payable in shares of Common Stock), (ii) evidences of
indebtedness or other securities (except for shares of Common Stock) of the
Company or of any corporation other than the Company, or (iii) subscription
rights, options or warrants to purchase any of the foregoing assets or
securities (excluding those referred to in subparagraph 8(d)(iii) hereof),
whether or not such rights, options or warrants are immediately exercisable
(hereinafter collectively referred to as "Distributions on Common Stock"), the
Company shall promptly notify each Series D Preferred Stock Holder thereof in
writing (such notice to be given at least ten (10) business days prior to such
record date) and shall issue to the Series D Preferred Stock Holders, the
Distribution on Common Stock to which they would have been entitled if they had
converted the Series D Preferred Stock held by them into Common Stock of the
Company immediately prior to the record date for the purpose of determining
shareholders entitled to receive such Distribution on Common Stock.
(c) Adjustments for Issuance of Additional Common Stock. Subject to
---------------------------------------------------
the exceptions referred to in subparagraph 8(e) hereof, in case the Company
shall at any time or from time to time after the Closing Date issue any
additional shares of Common Stock ("Additional Common Stock") for a
consideration per share either (i) less than the then current Market Price per
share of Common Stock (determined as provided in subparagraph 8(g) hereof)
immediately prior to the issuance of such Additional Common Stock, or (ii)
without consideration, then upon each such issuance, the then current Floor
Price shall be reduced, if necessary, (but not increased) to the price
determined by multiplying such current Floor Price by a fraction, of which:
(i) the numerator shall be (A) the number of shares of Common Stock
outstanding when the then current Floor Price became effective plus (B) the
number of shares of Common Stock which the aggregate amount of consideration, if
any, received by the Company upon all issues of Common Stock (other than those
referred to in subparagraph 8(e) hereof) since the then current Floor Price
became effective (including the consideration, if any, received for such Common
Stock) would purchase at the greater of the then current Market Price per share
of Common Stock or the then current Floor Price and
(ii) the denominator shall be (A) the number of shares of Common Stock
outstanding when the then current Floor Price became effective plus (B) the
number of shares of Common Stock issued (other than those referred to in
subparagraph 8(e) hereof) since the then current Floor Price became effective
(including the number of shares of such Additional Common Stock).
16.
<PAGE>
(d) Consideration. For purposes of subparagraph 8(c) hereof, the
-------------
following provisions shall also be applicable:
(i) In case of the issuance of Additional Common Stock for cash, the
consideration received by the Company therefor shall be deemed to be the net
cash proceeds received by the Company for such Additional Common Stock after
deducting any commissions or other expenses paid or incurred by the Company for
any underwriting of, or otherwise in connection with the issuance of, such
Additional Common Stock.
(ii) In case of the issuance (otherwise than upon conversion of
obligations or shares of stock of the Company) of Additional Common Stock for a
consideration other than cash, or a consideration a part of which shall be other
than cash, the amount of the consideration other than cash so received or to be
received by the Company shall be deemed to be the value of such consideration at
the time of its receipt by the Company as determined in good faith by the Board
of Directors of the Company, except that where the non-cash consideration
consists of the cancellation, surrender or exchange of outstanding obligations
of the Company (or where such obligations are otherwise converted into shares of
Common Stock), the value of the non-cash consideration shall be deemed to be the
amount, including principal and any accrued interest, as of the time of the
Company's receipt, of the obligations cancelled, surrendered, satisfied,
exchanged or converted. If the Company receives consideration, part or all of
which consists of publicly traded securities (i.e., in lieu of cash), the value
----
of such noncash consideration shall be the aggregate market value of such
securities (based on the latest reported trades) as of the close of the day
immediately preceding the date of their receipt by the Company.
(iii) In case of the issuance (other than by way of a Distribution on
Common Stock pursuant to subparagraph 8(b) hereof), whether by distribution or
sale to holders of its shares of Common Stock or to others, by the Company of
(i) any security (other than the Series D Preferred Stock or the Purchase
Warrants) that is convertible into shares of Common Stock or (ii) any rights,
options or warrants to purchase shares of Common Stock (except as stated in
subparagraph 8(a) hereof), the Company shall be deemed to have issued, for the
consideration described below, the number of shares of Common Stock into which
such convertible security may be converted when first convertible, or the number
of shares of Common Stock deliverable upon the exercise of such rights, options
or warrants when first exercisable, as the case may be (and such shares of
Common Stock shall be deemed to be Additional Common Stock for purposes of
subparagraph 8(c) hereof); provided, that if such number of shares of Common
Stock is thereafter increased in accordance with the terms of such convertible
security, rights, options or warrants, as a result of the
17.
<PAGE>
anti-dilution provisions of such convertible security, rights, options or
warrants or otherwise, the Company shall be deemed to have issued at the time of
such increase and at no consideration, the additional shares of Common Stock
into which such convertible securities may be converted as a result of such
increase or the additional shares of Common Stock for which such rights, options
or warrants may be exercised as a result of such increase, as the case may be.
The consideration to be deemed to be received by the Company at the time of the
issuance of such convertible securities or such rights, options or warrants
shall be the consideration so received determined as provided in subparagraph
8(d)(i) and (ii) hereof after deducting any commissions or other expenses paid
or incurred by the Company for any underwriting of, or otherwise in connection
with, the issuance of such convertible securities or rights, options or
warrants, plus (x) any consideration or adjustment payment to be received by the
Company in connection with such conversion, or (y) the aggregate price at which
shares of Common Stock are to be delivered upon the exercise of such rights,
options or warrants when first exercisable or, if no price is specified and such
shares of Common Stock are to be delivered at an option price related to the
market value of the Common Stock, an aggregate option price bearing the same
relation to the market value of the Common Stock at the time such rights,
options or warrants were granted; provided, that as to such rights, options or
--------
warrants further adjustment as shall be necessary on the basis of the actual
option price at the time of exercise shall be made at such time if the actual
option price is less than the aforesaid assumed option price. No further
adjustment of the Conversion Price shall be made as a result of the actual
issuance of shares of Common Stock referred to in this subparagraph (iii). If
any rights or warrants which lead to an adjustment of the Floor Price expire or
terminate without having been exercised, the Floor Price then in effect will be
appropriately readjusted. However, a readjustment of the Floor Price will not
affect any conversions which take place before the readjustment.
(iv) In case any event shall occur as to which the provisions of
subparagraphs (i), (ii) or (iii) of this subparagraph 8(d) are not strictly
applicable but the failure to make any adjustment would not fairly protect the
conversion rights represented by the Series D Preferred Stock in accordance with
the essential intent and principles of such subparagraphs, then, in each such
case, the Company shall, if requested by a majority in interest of the Series D
Preferred Stock Holders, at the expense of the Series D Preferred Stock Holders,
appoint a firm of independent public accountants of recognized national standing
selected by the Board of Directors of the Company (who may be the regular
auditors of the Company), which shall give their good faith opinion upon the
adjustment, if any, on a basis consistent with the essential intent and
principles established in subparagraphs
18.
<PAGE>
(i), (ii) or (iii) of this Section 8(d), necessary to preserve, without
dilution, the conversion rights represented by the Series D Preferred Stock.
Such opinion upon such adjustment, if any, as may be necessary shall be final
and binding on the Company and all of the Series D Preferred Stock Holders.
Upon receipt of such opinion, the Company will promptly mail copies thereof to
the Series D Preferred Stock Holders and shall make the adjustments described
therein.
(e) No Adjustments. No adjustment of the Floor Price shall be made as
--------------
a result of or in connection with the issuance of shares of Common Stock upon
conversion of the Series D Preferred Stock or the exercise of the Purchase
Warrants or upon conversion of any convertible securities outstanding as of the
Closing Date or any options granted under the Company's qualified stock option
plans set forth on Exhibit C to the Purchase Agreement. To the extent the
issuance (or deemed issuance) of shares of Common Stock shall not result in any
adjustment of the Floor Price pursuant to the provisions of this subparagraph
8(e), then such shares of Common Stock shall not be taken into account for
purposes of determining the prices under subparagraph 8(c) hereof.
(f) Rounding of Calculations; Minimum Adjustment. All calculations
--------------------------------------------
under this paragraph 8 shall be made to the nearest cent. No adjustment 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.
(g) Market Price. For purposes of this paragraph 8, the current
------------
"Market Price" of the Common Stock on any date shall be deemed to be the average
of the Market Prices for the 10 consecutive trading days commencing 12 trading
days before such date.
(h) Notice to Series D Preferred Stock Holders. In case at any time:
------------------------------------------
(i) the Company shall take any action which would require an
adjustment in the Floor Price or the Cap Price pursuant to subparagraph 8(a) or
(c) hereof; or
(ii) the Company shall authorize the granting to the holders of its
Common Stock of any Distribution on Common Stock as set forth in subparagraph
8(b) hereof; or
(iii) there shall be any capital reorganization or reclassification of
the Common Stock of the Company (other than a change in par value or from par
value to no par value or from no par value to par value of the Common Stock), or
any
19.
<PAGE>
consolidation or merger to which the Company is a party and for which approval
of any shareholders of the Company is required, or any sale or transfer of all
or substantially all of the assets of the Company; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in any one or more of said cases, the Company shall give written notice to
the Series D Preferred Stock Holders, not less than 30 days before any record
date or other date set for definitive action, of the date on which such action,
reorganization, reclassification, sale, transfer, consolidation, merger,
dissolution, liquidation or winding-up shall take place, as the case may be.
Such notice shall also set forth such facts as shall indicate the effect of any
such action (to the extent such effect may be known at the date of such notice)
on the current Conversion Price and the kind and amount of shares of Common
Stock and other securities and property deliverable upon conversion of the
Series D Preferred Stock. Such notice shall also specify the date as of which
the holders of record of shares of Common Stock shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
any such reorganization, reclassification, sale, transfer, consolidation,
merger, dissolution, liquidation or winding-up, as the case may be.
9. Voluntary Adjustment. The Company may make, but shall not be
--------------------
obligated to make, such decreases in the Conversion Price so as to increase the
number of shares of Common Stock into which the Series D 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. Notice of Adjustment of Conversion Price. Whenever the Conversion
----------------------------------------
Price, the Floor Price or the Cap Price is adjusted as provided herein, the
Company shall promptly provide a certificate of its Chief Financial Officer,
and, if requested by a majority in interest of Series D Preferred Stock Holders,
shall promptly obtain a certificate of a firm of independent public accountants
of recognized national standing selected by the Board of Directors of the
Company, setting forth the Conversion Price, the Floor Price or the Cap Price as
so adjusted and a brief statement of facts accounting for such adjustment, and
shall mail a brief summary thereof to the Series D Preferred Stock Holders.
11. Reservation and Validity of Common Stock for Conversion. The Company
-------------------------------------------------------
will take all such action as may be necessary to insure that all shares of
Common Stock which may be issued upon conversion of the Series D Preferred Stock
will, upon issuance, be legally and validly issued, fully
20.
<PAGE>
paid, and non-assessable and free from all taxes, liens and charges with respect
to the issue thereof. Without limiting the generality of the foregoing, the
Company will from time to time take all such action as may be required to insure
that the par value per share of Common Stock is at all times equal to or less
than the lowest of the then applicable Conversion Price. The Company will at
all times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by the outstanding
Series D Preferred Stock.
12. Fractional Shares in Conversion. No fractional shares of Common Stock
-------------------------------
shall be issued on any conversion.
