<PAGE>
As filed with the Securities and Exchange Commission on JULY 14, 1998
Securities Act File No. 333-50787 Exchange Act File No. 0-20462
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
CHATCOM, INC.
(Exact name of registrant as specified in its charter)
California 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Topanga Canyon Boulevard
Chatsworth, California 91311
(818) 709-1778
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
E. Carey Walters, Chief Executive Officer
ChatCom, Inc.
9600 Topanga Canyon Boulevard
Chatsworth, California 91311
(818) 709-1778
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copies to:
Sanford J. Hillsberg, Esq.
Young J. Kim, Esq.
Troy & Gould Professional Corporation
1801 Century Park East, Suite 1600
Los Angeles, California 90067
(310) 553-4441
Approximate date of commencement of proposed sale to public:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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<PAGE>
PROSPECTUS
CHATCOM, INC.
17,398,272 SHARES OF COMMON STOCK
This Prospectus relates to the offer by the securityholders named herein
(the "Selling Securityholders") for sale from time to time of up to 17,398,272
shares (the "Shares") of common stock, no par value ("Common Stock"), of
ChatCom, Inc., a California corporation (the "Company"). To the extent required
by applicable law or Securities and Exchange Commission regulations, this
Prospectus shall be delivered to purchasers upon resale of the Shares by the
Selling Securityholders.
The Shares consist of (i) 1,609,523 currently outstanding shares of Common
Stock (the "Outstanding Shares"), (ii) 2,662,400 shares of Common Stock issuable
upon conversion of currently outstanding shares of Series D Convertible
Preferred Stock (the "Series D Preferred Shares") of the Company or in payment
of any dividends on the Series D Preferred Shares that the Company may pay in
shares of Common Stock, (iii) 4,400,000 shares of Common Stock issuable upon
conversion of currently outstanding shares of Series E Convertible Redeemable
Preferred Stock (the "Series E Preferred Shares") of the Company or in payment
of any dividends on the Series E Preferred Shares that the Company may pay in
shares of Common Stock, (iv) 3,213,000 shares of Common Stock issuable upon
conversion of currently outstanding shares of Series F Convertible Redeemable
Preferred Stock (the "Series F Preferred Shares") of the Company or in payment
of any dividends on the Series F Preferred Shares that the Company may pay in
shares of Common Stock, (v) 1,360,000 shares of Common Stock issuable upon
conversion of currently outstanding shares of Series G Convertible Preferred
Stock (the "Series G Preferred Shares") of the Company or in payment of any
dividends on the Series G Preferred Shares that the Company may pay in shares of
Common Stock, (vi) 2,843,804 shares of Common Stock issuable upon conversion of
currently outstanding 9.5% Convertible Subordinated Notes (the "Convertible
Notes") of the Company or in payment of any interest on the Convertible Notes
that the Company may pay in shares of Common Stock, (vii) 200,000 shares of
Common Stock issuable upon the exercise of currently outstanding options to
purchase shares of Common Stock (the "Options"), and (viii) 1,109,545 shares of
Common Stock issuable upon the exercise of currently outstanding warrants to
purchase shares of Common Stock (the "Warrants"). The Warrants consist of
warrants to purchase 400,000 shares of Common Stock (the "Series D Warrants")
issued in connection with the sale of the Series D Preferred Shares to the
holders of those shares, warrants to purchase 254,545 shares of Common Stock
(the "Series E Warrants") issued in connection with the sale of the Series E
Preferred Shares to the holders of those shares, warrants to purchase 285,000
shares of Common Stock (the "Series F Warrants") issued in connection with the
sale of the Series F Preferred Shares and the Series G Preferred Shares to the
holder of those shares, warrants to purchase 150,000 shares of Common Stock (the
"Convertible Note Warrants") issued in connection with the sale of the
Convertible Notes to the holders of the Convertible Notes, and warrants to
purchase 20,000 shares of Common Stock (the "T&G Warrants") issued for certain
legal services previously rendered to the Company. The number of shares of
Common Stock issuable upon the conversion of the Series D Preferred Shares, the
Series E Preferred Shares, the Series F Preferred Shares and the Series G
Preferred Shares (collectively, the "Preferred Shares") and the Convertible
Notes, and upon the exercise of the Options and the Warrants is subject to
adjustment.
The Company will not receive any proceeds from the sale of the Shares
offered hereby. The Company will receive an aggregate of $1,851,681 upon the
exercise of all of the Options and the Warrants, subject, in the case of certain
of the warrants, to adjustment as a result of antidilution provisions. See "Use
of Proceeds" and "Selling Securityholders."
The Common Stock is quoted on the Nasdaq SmallCap Market under the symbol
"CHAT." See "Risk Factors -- Listing on the Nasdaq Smallcap Market." The closing
price of the Common Stock as quoted on the Nasdaq SmallCap Market on July 13,
1998 was $0.3438 per share. The Selling Securityholders have advised the Company
that they may sell, directly or through brokers, all or a portion of the
securities offered hereby in negotiated transactions or in one or more
transactions in the market at the price prevailing at the time of sale. In
connection with such sales, the Selling Securityholders and any participating
broker may be deemed to be "underwriters" of the Common Stock within the meaning
of the Securities Act of 1933, as amended. It is anticipated that usual and
customary brokerage fees will be paid by the Selling Securityholders in all open
market transactions. The Company will pay all other expenses of this offering.
See "Plan of Distribution."
__________________________
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES
A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON
PAGES 5 THROUGH 14 OF THIS PROSPECTUS.
__________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 15, 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy or information statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the following regional
offices: Seven World Trade Center, New York, New York 10048, and Citicorp
Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. In addition, the Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's Web site is http://www.sec.gov. The Common Stock of the
Company is quoted on the Nasdaq SmallCap Market. Reports, proxy statements and
other information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
Additional information regarding the Company and the securities offered
hereby is contained in the Registration Statement of which this Prospectus is a
part, and the exhibits thereto, filed with the Commission under the Securities
Act of 1933, as amended (the "Securities Act"). For further information
pertaining to the Company and the securities offered hereby, reference is made
to the Registration Statement and the exhibits thereto, which may be inspected
without charge at, and copies thereof may be obtained at prescribed rates from,
the office of the Commission at Judiciary Plaza, 450 Fifth Street, Washington,
D.C. 20549. Statements contained herein concerning the provisions of any
document are not necessarily complete and in each instance reference is made to
the copy of the document filed as an exhibit or schedule to the Registration
Statement. Each such statement is qualified in its entirety by reference to the
copy of the applicable documents filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated in this Prospectus by reference: (a) the Company's
Annual Report on Form 10-KSB for the year ended March 31, 1998, filed with the
Commission on July 10, 1998; (b) all other reports filed with the Commission
pursuant to Section 13 and 15(d) of the Exchange Act subsequent to July 10,
1998; and (c) the description of the Common Stock set forth in the Company's
Registration Statement on Form 10 under the Exchange Act, including any
amendment or report subsequently filed by the Company for the purpose of
updating that description. The file number of each of the foregoing documents is
0-20462.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the securities offered hereby shall be deemed
to be incorporated by reference into this Prospectus and to be a part of this
Prospectus from the date of filing of such documents. Any statement contained
in a document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein
2.
