<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
Commission file number 0-20462
CHATCOM, INC.
(Name of Small Business Issuer in Its Charter)
CALIFORNIA 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 TOPANGA CANYON BOULEVARD, CHATSWORTH, CALIFORNIA 91311
(Address of principal executive offices)
818/709-1778
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year: $7,271,000.
As of June 25, 1998, the aggregate market value of the common stock
held by non-affiliates of the Registrant computed by reference to The Nasdaq
Stock Market's closing price for the Registrant's Common Stock on June 25, 1998,
was approximately $4,764,000.
The number of shares outstanding of the Registrant's only class of
common stock, as of June 25, 1998, was 11,591,215.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive proxy statement for its Annual Meeting of
Shareholders which is anticipated to be filed within 120 days of March 31,1998,
is incorporated by reference in response to Part III of this Annual Report on
Form 10-KSB.
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INDEX TO FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
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Page
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<C> <S> <C>
Part I
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Item 1: Description of Business....................... 3
Item 2: Description of Property....................... 23
Item 3: Legal Proceedings............................. 23
Item 4: Submission of Matters to a Vote
of Security Holders........................... 25
Part II
-------
Item 5: Market for Common Equity and
Related Shareholder Matters................... 25
Item 6: Management's Discussion and Analysis.......... 26
Item 7: Financial Statements.......................... 32
Item 8: Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure.......................... 32
Part III
--------
Item 9: Directors, Executive Officers,
Promoters, and Control Persons;
Compliance with Section 16(a)
of the Exchange Act........................... 32
Item 10: Executive Compensation........................ 33
Item 11: Security Ownership of Certain
Beneficial Owners and Management.............. 33
Item 12: Certain Relationships and
Related Transactions.......................... 33
Item 13: Exhibits and
Reports on Form 8-K........................... 33
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PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
---------------------------------------------------------------------------
1995
----
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 THAT INVOLVES 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 OBTAIN ADDITIONAL FINANCING,
THE UNCERTAINTY OF MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS, THE RISKS
RELATING TO NEW PRODUCT DEVELOPMENT AND NEW APPLICATIONS OF THE COMPANY'S
PRODUCTS, CONDUCTING BUSINESS WITH FOREIGN CUSTOMERS AND THE COMPETITIVE
MARKET FOR THE COMPANY'S PRODUCTS AND THOSE DISCUSSED IN THE SECTION
ENTITLED "CAUTIONARY STATEMENTS AND RISK FACTORS" AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT.
ITEM 1. DESCRIPTION OF BUSINESS
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
---------
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
scalable 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.
In order to generate additional working capital to fund the Company's
marketplace transition and its continuing operating losses, the Company
completed several private placements of its equity and debt securities during
the fiscal year ended March 31, 1998 ("fiscal 1998") and
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prior fiscal years. The Company at present has insufficient liquidity to meet
its current 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's principal executive office is located at 9600 Topanga Canyon
Boulevard, Chatsworth, California 91311. Its telephone number is (818) 709-
1778.
Description of Products
- -----------------------
ChatterBox. With five different models in the family, the ChatterBox
-----------
series has been designed to meet the needs of the consolidated server market,
and thereby satisfies the needs of the high-density applications server,
Internet server and network simulation markets as well. Each ChatterBox model
is built around a selection of common server modules, which makes the whole
product line both functionally compatible and fully scaleable. The ChatterBox
family exhibits the following significant advantages:
. High to ultra-high platform density in compact industry-standard
enclosures. Current ultra-high density systems can support 112 fully
configured Pentium/(R)/ systems in one 19" rack enclosure. For high-
end server requirements, up to 28 dual SMP Pentium Pro/(R)/ platforms
can be accommodated in one enclosure.
. State of the art power distribution using load balancing power supply
modules in a highly fault tolerant and efficient N+1 configuration.
. High availability/low MTTR design with all system components being
fully hot-swappable and with no single point of system failure,
achieved through the deployment of a "multiple instance" architecture.
. Super scaleable fault tolerant clusters using advanced load-balancing
software to provide "processor bandwidth on demand" systems with near
linear efficiency.
. Systems management through ChatCom's Intelli-Management(TM) integrated
management system, which provides full monitoring and control
capabilities either locally or to a remote location using standards-
based remote management (SNMP).
. Ultra-high performance and data integrity is delivered through the
Company's ChatRAID(TM) Intelligent Disk Subsystem.
The Company believes the clustering technology will permeate the
networking industry where mission-critical applications are being deployed. The
Company has trademarked "RAINS", which stands for Redundant Array of Independent
Network Servers, and is partnering with Microsoft and Vinca Corporation
("Vinca") to provide turnkey solutions.
The open architecture of ChatterBox server platforms supports the
latest Pentium and Pentium Pro technology of Intel Corporation ("Intel"),
including the recently introduced Dual SMP Pentium Pro, which provides the
highest power to density ratio yet achieved with this technology. Processor
speeds up to 300MHz and memory sizes up to 512MB in both single and dual
processor designs are available, making these platforms comparable to the most
advanced stand-alone servers available today.
Designed from the outset for mission-critical applications, the
ChatterBox family performs in an arena where system failures or unrecoverable
loss of data are considered unacceptable. The addition of the integrated
ChatRAID level 7 disk storage architecture
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provides multiple server access to a self-healing, fault-tolerant storage
subsystem offering up to 1.1 Terabyte of high-availability data across multiple
redundant paths.
ChatterBox systems are in service worldwide supporting diverse
applications including Internet, intranet and web server functions, database and
Groupware (E-mail, etc.) server systems from Lotus Notes/(R)/ and Microsoft/(R)/
Exchange(TM) to Oracle environments, file servers, applications servers,
gateways, remote access, Citrix servers and many more. They are also in service
with a number of major peripheral manufacturers in support of their various
development and test programs. Configurations range in price from approximately
$5,000 up to approximately $30,000 for the Office series, while the more
powerful Corporate series range from $7,500 to over $300,000.