13. Company's Consolidation or Merger. If the Company shall at any time
---------------------------------
consolidate with or merge into another corporation (where the Company is not the
continuing corporation after such merger or consolidation), the Series D
Preferred Stock Holder shall thereafter be entitled to receive, upon the
conversion of the shares of Series D 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 the
Purchase Agreement shall thereafter be applicable in relation to any securities
or property thereafter deliverable upon the conversion of the Series D 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.
14. Optional Redemption. At any time from the Closing Date through and
-------------------
including the first anniversary of the Closing Date, the Company may (by
resolution of its Board of Directors) at its option, and after the first
anniversary of the Closing Date, the Company may (by resolution of its Board of
Directors) with the prior written consent of each of the Series D Preferred
Stock Holders whose shares are to be redeemed, upon not less than 30 days prior
written notice given by the Company to each Series D Preferred Stock Holder,
redeem the outstanding shares of Series D Preferred Stock in full or in part in
amounts aggregating not less than 1,000 shares of Series D Preferred Stock at an
optional redemption price equal to $1,000 per share plus the amount of any
accrued but unpaid dividends on the shares of Series D Preferred Stock to be so
optionally redeemed to the date of optional redemption. Each redemption of less
than all outstanding shares of Series D Preferred Stock occurring on or before
the
21.
<PAGE>
first anniversary of the Closing Date shall be made pro rata in respect of the
shares then outstanding. Each redemption of less than all outstanding shares of
Series D Preferred Stock occurring after the first anniversary of the Closing
Date shall be made pro rata in respect of the shares then outstanding as to
which the holders thereof have consented to redemption of their shares.
At least 30 days' prior notice by mail, postage prepaid, shall be given to
the holders of record of the shares of Series D Preferred Stock to be redeemed,
such notice to be addressed to each such holder 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 D 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 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 and segregated from the other assets of the
Company to be held in trust therefor, then, notwithstanding that the certificate
evidencing any shares of Series D 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, after notice of redemption has been given, the Company deposits, on or
prior to any date fixed for redemption of shares of Series D Preferred Stock,
with any bank or trust company in the State of California that has a combined
capital and surplus of not less than $100 million, as a trust fund, a sum
sufficient to redeem, on the date fixed for redemption thereof, the shares
called for redemption, with irrevocable instructions and authority to the bank
or trust company to give the notice of redemption thereof (or to complete the
giving of such notice if theretofore commenced) and to pay, on or after the date
fixed for redemption or prior thereto, the
22.
<PAGE>
redemption price of the shares to their respective holders upon the surrender of
their share certificates, then from and after the date of the deposit (although
prior to the date fixed for redemption), the shares shall no longer be
outstanding, and the holders thereof shall cease to be stockholders with respect
to such shares, and shall have no rights with respect thereto except the right
to receive from the bank or trust company payment of the redemption price of the
shares without interest, upon the surrender of their certificates therefor, and
except that dividends on such shares shall continue to accrue to the date fixed
for redemption. Any interest accrued on any funds so deposited shall be the
property of, and paid to, the Company. If the Series D Preferred Stock Holder
so called for redemption shall not, at the end of two years from the date fixed
for redemption thereof, have claimed any funds so deposited, such bank or trust
company shall thereupon pay over to the Company such unclaimed funds, and such
bank or trust company shall thereafter be relieved of all responsibility in
respect thereof to such holders and such holders shall look only to the Company
for payment of the redemption price.
15. Exchange and Cancellation of Series D Preferred Stock. Subject to all
-----------------------------------------------------
applicable securities laws and other applicable restrictions on transfer, at any
time at the request of any Series D Preferred Stock Holder to the Company at its
office provided under paragraph 17 hereof, the Company at its expense will issue
and deliver to or upon the order of the holder in exchange therefor new Series D
Preferred Stock registered in the name of such person or persons as may be
designated by such holder for the same aggregate number of shares as the Series
D Preferred Stock surrendered and substantially in the form thereof, dated the
date of the Series D Preferred Stock so surrendered. Any such new Series D
Preferred Stock shall bear any required notation as to any modification.
Upon the conversion in whole or in part of any Series D Preferred Stock, if
only a portion of the Series D Preferred Stock is used in such conversion, then
the Company shall execute and deliver to or upon the order of the holder
thereof, at the expense of the Company, a new Series D Preferred Stock
certificate or Series D Preferred Stock certificates evidencing the unused
portion of such Series D Preferred Stock.
All Series D Preferred Stock certificates or portions thereof which have
been converted shall be canceled by the Company and no Series D Preferred Stock
certificates shall be issued in lieu of the portion of the Series D Preferred
Stock so converted.
23.
<PAGE>
16. Replacement of Series D Preferred Stock Certificates. Upon receipt
----------------------------------------------------
of evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Series D Preferred Stock certificate and, in the case of any
such loss, theft or destruction, upon delivery of an indemnity reasonably
satisfactory to the Company (if requested by the Company), or in the case of any
such mutilation, upon surrender and cancellation of such Series D Preferred
Stock certificate, the Company will issue a new Series D Preferred Stock
certificate of like tenor in lieu of such lost, stolen, destroyed or mutilated
Series D Preferred Stock as if the lost, stolen, destroyed or mutilated Series D
Preferred Stock certificate were then surrendered for exchange. No Series D
Preferred Stock Holder shall be required to furnish an indemnity bond in
connection with any such loss, theft or destruction.
17. Office for Exchange and Registration. So long as any of the shares of
------------------------------------
the Series D Preferred Stock are outstanding, the Company will maintain an
office or agency where Series D Preferred Stock may be presented for exchange,
conversion or registration of transfer as provided in this Certificate of
Determination and Decrease. Such office or agency initially shall be the
principal office of the Company, which place may thereafter from time to time be
changed by notice to the holders of the Series D Preferred Stock then
outstanding.
18. Notices. So long as any of the Series D Preferred Stock is
-------
outstanding, the Company will give notice to all holders of the Series D
Preferred Stock promptly after any of its officers or directors learns (other
than by notice from any of such holders) of the existence of any of the
following:
(1) any Event of Noncompliance; and
(2) any material default under any evidence of Indebtedness or under
any indenture, mortgage or other agreement relating to any evidence of
Indebtedness in respect of which the Company or any of its Subsidiaries is
liable.
19. Severability of Provisions. If any right, preference or limitation
--------------------------
of the Series D Preferred Stock set forth in this resolution (as such resolution
may be amended from time to time) is invalid, unlawful or incapable of being
enforced by reason of any rule of law or public policy, all other rights,
preferences and limitations set forth in this resolution (as so amended) which
can be given effect without the invalid, unlawful or unenforceable right,
preference or limitation shall, nevertheless, remain in full force and effect,
and no right, preference or limitation herein set
24.
<PAGE>
forth shall be deemed dependent upon any other such right, preference or
limitation unless so expressed herein.
RESOLVED FURTHER, that the President and 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
and Decrease in accordance with this resolution and as required by law.
* * *
25.
<PAGE>
The undersigned further declares 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 their own knowledge.
Dated: December 6, 1996 /s/ James B. Mariner
----------------------------------
James B. Mariner, President
<PAGE>
The undersigned further declares 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 their own knowledge.
Dated: December 6, 1996 /s/ James R. Spievak
----------------------------------
James R. Spievak, Secretary
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is entered into as of April 1,
1997, by and between ChatCom, Inc., a California corporation (the "Company"),
and James B. Mariner ("Mariner").
1. Employment.
----------
1.1 Employment as President and Chief Executive Officer. The Company
---------------------------------------------------
agrees to employ Mariner, and Mariner agrees to be employed by the Company, as
the Company's President and Chief Executive Officer for the period beginning on
April 1, 1997 and ending on the termination date as described in Section 3 (the
"Employment Period").
1.2 Duties as Employee. Mariner agrees to serve the Company as
------------------
President and Chief Executive Officer during the Employment Period. Mariner's
duties shall be those customary for a President and Chief Executive Officer of a
company similar to the Company and such other duties as are specified by the
Company's Board of Directors (the "Board"), and he shall report to the Board.
Mariner shall also serve as a member of the Board of the Company, and the
Company agrees to include Mariner as a nominee for director in its slate of
candidates in all proxy materials for shareholder meetings to be held during the
Employment Period. During the Employment Period, the Company shall employ or
engage no one other than Mariner with his title or functions under this
Agreement. During the Employment Period, all officers, employees and
consultants of the Company shall report to, and only to, Mariner (directly or
through such channels as Mariner shall designate). During the Employment
Period, Mariner shall have the full, exclusive and final power and authority to
supervise and determine the business, affairs, and operations of the Company,
subject only to the ultimate direction of the Board. Without limiting the
generality of the immediately preceding sentence, Mariner shall have the full,
exclusive and final power and authority, subject only to the ultimate direction
of the Board, to initiate any and all action with respect to the Company and
supervise or determine all administrative and operational function of the
Company with respect to all of its assets and business, including, without
limitation, to hire, replace and terminate any and all personnel; to supervise
the operation and management of all business facilities, including real and
personal property; to acquire and dispose of personal property (wherever
acquired); to produce assets and exploit, license, lease and otherwise turn the
Company's assets to account, or to refrain therefrom.
Mariner's service shall be primarily performed in the greater metropolitan
area of Los Angeles, California. During his employment, Mariner shall devote
such time and effort as may be necessary to adequately perform his duties under
this Agreement. Mariner shall be entitled to manage and direct his own personal
investments and business affairs, to participate in such charitable and public
interest activities as he may deem appropriate, and to serve on other boards
(with the reasonable approval of the Board), all and to the extent that such
activities do
<PAGE>
not conflict with his obligations to the Company as the full-time President and
Chief Executive Officer of the Company.
This Agreement shall not be terminated by the voluntary or involuntary
dissolution of the Company, or by any merger after which the Company is not the
surviving or resulting entity, or upon any transfer of all or substantially all
of the assets of the Company. In the event of any such merger or transfer of
assets, or any similar corporate reorganization, whatever may be its form, the
provisions of this Agreement shall be binding on and inure to the benefit of,
and the obligations of the Company shall be assumed by, the surviving business
entity or the business entity to which such assets have been transferred.
1.3 Salary and Benefits.
-------------------
(a) Salary and Bonus. During the Employment Period, the Company shall
----------------
pay Mariner a salary at the annual rate of $165,000 per year (which rate shall
increase retroactively to April 1, 1997 to $185,000 per year immediately
following the completion by the Company of a financing for at least $2,000,000),
payable bi-monthly and subject to such payroll deductions as may be necessary or
customary in respect of the Company's salaried employees in general. For the
Employment Period, the Company shall pay Mariner a cash bonus of up to $65,000,
provided that the Company achieves net income of at least $500,000 and at least
$18,000,000 in revenues for the fiscal year ended March 31, 1998. (A portion of
the foregoing $65,000 bonus will be fixed by the Board and will be payable to
Mariner in the event the goals of achieving $2,000,000 in net income and
$25,000,000 in revenues for such fiscal year are only partially satisfied, with
such portion (i) to be based on the relationship of the actual operating results
achieved to the minimum and goal amounts for net income and revenues set forth
in this Section 1.3(a) and (ii) to reflect achievement of the goal of raising
equity capital sufficient to support the growth in revenues to the foregoing
minimum or goal amount levels.)