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modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated by reference (other than
exhibits to such documents that are not specifically incorporated by reference
in such documents). Written requests for such copies should be directed to
Dianna Saltmarch, Corporate Communications, ChatCom, Inc., 9600 Topanga Canyon
Boulevard, Chatsworth, California 91311. Telephone requests may be directed to
Ms. Saltmarch at (818) 709-1778.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
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1995.
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This Prospectus contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties, including, without limitation,
statements with respect to the Company's liquidity and capital resources,
strategy, proposed sales of the Company's products, markets for the Company's
products and the development of the Company's products, including consolidated
server products. The Company's actual results could differ materially from
those discussed in these forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, the ability
of the Company to obtaining additional financing, the uncertainty of market
acceptance of the Company's products, the risks relating to new product
development and new application of the Company's products, conducting business
with foreign customers and the competitive market for the Company's products and
those discussed in the following section as well as those discussed elsewhere in
this Prospectus and any document incorporated herein by reference.
THE COMPANY
ChatCom, Inc. ("ChatCom" or the "Company") develops, integrates,
manufactures and markets highly-efficient centralized servers and storage
management systems. Commencing in the fiscal year ended March 31, 1997, the
Company has worked to reposition itself into the rapidly growing consolidated
server market and has won a major industry award for the excellence of its
product line in meeting consolidated server requirements (LAN Times - Best of
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Times Award for Consolidated Servers, February 1997). In prior 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 shift its product development and marketing efforts to focus on
the consolidated server market.
The Company has taken significant steps to position itself in the
consolidated server, network test and simulation, clustering, computer
telephony, multi-user remote access and telecom Internet service markets,
refocusing its product development and marketing efforts to achieve this goal.
The Company considers its major strength to be its ability to deliver fault
resilient high and ultra-high density processing platforms, which deploy the
latest in processor and bus technology. Its product line features a highly
scaleable architecture, highly competitive power efficiency, fully functioned
management software and low Mean-Time-To-Repair (MTTR). 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. With five different models
in the family, the ChatterBox series has been designed to meet the needs of the
consolidated server market, and thereby addresses the needs of the high-density
applications server, Internet server and network simulation markets.
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
3.
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subsystem offering up to 1.1 Terabyte of high-availability data across multiple
redundant paths. Certain of the Company's products utilize a Redundant Array of
Independent Network Servers, or RAINS(TM), to provide turnkey solutions.
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 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(TM), which ChatCom
believes provides the highest power to density ratio yet achieved with this
technology. Processor speeds of up to 266MHz and memory sizes of up to 512MB in
both single and dual processor designs are available in the ChatterBox server
platforms.
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 and numerous other applications. These
systems 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 Company's
Office series, while the Company's more powerful Corporate series range from
$7,500 to over $300,000. In creating the Corporate and Office Series product
lines, the Company has introduced significant new system management features.
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 Hewlett-Packard's OpenView(R) or IBM's
Netview (TM). In addition, 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.
In order to generate additional working capital to fund the Company's
marketplace transition and its continuing operating losses, the Company has
completed several private placements of its equity and debt securities during
the prior and current fiscal years. The Company at present has insufficient
liquidity to meet its obligations or to support its current level of operations
or any significant increase in revenues, and is actively seeking additional
financing to meet its short-term needs. Should the Company fail to obtain
additional financing in the immediate future, it will be forced to substantially
reduce its operations, seek protection under bankruptcy laws or suspend its
operations. There can be no assurance that the Company will be able to obtain
additional financing or will be able to generate increased revenues or achieve
profitability even if revenues do increase.
The Company was incorporated under the laws of the State of California
in March 1982. The Company was originally named "Astro Systems and Engineering,
Inc." and changed its name to "Astro Sciences Corporation" in 1985. In February
1996, the Company changed its name to "ChatCom, Inc." The Company currently
employs approximately 35 full-time employees, of which 11 are in manufacturing,
five are in sales, four are in research and product development, five are
classified as officers and general and administrative, five are in technical
support, two are in quality assurance, two are in sustaining engineering and one
is in marketing. The Company's principal executive office is located at 9600
Topanga Canyon Boulevard, Chatsworth, California 91311. Its telephone number is
(818) 709-1778.
4.
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RISK FACTORS
The securities offered hereby are speculative in nature, involve a high
degree of risk, and should not be purchased by any investor who cannot afford
the loss of his entire investment. Prior to making an investment decision with
respect to the securities offered hereby, prospective investors should carefully
consider, along with the other matters discussed in this Prospectus, the
following risk factors:
ABILITY TO CONTINUE AS A GOING CONCERN. As a result of the Company's net
losses and negative cash flow from operating activities in recent years, the
Company's independent auditors have included in their report on the Company's
March 31, 1998 and 1997 financial statements an explanatory paragraph regarding
the ability of the Company to continue as a going concern. The Company is
seeking additional debt and equity funds, in one or more private placements or
loan transactions, in order to obtain the funds necessary to meet its immediate
working capital needs. There can be no assurance that the Company will be able
to successfully complete the private placements or loan transactions or
otherwise obtain the necessary funds to continue the Company's operations.