Sources and Availability of Raw Materials. The Company purchases from
-----------------------------------------
various independent suppliers numerous parts, including computer chips, power
supplies, printed circuit boards, chassis, resistors, capacitors, and various
electronic components that the Company assembles into products. Although there
are at least dual suppliers for many of such parts, supplies and components, the
Company currently relies on single sources of supply for certain parts and
components, and the Company is vulnerable to product changes by and variances in
product quality from these suppliers. The Company's primary sources for these
items, which are readily available, are electronics distributors, including
Arrow Electronics, Inc., Bell Industries Inc., InterWorks Computer Products
Incorporated, Kent Electronics, Inc. and Pioneer-Standard Electronics, Inc.
The Company purchases certain components (the Cirrus VGA integrated
circuit, Intel processors, Opti integrated circuits, Omega power supply modules
and 3Com application specific integrated circuits), which contain technology
that is proprietary to its manufacturer and is therefore unavailable from other
manufacturers. The Company has no written supply agreements covering any of
these components. The Omega power supply module is purchased directly from
Omega Power Systems, Inc. ("Omega") and this module is an integral portion of
one of the power supply options offered by the Company.
The Company is required to carry significant amounts of inventory to
meet the rapid delivery requirements of its customers. Inventories held by the
Company are subject to obsolescence and the Company reports inventories net of a
reserve for obsolescence.
As a result of the Company's continuing liquidity problems during
fiscal 1998, the Company has been sued for non-payment by several suppliers of
products and services, and numerous other vendors have forwarded their accounts
with the Company to collection agencies. To date, the Company has been
successful in settling certain of these complaints whereby the vendors have
agreed to accept a substantial discount to the balance owed of at least 40%,
allow the Company a payment moratorium (typically two months), and to accept
payment of the restated debt over an extended period of time. In the event the
Company is unable to timely meet its payment obligations of these restated
debts, any discounts afforded the Company to date would be cancelled and the
original amount would be reinstated (less any payments made by the Company).
The Company has continued to purchase from substantially all of its suppliers
during its liquidity crisis, including those who have initiated lawsuits for
non-payment, provided that the Company pay for products and services at time of
receipt by the Company.
Markets and Marketing
- ---------------------
The Networking Market. Products that serve as the building blocks for
---------------------
data/voice networks have traditionally fallen into two categories -- those that
utilize the same underlying
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technology as standard desktop personal computers ("PCs"), and those that
require specialized hardware and software. Included in the former group are
Internet/intranet servers, fileservers, database servers, and E-mail gateways,
while the latter group includes products such as routers, bridges, remote access
systems, and telephone switching systems.
Companies such as Compaq Computer Corporation ("Compaq"), Hewlett-
Packard Company ("HP"), IBM, Sun Microsystems, Inc., Dell Computer Corporation
("Dell") and others have been the traditional leaders in providing hardware for
the server market, whereas companies such as Cisco Systems, Inc., 3Com
Corporation, Bay Networks, Inc., and Ascend Communications, Inc. have grown to
multimillion dollar or billion dollar corporations with products that address
`specialized' networking functions.
The Marketing Approach. Today, with the extraordinary power of
----------------------
technologies utilizing Intel's Pentium processors and Digital Equipment
Corporation's Alpha/(R)/ processors, virtually all networking functions can be
performed on PC-based hardware. Since ChatterBox integrates multiple server
modules that are based on such PC-based technology into compact, power
efficient, highly-reliable and highly-manageable systems for mission critical
applications, it is well-positioned to become an ideal platform for network
server consolidation. The advantages of having a common, low-cost `engine' for
all networking applications are only now becoming apparent, and ChatCom believes
that it is possible to make significant inroads into this emerging market.
The Company will continue to pursue its objective of providing
powerful, reliable, scalable, fault-tolerant and feature-rich products for the
mission critical market. While not among the lowest priced products of their
kind, the Company believes that ChatterBox systems rank among the products with
the best price/performance characteristics available, when the ChatterBox's
numerous value-added capabilities are considered.
Trade Shows and Advertising. Through the first half of fiscal 1998,
---------------------------
the Company participated and exhibited at several national trade shows,
including:
. NetWorld+InterOp, Las Vegas
. PC Expo, New York
. NetWorld+InterOp, Atlanta
. Computer Telephony, Los Angeles
These shows have offered the opportunity for broad exposure of the
Company's products to both end-users and resellers, and are among the best-
attended of the numerous shows that serve the networking industry. Through
fiscal 1998, the Company has also maintained some presence at certain regional
trade shows that addressed focused aspects of the industry, such as those put on
by Novell and Microsoft user groups. In addition, during fiscal 1997, the
Company initiated an advertising compaign designed to expand its demographic
coverage to address information technology (IT) executives as well as the LAN
management personnel covered in previous compaigns. New solutions-oriented
messages conveyed the benefits of deploying the Company's products in several
key markets, including remote access, Internet and web servers and Microsoft
NT/Backoffice (r) servers. LAN Times was selected as the core advertising
vehicle based upon prices, research and previous lead generation performance.
As a result of the Company's continuing liquidity crisis, the Company
has not been able to advertise its products through most of fiscal 1998.
Additionally, for the fiscal year ending March 31, 1999 ("fiscal 1999"), the
Company has planned to substantially reduce expenditures for trade shows until
such time as its financial condition improves and, instead, will attempt to
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participate with certain exhibitors on a shared or partnered basis.
Additionally, the Company will not advertise its products until its financial
condition improves.
Sales Channel Development. The Company has traditionally sold its
--------------------------
products through value-added resellers ("VARs"), and will continue to do so for
a significant portion of its sales. However, as a result of the Company's
continuing liquidity crisis during fiscal 1998, the Company reduced its support
for its VARs, which the Company believes was responsible for sales through VARs
during fiscal 1998 declining substantially as compared to fiscal 1997. The
Company believes that in order to expand sales through its VAR network for
fiscal 1999, the Company would be required to devote certain financial resources
to attract larger and technically skilled VARs, and train existing VARs to
ensure high-quality service and response to end-users. Currently, the Company is
unable to provide sufficient financial support to its current VAR network and
will not be able to provide extensive training of its VAR network until such
time as the Company has sufficient financial resources.