(b) Incentive, Savings and Retirement Plans. Mariner shall be
---------------------------------------
entitled to participate at the discretion of the Board in all annual bonus,
incentive, stock option, savings and retirement plans, practices, policies and
programs applicable generally to other senior executives of the Company.
(c) Welfare Benefit Plans. Mariner shall be eligible for
---------------------
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company to the extent
applicable generally to other senior executives of the Company.
(d) Vacations. Mariner shall be entitled to paid four weeks vacation
---------
and sick leave and holidays in accordance with the Company's policies for other
senior executives of the Company.
2.
<PAGE>
(e) Fringe Benefits. Mariner shall be entitled to fringe benefits in
---------------
accordance with the plans, practices, programs and policies as in effect
generally with respect to other senior executives of the Company, including
medical insurance and fully paid annual physical exams, the use of the Company's
GMC Suburban or another vehicle of equivalent value or cost, auto insurance,
fuel oil and maintenance.
(f) Life Insurance. During the Employment Period, the Company, at its
--------------
expense, shall provide Mariner with a two-year term life insurance policy in the
amount of $1 million, with the beneficiary for such policy to be named by
Mariner, provided that the annual premium cost to the Company shall not exceed
$5,000 and with Mariner having the option to pay premiums in excess of $5,000
per year.
2. Additional Compensation.
-----------------------
2.1 Vesting of Options for Fiscal Year Ended March 31, 1997. The
-------------------------------------------------------
Company and Mariner hereby confirm and agree that, notwithstanding anything in
the provisions of the letter agreement, dated March 5, 1996, between the Company
and Mariner (the "Prior Agreement") to the contrary, all of the options to
purchase a total of 120,000 shares of the Company's Common Stock previously
granted to Mariner that were available for potential vesting with respect to the
fiscal year ended March 31, 1997 shall be deemed to be vested as of March 31,
1997, despite the Company's failure to meet the EBIT and revenue targets for
that vesting described in the Prior Agreement.
2.2 Vesting of Options for Fiscal Years Ended March 31, 1998 and
------------------------------------------------------------
March 31, 1999. Provided that Mariner continues to be employed as the Company's
- --------------
President and CEO through the applicable vesting dates or as otherwise
specifically provided in Section 3.3, the remaining options to purchase a total
of 240,000 shares of the Company's common stock granted to Mariner pursuant to
the Prior Agreement shall vest on March 31, 2000 as to 120,000 shares and March
31, 2001 as to the remaining 120,000 shares and be exercisable through March 4,
2003, except that such vesting will be accelerated during the Employment Period,
as follows:
(a) Options for Fiscal Year Ended March 31, 1998. Options to purchase
--------------------------------------------
120,000 shares of the Company's common stock shall vest as of March 31, 1998,
provided that the Company achieves for the fiscal year ended March 31, 1998 both
net income of at least $2,000,000 and at least $25,000,000 in revenues. (A
portion of the foregoing options to purchase 120,000 shares will be fixed by the
Board and will vest in the event the foregoing financial tests are only
partially satisfied, provided that the Company generates at least $500,000 in
net income and $18,000,000 in revenues, and with such portion (i) to be based on
the relationship of the actual operating results achieved to the minimum and
goal amounts for net income and revenues set forth in this Section 2.2(a) and
(ii) to reflect
3.
<PAGE>
achievement of the goal of raising equity capital sufficient to support the
growth in revenues to the foregoing minimum or goal amount levels.)
(b) Options for Fiscal Year Ended March 31, 1999. The performance
--------------------------------------------
standards for the vesting of the remaining options to purchase 120,000 shares of
the Company's common stock for the fiscal year ended March 31, 1999 shall be
agreed to by the Company and Mariner prior to the commencement of that fiscal
year.
(c) Options for Fiscal Years Ended after March 31, 1999. The
---------------------------------------------------
performance standards for the vesting of any options that may be granted after
the date of this Agreement with respect to fiscal years ended after March 31,
1999 shall be agreed to by the Company and Mariner prior to the commencement of
such respective fiscal years.
(d) Cancellation of Unvested Options. Except as provided below,
--------------------------------
options not vested pursuant to Section 2.2(a), 2.2(b) or 2.2(c) hereof shall be
cancelled following a determination by the Board that the tests for vesting have
not been satisfied.
3. Termination. The term of Mariner's employment under this Agreement
-----------
may terminate as hereinafter provided, in which case (i) Mariner shall be
entitled to the amounts set forth in Section 3.3 hereof and (ii) Mariner shall
remain subject to the provisions of Sections 4, 5 and 6 hereof to the extent
applicable. Either party may terminate this Agreement at any time on at least
one year's written notice, provided that such notice may not be delivered by the
Company prior to April 1, 1998. Upon his termination as the Company's President
and Chief Executive Officer, Mariner shall promptly resign as a member of the
Board, if so requested by the Company.
3.1 Death or Disability. If Mariner dies or becomes disabled during
-------------------
the Employment Period, Mariner's employment under this Agreement shall
automatically terminate upon death or after four and one-half consecutive months
of disability, as the case may be. "Disability" shall mean any physical or
mental illness that renders Mariner unable to perform his agreed-upon services
under this Agreement for any four and one-half consecutive months. Such
disability shall be determined by a licensed physician not affiliated with the
parties to this Agreement. In the event of Mariner's death, the amounts due him
pursuant to this Agreement through the date of his death shall be paid to
whomever he has previously designated or, in the event no such designation is
made, to his estate, or to the beneficiaries of his estate.
3.2 Good Cause. Mariner's employment under this Agreement may be
----------
terminated upon written notice by the Company for "good cause," as determined in
good faith by the Board. The term "good cause" is defined as (a) Mariner's
continuing repeated willful failure or refusal to perform his duties as required
by this Agreement; (b) gross negligence, material violation by Mariner of any
duty of loyalty to the Company or any other material misconduct on the part of
Mariner; (c) Mariner's conviction by, or entry of a plea of guilty or
4.
<PAGE>
nolo contendere in, a court of competent and final jurisdiction for any crime
involving moral turpitude or a felony punishable by imprisonment in the
jurisdiction involved; or (d) Mariner's commission of an act of fraud, whether
prior to or subsequent to the date hereof, upon the Company, as determined in
good faith by the Board. Mariner shall be given at least 30 days to fully
correct any event under (a) or (b) of the preceding sentence and to indemnify
the Company for any damage caused to it by such event.
3.3 Payments Upon Termination. Upon the completion of the Employment
-------------------------
Period, Mariner shall not receive any further salary, bonus or severance
payments, but shall be entitled to receive the salary and bonus payments set
forth in Section 1.3(a) for the Employment Period. Options held by Mariner that
have vested as of the date of the completion of the Employment Period or that
otherwise vest pursuant to this Section 3.3 shall be exercisable for a period of
time following the Employment Period equal to the sum of (a) two years plus (b)
the period of time that Mariner has served as the Company's Chief Executive
Officer, but with such exercise period to not exceed five years or the original
expiration date of such options. As described in this Section 3.3, all other
unvested options shall be cancelled as of the date of completion of the
Employment Period or, where appropriate, as of the end of the applicable fiscal
year determination that the relevant performance standards have not been met.
(a) Death or Disability. In the event of Mariner's termination as set
-------------------
forth in Section 3.1 hereof, he shall receive his salary through the date of
such termination. Any bonus that would have been payable for the fiscal year in
which termination occurs pursuant to Section 3.1 and any options granted
pursuant to Section 2.2 that would otherwise have vested (in whole or in part)
at the end of the fiscal year in which such death or disability occurs will be
payable and vest (in whole or in part) upon a determination by the Board as of
the end of that fiscal year that the performance standards for such partial or
complete payment and vesting have been met; provided, however, that the
foregoing bonus shall be payable pro rata (based on the number of months that
Mariner serves as Chief Executive Officer during the fiscal year in which his
termination occurs). In no event shall Mariner be entitled to receive any other
additional salary, bonus, options or compensation of any other kind hereunder.
(b) Good Cause. In the event of Mariner's termination as set forth in
----------
Section 3.2 hereof, he shall receive his salary through the date of such
termination. Options vested at such termination date shall be exercisable in
accordance with the terms of the Company's Stock Option Plan, as modified by
Section 3.3. Options not vested at such termination date shall be immediately
cancelled. In no event shall Mariner be entitled to receive additional salary,
bonus, options or compensation of any other kind hereunder.
(c) Termination Without Cause. In the event the Company terminates
-------------------------
the Employment Period without cause effective as of the end of a fiscal year
(the "Final Fiscal Year Served"), (a) Mariner shall be entitled to receive his
salary for the Final Fiscal Year
5.
<PAGE>
Served, and (b) provided that the performance standards for the year preceding
the Final Fiscal Year served were achieved, Mariner shall be entitled to receive
all of his bonus for the Final Fiscal Year served and all of the options granted
pursuant to Section 2.2 that would have vested with respect to that fiscal year
shall be deemed to have vested whether or not the performance standards for the
Final Fiscal Year Served were met. In the event the Company terminates the
Employment Period by delivering the one-year termination notice on a date that
falls after the end of a fiscal year, (a) the options and bonus for the period
from the end of such fiscal year to the date of delivery of the notice shall be
earned and vested (pro rata based on the number of months that Mariner serves as
Chief Executive Officer from the end of such fiscal year to the date of delivery
of the notice) but only in the event and to the extent that the performance
standards for the fiscal year in which the termination notice was delivered are
met, and (b) Mariner shall receive his salary for the one-year period commencing
with delivery of the termination notice, and, provided that the performance
standards for the preceding fiscal year were met, the Company shall negotiate in
good faith (taking into consideration that the performance standards had been
achieved for the preceding fiscal year) a bonus amount and option vesting
schedule for the one-year period that commences with delivery of the termination
notice (which constitutes the final year of the Employment Period) that shall
not be tied to the achievement of any performance standards. In the event the
performance standards for the preceding fiscal year were only partially met,
Mariner and the Company will negotiate in good faith a bonus and option vesting
schedule with appropriate performance standards. Options not vested at the
termination date pursuant to this Section 2.2(c) shall be immediately cancelled.
In no event shall Mariner be entitled to receive any other salary, bonus,
options or compensation of any kind hereunder.
Should the Company terminate the Employment Period without cause, it shall
have the right to cause Mariner to cease serving as President and Chief
Executive Officer 30 days after delivery of such notice, in which case Mariner
shall retain all rights to receive and vest options (subject to the preceding
paragraph) as if he continued to serve for the one-year period following
delivery of the notice and he shall have the option to either (a) receive his
salary and bonus with respect to that one-year period paid either at such times
as those amounts would be payable had he continued to serve or (b) receive a
lump sum payment 30 days following receipt of such notice equal to 90% of his
salary and bonus that would be payable had he continued to serve for that one-
year period as payment in full for those amounts.
(d) Voluntary Resignation. In the event Mariner terminates the
---------------------
Employment Period without cause as of a date prior to the completion of a fiscal
year, Mariner shall be entitled to receive his salary through that date and a
pro rata share of both the bonus and the options granted pursuant to Section 2.2
for that fiscal year (based on the number of months that he served as Chief
Executive Officer in that fiscal year), but only in the event and to the extent
that the performance standards for that fiscal year were met. Options not
vested at such termination date shall be immediately cancelled. In no event
shall Mariner be entitled to receive any other salary, bonus, options or
compensation of any kind hereunder.
6.