LIQUIDITY. The Company's continuing losses and negative cash flow from
operations have created a severe liquidity problem for the Company. As of March
31, 1998, the Company had negative working capital of $1,335,000, as compared to
working capital of $3,195,000 as of March 31, 1997. The Company must immediately
provide additional liquidity to meet its current obligations and maintain its
current level of operations or any significant future increase in revenues and
is actively seeking additional financing to meet those needs. The Company is
currently negotiating debt and equity investments and debt restructurings with
several potential investors and trade creditors. However, there can be no
assurance that any such financings or restructurings will ever be consummated,
that such financings or restructurings if so consummated will be on terms
favorable to the Company or that such financings or refinancings will be
sufficient to meet the Company's immediate needs. The Company will be forced to
significantly reduce or suspend its operations or seek protection under the
bankruptcy laws if it is unable to secure additional financing in the immediate
future.
In December 1997, the Company completed the issuance of certain of the
Convertible Notes in the aggregate principal amount of $540,000 and the
Convertible Note Warrants. Such Convertible Notes together with $350,000 of the
Convertible Notes issued by the Company in May 1997, mature on January 1, 1999.
Existence of the Convertible Notes may make new equity investments in the
Company less attractive to potential investors.
In March 1998, the Company completed a conversion of $1,345,000 in
unsecured debt owed to Vermont Research Products, Inc. ("VRPI"), which is a
supplier and the Company's largest creditor, into the Company's Series F
Preferred Shares, the Series G Preferred Shares and the Series F Warrants. The
agreement with VRPI also provides for periodic cash payments by the Company to
VRPI and the remittance of 25% of the Company's collections of foreign accounts
receivable after February 1, 1998, as well as 20% of the net proceeds to the
Company of any equity financings (other than commercial bank loan financing or
asset based lending against United States accounts receivable and finished or
assembled goods inventory) effected by the Company subsequent to February 1,
1998 upon consummation of such financings, plus the sum of $50,000 upon
consummation of each of the first two such financings, until all amounts due to
VRPI (approximately $410,000 as of March 31, 1998) is paid in full. The
agreement also provides that as long as any amounts of Series F Preferred Shares
and Series G Preferred Shares remain outstanding, VRPI shall have the right to
approve (with such right to not be unreasonably withheld) any preferred stock
offering by the Company which ranks equal to or senior to those of VRPI, and
approve any debt offering contemplated by the Company, except for commercial
bank lines of credit or loans secured by the Company's United States accounts
receivable or inventory.
5.
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The Company's ability to obtain any future financing may be adversely affected
by the need to obtain approval from VRPI pursuant to the agreement. there can be
no assurance that VRPI will approve any such future financing or that such
approval will not be subject to certain conditions as may be requested by VRPI.
The Company's agreement with VRPI provides that in the event the Company
fails to file a registration statement covering the Common Stock issuable upon
conversion of the foregoing preferred stock by a specified date, VRPI shall have
the option to surrender its rights under the agreement and be reinstated as an
unsecured creditor for the full amount of the debt, less any payments which have
been made by the Company. The Company is delinquent in making certain cash
payments to VRPI, and VRPI has asserted that the Company has failed to timely
file the aforementioned registration statement and has demanded to be
reinstated as an unsecured creditor for the full amount of the debt (which the
Company has not agreed to do). Subsequently, on June 15, 1998, the Company
entered into an agreement with VRPI pursuant to which VRPI provided debt
financing to the Company in the amount of $100,000 evidenced by a note that is
payable on July 11, 1998, and VRPI provided an additional $100,000 of financing
to the company on July 7, 1998. There can be no assurance, however, that VRPI
will provide any further financing to the Company or not seek to assert any
legal rights it may have against the Company. In connection with the debt
financing, the Company agreed that it shall not negotiate or consummate any
financing with any other party other than VRPI, those parties who may
participate with VRPI and a certain bank in connection with a contemplated
credit facility. Such restrictions on financing limit the Company's ability to
obtain short-term 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 seeking, if the Company continues to experience operating losses
in the future that result 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 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 to
acquire Common Stock 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 over the longer term,
the Company may be required 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 or significantly reduce or
suspend its operations.
PRIOR OPERATING LOSSES; FLUCTUATIONS IN OPERATING RESULTS. The Company has
reported net losses of $7,773,000, $4,601,000 and $1,968,000 for the fiscal
years ended March 31, 1998 ("fiscal 1998"), March 31, 1997 ("fiscal 1997"), and
March 31, 1996 ("fiscal 1996"). The Company also has incurred an operating loss
for the three-months ended June 30, 1998. 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, timing of
product shipments, status of world economic conditions 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, fluctuations in foreign currency exchange rates and other
factors beyond the control of the Company. In addition, as sales of the
Company's products shift from the remote access to the consolidated server
market, the Company believes its revenues will be increasingly dependent upon
larger orders and its products will have higher average selling prices. Such
increase in size of order and selling price of products may materially
contribute to the fluctuations in the Company's results of operations. For
example, the current United States list price of the Company's most powerful
system exceeds $300,000. The acceleration or delay of a number of shipments
from one quarter to the next can significantly affect the Company's results of
operations for that quarter. The higher average selling prices have resulted in
longer sales cycles and may pose significant barriers to the purchase of the
Company's products for potential customers.
LEGAL PROCEEDINGS.
6.
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In March 1998, the Company completed a conversion of $1,345,000 in unsecured
debt owed to VRPI into the Company's Series F Preferred Shares, the Series G
Preferred Shares and the Series F Warrants. The agreement with VRPI also
provides for the remittance of 25% of the Company's collections of foreign
accounts receivable after February 1, 1998, as well as 20% of the net proceeds
to the Company of any equity financings (other than commercial bank loan
financing or asset based lending against United States accounts receivable and
finished or assembled goods inventory) effected by the Company subsequent to
February 1, 1998 upon consummation of such financings, plus the sum of $50,000
upon consummation of each of the first two such financings, until all amounts
due to VRPI (approximately $410,000 as of March 31, 1998) is paid in full. The
agreement also provides that the Company shall file a registration statement
registering the shares of the Company's Common Stock issuable upon conversion of
the Series F Preferred Shares and Series G Preferred Shares and upon exercise of
the Series F Warrants. The Company has been informed by VRPI that VRPI may
commence legal proceedings against the Company for alleged breach of the
agreement. To date VRPI has not commenced any legal proceeding against the
Company and is currently providing financing to the Company. However,
commencement of any lawsuit by VRPI would have a material adverse effect on the
business and financial condition of the Company.
As a result of the Company's continuing liquidity problems during fiscal
1998, the Company also has been sued for non-payment by several suppliers of
products and services. Several other vendors have forwarded their accounts with
the Company to collection agencies. Certain of the trade creditors have
instituted legal proceedings to obtain attachment orders on the Company's
assets. The Company has entered into settlements with several of the trade
creditors and is negotiating settlements with the other trade creditors.