Direct Sales. During fiscal 1997, the Company began a direct sales
------------
program to large corporate users of ChatCom equipment as testing platforms for
quality assurance.
Engineering and Customer Service
- --------------------------------
Engineering. The Engineering department reviews Marketing Requirement
-----------
Documents to ensure that the Company's products meet customer requirements.
Engineering researches component resources to ensure that the Company's products
use state-of-the-art components resulting in reliable, competitive and cost
effective products. Engineering attempts to ensure that all design processes
follow established procedures in conformance with ISO9000 requirements. The
Enginering department executes designs using in-house engineering resources, as
well as outsourcing engineering workload to ISO9000 certified third-party
development sources. Engineering transitions products to Manufacturing and
provides engineering support at the onset of release through product end-of-life
to ensure that the Company's products are manufactured in strict conformance
with specifications. Engineering also provides support to Customer Service to
ensure that its customer base receives full levels of support. Engineering also
provides documentation of all products.
Customer Service. The Customer Service organization is responsible
----------------
for processing all incoming service calls, managing in-warranty and out-of-
warranty repair returns/shipments, and tracking all reported product problems.
Sales and Distribution
- ----------------------
The Sales Organization. The Sales organization reports to the
----------------------
Company's President, and is currently divided into four regions - Eastern,
Central, Western and International. The Company has sales offices in San
Antonio, Ottawa, and Chatsworth, California. There are also currently two sales
staff located at headquarters who provide inside support for the regions.
Significant Customers. During the fiscal year ended March 31, 1998 no
---------------------
customer accounted for more than 10% of the Company's net sales. During the
fiscal year ended March 31, 1997 the Company received approximately 13% of its
gross revenues from sales to US Robotics Access Corp., an end-user of the
Company's products. No other single customer accounted for more than 10% of the
Company's revenues for the fiscal years ended March 31, 1997 and March 31, 1996.
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Manufacturing
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The Company contracts for the purchase of various electronic and
mechanical components from vendors and other manufacturers. Some are complete
subassemblies, such as power supplies or custom-built chassis, while others are
individual items such as bare circuit boards and chips. Rather than manufacture
the actual electronic circuit boards and mount the components used in its
products, the Company subcontracts the mounting and soldering of these
assemblies and then performs assembly, integration, and final testing.
Because no heavy manufacturing such as wave soldering of circuit
boards or sheet metal fabrication is performed by the Company at its leased
premises, the Company would be able, if it became necessary, to quickly increase
its production levels with relatively little disruption to current operations.
This also allows the Company to incorporate the latest technology without having
to retool its manufacturing. The Company believes that it is capable of doubling
its present output with the addition of more assemblers and testers.
OEM Agreements. The Company currently has agreements with original
--------------
equipment manufacturers ("OEMs") to incorporate their chips into the Company's
products and 3Com Corporation to manufacture the Company's RAID subsystem
products and to market failover (clustering) software in conjunction with its
consolidated servers under the ChatCom name. Other than the foregoing, the
Company does not have any significant agreements with OEMs.
Competition
- -----------
Products that are competitive with ChatterBox fall into two main
categories:
. `Racked-and-stacked' stand-alone servers
. Integrated, purpose-designed rack-mounted systems (similar to
ChatterBox)
The racked and stacked server category is comprised of many servers
(e.g., from manufacturers such as Compaq, HP, IBM, Dell, etc.) placed on custom
metal racks. Metal rack systems are available from numerous companies such as
Wright Line, Ergotron, Inc., American Network Products, Engineered Data Products
(NetCom3), Kewaunee and others. While this approach does allow a user to
maintain some degree of order and a neat appearance, it does not significantly
reduce space requirements, nor does it reduce power or cabling requirements.
Furthermore, it does nothing to consolidate the manageability of the separate
systems. Nonetheless, the Company considers its major competition to come from
these `racked-and-stacked' server systems.
Among the second group of competitors (purpose-designed systems) is
Cubix Corporation ("Cubix"), a manufacturer that has been traditionally
considered among the Company's key competitors. Cubix is a strong player in
managed systems-level platforms for communications and application servers.
Cubix manufactures a platform with similar functionality to ChatCom's product
line. Cubix manufactures proprietary motherboards, whereas ChatCom uses industry
standard motherboards in most of its products. The form factor of the two
product lines is different and the Company believes that its product lines
provide greater flexibility due to its architecture.
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New Product Development
- -----------------------
The Computer Industry. The Company's business is, as is the business
---------------------
of all of the computer hardware and software industry, extremely competitive and
rapidly changing. Without continued refinement of existing products, and the
development of new products, the Company could easily lose any competitive
advantage it may possess. It is therefore essential that substantial resources
be devoted to research and new product development.
Recent Developments. As described previously, the Company in recent
-------------------
years repositioned its products as a family of systems, rather than a collection
of building blocks. In creating the Corporate and Office Series product lines,
significant new system management features have been introduced. These are
composed of ChatCom's Intelli-Management monitoring and control system, coupled
with a major new version of the Company's ChatView(TM) management software.
Version 3 of this software operates in Microsoft's Windows NT environment, and
allows a ChatterBox system to be managed through industry-standard SNMP-based
products such as HP's OpenView/(R)/ or IBM's Netview(TM).
Pentium Pro 200/(R)/ -- A line of servers featuring the Intel Pentium
Pro CPU was introduced by the Company in March 1997 and is positioned for high-
speed, high-bandwidth applications, such as Internet/intranet/web servers,
groupware applications and traditional file serving.
Pentium-II(R) 300 -- A line of servers featuring the Intel Pentium-II
CPU was introduced by the Company in March 1998 and will be augmenting the
Pentium Pro products for high-speed, high-bandwidth applications in many of the
same markets.