<PAGE>
4. Ownership of Intangibles. Mariner hereby grants and assigns to the
------------------------
Company all of his right, title and interest in and to any ideas, designs,
techniques, processes, trademarks, inventions and improvements related to the
Company's business (collectively, "Inventions") conceived during the term of
this Agreement, which Inventions relate to the business of the Company or any of
its affiliates, or to actual or demonstrably anticipated research or development
of the Company or any of its affiliates, or results from work performed by
Mariner for the Company or any of its affiliates, together with all patents that
are pending or have been issued in the United States and in all foreign
countries during the term of this Agreement with respect to such Inventions (the
"Proprietary Rights"). All such Proprietary Rights shall be the sole and
exclusive property of the Company and shall remain such notwithstanding the
subsequent termination of employment under this Agreement. To the extent that
any Proprietary Rights or other ideas, designs, techniques, processes,
trademarks, inventions or improvements used by the Company during the term of
this Agreement rely upon or use patented or unpatented Inventions that Mariner
has made or conceived prior to the date of this Agreement, Mariner hereby grants
an exclusive, perpetual, royalty-free, worldwide license to use such Invention.
5. Confidential Information. Mariner agrees that during the Employment
------------------------
Period, he will be dealing with proprietary, nonpublic and confidential
information, including inventions and processes developed by the Company or any
of its affiliates, relating to the present and prospective business, assets and
good will of the Company or any of its affiliates (all of the foregoing referred
to as "confidential information"). Without limiting the generality of the
foregoing, it is understood that Mariner will have access to information
regarding intellectual property of the Company or any of its affiliates,
inventions and ideas under development by them, and information regarding the
actual and prospective business and customers of the Company or any of its
affiliates. Mariner agrees that he will not disclose to anyone, directly or
indirectly, any of such confidential matters, or use them other than in the
course of performing his obligations under this Agreement. All documents
prepared by Mariner in connection with the services provided herein, and all
confidential information (however embodied or recorded) that might be given to
him are the exclusive property of the Company and shall be returned to the
Company at its request. After termination of Mariner's employment with the
Company, he shall not, without the prior written consent of the Company, or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it in writing. Mariner acknowledges that such actions could cause
irreparable harm to the Company and that the Company may obtain an injunction or
other equitable relief to enforce this provision. Furthermore, upon termination
of this Agreement, Mariner shall promptly deliver to the Company all books,
memoranda, records and written data in original form of every kind relating to
the business and affairs of the Company that may then be in his personal
possession.
7.
<PAGE>
6. Noncompetition.
--------------
6.1 No Competing Activities. Mariner agrees that, while he is
-----------------------
employed by the Company, he shall not engage or participate in any state of the
United States, directly or indirectly, either as an owner, partner, director,
trustee, officer, employee, consultant, advisor or in any other individual or
representative capacity, in any activity which is the same as, similar to or
competitive in any manner with the business of the Company or its members or
affiliates (herein, a "Competing Activity") or have any investment in a business
which is engaged in a Competing Activity (other than an ownership interest of
less than 5% of any company whose securities are listed on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market or Nasdaq
Small Cap Market). Mariner further agrees that in the event of a termination
for good cause as set forth in Section 3.2 hereof or Mariner's election to
terminate employment pursuant to Section 3.3 hereof, he shall not, for a two-
year period following such termination of employment, engage in a Competing
Activity or have any investment in a business which is engaged in a Competing
Activity (other than an ownership interest of less than 5% of any company whose
securities are listed on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market or Nasdaq Small Cap Market).
6.2 Reasonable Limitations. Mariner acknowledges that, given the
----------------------
nature of the Company's business, the covenants contained in this Section 6
contain reasonable limitations as to time, geographical area and scope of
activity to be restrained, and do not impose a greater restraint than is
necessary to protect the legitimate business interests of the Company. If,
however, this Section 6 is determined by any court of competent jurisdiction, or
in any arbitration, as the case may be, to be unenforceable by reason of its
extending for too long a period of time or over too large a geographic area or
by reason of its being too extensive in any other respect or for any other
reason it will be interpreted to extend only over the longest period of time for
which it may be enforceable and/or over the largest geographical area as to
which it may be enforceable and/or to the maximum extent in all other aspects as
to which it may be enforceable, all as determined by such court, or in such
arbitration, as the case may be.
6.3 Acknowledgement. Mariner understands that the restrictions in
---------------
Section 6.1 hereof may limit his ability to earn a livelihood in a business
similar to the business of the Company, but he nevertheless believes that he has
received and will receive sufficient consideration hereunder and otherwise as an
employee of the Company to justify such restrictions which, in any event, given
his education, abilities and skills, Mariner does not believe would prevent him
from earning a living.
8.
<PAGE>
7. Miscellaneous.
-------------
7.1 Modification and Waiver of Breach. No waiver or modification of
---------------------------------
this Agreement shall be binding unless it is in writing signed by the parties
hereto. No waiver of a breach hereof shall be deemed to constitute a waiver of
a future breach, whether of a similar or dissimilar nature.
7.2 Assignment. This Agreement shall inure to the benefit of and
----------
shall be binding upon the Company, its successors and assigns. The obligations
and duties of Mariner hereunder are personal and not assignable, whether
voluntarily or involuntarily or by operation of law or otherwise.
7.3 Notices. All notices and other communications required or
-------
permitted under this Agreement shall be in writing, served personally on, or
mailed by certified or registered United States mail to, the party to be charged
with receipt thereof. Notices and other communications served by mail shall be
deemed given hereunder 72 hours after deposit of such notice or communication in
the United States Post Office as certified or registered mail with postage
prepaid and duly addressed to whom such notice or communication is to be given,
in the case of (a) the Company, 9600 Topanga Canyon Boulevard, Chatsworth,
California 91311, Attention: Secretary, or (b) Mariner, to the address set
forth below his name on the signature page hereof. Any such party may change
said party's address for purposes of this Section 7.3 by giving to the party
intended to be bound thereby, in the manner provided herein, a written notice of
such change.
7.4 Counterparts. This instrument may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
7.5 Governing Law. This Agreement shall be construed in accordance
-------------
with, and governed by, the internal laws of the State of California.
7.6 Arbitration; Legal Fees. Any dispute with respect to this
-----------------------
Agreement shall be resolved by binding arbitration pursuant to the rules of the
American Arbitration Association. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of any alleged
dispute, breach, default or misrepresentation in connection with this Agreement,
the successful or prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs it incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
9.
<PAGE>
7.7 Savings Clause. If any provision of this Agreement or the
--------------
application thereof is held invalid, the invalidity shall not affect other
provisions or applications of the Agreement which can be given effect without
the invalid provisions or applications and to this end the provisions of this
Agreement are declared to be severable.
7.8 Complete Agreement. This instrument constitutes and contains the
------------------
entire agreement and understanding concerning Mariner's employment and the other
subject matters addressed herein between the parties, and supersedes and
replaces all prior negotiations and all agreements proposed or otherwise,
whether written or oral, concerning the subject matters hereof. This is an
integrated document.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day
and year first above written.
MARINER: THE COMPANY:
CHATCOM, INC.
/s/ James B. Mariner By: /s/ Richard Picheny
- --------------------------- --------------------------
James B. Mariner Executive Vice President
and Secretary
Address:
177 RIVERSIDE AVE.
- ---------------------------
NEWPORT BEACH
- ---------------------------
CALIFORNIA 92663
- ---------------------------
10.
<PAGE>
EXHIBIT 10.19
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between Gerald R. Sayer, Ph.D. and Astro Sciences
Corporation, a California Corporation (the "Company"), is effective as of August
14, 1995.
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is an Officer and Director of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers in
today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitees' continued service to
the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) permitted by law as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when (i)
there has been a change in control of the Company, not approved by a resolution
of the Company's Board of Directors, of a nature that would be required to be
reported by a company subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in response to Schedule
14A of Regulation 14A promulgated under the Exchange Act, including in any event
the acquisition by any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) of beneficial ownership, directly or indirectly,
of securities of the Company representing twenty-five percent (25%) or more of
the combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two (2) years by a change in the
identity of a majority of the members of the Company's Board of Directors
otherwise than through death, disability or retirement in accordance with the
Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs,
expenses and obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or is or was serving at the request of the Company as a
director, officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of
a member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnitee
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, a Claim by reason of (or arising in part out
of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the
fullest extent permitted by law as soon as practicable but in any event no later
than thirty (30) days after written demand is presented to the Company, against
any and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company bylaw now or
hereafter in effect relating to claims for Indemnifiable Events, the Company
shall seek legal advice only from special, independent counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company within
the last ten (10) years (other than in connection with such matters) or for the
Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of
-----------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of
--------------
any claim, action, suit or proceeding, by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall be
--------------------
in addition to any other rights Indemnitee may have under the Company's bylaws
or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an
-------------------
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors or
personal or legal representatives after the expiration of two (2) years from the
date of accrual of such cause of action, and any claim or cause of action of the
Company or its affiliate shall be extinguished and deemed released unless
asserted by the timely filing of a legal action within such two (2) year period;
provided, however, that if any shorter period of limitations is otherwise
applicable to any such cause of action such shorter period shall govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure
-------------------
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable
------------
in the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of California applicable
to contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
ASTRO SCIENCES CORPORATION
a California corporation
_______________________________ By: _________________________
GERALD R. SAYER, Ph.D.
6
<PAGE>
EXHIBIT 10.20
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between James D. Edwards and Astro Sciences Corporation, a
California Corporation (the "Company"), is effective as of October 9, 1995.
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available;
WHEREAS, Indemnitee is a Director of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers in
today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitees' continued service to
the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) permitted by law as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when (i)
there has been a change in control of the Company, not approved by a resolution
of the Company's Board of Directors, of a nature that would be required to be
reported by a company subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in response to Schedule
14A of Regulation 14A promulgated under the Exchange Act, including in any event
the acquisition by any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) of beneficial ownership, directly or indirectly,
of securities of the Company representing twenty-five percent (25%) or more of
the combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two (2) years by a change in the
identity of a majority of the members of the Company's Board of Directors
otherwise than through death, disability or retirement in accordance with the
Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in, or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnitee
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty (30) days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company bylaw now or
hereafter in effect relating to claims for Indemnifiable Events, the Company
shall seek legal advice only from special, independent counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company within
the last ten (10) years (other than in connection with such matters) or for the
Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of
-----------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of
--------------
any claim, action, suit or proceeding, by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall be
--------------------
in addition to any other rights Indemnitee may have under the Company's bylaws
or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an insurance
-------------------
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors or
personal or legal representatives after the expiration of two (2) years from the
date of accrual of such cause of action, and any claim or cause of action of the
Company or its affiliate shall be extinguished and deemed released unless
asserted by the timely filing of a legal action within such two (2) year period;
provided, however, that if any shorter period of limitations is otherwise
applicable to any such cause of action such shorter period shall govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure
-------------------
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
ASTRO SCIENCES CORPORATION,
a California corporation
____________________________ By:__________________________
JAMES D. EDWARDS
6
<PAGE>
EXHIBIT 10.21
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between Sanford C. Sigoloff and ChatCom, Inc., a
California Corporation (the "Company"), is effective as of February 8, 1996.