However, there can be no assurance that any settlements will be obtained by the
Company with such other trade creditors. In the event any trade creditor
obtains a writ of attachment on the Company's assets, the Company may have to
commence bankruptcy proceedings and any settlement discussions with other trade
creditors will most likely terminate. The Company has incurred, and anticipates
continuing to incur, substantial legal expenses in connection with the foregoing
legal proceedings.
In April 1998, one of the Company's suppliers notified the Company of a
certain purchase commitment allegedly made by the Company to the supplier in the
amount of approximately $640,000. Although the Company believes that it has not
entered into such purchase commitment and has requested the supplier to provide
documents and information to support the alleged purchase commitment, there can
be no assurance that the Company is not obligated to purchase the parts and
components from the supplier. Although the supplier has not commenced legal
proceedings in connection with the alleged purchase commitment, the Company may
incur substantial legal expenses in the event such legal proceeding is
instituted. The Company believes that the majority of parts and components in
question is of a type that cannot be readily resold by the Company. The supplier
has not shipped the parts and components to 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.
Although the Company has received orders for products implementing the Redundant
Array of Independent Network Servers, or RAINS(TM), during fiscal 1998, there
can be no assurance that the market demand for such products will continue or
expand.
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
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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 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.
The Company has identified and increased its product development and sales
efforts in certain market segments in which the Company believes the demand for
its products will increase in the future. These include the computer telephony
market, the product testing and quality assurance market and the international
market in general. There can be no assurance that the Company's efforts in such
market segments will result in increased revenues or profitability in the
future. In addition, as part of the Company's sales and distribution strategy,
the Company has entered into strategic relationships and business alliances with
software developers, data processing companies and others, including Computer
Associates, StarVox Inc and Vinca Corporation. The success of such
relationships depend in part on the demand for the integration of products
provided by such alliances, the performance of such products, the compatibility
of the sales and distribution objectives of such companies and other factors.
There can be no assurance that any such strategic relationships and alliances
will provide the intended results.
As part of the Company's efforts to develop new products, the Company has
concentrated a significant portion of its resources on the design and
development of a new series of products code named "BrightStar." The success of
the BrightStar line of products will depend on the Company's ability to
implement the technology that will enhance the power, mechanical and other
features of the products, the products' ability to meet the storage management
needs of its customers and, the price of such products relative to that of the
Company's competitors. The Company currently anticipates that the commercial
introduction of the products incorporating BrightStar technology to take place
in the Fall of 1998. There can be no assurances, however, that the Company will
be able to meet its anticipated product introduction schedule or that shipments
of BrightStar related products will represent a significant portion of the
Company's revenues in future periods. The inability of the company to
successfully develop, market and sell the BrightStar line of products would have
a material adverse effect on the results of operation and financial condition of
the Company.
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.
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. The Company believes that
its products have often allowed customers to implement new enhancements while
maintaining the existing technologies.
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 Hewlett-Packard
Company, Compaq Computer Corporation, Dell Computer Corporation, and to a lesser
extent, Cubix Corp., CommVision Corp. and EVERSYS Corp., who offer functionally
similar consolidated server solutions, 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.
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The Company's future success and its ability to remain competitive will
depend in significant part upon the technological quality of its products and
processes relative to those of its competitors and its ability both to develop
new and enhanced products and services and to introduce such products and
processes at competitive prices and in a timely and cost-effective manner. The
Company's products compete with its competitors' products based on ease of
implementation, fault tolerance, manageability and features. No assurance can be
given that the Company will be able to develop new and enhanced products and
services at competitive prices and in a timely manner.
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.
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 may provide 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 with any of these individuals. The
Company hired Gordon L. Almquist as its new Vice President
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of Finance and Chief Financial Officer in November 1997 and appointed him as the
Chief Operating Officer in February 1998 and hired E. Carey Walters as its new
Chief Executive Officer in March 1998. Gary Dunham, the Company's Vice President
of Sales and Marketing, resigned in February 1998 and James B. Mariner, the
Company's former President, Chief Executive Officer and director, currently
serves as a sales and marketing consultant to the Company pursuant to a
consulting agreement. Robert Ruiz, the Company's Vice President of Engineering,
resigned in March 1998. In addition, Sanford C. Sigoloff, Philip B. Smith,
George L. Lazik, Andrew M. Brown and James B. Mariner each resigned as a
director of the Company during fiscal 1998 and Gerald R. Sayer resigned as a
director of the Company in May 1998.
As part of its cost reduction program, the Company implemented a management
and personnel restructuring during the past fiscal years, which has resulted in
workforce reductions and the emphasis of certain departments of the Company.
Such restructuring and cost reduction may make it difficult for the Company to
retain its personnel. The Company plans to implement a further substantial
reduction of its workforce in the event its liquidity and capital resources do
not improve in the immediate future. There can be no assurance that such
restructuring and workforce reductions may not have a material adverse effect on
the business and operations of the Company. 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 any additional necessary personnel.
DEPENDENCE ON VALUE ADDED RESELLERS. The Company depends on its network of
independent value added resellers ("VARs") to market and sell the Company's
products. During the year ended March 31, 1998 and 1997, approximately 63.3%
and 86.6%, respectively, of the Company's net sales were generated from the
Company's VARs. As a result of the Company's liquidity problem and the reduction
of its marketing and technical support of its VARs, the Company has experienced
difficulty in managing and retaining the support of the Company's VARs. Any
significant loss in the Company's network of VARs may have a material adverse
effect on the Company's sales and results of operations.
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 Company believes that such changes and quality
fluctuations could be accommodated, 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
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components. During the fiscal quarter ended June 30, 1997, the Company's
operations and revenues were adversely effected by a constraint on the number of
Pentium Pro(R) chips allocated to the Company by Intel. Although such
constraint has been lifted, there can be no assurance that such future
disruption in supply will not adversely affect the operations of the Company.
A particular power supply module is purchased directly from a proprietary
sole source supplier and is an integral portion of one of the power supply
options offered by the Company. Should the supplier 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.
As a result of the Company's liquidity problems, certain suppliers may
demand payment in full before shipment or more accelerated payment terms than
previously allowed to the Company. There can be no assurance that any future
disruption in supply arising from the Company's liquidity problem will not
adversely affect the Company's operations.