Pentium ChatTwin(TM) -- In fiscal 1996, the Company introduced its
ChatTwin line of server modules. The ChatTwin contains two complete processing
units on a single board, and fourteen such boards can be housed in a single card
cage. The Corporate Series Model 2040 can house up to four card cages, which
provides capacity for up to 112 processors in a six and a half foot tall cabinet
that occupies approximately five square feet of floor space. In March 1997, the
Company introduced significant performance enhancements to its ChatTwin server
module. The ChatTwin server module is available with two fully functional,
completely independent Pentium servers integrated on a single card.
In fiscal 1996, the Company also introduced the ChatPowerPlus(TM)
redundant, hot-swappable module power supply unit for its processing systems.
The ChatPowerPlus unit is based on the "N+1" concept, whereby the user populates
the unit with the number of power modules needed to provide power to the
processor units plus an additional power module. As the power modules can be
exchanged without powering down other power modules, a power module failure does
not result in the failure of any processing units and the failed power module
may be replaced without the interruption of any processing. Because the
ChatPowerPlus holds up to four power modules that are individually exchangeable,
the user may obtain true fault tolerance and redundancy by employing power
modules with 133% of the user's maximum power needs, as opposed to the 200%
required by most redundant power systems. The Company knows of no systems
offered by its competitors that provide the processing power density of its
systems utilizing the ChatTwin and ChatPowerPlus units.
AMD(R) K6-2 with 3D Now! -- The Company anticipates introducing a new
line of servers during the quarter ending September 30, 1998, which support the
newest K6-2 333 MHz CPU running the Front Side Buss at 100 MHz. Benchmarks show
this product keeping pace with the Pentium-II 400 chip in the graphics market,
but since the Company's products are generally not
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used in that fashion, this product will augment the current Pentium 233 MMX
product in the medium performance, application server market.
Beginning in June 1996, the Company has concentrated a significant portion
of its product development efforts on the design and development of a new family
of products code named the "BrightStar" project. BrightStar is being launched as
an enhanced version of the Company's current ChatterBox line of network servers.
Mechanical, power, cooling, and management enhancements will allow corporate
enterprises to easily scale their server architectures to any level.
Furthermore, BrightStar gives a similar "look and feel" to currently disparate
technologies from Intel, Sun, and DEC (now a wholly owned subsidiary of Compaq).
BrightStar will allow entities to significantly reduce the time it takes to
deploy, repair/upgrade, or scale their server rooms without introducing the
typical problems of location, how to power/cool them, or how to manage them. By
offering these different technologies within BrightStar, a corporation is not
boxed into choosing a particular technology for all tasks at hand. BrightStar's
ability to collocate these once disparate technologies while making them appear
to be similar (i.e., sharing the same peripherals, sliding in next to each other
in the same chassis, plugging into the same high-performance disk subsystem and
finally having one company to service and support these variable technologies)
allows corporations to pick the best technology for the task at hand, while
reducing their training costs and allowing them to maintain a significant
portion of their investment when upgrading or replacing technology. The power
and mechanical enhancements in BrightStar will allow the Company to deploy a
wide range of products utilizing many common components. The Company is
initially introducing BrightStar with dual Pentium-II 450 MHz CPUs, since this
will handle the most general purpose applications that BrightStar can address.
Immediately following will be an Ultra Sparc 10/20 product, which will target
the more specific UNIX/RISC applications. An Alpha product may be introduced as
market demand increases. Finally, BrightStar will allow the Company to increase
its density from the current 112 Pentiums per rack, to 160 Pentium-IIs per rack,
based on Intel's mobile Pentium-II module. Many of these offerings are made
possible because the industry has embraced a more standard form-factor (ATX) and
have rallied behind the PCI bus as the standard way to connect most add-in cards
(e.g. SCSI, Network Interfaces Cards, etc.). When Intel starts to ship its newly
announced Slot 2 technology, BrightStar will incorporate these CPUs with the
same "look and feel" as others mentioned.
The Company is currently anticipating the commercial introduction of
products incorporating the Bright Star technology during Fall 1998. No
assurances can be given, however, that the Company will be able to meet its
anticipated product introduction schedule or that future shipments of Bright
Star related products will represent a significant portion of the Company's
revenues in future periods. See "Cautionary Statements and Risk Factors -
Dependence on New Product Development".
Research and Development The Company has spent approximately $2,041,000
------------------------
$1,246,000 and $914,000 on company-sponsored research and development activities
during the fiscal years ended March 31, 1998, 1997, and 1996, respectively.
Environmental Laws
- ------------------
Compliance with federal, state and local provisions that have been enacted
or adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, likely will not have a
significant effect upon the capital expenditures, earnings, or competitive
position of the Company.
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Organization and Business Development
- -------------------------------------
The Company was incorporated under the laws of the State of California in
March 1982. The Company originally was named "Astro Systems and Engineering,
Inc." and changed its name to "Astro Sciences Corporation" in 1985. On February
9, 1996, the Company changed its name to "ChatCom, Inc."
Originally an engineering and technical consulting services company, the
Company acquired the assets of J&L Information Systems, Inc., a California
corporation ("J&L") in 1988. From 1982 (prior to J&L's incorporation) through
late 1985, J&L's primary activity consisted of the manufacturing and marketing
of remote access products for TeleVideo Systems, Inc.'s multi-user systems. As
the use of personal computer-based local area networks ("LANs") increased in
1986, J&L expanded its line of remote user access products to include
Novell/(R)/ networks and networks of other emerging vendors. At the same time,
J&L evolved into a publisher of asynchronous communications software for LANs.
After the acquisition of J&L, the Company terminated its engineering
services business and concentrated completely on the J&L product business.
Currently, the Company's primary business activity is developing, integrating,
manufacturing and marketing highly-efficient centralized servers and storage
management systems.
Employees
- ---------
The Company currently employs approximately 35 full-time employees, of
which 11 are in manufacturing, 5 are in sales, 4 are in research and product
development, 5 are classified as officers, general and administrative, 5 are in
technical support, 2 are in quality assurance, 2 are in sustaining engineering
and 1 in marketing.
CAUTIONARY STATEMENTS AND RISK FACTORS
In addition to the other information set forth in this Annual Report,
persons who may own or intend to own securities of the Company should
carefully consider 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 reports 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.