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a Director of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors and
officers in today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitees' continued
service to the Company in an effective manner, the Company wishes to provide in
this Agreement for the indemnification of and the advancing of expenses to
Indemnitee to the full extent (whether partial or complete) permitted by law as
set forth in this Agreement, and, to the extent insurance is maintained, for the
continued coverage of Indemnitee under the Company's directors' and officers'
liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when
(i) there has been a change in control of the Company, not approved by a
resolution of the Company's Board of Directors, of a nature that would be
required to be reported by a company subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
response to Schedule 14A of Regulation 14A promulgated under the Exchange Act,
including in any event the acquisition by any "person" (as such term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act) of beneficial ownership,
directly or indirectly, of securities of the Company representing twent-five
percent (25%) or more of the combined voting power of the Company's then
outstanding securities, (ii) followed within a period of not more than two (2)
years by a change in the identity of a majority of the members of the Company's
Board of Directors otherwise than through death, disability or retirement in
accordance with the Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs,
expenses and obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or is or was serving at the request of the Company as a
director, officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of
a member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnitee
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, a Claim by reason of (or arising in part out
of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the
fullest extent permitted by law as soon as practicable but in any event no later
than thirty (30) days after written demand is presented to the Company, against
any and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a
-----------------
Change in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to indemnity payments and
Expense Advances under this Agreement or any other agreement or Company bylaw
now or hereafter in effect relating to claims for Indemnifiable Events, the
Company shall seek legal advice only from special, independent counsel selected
by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), and who has not otherwise performed services for the
Company within the last ten (10) years (other than in connection with such
matters) or for the Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall
---------------------------------------
indemnify Indemnitee against any and all expenses (including attorneys' fees)
and, if requested by Indemnitee, shall (within two (2) business days of such
request) advance such expenses to Indemnitee, which are incurred by Indemnitee
in connection with any claim asserted against or action brought by Indemnitee
for (i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any
-----------------
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of a Claim but not, however, for all of the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled. Moreover, notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any or all Claims relating in whole or in part to an
Indemnifiable Event or in defense of any issue or matter therein, including
dismissal without prejudice, the Indemnitee shall be indemnified against all
Expenses incurred in connection therewith. In connection with any determination
by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be
indemnified hereunder the burden of proof shall be on the Company to establish
that Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the
--------------
termination of any claim, action, suit or proceeding, by judgment, order,
settlement (whether with or without court approval) or conviction, or upon a
plea of nolo contendere, or its equivalent, shall not create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder
--------------------
shall be in addition to any other rights Indemnitee may have under the Company's
bylaws or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an
-------------------
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
9. Period of Limitations. No legal action shall be brought and no
---------------------
cause of action shall be asserted by or on behalf of the Company or any
affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs,
executors or personal or legal representatives after the expiration of two (2)
years from the date of accrual of such cause of action, and any claim or cause
of action of the Company or its affiliate shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such two
(2) year period; provided, however, that if any shorter period of limitations is
otherwise applicable to any such cause of action such shorter period shall
govern.
10. Amendments, Etc. No supplement, modification or amendment of
---------------
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement,
-----------
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
12. No Duplication of Payments. The Company shall not be liable
--------------------------
under this Agreement to make any payment in connection with any claim made
against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, bylaw or otherwise) of the amounts
otherwise indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and
-------------------
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, including any direct or indirect successor by
purchase, merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be
------------
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable, and the
remaining provisions shall remain enforceable to the fullest extent permitted by
law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and
--------------
construed and enforced in accordance with the laws of the State of California
applicable to contracts made and to be performed in such state without giving
effect to the principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
CHATCOM, INC.,
a California corporation
- ----------------------------- By:__________________________
SANFORD C. SIGOLOFF
6
<PAGE>
EXHIBIT 10.22
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between Philip B. Smith and ChatCom, Inc., a California
Corporation (the "Company"), is effective as of February 8, 1996.
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available;
WHEREAS, Indemnitee is a Director of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers in
today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitees' continued service to
the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) permitted by law as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when (i)
there has been a change in control of the Company, not approved by a resolution
of the Company's Board of Directors, of a nature that would be required to be
reported by a company subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in response to Schedule
14A of Regulation 14A promulgated under the Exchange Act, including in any event
the acquisition by any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) of beneficial ownership, directly or indirectly,
of securities of the Company representing twenty-five percent (25%) or more of
the combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two (2) years by a change in the
identity of a majority of the members of the Company's Board of Directors
otherwise than through death, disability or retirement in accordance with the
Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in, or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnitee
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty (30) days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company bylaw now or
hereafter in effect relating to claims for Indemnifiable Events, the Company
shall seek legal advice only from special, independent counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company within
the last ten (10) years (other than in connection with such matters) or for the
Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of
-----------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of
--------------
any claim, action, suit or proceeding, by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall be
--------------------
in addition to any other rights Indemnitee may have under the Company's bylaws
or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an insurance
-------------------
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors or
personal or legal representatives after the expiration of two (2) years from the
date of accrual of such cause of action, and any claim or cause of action of the
Company or its affiliate shall be extinguished and deemed released unless
asserted by the timely filing of a legal action within such two (2) year period;
provided, however, that if any shorter period of limitations is otherwise
applicable to any such cause of action such shorter period shall govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure
-------------------
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
CHATCOM, INC.,
a California corporation
____________________________ By:__________________________
PHILIP B. SMITH
6
<PAGE>
EXHIBIT 10.23
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between John R. Grady and Astro Sciences Corporation, a
California Corporation (the "Company"), is effective as of January 3, 1994.
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available;
WHEREAS, Indemnitee is an Officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers in
today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitees' continued service to
the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) permitted by law as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when (i)
there has been a change in control of the Company, not approved by a resolution
of the Company's Board of Directors, of a nature that would be required to be
reported by a company subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in response to Schedule
14A of Regulation 14A promulgated under the Exchange Act, including in any event
the acquisition by any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) of beneficial ownership, directly or indirectly,
of securities of the Company representing twenty-five percent (25%) or more of
the combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two (2) years by a change in the
identity of a majority of the members of the Company's Board of Directors
otherwise than through death, disability or retirement in accordance with the
Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnitee
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty (30) days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company bylaw now or
hereafter in effect relating to claims for Indemnifiable Events, the Company
shall seek legal advice only from special, independent counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company within
the last ten (10) years (other than in connection with such matters) or for the
Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of
-----------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of
--------------
any claim, action, suit or proceeding, by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall be
--------------------
in addition to any other rights Indemnitee may have under the Company's bylaws
or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an insurance
-------------------
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors or
personal or legal representatives after the expiration of two (2) years from the
date of accrual of such cause of action, and any claim or cause of action of the
Company or its affiliate shall be extinguished and deemed released unless
asserted by the timely filing of a legal action within such two (2) year period;
provided however, that if any shorter period of limitations is otherwise
applicable to any such cause of action such shorter period shall govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement the Company
-----------
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure
-------------------
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
ASTRO SCIENCES CORPORATION,
a California corporation
______________________________ By:__________________________
JOHN R. GRADY
6
<PAGE>
EXHIBIT 10.24
INDEMNIFICATION AGREEMENT
--------------- ---------
This Agreement between James B. Mariner and ChatCom, Inc., a
California Corporation (the "Company"), is effective as of March 5, 1996.
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is an Officer and Director of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors and
officers in today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitees' continued
service to the Company in an effective manner, the Company wishes to provide in
this Agreement for the indemnification of and the advancing of expenses to
Indemnitee to the full extent (whether partial or complete) permitted by law as
set forth in this Agreement, and, to the extent insurance is maintained, for the
continued coverage of Indemnitee under the Company's directors' and officers'
liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when
(i) there has been a change in control of the Company, not approved by a
resolution of the Company's Board of Directors, of a nature that would be
required to be reported by a company subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
response to Schedule 14A of Regulation 14A promulgated under the Exchange Act,
including in any event the acquisition by any "person" (as such term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act) of beneficial ownership,
directly or indirectly, of securities of the Company representing twenty-five
percent (25%) or more of the combined voting power of the Company's then
outstanding securities, (ii) followed within a period of not more than two (2)
years by a change in the identity of a majority of the members of the Company's
Board of Directors otherwise than through death, disability or retirement in
accordance with the Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs,
expenses and obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or is or was serving at the request of the Company as a
director, officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of
a member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnitee
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, a Claim by reason of (or arising in part out
of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the
fullest extent permitted by law as soon as practicable but in any event no later
than thirty (30) days after written demand is presented to the Company, against
any and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a
-------------------
Change in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to indemnity payments and
Expense Advances under this Agreement or any other agreement or Company bylaw
now or hereafter in effect relating to claims for Indemnifiable Events, the
Company shall seek legal advice only from special, independent counsel selected
by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), and who has not otherwise performed services for the
Company within the last ten (10) years (other than in connection with such
matters) or for the Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of
-----------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of
--------------
any claim, action, suit or proceeding, by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall
--------------------
be in addition to any other rights Indemnitee may have under the Company's
bylaws or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an
-------------------
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
9. Period of Limitations. No legal action shall be brought and no
---------------------
cause of action shall be asserted by or on behalf of the Company or any
affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs,
executors or personal or legal representatives after the expiration of two (2)
years from the date of accrual of such cause of action, and any claim or cause
of action of the Company or its affiliate shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such two
(2) year period; provided, however, that if any shorter period of limitations is
otherwise applicable to any such cause of action such shorter period shall
govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure
-------------------
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable
------------
in the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of California applicable
to contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
CHATCOM, INC.,
a California corporation
_____________________________ By:__________________________
JAMES B. MARINER
6
<PAGE>
EXHIBIT 10.25
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between Richard Picheny and ChatCom, Inc., a California
Corporation (the "Company"), is effective as of March 10, 1997.
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available;
WHEREAS, Indemnitee is an Officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers in
today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitees' continued service to
the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) permitted by law as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when (i)
there has been a change in control of the Company, not approved by a resolution
of the Company's Board of Directors, of a nature that would be required to be
reported by a company subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in response to Schedule
14A of Regulation 14A promulgated under the Exchange Act, including in any event
the acquisition by any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) of beneficial ownership, directly or indirectly,
of securities of the Company representing twenty-five percent (25%) or more of
the combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two (2) years by a change in the
identity of a majority of the members of the Company's Board of Directors
otherwise than through death, disability or retirement in accordance with the
Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnitee
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty (30) days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company bylaw now or
hereafter in effect relating to claims for Indemnifiable Events, the Company
shall seek legal advice only from special, independent counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company within
the last ten (10) years (other than in connection with such matters) or for the
Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of
-----------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of
--------------
any claim, action, suit or proceeding, by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall be
--------------------
in addition to any other rights Indemnitee may have under the Company's bylaws
or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an insurance
-------------------
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors or
personal or legal representatives after the expiration of two (2) years from the
date of accrual of such cause of action, and any claim or cause of action of the
Company or its affiliate shall be extinguished and deemed released unless
asserted by the timely filing of a legal action within such two (2) year period;
provided however, that if any shorter period of limitations is otherwise
applicable to any such cause of action such shorter period shall govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement the Company
-----------
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure
-------------------
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
CHATCOM, INC.,
a California corporation
_____________________________ By:__________________________
RICHARD PICHENY
6
<PAGE>
EXHIBIT 10.26
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between Andrew M. Brown and ChatCom, Inc., a California
Corporation (the "Company"), is effective as of May 14, 1997.