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 parts 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 work-in-process 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.
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 1998 and fiscal 1997, the Company recorded
additions to its valuation allowance for obsolete and excess inventories in the
amounts of $1,409,000, and $794,000, respectively, which adversely affected
gross profit and net income in the periods in which additional valuation
allowances were recorded. In addition, as a result of lower than anticipated
demand, the significant increases in inventory, due primarily to product returns
from a foreign distributor as well as price decreases due to technological
obsolescence of certain components associated with the returned equipment, the
Company recorded an increase to its valuation allowance for obsolete and excess
inventories in the amount of approximately $400,000 and approximately $1,100,000
during the quarters ended December 31, 1997 and March 31, 1998, respectively.
See "Risk Factors--International Risks." 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.
INTERNATIONAL RISKS. During fiscal 1998 and fiscal 1997, net sales outside
the United States accounted for approximately $1,162,000 and $1,206,000, or
16.0% and 13.2%, respectively, of the Company's total net sales. The Company
believes that foreign sales will continue to account for a significant portion
of its future
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revenues. The Company's international business is subject to special risks,
including fluctuating currency exchange rates, changes in import and export
controls, tariffs, changes in governmental policies (including United States
trade policy toward certain countries), product safety and other regulatory
requirements, currency controls, political and economic instability and other
factors which could have a material adverse effect on the Company's business,
financial condition and results of operations. With respect to international
sales that are denominated in U.S. dollars, an increase in the value of the U.S.
dollar relative to foreign currencies could increase the effective price of, and
reduce demand for, the Company's products relative to competitive products
priced in the local currency.
Should the Company substantially increase its product sales in foreign
countries, the Company believes that it may be required to increase the amount
of credit it extends to purchasers or distributors in these markets. The
Company has had only limited experience in extending credit to foreign customers
and will encounter increased risks in extending credit to new customers in
these markets, including the creditworthiness of such customers and the
difficulty of collecting accounts receivable in these countries. During the
first two quarters of fiscal 1998, the Company shipped equipment in the amount
of $3.3 million in the aggregate to Macon Holdings (s) Pte. Ltd. ("Macon"), a
distributor located in Singapore. The sales were made to Macon on an "open
account" basis with payment terms generally 30 days from date of invoice. As a
result of Macon's inability to effect timely payments of its obligations to the
Company, which Macon has attributed primarily to the Asian economic crisis
during the later part of 1997 as well as less than anticipated market acceptance
of the equipment, the Company and Macon collectively agreed in December 1997 to
permit Macon to return to the Company all of the equipment not already sold by
Macon (approximately $2.7 million at sales price, approximately $1.8 million at
cost). Of the amount returned by Macon, approximately $505,000 (approximately
$328,000 at cost) was received by the Company during the quarter ended December
31, 1997 (of which $285,000 at sales price, approximately $185,000 at cost was
accrued for as of September 30, 1997) and approximately $2.2 million
(approximately $1.4 million at cost) was received during the quarter ended March
31, 1998 (of which approximately $2.1 million at sales price and, approximately
$1.3 million at cost was accrued for during the quarter ended December 31,
1997). The return of the equipment from Macon has resulted in a substantial
increase in the Company's finished goods inventory. Although such returned
equipment is of a type that can be readily resold to other customers, there can
be no assurance that the Company will be able to secure additional orders for
such equipment. See "Risk Factors--Management of Inventory; Risk of Inventory
Obsolescence."
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 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.
LISTING ON THE NASDAQ SMALLCAP MARKET. The Company's Common Stock is
currently quoted on the Nasdaq SmallCap Market and, as a result, the Company is
subject to the continued listing requirements of the Nasdaq SmallCap Market. In
June 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") issued a delisting letter to
the Company in an attempt to delist the Company's Common Stock from the Nasdaq
SmallCap Market. In response, the Company requested an oral hearing before a
panel authorized by the National Association of Securities Dealers, Inc. Board
of Governors to appeal the decision by Nasdaq to delist the Company's Common
Stock from the Nasdaq SmallCap Market. The request for hearing stayed the
delisting proceedings until July 16, 1998, the date of the oral hearing. Since
the Company does not currently satisfy the continued listing requirements of the
Nasdaq SmallCap Market and is unlikely to satisfy these requirements in the
foreseeable future, the Company anticipates that it may not prevail at the
hearing. In addition, in the event the Company's Common Stock is delisted from
being quoted on the Nasdaq SmallCap Market, there can be no assurance that the
Company's Common Stock can be listed in any securities exchange or other trading
market. Lack of an established trading market for the Company's Common Stock may
limit Common Stock holders' ability to dispose of their shares and may
negatively affect the prevailing price of the Common Stock.
DIVIDENDS ON COMMON STOCK UNLIKELY. The Company has never declared or paid
dividends on its Common Stock. 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 any dividends on the
Common Stock is subject to the prior payment of dividends on the outstanding
Preferred Shares and any other shares of preferred stock that may be issued.
Additionally, certain financing arrangements which the Company has recently
entered into currently prohibit the payment of dividends. The payment of
dividends in the future will be at the discretion of its Board of Directors.
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POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS, PREFERRED STOCK
AND CONVERTIBLE NOTES. As of March 31, 1998, there were 6,562,943 shares of
Common Stock reserved for issuance upon exercise of stock options and warrants
that have been granted or issued. 2,013,483 of the outstanding options and all
of the 3,627,460 warrants are currently exercisable at exercise prices ranging
from $0.35 to $4.03 per share. As of March 31, 1998, an additional 8,517 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 additional
shares of Common Stock are reserved for issuance upon the conversion of the
Company's Preferred Shares, the Convertible Notes, the accrued but unpaid
dividends related to the Preferred Shares that may be paid in shares of Common
Stock and the interest on the Convertible Notes 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 of certain of
the Preferred Shares, the Convertible Notes and dividends and interest related
thereto may increase based on a decline in the market price of the Common Stock
on the date of conversion, such conversions may have a dilutive effect on the
Company's shareholders.
MARKET PRICE FLUCTUATIONS. 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 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.