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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 convertible
notes and warrants in the aggregate principal amount of $540,000. 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 or debt 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 Stock and Series G Preferred Stock and certain 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) are paid in full. The
agreement also provides that as long as any amounts of Series F Preferred Stock
and Series G Preferred Stock 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. In the event the Company fails to file a registration
statement covering the Common Stock issuable upon conversion of the foregoing
preferred stock by specified date, the agreement provides that 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. 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.
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. 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, until July 11, 1998. 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 and in the fiscal quarter ended June 30, 1998. 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
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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 recorded net losses of $7,773,000, $4,601,000 and
$1,968,000 for the fiscal years ended March 31, 1998 ("fiscal 1998"), 1997
("fiscal 1997"), and 1996 ("fiscal 1996"). The Company also has incurred an
operating loss for the three months ending 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
-----------------
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 Stock and
Series G Preferred Stock and certain warrants to purchase the Company's Common
Stock. 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
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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) are 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 Stock and Series G Preferred Stock and upon exercise of
the 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 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 no
assurance that any settlements will be obtained by the Company with each such
trade creditor. 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
believes that it
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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 focused 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 enchance the power, mechanical and other
features of the products, the products ability to meet the storage managements
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 September 1998. There can be no assurances, however, that the Company will
be able to meet its anticipated product introduction schedule or that future
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 will have
a material adverse effect on the results of operations and financial condition
of the Company.
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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.
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
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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
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Company is particularly dependent on the skills and contributions of certain of
its management personnel, although the Company currently does not have long-term
employment agreements with any of these individuals. The Company hired Gordon
L. Almquist as its new Vice President 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 to
market and sell the Company's products. During the years 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 problems 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
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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 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 future disruptions in supply will not
occur and 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.
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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, 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 $1.1
million during the quarters ended December 31, 1997 and March 31, 1998,
respectively. See "Cautionary Statements and 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
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 and
paid 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
Page 20
<PAGE>
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 "Cautionary Statements and 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 in an
attempt to submit a plan for achieving compliance with the continued listing
requirements of 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 stock and any other shares of
preferred stock that may be issued. Additionally, certain financing
arrangements which
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<PAGE>
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.
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
outstanding preferred stock, convertible notes, the accrued but unpaid dividends
related to the preferred stock 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
stock, 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 stock
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 stock 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 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 stock and any
other notes or shares of preferred stock are satisfied.
Page 22
<PAGE>
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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's present office and manufacturing facility is located at 9600
Topanga Canyon Boulevard, Chatsworth, California, and consists of approximately
25,000 square feet. This space was leased by the Company for a five-year term
that expires on November 30, 1998, with rental payments of approximately
$137,000 for fiscal year ended March 31, 1998 This facility is devoted to the
Company's corporate, administrative and manufacturing and assembly activities.
Approximately 50% of the space is allocated to production, 15% to sales and
marketing, 15% to administration, and 20% to engineering and product support
laboratories. The Company considers its present office and manufacturing
facility to be generally suitable and adequate for its intended purposes.
The Company does not intend to acquire real estate, interests in real
estate, or real estate mortgages, for investment. It has been and will continue
to be for the foreseeable future, the Company's policy to reinvest its earnings,
if any, in its business to increase the working capital and to expand the
production capacity of the Company.
ITEM 3. LEGAL PROCEEDINGS
A. On January 15, 1998, the Company was sued by Strategic Growth
International, Inc. ("SGI"), an investor relations consulting firm. The lawsuit,
filed in U.S. Federal District Court, Central District of California, sought
damages from the Company for the balance of certain finder's fees ($191,500)
alleged by SGI to be owed by the Company to SGI in connection with the Company's
financings from The High View Fund and The High View Fund. L.P. and for
Page 23
<PAGE>
amounts alleged by SGI to be owed to SGI for consulting services ($75,841) and
the economic value of stock options for 66,666 shares of the Company's Common
Stock that SGI was to receive in connection with SGI's consulting services. SGI
also sought reimbursement for its legal fees in connection with the lawsuit and
obtained an attachment against certain of the Company's assets in connection
with this lawsuit. As of March 31, 1998, the parties agreed to settle the
lawsuit. The terms of the settlement include the Company's issuance to SGI of
800,000 shares of Common Stock, the granting to SGI of options to purchase
200,000 shares of the Company's Common Stock at an exercise price of $.50 per
share (the closing bid price on February 5, 1998), the payment of $10,000 for
SGI's legal fees, and the payment of $100,000 in cash to SGI, $25,000 of which
was paid by the Company on February 9, 1998, with the balance ($75,000) payable
in equal consecutive monthly installments of $15,000, beginning April 9, 1998.
The Company also agreed to register the foregoing shares under the Securities
Act of 1933, including shares issuable upon the exercise of the stock options.
As a result of the settlement, the Company recorded a charge to general and
administrative expenses of approximately $567,000 (of which approximately
$67,000 is attributable to the value of the options issued to SGI) for the
estimated value of the settlement, during the quarter ended March 31, 1998.
B. 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 Stock and Series G Preferred Stock and certain warrants to purchase
the Company's Common Stock. 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 financing 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) are 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 Stock and Series G Preferred Stock and upon exercise of
the 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.
C. As a result of the Company's continuing liquidity problems during
fiscal 1998, the Company has been sued for non-payment by several suppliers of
products and services, and numerous other vendors have forwarded their accounts
with the Company to collection agencies. To date, the Company has been
successful in settling these complaints whereby the vendors have agreed to
accept a substantial discount to the balance owed of at least 40%, and allowing
the Company a payment moratorium (typically two months), and to accept payment
of the restated debt over an extended period of time. In the event the Company
is unable to timely meet its payment obligations of these restated debts, any
discounts afforded the Company to date would be cancelled and the original
amount reinstated (less any payments made by the Company). The Company has
continued to purchase from substantially all of its suppliers during its
liquidity crisis, including those who have intitated lawsuits for non-payment,
provided that the Company pay for products and services at time of receipt by
the Company.