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available;
WHEREAS, Indemnitee is a Director of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers in
today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitees' continued service to
the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) permitted by law as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when (i) there
has been a change in control of the Company, not approved by a resolution of the
Company's Board of Directors, of a nature that would be required to be reported
by a company subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), in response to Schedule 14A of
Regulation 14A promulgated under the Exchange Act, including in any event the
acquisition by any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act) of beneficial ownership, directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two (2) years by a change in the
identity of a majority of the members of the Company's Board of Directors
otherwise than through death, disability or retirement in accordance with the
Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnitee
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty (30) days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company bylaw now or
hereafter in effect relating to claims for Indemnifiable Events, the Company
shall seek legal advice only from special, independent counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company within
the last ten (10) years (other than in connection with such matters) or for the
Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of
-----------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of any
--------------
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall be
--------------------
in addition to any other rights Indemnitee may have under the Company's bylaws
or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an insurance
-------------------
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors or
personal or legal representatives after the expiration of two (2) years from the
date of accrual of such cause of action, and any claim or cause of action of the
Company or its affiliate shall be extinguished and deemed released unless
asserted by the timely filing of a legal action within such two (2) year period;
provided, however, that if any shorter period of limitations is otherwise
applicable to any such cause of action such shorter period shall govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights .
12. No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure
-------------------
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
CHATCOM, INC.,
a California corporation
_____________________________ By:__________________________
ANDREW M. BROWN
6
<PAGE>
EXHIBIT 10.27
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between Russell Jackson and ChatCom, Inc., a California
Corporation (the "Company"), is effective as of February 8, 1996.
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available;
WHEREAS, Indemnitee is an officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers in
today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitees' continued service to
the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) permitted by law as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when (i) there
has been a change in control of the Company, not approved by a resolution of the
Company's Board of Directors, of a nature that would be required to be reported
by a company subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), in response to Schedule 14A of
Regulation 14A promulgated under the Exchange Act, including in any event the
acquisition by any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act) of beneficial ownership, directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two (2) years by a change in the
identity of a majority of the members of the Company's Board of Directors
otherwise than through death, disability or retirement in accordance with the
Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnitee
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty (30) days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company bylaw now or
hereafter in effect relating to claims for Indemnifiable Events, the Company
shall seek legal advice only from special, independent counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company within
the last ten (10) years (other than in connection with such matters) or for the
Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of
-----------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of any
--------------
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall be
--------------------
in addition to any other rights Indemnitee may have under the Company's bylaws
or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an insurance
-------------------
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors or
personal or legal representatives after the expiration of two (2) years from the
date of accrual of such cause of action, and any claim or cause of action of the
Company or its affiliate shall be extinguished and deemed released unless
asserted by the timely filing of a legal action within such two (2) year period;
provided, however, that if any shorter period of limitations is otherwise
applicable to any such cause of action such shorter period shall govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights .
12. No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure
-------------------
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
CHATCOM, INC.,
a California corporation
_____________________________ By:__________________________
RUSSELL JACKSON
6
<PAGE>
OEM AGREEMENT
This Agreement is entered into by and between Vinca Corporation, having its
principal place of business at 2000 Central Park East, 1815 South Street, Orem,
Utah, 84058 ("Vinca"), and ChatCom, Inc., 9600 Topanga Canyon Blvd., Chatsworth,
California 91311 ("OEM"), and shall govern the acquisition and sales of Vinca
Products by OEM (hereinafter "Agreement").
1. DEFINITIONS Each term defined in this Section is as follows unless the
-----------
context in which the term is used expressly provides otherwise. The term
"Section" refers to an identified section of this Agreement.
a. Vinca Products means the Vinca hardware and software products
--------------
identified in Exhibit A that OEM is authorized to market and sell.
b. OEM Products means OEM's products and/or services identified in
------------
Exhibit B.
c. Bundled Products means the combination of Vinca Products and OEM
----------------
Products that OEM will market and sell as a single product offering.
d. End User means an entity that is not an affiliate of OEM's enterprise
--------
and acquires the Bundled Products for Internal Use. "End User" does not
include an entity that resells, sells, licenses, rents or leases
Bundled Products to other parties in the regular course of its
business.
e. Expiration means the date upon which this Agreement shall expire or is
----------
terminated as set forth in Section 2.
f. Internal Use means use solely by OEM, within OEM's business operations,
------------
and nor for resale.
g. Marks means Vinca's trademarks, service marks, logos, designation and
-----
insignias.
h. Private Label Manufacturer means an entity that Vinca licenses the
--------------------------
right to offer Vinca Products under such entities trade name pursuant
to Section 12.
i. Upgrades means a new release to an existing Vinca Product, which
--------
incorporates, accumulated corrections, performance improvements or
feature enhancements, together with new or revised documentation, and
which is generally made available to Vinca resellers and users.
2. TERM. The term of this Agreement shall be one (1) year, unless terminated
----
earlier as provided in this Agreement, and will continue thereafter until
terminated by either party upon ninety (90) days written notice. This
Agreement shall commence on the date it is executed by an authorized Vinca
signatory.
3. APPOINTMENT Vinca appoints OEM as a Vinca Authorized Original Equipment
-----------
Manufacturer. This appointment is non-exclusive. Vinca grants OEM a non-
exclusive, non-transferable, worldwide license to market Vinca Products to
(i) End Users acquiring Bundled Products for Internal Use and (ii) OEM
authorized resellers acquiring Bundled Products solely for resale in the
ordinary course of business. OEM agrees to offer Vinca Products only as
part of a Bundled Products offering and not as a separate product offering.
Notwithstanding the forgoing or any other provision contained in this
Agreement to the contrary, OEM shall be entitled to acquire Vinca Products
for use or resale, without the obligation of selling the Vinca Product
(here after "Distributed Products"). Distributed Products may be acquired
from Vinca by OEM at Forty two percent (42%) off Vinca's current suggested
retail price.
4. PRODUCTS AND PRICES
-------------------
a. Product Changes. Vinca reserves the right to make changes to Vinca
---------------
Products, including, and without limitation, changes that are required
(i) for security, or (ii) to facilitate performance in accordance with
specifications.
1
<PAGE>
b. Pricing and Discounts OEM may acquire Vinca Products at the Suggested
---------------------
Retail Prices ("SRP") listed in Vinca's general price list, less the
discount set forth in Exhibit A (or, as applicable, at the per unit price
set forth in Exhibit A). Upon thirty (30) days advanced written notice,
Vinca reserves the right at anytime to (i) add Vinca Products to or drop
Vinca Products from the general price list and Exhibit A, (ii) increase or
decrease prices on the general price list, and/or (iii) to increase
discounts. Orders requesting delivery after the effective date of a price
increase will be charged at the increased price.
c. Taxes Prices are exclusive of all applicable taxes. OEM agrees to pay all
-----
taxes associated with the sublicensing and delivery of Vinca Products,
including but not limited to, sales, use, excise, added value and similar
taxes and all customs, duties or governmental impositions, but excluding
taxes on Vinca's net income. Any tax or duty Vinca may be required to
collect or pay upon the delivery of the Vinca Products will be paid by OEM,
and such sums shall be due and payable to Vinca. If OEM claims a tax
exemption, OEM must provide Vinca with valid tax exemption certificates.
d. Price Protection. In the event of a price decrease, all inventory acquired
----------------
by OEM from VInca before the price decrease and not yet sold, will be
granted price protection. The difference between the price existing
immediately prior to the decrease, less any prior credits, and the new
price will be credited to OEM's account.
e. Product Upgrades. Except if this Agreement has been terminate for cause as
----------------
set forth in Section 11, OEM may purchase Upgrades in accordance with
Vinca's general Upgrade policies for a period of one (1) year after the
termination of this Agreement. The terms and conditions of this Agreement
shall continue to govern such upgrade purchases. In the event this
Agreement is terminated, at any time, for cause by Vinca as set forth in
Section 11, OEM shall not have the right to purchase Upgrades past the
effective date of the termination. However, upon termination for cause by
Vinca, Vinca agrees to honor purchase orders directly from OEM's customers
requesting Vinca Product Upgrades, provided (i) the purchase order
reflects the then current list price of the Upgrade, (ii) payment is
received in advance of the Upgrade shipping unless Vinca agrees to extend
credit terms, which credit terms shall not be unreasonably denied, and
(iii) OEM's customer agrees to be bound by the terms and conditions of
Vinca's then current end user license agreement. This Section 4e. shall
apply only to OEM customers that have acquired Bundled Products and who
subsequently issue purchase orders for Upgrades.
5. MARKETING, END USER SATISFACTION AND SUPPORT
--------------------------------------------
a. Use of Vinca Marks and Trade Names. OEM is authorized to use the Vinca
----------------------------------
Marks applicable to Vinca Products in connection with its marketing of
Bundled Products, in accordance with Vinca's trademark usage policies and
during the term of this Agreement. OEM is not otherwise authorized to use
any Vinca trade name without the prior written consent of Vinca. Upon the
Expiration of this Agreement, and the sale of Vinca Products in OEM's
inventory as provided in Section 12f., OEM agrees to cease all display,
advertising use of any and all Vinca trade names and Marks. OEM agrees not
to alter, erase or overprint any notice provided by Vinca; provided
however, OEM may reduce the size of such notices (while still conspicuous)
and incorporate them into OEM's notice. OEM recognizes Vinca's ownership
and title to the trade names and Marks and the goodwill attaching to the
trade names and Marks. OEM agrees that any goodwill that accrues because of
its use of the trade names and/or Marks will become Vinca's property. OEM
agrees not to contest Vinca's Marks or trade names, or make application for
registration of any Vinca Marks or trade names without Vinca's prior
written consent. OEM agrees not to use, employ or attempt to register any
trademarks or trade names that are confusingly similar to Vinca's Marks or
trade names.
b. End User Satisfaction. The Vinca Products are technically complex and
---------------------
require high-quality support to achieve and maintain End User satisfaction.
End User satisfaction is a condition of OEM's continued authorization by
Vinca. In order to help ensure high End User satisfaction, OEM agrees to
(i) report to Vinca promptly all suspected and actual problems with any
Vinca Product; (ii) maintain a shipment report identifying the End User or
OEM authorized reseller, the Vinca Product sold, the date of sale, and each
Vinca Product's serial number; (iii) retain all shipment reports for (3)
years after the date of sale, and assist Vinca, upon request, in tracing a
product to an End User or OEM authorized reseller, in order to distribute
critical product information, locate a Vinca Product for safety reasons, or
discover unauthorized marketing or infringing acts; (iv) refrain from
making representation, warranties or guarantees to customers with respect
to the specification, features or capabilities of the Vinca Products that
are inconsistent with the Vinca literature; and (v) provide all original
diskettes and manuals accompanying each Vinca Product.
2
<PAGE>
c. Maintenance and Support Vinca will provide OEM support equivalent to the
-----------------------
support provided by Vinca to other similarly situated Vinca Authorized
Original Equipment Manufacturers.