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. Certain existing creditors of the Company have a
security interest in certain of the Company's assets, and the Company
anticipates that any line of credit it may obtain will be secured by the
Company's accounts receivable, inventory and intangible assets,
therefore, the lender will have a claim to the Company's assets on liquidation,
which is prior to that of the Company's shareholders. As a result of
settlements of certain claims instituted against the Company, additional
creditors may obtain security interests in certain of the Company's assets in
the future. Additionally, holders of the Convertible Notes, the Preferred
Shares and any other notes or shares of preferred stock that Company may issue
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 the Convertible Notes and the Preferred Shares and any
other notes or shares of preferred stock their entire initial investment plus
any accrued but unpaid dividends or interest 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
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his investment under such circumstances will depend on the net amount of funds
available after senior creditors and holders of the Convertible Notes, the
Preferred Shares and any other notes or shares of preferred stock are satisfied.
AUTHORIZATION OF PREFERRED STOCK; PROVISIONS AFFECTING CHANGES IN CONTROL.
The Company's Articles of Incorporation authorizes the issuance of "blank check"
preferred stock with such designation, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue a new series
of preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Common Stock. In the event of issuance, the new series of
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
YEAR 2000. The Company is currently working to resolve the potential
impact of the year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. The year 2000 problem is the result
of computer programs being written using two digits (rather than four) to define
the applicable year. In any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculation or system failures. Based on
preliminary information, costs of addressing potential problems are currently
not expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if
the Company, its customers or vendors are unable to resolve such processing
issues in a timely manner, it could result in material financial risk to the
Company. Accordingly, the Company plans to devote the necessary resources to
resolve all significant year 2000 issues in a timely manner.
USE OF PROCEEDS
The Company will not receive any proceeds from the conversion of the
Preferred Shares or the Convertible Notes. The Options to purchase 200,000
shares of Common Stock, the Series D Warrants to purchase 400,000 shares of
Common Stock, the Series E Warrants to purchase 254,545 shares of Common Stock,
the Series F Warrants to purchase 285,000 shares of Common Stock, the
Convertible Note Warrants to purchase 150,000 shares of Common Stock and the T&G
Warrants to purchase 20,000 shares of Common Stock may be exercised to purchase
Common Stock at a price of $0.50, $3.125, $1.25, $0.35, $0.375 and $1.375 per
share, respectively, subject to adjustment as a result of antidilution
provisions in the case of certain of the Options and Warrants. The Company
intends to use any cash proceeds that it may receive from the exercise of the
Options or the Warrants (a total of $1,851,681 if all of the Options and the
Warrants are exercised, subject in the case of certain of the Warrants to
adjustment as a result of antidilution provisions) for working capital purposes.
The Company will not otherwise receive any of the proceeds from the sale by the
Selling Securityholder of any of the Shares offered hereby. The Company will pay
all of the costs of this offering.
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SELLING SECURITYHOLDERS
The Shares offered hereby represent shares of (i) currently outstanding
Common Stock, (ii) Common Stock issuable upon conversion of the currently
outstanding Preferred Shares or in payment of any dividends on the Preferred
Shares that the Company may pay in shares of Common Stock, (iii) Common Stock
issuable upon conversion of the currently outstanding Convertible Notes or in
payment of any interest on the Convertible Notes that the Company may pay in
shares of Common Stock, (iv) Common Stock issuable upon the exercise of
currently outstanding Options, and (v) Common Stock issuable upon the exercise
of currently outstanding Warrants. In connection with the issuance of the
Outstanding Shares, the Preferred Shares, the Convertible Notes, the Options and
the Warrants, the Company has agreed to register the shares of Common Stock
issued or issuable to the Selling Securityholders. The Shares have been
registered pursuant to such registration rights provisions. The terms of the
issuance of the Outstanding Shares, the Preferred Shares, the Convertible Notes,
the Options and the Warrants were determined by arm's-length negotiations
between the Company and the Selling Securityholders. Neither the Selling
Securityholders nor any of their affiliates had or has any material relationship
with the Company or its officers, directors or affiliates except as noted in the
table below.
The following table sets forth as of the date of this Prospectus the number
and percent of shares of Common Stock beneficially owned by the Selling
Securityholders, the number of shares of Common Stock offered hereby by the
Selling Securityholders, and the number and percent of shares of Common Stock to
be held by the Selling Securityholders after the conclusion of this offering.
<TABLE>
<CAPTION>
Before Offering After Offering
---------------------- ------------------------
Number of Number of
Shares Number of Shares
Selling Beneficially Shares Beneficially
Securityholders Owned(1)(2) Percent Being Offered Owned(1)(3) Percent
--------------- ------------ ------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
The Tail Wind Fund Ltd.(4) 3,012,760 20.6 3,012,760 0 --
Martin Stern(4) 1,641,785 12.4 1,641,785 0 --
The High View Fund, L.P.(5) 3,165,617 21.5 3,113,217 52,400 *
The High View Fund(5) 2,732,887 19.1 2,680,487 52,400 *
The High View Fund II, L.P.(5) 156,814 1.3 156,814 0 --
The High View SSFI Fund,
LDC(5) 105,686 * 105,686 0 --
Vermont Research Products,
Inc.(6) 4,858,000 29.5 4,858,000 0 --
Strategic Growth International,
Inc.(7) 1,230,000 10.4 1,000,000 230,000 *
Barry Saxe 1,200,375 10.4 809,523 390,852 1.4
Troy & Gould Professional
Corporation(8) 20,000 * 20,000 0 --
----------
17,398,272
</TABLE>
______________
* less than 1%
(1) Pursuant to the rules promulgated under the Exchange Act, a person is deemed
to be the beneficial owner of a security if that person has the right to
acquire ownership of such security within 60 days.
(2) Since the Preferred Shares and the Convertible Notes are convertible into
shares of Common Stock and the Options and the Warrants are exercisable for
shares of Common Stock within 60 days of the date hereof,
15.
<PAGE>
this column also includes shares of Common Stock that may be issued upon the
conversion of the Preferred Shares and the Convertible Notes and upon the
exercise of the Options and the Warrants. Also includes shares of Common
Stock issuable as dividends on the Preferred Shares or issuable as interest
on the Convertible Notes. See Notes (4), (5) and (6) below.
(3) The table assumes that the Selling Securityholders will dispose of all
Shares owned or issuable to them that are being registered for sale by this
Prospectus.