Page 24
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended March 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock (the "Common Stock") currently trades on The
Nasdaq Stock Market, listed under SmallCap issues, and is quoted under the
symbol "CHAT." The Common Stock began trading on The Nasdaq Stock Market in
February 1993 under the symbol "AOSC." On February 23, 1996, the Company's
Common Stock began trading under the symbol "CHAT" as a result of the change of
the name of the Company from Astro Sciences Corporation to ChatCom, Inc. As a
result of the Company's inability to satisfy the continued listing requirements
of The Nasdaq SmallCap Market, Nasdaq has instituted proceedings to delist the
Company's Common Stock from The Nasdaq SmallCap Market. An oral hearing before
the National Association of Securities Dealers, Inc. Board of Governers has been
scheduled on July 16, 1998 to review the Company's qualification to be listed on
The Nasdaq SmallCap Market. There can be no assurance that the Company will
prevail at the hearing. See "Description of Business - Cautionary Statements
and Risk Factors - Listing on The Nasdaq Stock Market."
The following table presents the range of the high and low closing prices
for the Common Stock for the periods indicated. The information has been
obtained from the Nasdaq Stock Market Summary of Activity and reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. There are currently more than 24 known market
makers for the Common Stock.
<TABLE>
<CAPTION>
Fiscal Year 1998 Fiscal Year 1997
-------------------------------- -------------------------------
Quarter High Low High Low
------- -------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
First Quarter $2.69 $1.69 $3.93 $2.00
Second Quarter $1.63 $1.25 $2.88 $1.88
Third Quarter $1.75 $0.28 $3.06 $2.38
Fourth Quarter $0.84 $0.44 $3.38 $2.50
</TABLE>
As of June 15, 1998, there were 618 stockholders of record of the Common
Stock.
No dividends have been declared or paid on the Common Stock by the Company.
The provisions of the Company's outstanding shares of preferred stock prohibit
the payment of dividends on the Common Stock while shares of such preferred
stock are outstanding. The Company does not intend to pay any cash dividends on
the Common Stock in the foreseeable future. Instead, it is anticipated that the
Company will retain earnings, if any, to finance its operations and growth.
Page 25
<PAGE>
Recent Sales of Unregistered Securities
- ---------------------------------------
In March 1998, the Company completed a conversion of unsecured debt in
an aggregate amount of $1,345,000 owed to VRPI into the Company's Series F
Preferred Stock ($945,000) and Series G Preferred Stock ($400,000) and warrants
to purchase 285,000 shares of the Company's Common Stock at an exercise price of
$0.35 per share. The Series F Preferred Stock is convertible into shares of
Common Stock at a conversion price equal to 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 Series G Preferred Stock is convertible into shares of Common Stock
at a conversion price equal to $0.35.
In March 1998, the Company sold an aggregate of 809,523 shares of
Common Stock to a shareholder of the Company for an aggregate consideration of
$300,000.
In April 1998, the Company issued 800,000 shares of Common Stock and
options to purchase 200,000 shares of Common Stock at an exercise price of $0.50
per share as part of the consideration for the settlement of a lawsuit initiated
by Strategic Growth International, Inc.
In December 1997, the Company issued warrants to purchase 150,000
shares of the Company's Common Stock at an exercise price of $0.375 per share in
connection with the issuance of convertible subordinated notes of $350,000 and
$540,000 issued by the Company in May 1997 and December 1997, respectively.
In November 1997, the Company issued warrants to purchase 20,000
shares of the Company's Common Stock at an exercise price of $1.375 per share as
consideration for the extension of credit to the Company by Troy & Gould
Professional Corporation, general counsel to the Corporation.
The Company believes that the issuances of securities pursuant to the
foregoing transactions were exempt from registration under the Securities Act of
1933, as amended, by virtue of Section 4 (2) thereof as transactions not
involving public offerings. No underwriters were engaged in connection with any
of the foregoing offers or sales of securities and no commissions were paid in
connection with such sales.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations for the Fiscal Year Ended March 31, 1998 Compared to the
- ------------------------------------------------------------------------------
Fiscal Year Ended March 31, 1997
- --------------------------------
The Company recorded a net loss of $7,773,000 for the fiscal year
ended March 31, 1998 ("fiscal 1998"), on revenues of $7,271,000 as compared to a
net loss of $4,601,000 on revenues of $9,103,000 for the fiscal year ended March
31, 1997 ("fiscal 1997").
Sales, Sales Returns, and Costs of Goods Sold
---------------------------------------------
Net sales decreased $1,832,000 or 20%, from $9,103,000 in fiscal 1997
to $7,271,000 in fiscal 1998. The decline in revenues was due primarily to a
decrease in shipments to domestic Value Added Resellers which the Company
believes is attributable to the declining demand for remote control type remote
access solutions; decreased advertising expenditures and marketing support for
VARs during fiscal 1998 due to the Company's cash flow constraints; and the
redirection of the Company's sales and marketing efforts toward the server
consolidation and
Page 26
<PAGE>
network emulation markets which began during fiscal 1997. The Company also
believes that sales have been adversely impacted by the Company's poor financial
condition to the extent that certain customers may delay purchases from the
Company or order from other suppliers until such time as the Company's financial
condition significantly improves.
Sales returns increased to $3,070,000 in fiscal 1998 compared to
$718,000 in fiscal 1997 and was primarily the result of an agreement entered
into during December 1997 between the Company and its Singapore distributor,
Macon Holdings (S) Pte. Ltd. ("Macon") whereby the Company agreed to permit
Macon to return a majority of the equipment ($2.7 million at sales price,
approximately $1.8 million at cost) previously sold to Macon in the quarterly
periods ended June 30, 1997 ($2.8 million) and September 30, 1997 ($.5 million)
due to Macon's inability to pay for this equipment. Macon has attributed its
inability to pay for such equipment primarily to the Asian economic crisis
during the later part of 1997 as well as less than anticipated market acceptance
of the equipment. 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 equipment received from Macon is a type that can be
readily sold to other customers in the event the Company is able to secure
additional orders for such products. Through March 31, 1998, approximately $1.1
million (approximately $705,000 at cost) of the equipment returned from Macon
had been resold by the Company to other customers.