6. PLACING ORDERS & TERMS OF PAYMENT
---------------------------------
a. Financial Information and Payment Terms OEM agrees to provide to Vinca
---------------------------------------
financial information and evidence of financial security as reasonably
required by Vinca. Vinca may extend to OEM a line of credit based upon
OEM's financial information. Vinca reserves the right to set the credit
limit at any level deemed prudent, and may increase or decrease the line
of credit at any time based upon OEM's payment history, credit limit,
and/or perceived risk. OEM agrees to pay for Vinca Products it orders in
accordance with the credit and payment terms provided to OEM, as they
may change from time to time, or any special terms and conditions agreed
to by Vinca and OEM. Invoices not paid when due will accrue interest on
an annual basis from the date due until paid of two percentage points
(2%) over the prime interest rate of the Chase Manhattan Bank of New
York on any outstanding balance or the maximum legal rate allowed by
law, whichever is less. All Vinca Products ordered by OEM in excess of
the credit limit will be paid for in acceptable currency in advance of
shipment, by a letter of credit drawn upon a bank acceptable to Vinca, a
bank cashier's check, or a bank wire transfer. Vinca grants OEM payment
terms of net thirty (30) days from date of Vinca's invoice to OEM for
Vinca Products acquired hereunder, except as provided in Section 12 for
Private Label Manufacturers. The initial line of credit extend to OEM is
One Hundred Thousand dollars (100,000).
b. Acceptance of Orders All orders will be subject to acceptance
--------------------
writing by Vinca at its principal place(s) of business and will not be
binding until the earlier of acceptance or shipment. Orders requesting
shipment more than thirty (30) days from the date of the order will not
be subject to aceptance by Vinca and will be null and void.
c. Cancellation of Orders Orders accepted by Vinca may be canceled by OEM
----------------------
without penalty by giving written notice of cancellation to Vinca at
least five (5) days prior to the scheduled shipment date. Orders
manufactured to OEM specifications canceled less than five (5) days
prior to the scheduled shipment date may be subject to a cancellation
payment of fifteen percent (15%) of the invoice value of the canceled
order. In no event may OEM cancel any order or any portion of an order
after shipment.
d. Product Availability and Shipping Designations Vinca will use
----------------------------------------------
commercially reasonable efforts to fill OEM's orders or Vinca Products
and meet OEM's request for shipment dates subject to product
availability and consistent with Vinca production and supply schedules.
However, Vinca will not be liable for any damages to OEM or to any third
party for Vinca's failure to fill any orders or for any delay in
delivery or error in filling any orders for any reason whatsoever. Vinca
will ship Vinca Products and bill OEM to OEM's designated "ship to" and
"bill to" locations. OEM may change the "ship to" location at any time
prior to shipment date; however, Vinca may not be able to honor a notice
unless it is in writing and received at least five (5) days prior to the
estimated shipment date. The right to change "ship to" locations does
not include any right to drop ship to customer sites.
e. Obligation to Ship in Presence of Breach Even in cases where Vinca
----------------------------------------
accepts a purchase order, Vinca will not be obligated to ship Vinca
Products if OEM is more than thirty (30) days in arrears on payments
owing to Vinca or if OEM is otherwise in breach of this Agreement at the
time of the scheduled shipment.
f. Delivery Delivery will be made F.O.B. Point of Shipment, ground only.
--------
OEM may designate the carrier to be used on the face of its order. Where
no carrier is stated in the order, Vinca will select the carrier. Vinca
will prepay insurance and freight, and will add the cost of insurance
and freight to OEM's invoice.
g. Title & Risk of Loss Title to Vinca Products, exclusive of the rights
---------------------
retained under this Agreement in Marks, patents, copyrights, trade
names, trade secrets and intellectual property, and all risk of loss
will pass to OEM upon delivery at Vinca's designated shipping facility
to the common carrier.
<PAGE>
h. Security Interest. OEM grants Vinca, as security for its obligations
-----------------
under this Agreement, a purchase money security interest in (i) the
Vinca Products acquired under the Agreement or any extension thereof,
and (ii) the proceeds from the sale of such Vinca Products.
i. Point of Sale Reports. OEM agrees to provide Vinca, by no later than the
----------------------
tenth (10th) business day of each calendar month, a Point of Sale report
for the previous calendar month. "Point of Sale Report" (POS Report)
shall mean a report provided by OEM to Vinca that includes, (i) a list
of Vinca Products sold, (ii) the customer name with zip code, and (iii)
the part numbers of the Vinca Products sold. The POS Report may only be
used by Vinca to provide compensation to Vinca's sales force and to
concentrate marketing activities to promote greater sales.
7. INTELLECTUAL PROPERTY RIGHTS & INDEMNIFICATION
----------------------------------------------
a. Software "Software" shall include firmware and software. OEM agrees to
--------
be bound by the applicable Software License Agreement with respect to
all software put to Internal Use by OEM.
b. Indemnification Vinca agrees to indemnify, defend and hold OEM harmless
---------------
from any and all damages, liabilities, and costs and expenses incurred
by OEM as a result of any claim, judgment or adjudication against OEM
that provides that the Vinca Products, trade names or the Marks
appropriately used by OEM in connection with marketing or use of the
Vinca Products infringe any United States trademark, copyright or
patent, provided: (i) OEM promptly notifies Vinca in writing of the
claim; and (ii) Vinca has the sole control of the defense of any action
and all negotiations for settlement. Notwithstanding the foregoing,
where a proposed settlement of any claim under this Section 7b.
adversely affects OEM's or its customer's right of use of Vinca Products
in their possession, such settlement agreement shall be with OEM's
approval, which approval shall not unreasonably be withheld.
c. Actual or Potential Product Infringement Should Vinca Products become,
----------------------------------------
or in Vinca's opinion be likely to become, the subject of infringement
of any trademark, copyright or patent, OEM agrees to permit Vinca, at
its sole option and expense, either to procure for OEM the right to
continue using the Vinca Products, to replace or modify them so that
they become non-infringing, or to grant OEM credit for the Vinca
Products and accept their return.
d. Disclaimer THE ABOVE STATES THE ENTIRE LIABILITY OF VINCA WITH RESPECT
----------
TO INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS OR ANY OTHER FORM OF
INTELLECTUAL PROPERTY RIGHT BY ANY PRODUCT SUPPLIED BY VINCA.
e. Proprietary Nature of Products and Ownership No title to or ownership of
--------------------------------------------
software or other proprietary technology acquired under the Agreement is
transferred to OEM. Notwithstanding any provision to the contrary, Vinca
or the licensor through which Vinca obtained the rights to distribute
the Vinca Products, owns and retains all title and ownership of all
intellectual property rights in the Vinca Products, including all
software, firmware, all modifications thereto and derivative works
therefrom acquired under this Agreement. Vinca does not transfer any
portion of such title and ownership, or any of the associated goodwill,
to OEM. OEM agrees to be bound by and observe the proprietary nature of
the Vinca Products.
f. Product Tampering OEM agrees not to de-compile, reverse engineer,
-----------------
reverse compile, modify or perform any similar type of operation on any
software, firmware or hardware acquired under the Agreement. OEM also
agrees that any such works are derivative works and as such are the sole
and exclusive property of Vinca or its licensor.
g. Confidential Information The parties agree that any Confidential
------------------------
Information, as defined below, provided under this Agreement will be
held and maintained in strict confidence. Each party agrees to protect
the confidentiality of such information in a manner consistent with the
way a reasonable person would protect similar Confidential Information.
"Confidential Information" means the information and materials noticed
or marked by Vinca or OEM as confidential and proprietary. "Confidential
Information" does not include information that (i) is already known to
the receiving party at the time it is disclosed and has not been
obtained wrongfully, (ii) becomes publicly known without fault of the
receiving party, (iii) is independently developed by the receiving
party, (iv) is approved for release in writing by the disclosing party,
(v) is disclosed without restriction by the disclosing party to a third
party or (vi) is disclosed pursuant to legal obligations beyond the
control of the disclosing and receiving parties.
<PAGE>
8. WARRANTIES
----------
a. Statements of Limited Warranty Vinca provides, to End Users only,
------------------------------
warranties for software in the Software License Agreement that
accompanies each software product and warranties for Vinca hardware in
the statement of Limited Warranty that accompanies each hardware
product. Each such Vinca Statement of Limited Warranty and each such
Software License Agreement is hereby incorporated in this Agreement by
reference. Vinca extends the warranties contained in the applicable
Statement of Limited Warranty or Software License Agreement through OEM
to End Users. OEM is responsible to provide, or cause to be provided, a
copy of the applicable Statement of Limited Warranty or Software License
Agreement, provided by Vinca, to End Users for their review at the time
of installation. Each revised statement of Limited Warranty or Software
License Agreement will become effective on the date indicated in the
Statement of limited Warranty or Software License Agreement received
from Vinca. Vinca does not warrant non-Vinca products; such products are
provided by Vinca on an "AS IS" basis. Any warranty for non-Vinca
products will be provided by the manufacturer of such products in
accordance with the applicable manufacturer's warranty.
b. Warranty Service Responsibilities. OEM agrees to validate all warranty
---------------------------------
claims presented to OEM, and to maintain the capability to provide
warranty services.
9. LIMITATION OF WARRANTIES. THE WARRANTIES DESCRIBED IN THE APPLICABLE VINCA
------------------------
STATEMENT OF LIMITED WARRANTY OR SOFTWARE LICENSE AGREEMENT AND SECTION 8
ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
10. LIMITATION OF REMEDIES. VINCA'S ENTIRE LIABILITY AND OEM'S EXCLUSIVE REMEDY
----------------------
FOR ANY CLAIMS CONCERNING THIS AGREEMENT AND VINCA PRODUCTS ACQUIRED UNDER
THIS AGREEMENT ARE SET FORTH IN THIS SECTION. NOTWITHSTANDING ANYTHING TO
THE CONTRARY IN THE AGREEMENT, NEITHER VINCA NOR OEM WILL BE LIABLE TO THE
OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS) SUSTAINED OR INCURRED IN CONNECTION WITH THIS
AGREEMENT AND THE VINCA PRODUCTS THAT ARE SUBJECT TO THIS AGREEMENT
REGARDLESS OF THE FORM OF ACTION AND WHETHER OR NOT SUCH DAMAGES ARE
FORESEEABLE.
a. Hardware In all situations involving performance or non-performance of
--------
hardware acquired under this Agreement, OEM's remedy in the adjustment
or repair of the hardware or replacement of parts of the hardware by
Vinca.
b. Software OEM will include Vinca's standard "shrink wrap" End User
--------
Software License Agreement ("End User Agreement") with each sale of the
Bundled Product. Vinca will provide OEM with new releases of the End
User Agreement and OEM shall have thirty (30) days to incorporate the
new release in the Bundled Product. A copy of Vinca's current End User
Agreement is attached as Exhibit D.
c. Third Party Claims. Vinca will not be liable for any claim by OEM based
------------------
on any third party claim, except as stated in Sections 7 and 8 of this
Agreement.
d. Aggregate Liability. Vinca's liability for direct damages to OEM for any
-------------------
cause whatsoever, except as otherwise stated in this Section, and
regardless of the form of action, will be limited to the greater of (1)
$500,000 or (2) the price, less discount, of the Vinca Product that
caused the damages or gave rise to the cause of action. This limitation
does not apply to the payment of the costs, damages and attorney's fees
referred to in Sections 7.b and 13.g, or to claims by OEM for personal
injury or damage to real property or tangible personal property caused
by Vinca's negligence.
11. TERMINATION
-----------
a. Termination for Cause Either party may terminate this Agreement for the
---------------------
breach by the other party. The terminating party will first give the
other party written notice of the breach and a reasonable period of at
least thirty (30) days in which to cure the alleged breach. If a cure is
not achieved during the cure period, then the non-breaching party may
terminate the Agreement upon written notice.