(4) The number of Shares issuable to The Tail Wind Fund Ltd. and Martin Stern
upon conversion of the Series E Preferred Shares is variable and depends
upon the market price of the Common Stock during the five trading days
preceding the applicable date of conversion. The table reflects the
issuance to The Tail Wind Fund Ltd. and Martin Stern of one and one-half
times the number of Shares issuable upon conversion of the Series E
Preferred Shares assuming the market price of the Common Stock during the
five trading days preceding the applicable date of conversion is $0.50,
although The Tail Wind Fund Ltd. and Martin Stern may be entitled to receive
fewer Shares than indicated in the table or to receive shares of Common
Stock in excess of the Shares shown in the table covered by the Prospectus
in the event the market price of the Common Stock during the five trading
days preceding the applicable date of conversion is substantially above or
below $0.50, respectively. Pursuant to agreements with the Company, The Tail
Wind Fund Ltd. and Martin Stern have each agreed not to convert any of the
Series E Preferred Shares held by each of them to the extent the shares of
Common Stock issuable upon such conversion and other shares of Common Stock
beneficially owned by such Selling Securityholder and his or its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Series E Preferred
Shares) exceeds 4.9% of the outstanding shares of Common Stock of the
Company. The number of shares indicated in the table does not include any
shares of Common Stock issuable upon conversion of any Series E Convertible
Redeemable Preferred Stock or upon exercise of any warrants that have not
yet been issued but are issuable to The Tail Wind Fund Ltd. and Martin Stern
in the event certain conditions for such issuance are satisfied.
(5) The High View Fund, L.P., The High View Fund, The High View Fund II, L.P.
and The High View SSFI Fund, LDC (collectively, the "High View Entities")
are affiliates of each other. The number of Shares issuable to The High
View Fund, L.P. and The High View Fund upon conversion of the Series D
Preferred Shares is variable and depends in part upon the market price of
the Common Stock during the ten trading days preceding the applicable date
of conversion, subject to a minimum conversion price of $1.50 and a maximum
conversion price of $4.50. The table reflects the issuance to The High View
Fund, L.P. and The High View Fund of the number of Shares issuable upon
conversion of the Series D Preferred Shares at the minimum conversion price
of $1.50 (and payment of dividends thereon for a two-year period in shares
of Common Stock at a market price of $0.50). The High View Fund, L.P. and
The High View Fund may be entitled to receive fewer Shares than indicated in
the table upon conversion of the Series D Preferred Shares. The number of
Shares issuable to each of the High View Entities upon conversion of the
Convertible Notes is variable and depends upon the market price of the
Common Stock during the ten trading days preceding the applicable date of
conversion, subject to a minimum conversion price of $0.35 and a maximum
conversion price of $0.95. The table reflects the issuance to each of the
High View Entities of the number of Shares issuable upon conversion of the
Convertible Notes (and payment of interest thereon through maturity in
shares of Common Stock) at the minimum conversion price of $0.35. The High
View Entities may be entitled to receive fewer Shares than indicated in the
table upon conversion of the Convertible Notes.
(6) The number of Shares issuable to Vermont Research Products, Inc. upon
conversion of the Series F Preferred Shares is variable and depends upon the
market price of the Common Stock during the five trading days preceding the
applicable date of conversion, subject to a minimum conversion price of
$0.35 and a maximum conversion price of $0.95. The number of Shares issuable
to VRPI upon conversion of the Series G Preferred Shares is fixed at $0.35.
The table reflects the issuance to VRPI of the number of Shares issuable
upon conversion of both the Series F Preferred Shares and the Series G
Preferred Shares (and payment of dividends thereon for a two-year period in
shares of Common Stock) at the conversion price of $0.35. Accordingly, VRPI
may be entitled to receive fewer Shares than indicated in the table.
(7) The number of shares beneficially owned includes 230,000 shares beneficially
owned by certain principals of Strategic Growth International, Inc.
Strategic Growth International, Inc. has provided certain consulting
services to the Company.
(8) Troy & Gould Professional Corporation has provided certain legal services to
the Company.
16.
<PAGE>
PLAN OF DISTRIBUTION
The Selling Securityholders may sell, directly or through brokers, the
Shares in negotiated transactions or in one or more transactions in the market
at the price prevailing at the time of sale. In connection with such sales, the
Selling Securityholders and any participating broker may be deemed to be
"underwriters" of the shares of Common Stock within the meaning of the
Securities Act, although the offering of these securities will not be under
written by a broker-dealer firm. Sales in the market may be made to broker-
dealers making a market in the Common Stock or other broker-dealers, and such
broker-dealers, upon their resale of such securities, may be deemed to be
"selling securityholders" in this offering. The Company will not receive any of
the proceeds from the sale of the Shares by the Selling Securityholders.
Pursuant to the terms under which certain of the Outstanding Shares, the
Preferred Shares, the Convertible Notes, the Options and certain of the Warrants
were sold, the Company has agreed to indemnify certain of the Selling
Securityholders who acquired those securities against such liabilities as they
may incur as a result of any untrue statement of a material fact in the
Registration Statement of which this Prospectus forms a part, or any omission
herein or therein to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading. Such indemnification includes liabilities that the Selling
Securityholders may incur under the Securities Act.
The Company will bear all costs and expenses of the registration under the
Securities Act and certain state securities laws of the Shares, other than fees
of counsel (if any) for the Selling Securityholders and any discounts or
commissions payable with respect to sales of the Shares.
From time to time this Prospectus will be supplemented and amended as
required by the Securities Act. During any time when a supplement or amendment
is so required, the Selling Securityholders are required to cease sales until
the Prospectus has been supplemented or amended.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon by Troy
& Gould Professional Corporation, Los Angeles, California. Troy & Gould
Professional Corporation owns warrants to purchase 20,000 shares of Common Stock
at $1.375 per share and is a Selling Securityholder.
EXPERTS
The audited financial statements (as of March 31, 1997 and for each of the
two years in the period ended March 31, 1997) contained in the Company's Annual
Report on Form 10-KSB for the year ended March 31, 1998, and incorporated in
this Prospectus by reference, have been so incorporated in reliance on the
report of Deloitte & Touche LLP, independent public accountants (which report
includes an explanatory paragraph regarding the ability of the Company to
continue as a going concern), given on the authority of said firm as experts in
auditing and accounting.
The audited financial statements (as of March 31, 1998 and for the year
then ended) contained in the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1998, and incorporated in this Prospectus by reference, have
been so incorporated in reliance on the report of Grobstein, Horwath & Company
LLP, independent public accountants (which report includes an explanatory
paragraph regarding the ability of the Company to continue as a going concern),
given on the authority of said firm as experts in auditing and accounting.
17.