The Company believes that sales may fluctuate on a quarterly basis as
a result of a number of factors, including the status of world economic
conditions, fluctuations in foreign currency exchange rates and the timing of
system shipments (the current U.S. list price of the Company's most powerful
system, for example, exceeds $300,000; thus the acceleration or delay of a small
number of shipments from one quarter to another can significantly affect the
results of operations for the quarters involved). Orders and shipments during
the quarter ended June 30, 1998 have been lower than anticipated, which the
Company believes is the result of reduced expenditures for advertising and
marketing programs and the postponment of hiring or replacement of certain
sales personnel due to the Company's continued cash flow constraints, and the
Company's poor financial condition to the extent that it has caused certain
customers to delay purchases from the Company or order from other suppliers.
Additionally, as a result of the Company's poor financial condition, the Company
may not be able to effect the timely procurement of manufacturing components and
thus may need to extend the time normally required to ship finished goods and
may not be able to satisfy delivery requirements of certain customers. For
these reasons, orders and shipments for the quarter ended June 30, 1998 and
subsequent quarters may be adversely affected.
Cost of goods sold were $6.7 million or 92% of net sales during fiscal
1998 compared to $6.8 million or 76% of net sales during fiscal 1997. The
decrease in gross margin in fiscal 1998 compared to fiscal 1997 (8% vs. 24%,
respectively) was primarily the result of an increase to the reserve for
inventory obsolescence, price discounting on a variety of orders due to
competition and increased manufacturing overhead during fiscal 1998 due to
increased indirect labor (primarily related to quality assurance). Although the
cost of certain components (i.e., microprocessors and random access memory
components) during fiscal 1998 were somewhat lower than fiscal 1997, the Company
has not been able to achieve further reductions in component costs due to the
lower quantities purchased during fiscal 1998 as a result of the decrease in
sales described above. The Company's gross margins are affected by several
factors,
Page 27
<PAGE>
including, among others, sales mix and distribution channels and, therefore, may
vary in future periods from those experienced during fiscal 1998. Additionally,
rapidly changing technology and engineering refinements to the Company's
hardware and software products are relatively common. These changes can cause
the finished goods inventory to experience a relatively short shelf life. The
Company has incurred inventory writedowns in the past. While the Company
maintains valuation allowances for excess and obsolete inventories, which it
believes to be adequate, significant changes in the technology prevailing in the
industry could require the Company to record additional valuation reserves.
During fiscal 1998 and fiscal 1997, the Company recorded significant 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. A substantial portion of the increase in inventory reserves for fiscal
1998 was a result of the less than anticipated sales during fiscal 1998 (as
described above) and the increase in inventory balances at March 31, 1998,
primarily as a result of the sales returns from Macon. The Company believes that
its allowance for obsolete and excess inventories that are currently recorded
are sufficient to properly state inventories at their net realizable value.
However, material additions to such allowance might be required in the future if
technology or market conditions affecting the Company's product sales mix change
significantly.
Selling Expense
---------------
Selling expense decreased $92,000, or 3%, to $3,170,000 in fiscal 1998
from $3,262,000 in fiscal 1997. The decrease was primarily the result of
decreased advertising expenses ($285,000) and decreased marketing salaries
($70,000) due to certain cost reductions implemented during the second quarter
of fiscal 1998. The decreases in fiscal 1998 were substantially offset by
increased personnel costs as a result of additional sales personnel and
increased expenses associated with international sales efforts.
General and Administrative Expense
----------------------------------
General and administrative expense increased $495,000, or 21%, to
$2,834,000 in fiscal 1998 from $2,339,000 in fiscal 1997. The increase was
primarily attributable to the cost of a settlement ($567,000) in February 1998
of a lawsuit which was filed against the Company by Strategic Growth
International, Inc., an investor relations consulting firm; increased legal fees
($195,000) due in part to the Company's liquidity problems and an accrual of a
penalty ($106,000 as of March 31, 1998) due to the continued delay in
registering shares in connection with the Company's Series E Convertible
Redeemable Preferred Stock (which is primarily due to the Company's liquidity
problems). These increases were partially offset by lower expeditures related to
investor relations during fiscal 1998 ($135,000). As a result of the Company's
current liquidity problems, a number of vendors have either sued the Company or
have forwarded their accounts to collection. The Company anticipates incurring
substantial legal expenses during fiscal 1999 as well as possible interruption
in the receipt of goods and services due to its liquidity problems.
Severance Expense
-----------------
During fiscal 1998, the Company recorded severance expense of
$100,000 related to the payments that the Company has agreed to pay to a former
executive officer of the Company pursuant to the remaining terms of his
employment contract. There were no terminations during fiscal 1997 that
involved similar agreements.
Page 28
<PAGE>
Research and Development Expense
--------------------------------
Research and development expense increased $795,000, or 64%, from
$1,246,000 in fiscal 1997 to $2,041,000 in fiscal 1998. The increase was
primarily attributable to additional personnel ($164,000) and consultants
($268,000) as well as increased expenditures for prototypes ($179,000) due to
the Company's efforts to decrease product development time and increase pre-
production product testing. A majority of the product development expenses
incurred in fiscal 1998 are related to certain products which are expected to be
commercially introduced during the quarter ending September 30, 1998. The timely
commercial introduction of these products are dependent on several factors
including continued employment of key personnel and consultants and the timely
payment to vendors and suppliers of materials and services. There can be no
assurance that the products being developed will be commercially introduced in
September 1998 or at all.
Interest Expense
----------------
Interest expense increased $219,000 from $12,000 in fiscal 1997 to
$231,000 during fiscal 1998, primarily as a result of the Company's acceptance
of a charge for interest ($175,000) by Vermont Research Products, Inc. ("VRPI"),
a major supplier of certain products which are resold by the Company, in
anticipation of the Company entering into an agreement with VRPI whereby VRPI
agreed to convert a portion of the balance owed by the Company to preferred
stock, as well as interest associated with convertible subordinated notes of
$350,000 and $540,000 issued by the Company in May 1997 and December 1997,
respectively.