5
<PAGE>
b. Termination by Vinca Vinca may terminate the Agreement if OEM fails to
--------------------
meet its payment obligations under the Agreement and this failure
continues for thirty (30) days following receipt of written notice.
c. Insolvency, Assignment, or Bankruptcy Either party may terminate this
-------------------------------------
Agreement upon written notice to the other party if the other party (i)
is not paying its debts as such debts generally become due, (ii) becomes
insolvent, (iii) files or has filed against it a petition (or other
document) under any Bankruptcy Law or similar law, which is unresolved
within sixty (60) days of the filing of such petition (or document),
(iv) proposes any dissolution, liquidation, composition, financial
reorganization or recapitalization with creditors, (v) makes a general
assignment or trust mortgage for the benefit of creditors, or (vi) if a
receiver, trustee, custodian or similar agent is appointed, and not
dismissed within thirty (30) days, or takes possession of any of OEM's
property or business.
d. Acceleration of Payment Upon termination of the Agreement by Vinca
-----------------------
based on OEM's breach of the payment terms and failure to cure within
the period set forth in this Agreement, the due dates of all outstanding
invoices to OEM for Vinca Products will automatically be accelerated so
that they become due and payable on the effective date of termination,
even if longer terms had been provided previously. All orders or
portions of orders remaining unshipped as of the effective date of such
termination will automatically be canceled.
e. Effect of Termination on Obligations. Termination of this Agreement
------------------------------------
will not affect any pre-termination obligations of either party under
this Agreement, and any termination is without prejudice to the
enforcement of any undischarged obligations existing at the time of
termination. Regardless of any other provision of this Agreement, Vinca
will not by reason of the termination of this Agreement be liable for
compensation, reimbursement, or damages on account of the loss of
prospective profits on anticipated sales, or on account of expenditures,
investments, leases, or commitments in connection with OEM's business
or goodwill, or otherwise.
12. PRIVATE LABEL MANUFACTURER
--------------------------
a. Different Trade Name. Upon written permission from Vinca or as provided
--------------------
in Exhibit A, Vinca grants OEM a nonexclusive, nontransferable,
worldwide license to duplicate, distribute and market specified Vinca
Products under an OEM trade name. This license includes the right to
reproduce Vinca user manuals, substituting the OEM trade name for the
Vinca Product trade name.
b. Masters Vinca software, in binary or object code only, will be provided
-------
to OEM on master tapes, diskettes or other physical media as mutually
agreed upon (the "Masters"), or as otherwise set forth in Exhibit C.
From the Masters, OEM will make copies to market, distribute, and
sublicense, subject to the terms of this Agreement. OEM shall be solely
responsible for copying the software to the physical media, and for
warranting the physical media to the end user. OEM shall receive one (1)
Master for each Vinca software product.
c. Royalties OEM shall pay Vinca a royalty for each Vinca software product
---------
duplicated and sublicensed by OEM to an End User or reseller equal to
Vinca's Suggested Retail List Price, less the applicable discount set
forth in Exhibit A. A royalty will not be owing for product duplicated
and provided to End Users on an evaluation basis only ("Evaluation
Product"). A royalty will be owing to Vinca for all Evaluation Product
not returned to OEM within sixty (60) days or which is not made
inoperable within such timeframe by means of the Vinca software product.
All royalties owing to Vinca under this Section 12 shall be due and
payable within thirty (30) days from the date the (i) Vinca Product is
shipped to OEM's end user customer or reseller, or (ii) Evaluation
Product is invoiced as a sale.
d. Royalty Report. Within ten (10) business days following each calendar
--------------
month, OEM shall provide Vinca with a royalty report containing (i) the
number and type of copies of Vinca Products duplicated; the number of
Vinca Products sold and shipped as Evaluation Product, and (ii) the name
and address of each End User acquiring the product or receiving an
evaluation copy.
e. Proprietary Rights. This Agreement does not grant to OEM any title or
------------------
right of ownership to any software code, derivative work thereto, or
related documentation. OEM will include the following notice in a
conspicuous place on all packaging incorporating Vinca Products: "This
product is based in whole or in part on technology developed by Vinca
Corporation." OEM will not remove any copyright notices or proprietary
legends contained within the Vinca software code; provided, however, OEM
may reduce the size of such notices or legends (while still conspicuous)
and incorporate
6
<PAGE>
them into OEM's notices or legends. OEM will include or cause to be
included conspicuously in the manuals and on each copy of Vinca Products
duplicated, including partial copies or modifications of these manuals and
software product the following copyright notice: "Portions of this program
Copyright 1991-1997 Vinca Corporation. All Rights Reserved."
f. Termination. Upon the expiration or termination of this Agreement, all
-----------
rights of OEM to duplicate, distribute or private label Vinca Products, or
any portion thereof, shall cease; except that OEM shall have the right to
distribute Vinca Products already duplicated or purchased from Vinca and
in OEM's inventory in an amount not to exceed fifty (50) units.
13. GENERAL PROVISIONS
------------------
a. Force Majeure. If either party is prevented from performing any portion of
-------------
the Agreement (except the payment of money) by causes beyond its control,
including labor disputes, civil commotion, war, governmental regulations or
controls, casualty, inability to obtain materials or services or acts of
God, such defaulting party will be excused from performance for the period
of the delay and for a reasonable time thereafter.
b. Jurisdiction. This Agreement will in all respects be governed by and
------------
construed in accordance with the laws of the State of California of the
United States of America, and will not be construed in accordance with or
governed by the United Nations Convention for the International Sales of
Goods.
c. Survival of Terms. The provisions of the Agreement that by their nature
-----------------
extend beyond the Expiration of this Agreement will survive and remain in
effect until all such obligations are satisfied.
d. Waiver. No waiver of any provision, right, or remedy under the Agreement on
------
one occasion, by either party, will be deemed a waiver of that provision,
or any other provision, right or remedy on any other occasion.
e. Superior Agreement. This Agreement will not be supplemented or modified by
------------------
any course of dealing or usage of trade. Variance from or addition to the
terms and condition of this Agreement in any purchase order or other
written notification from OEM (including but not limited to any
specification of a price different than Vinca's current list price, less
the appropriate discount) will be of no effect, unless agreed to in
writing by Vinca.
f. Assignment. This Agreement is not assignable by OEM, except to a parent,
----------
subsidiary or affiliate of OEM, in whole or in part, without Vinca's prior
written consent, which consent will not unreasonably be withheld. Any
attempted assignment without Vinca's written consent will be null and void.
g. Attorneys' Fees. Each party agrees to pay the prevailing party's reasonable
---------------
attorneys' fees and costs of litigation.
h. Notice. Unless otherwise agreed to by the parties, all notices required
------
under this Agreement will be deemed effective when made in writing and sent
by either (i) registered mail, (ii) certified mail, return receipt
requested, (iii) overnight mail, addressed and sent to the address
indicated in this Agreement and to the attention of the party executing the
Agreement or that person's successor, or (iv) by telephone facsimile
transfer appropriately directed to the attention of the party executing the
Agreement or that person's successor.
i. Severability. If any term, provision, covenant or condition of this
------------
Agreement is held invalid or unenforceable for any reason, the remainder of
the provisions will continue in full force and effect as if the Agreement
had been executed with the invalid portion eliminated. The parties further
agree to substitute for the invalid provision a valid provision, which most
closely approximates the intent and economic effect of the invalid
provision.
j. Independent Contractors. Each party acknowledges that the parties to the
-----------------------
Agreement are independent contractors and that it will not represent itself
as an agent or legal representative of the other.
k. Compliance with Laws. OEM agrees to not export Vinca Products, directly or
--------------------
indirectly, separately or as part of a system, without first obtaining
proper authority to do so from the appropriate governmental agencies or
entities, as may be required by law.
7
<PAGE>
l. Government Rights. OEM agrees to (i) identify the Vinca Products in all
-----------------
proposals and agreements with the United States Government or any
contractor for the United States Government; and (ii) identify or mark the
software products provided pursuant to any agreement with the United States
Government or any contractor for the United States Government as necessary
to obtain protection substantially equivalent to that afforded commercial
computer software and related documentation developed at private expense
and provided with Restricted Rights as defined in DOD FAR Supplement 48
C.F.R. 252-227-7013(c)(1)(ii) in effect as of May 18, 1987 or any successor
regulation.
m. Records Examinations. OEM agrees to allow Vinca to examine its records,
--------------------
a mutually agreeable time, which are reasonable necessary to determine
compliance or noncompliance with this Agreement. Any examination will be
at the expense of Vinca and will be solely for the purpose of ensuring
compliance with the Agreement. Any examination will be conducted only by
an authorized representative of Vinca, and will occur during regular
business hours at OEM's business location. Examinations will be made no
more frequently than annually, and Vinca will give OEM at least ten (10)
days prior written notice of the date of the examination and the name of
the Vinca authorized representative who will be conducting the examination.
All information obtained will be maintained confidential. The examiner
will give OEM and Vinca a report containing only the information necessary
to indicate compliance or non-compliance with this Agreement.
n. Headings. The headings provided in this Agreement are for convenience only
--------
and will not be used in interpreting or construing this Agreement.
AGREED TO AND ACCEPTED BY:
CHATCOM, INC. (OEM) VINCA CORPORATION
SIGNATURE BY: /s/ Richard Picheny SIGNATURE BY: /s/ Alan Rudd
----------------------- ----------------------
NAME: Richard L. Picheny NAME: Alan Rudd
------------------------------- ------------------------------
TITLE: Executive Vice President TITLE: President
DATE: June 17, 1997 DATE: June 16, 1997
8
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-
3792 and No. 33-99668 of ChatCom, Inc. on Form S-3 of our report dated June 20,
1997 (which expresses an unqualified opinion and includes an explanatory
paragraph relating to substantial doubt regarding the Company's ability to
continue as a going concern), appearing in this Annual Report on Form 10-KSB of
ChatCom, Inc. for the year ended March 31, 1997.
DELOITTE & TOUCHE LLP
Los Angeles, California
July 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS, STATEMENTS OF OPERATIONS, STATEMENTS OF CASH FLOWS AND RELATED FOOTNOTES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1996
<PERIOD-START> APR-01-1996 APR-01-1995
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 1,169 1,067
<SECURITIES> 0 0
<RECEIVABLES> 1,443 2,230
<ALLOWANCES> (109) (262)
<INVENTORY> 2,721 3,481
<CURRENT-ASSETS> 5,332 7,218
<PP&E> 1,398 1,033
<DEPRECIATION> (747) (494)
<TOTAL-ASSETS> 6,007 7,778
<CURRENT-LIABILITIES> 2,137 3,717
<BONDS> 0 0
0 0
2,322 1,294
<COMMON> 9,338 5,860
<OTHER-SE> (7,852) (3,112)
<TOTAL-LIABILITY-AND-EQUITY> 6,007 7,778
<SALES> 9,103 14,790
<TOTAL-REVENUES> 9,103 14,790
<CGS> 6,894 9,882
<TOTAL-COSTS> 6,894 9,882
<OTHER-EXPENSES> 6,847 6,689
<LOSS-PROVISION> 166 37
<INTEREST-EXPENSE> 12 183
<INCOME-PRETAX> (4,601) (1,964)
<INCOME-TAX> 0 4
<INCOME-CONTINUING> (4,601) (1,968)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,601) (1,968)
<EPS-PRIMARY> (0.61) (0.26)
<EPS-DILUTED> (0.61) (0.26)
</TABLE>