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or make any representations, other than those contained in this
Prospectus, in connection with the offering hereby, and, if given or made, such
information and representations must not be relied upon as having been
authorized by the Company or the Selling Securityholders. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, any
securities to any person in any State or other jurisdiction in which such offer
or solicitation is unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or the facts herein set
forth since the date hereof.
_______________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information...... 2
Incorporation of Certain
Documents by Reference... 2
The Company................ 3
Risk Factors............... 5
Use of Proceeds............ 14
Selling Securityholders.... 15
Plan of Distribution....... 17
Legal Matters.............. 17
Experts.................... 17
</TABLE>
================================================================================
================================================================================
17,398,272 Shares of Common Stock
CHATCOM, INC.
____________
PROSPECTUS
____________
July 15, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company estimates that expenses in connection with the distribution
described in this Registration Statement will be as follows. All expenses
incurred with respect to the distribution will be paid by the Company, and such
amounts, with the exception of the Securities and Exchange Commission
registration fees, are estimates.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 2,669
Nasdaq listing fees........................................... 7,500
Accounting fees and expenses.................................. 30,000
Legal fees and expenses....................................... 35,000
Miscellaneous................................................. 3,000
-------
Total........................................................ $78,169
-------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under California law, a California corporation may eliminate or limit the
personal liability of a director of the corporation for monetary damages for
breach of the director's duty of care as a director, provided that the breach
does not involve certain enumerated actions, including, among other things,
intentional misconduct or knowing and culpable violation of the law, acts or
omission which the director believes to be contrary to the best interest of the
corporation or its shareholders or which reflect an absence of good faith on the
director's part, the unlawful purchase or redemption of stock, payment of
unlawful dividends and receipt of improper personal benefits. The Company's
Board of Directors believes that such provisions have become commonplace among
major corporations and are beneficial in attracting and retaining qualified
directors, and the Company's Articles of Incorporation include such provisions.
The Company's Articles of Incorporation and Bylaws also impose a mandatory
obligation upon the Company to indemnify any director or officer to the fullest
extent authorized or permitted by law (as now or hereinafter in effect),
including under circumstances in which indemnification would otherwise be at the
discretion of the Company. In addition, the Company has entered into
indemnification agreements with each of its directors and officers providing for
the maximum indemnification permitted or authorized by law.
The foregoing indemnification provisions are broad enough to encompass
certain liabilities of directors and officers under the Securities Act of 1933,
as amended (the "Securities Act").
The registration rights agreements between the Company and certain of the
Selling Securityholders who purchased certain of the Outstanding Shares, the
Preferred Shares, the Convertible Notes, the Options and certain of the Warrants
provide that the Company shall indemnify such Selling Securityholders, and such
Selling Securityholders shall indemnify the Company and the officers and
directors of the Company, for certain liabilities, including certain liabilities
under the Securities Act.
(i)
<PAGE>
ITEM 16. EXHIBITS
The following exhibits, which are furnished with this Registration
Statement or incorporated by reference, are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -------------------------------------------------------------------
<C> <S>
4.1 Form of Common Stock certificate (1).
5.1 Opinion of Troy & Gould Professional Corporation (2).
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Grobstein, Horwath & Company LLP.
23.3 Consent of Troy & Gould Professional Corporation (contained in Exhibit 5.1).
24.1 Power of Attorney (3).
</TABLE>
______________
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3, as amended (Registration No. 33-99668), filed with the Commission
on November 21, 1995, which exhibit is hereby incorporated herein by
reference.
(2) Previously filed as an exhibit to this Registration Statement.
(3) Previously filed in Part II to this Registration Statement.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(ii)
<PAGE>
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement.
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this Registration
Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that (i) and (ii) do not apply if the Registration Statement
is on Form S-3, and the information required to be included in a post-effective
amendment is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(iii)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Chatsworth, State of California, on
July 14, 1998.
CHATCOM, INC.
By /s/ E. Carey Walters
--------------------------------------
E. Carey Walters
President, Chief Executive Officer
and Director
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ E. Carey Walters President, Chief Executive Officer July 14, 1998
- ----------------------------- and Director (Principal Executive Officer)
E. Carey Walters
/s/ Gordon L. Almquist Vice President-Finance and Chief July 14, 1998
- ----------------------------- Operating Officer (Principal
Gordon L. Almquist Financial and Accounting Officer)
/s/ Richard F. Gordon, Jr.* Chairman of the Board July 14, 1998
- -----------------------------
Richard F. Gordon, Jr.
/s/ A. Charles Lubash* Director July 14, 1998
- -----------------------------
A. Charles Lubash
/s/ James D. Edwards* Director July 14, 1998
- -----------------------------
James D. Edwards
</TABLE>
______________
* Executed on behalf of such person by Gordon L. Almquist pursuant to the
power of attorney granted to Mr. Almquist in the Registration Statement
filed April 23, 1998.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ------------------------------------------------------------------
<C> <S>
4.1 Form of Common Stock certificate (1).
5.1 Opinion of Troy & Gould Professional Corporation (2).
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Grobstein, Horwath & Company LLP.
23.3 Consent of Troy & Gould Professional Corporation (3).
24.1 Power of Attorney (contained in Part II).
</TABLE>
______________
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3, as amended (Registration No. 33-99668), filed with the Commission
on November 21, 1995, which exhibit is hereby incorporated herein by
reference.
(2) Previously filed as an exhibit to this Registration Statement.
(3) Previously filed in Part II to this Registration Statement.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Shareholders and Board of Directors of ChatCom, Inc.:
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-50787 of ChatCom, Inc. on Form S-3 of our report,
dated June 20, 1997 (which report contains an explanatory paragraph regarding
the ability of the Company to continue as a going concern) appearing in the
Annual Report on Form 10-KSB of ChatCom, Inc. for the year ended March 31, 1998,
and to the reference to us under the heading "Experts" in the Prospectus which
is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
Los Angeles, California
July 10, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Shareholders and Board of Directors of ChatCom, Inc.:
We consent to the incorporation by reference in this Registration Statement of
ChatCom, Inc. on Form S-3 of our report, dated July 6, 1998 (which report
contains an explanatory paragraph regarding the ability of the Company to
continue as a going concern) appearing in the Annual Report on Form 10-KSB of
ChatCom, Inc. for the year ended March 31, 1998, incorporated by reference in
the Prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Grobstein, Horwath & Company LLP
Sherman Oaks, California
July 10, 1998