Results of Operations for the Fiscal Year Ended March 31, 1997 Compared to the
- ------------------------------------------------------------------------------
Fiscal Year Ended March 31, 1996
- --------------------------------
The Company recorded a net loss of $4,601,000 for the fiscal year
ended March 31, 1997 ("fiscal 1997"), on revenues of $9,103,000 as compared to a
net loss of $1,968,000 on revenues of $14,790,000 for the year ended March 31,
1996 ("fiscal 1996").
Sales and Costs of Goods Sold
-----------------------------
Sales decreased $5,687,000, or 39%, from $14,790,000 in fiscal 1996 to
$9,103,000 in fiscal 1997. The Company believes that the decrease in revenues
was attributable in part to a constraint on the number of Pentium Pro chips
allocated by Intel (which problem was subsequently corrected), a large volume of
orders received late in fiscal 1997, which could not be manufactured in time to
ship during fiscal 1997, delays in foreign government orders, a declining demand
for remote control type remote access solutions, decreased marketing efforts
during the last quarter of fiscal 1996 due to cash flow constraints and the
redirection of marketing efforts toward the server consolidation and network
emulation markets during fiscal 1997.
Cost of goods sold decreased $2,988,000, or 30%, from $9,882,000 in
fiscal 1996 to $6,894,000 in fiscal 1997. The decrease was attributable to
decreased product sales in fiscal 1997. The percentage decrease in cost of
sales was less than the percentage decrease in revenues due to fixed costs
contained in cost of sales that did not decrease proportionately with revenues
and a $632,000 increase in additions to inventory reserves for product
obsolescence.
Page 29
<PAGE>
Selling Expense
---------------
Selling expense decreased $167,000, or 5%, from $3,429,000 in fiscal 1996
to $3,262,000 in fiscal 1997. The decrease was attributable to a decrease in
sales department salaries of $93,000, a decrease in sales commissions of $38,000
and a decrease in advertising expenditures of $172,000. These decreases were
partially offset by an increase in marketing salaries of $85,000. The decrease
in sales salaries was attributable to the resignations of the Vice President of
Sales and a regional sales manager during the first two quarters of fiscal 1997.
The decrease in sales commissions was primarily attributable to the decrease in
revenues in fiscal 1997. Advertising expense decreased as a result of cash flow
constraints during the last quarter of fiscal 1996 and the Company's lack of a
marketing director during the first quarter of fiscal 1997. Marketing
department salaries increased as a result of the hiring of a marketing director
and a marketing communications manager in the first quarter of fiscal 1997.
General and Administrative Expense
----------------------------------
General and administrative expense increased $335,000, or 17%, from
$2,004,000 in fiscal 1996 to $2,339,000 in fiscal 1997. The increase consisted
of a $139,000 increase in salaries, an $84,000 increase in officers' travel, a
$112,000 increase in bad debt expense and the recording of $62,000 in
restructuring expenses related to the elimination of certain positions during
August 1996. These increases were partially offset by a $92,000 decrease in
legal fees. The increase in salaries was primarily attributable to the creation
of an "Office of the President" that involved the hiring of a Senior Vice
President for Business Development and the transfer of the Senior Vice President
of Technology from the research and development cost center to the general and
administrative cost center. The increase in officers' travel was attributable
to an increased number of officers and a concerted effort by the Company to keep
its executive officers in close contact with its customers. The increase in bad
debts was primarily attributable to the financial failure of a large reseller of
the Company's products.
Severance Expense
-----------------
During fiscal 1996, the Company recorded a severance expense of $322,000
related to the payments that the Company has agreed to pay to former executive
officers of the Company pursuant to the remaining terms of their employment
contracts. There were no terminations during fiscal 1997 that involved similar
agreements.
Research and Development Expense
--------------------------------
Research and development expense increased $332,000, or 36%, from $914,000
in fiscal 1996 to $1,246,000 for fiscal 1997. The increase was primarily
attributable to an effort by the Company to decrease development time and
increase pre-production product testing. The increase included net workforce
increases in the Company's engineering staff and a $178,000 increase in
prototyping and consulting expenses.
Interest Expense
----------------
Interest expense decreased $171,000, or 93%, from $183,000 in fiscal 1996
to $12,000 in fiscal 1997, due to the retirement of virtually all of the
Company's debt financing during the first quarter of fiscal 1997.
Page 30
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company recorded net losses of $7.8 million and $4.6 million during
fiscal 1998 and fiscal 1997, respectively. During fiscal 1998, cash decreased
$788,000 primarily due to the negative cash flow from operations of $2.7
million. The negative cash flow from operations during fiscal 1998 was
comprised primarily of the net loss ($7.8 million) and an increase in
inventories ($1.3 million), primarily as a result of the inventories returned
from Macon during the second half of fiscal 1998 (approximately $1.8 million at
cost). These decreases were partially offset by an increase in accounts payable
($3.1 million), due primarily to the Company's delay in paying suppliers as a
result of the Company's liquidity problems, and by non cash charges primarily
related to depreciation and amortization ($350,000) and inventory obsolescence
($1,409,000).
Net cash used for investing activities during fiscal 1998 ($187,000) was
the result of expenditures related to computers and manufacturing equipment.
Net cash provided by financing activities during fiscal 1998 ($2.1 million)
was primarily the result of the issuance of 1,100 shares of Series E Preferred
Stock ($937,000), the issuance of convertible subordinated debt ($890,000),
and the issuance of Common Stock ($300,000).
As of March 31, 1998, the Company had negative working capital of $1.3
million, as compared to working capital of $3.2 million as of March 31, 1997.
The Company must immediately provide additional liquidity to meet its current
obligations and maintain its operations and is actively seeking additional
financing to meet its immediate needs. There can be no assurance that the
Company will be able to obtain any commitments for sufficient financing and the
Company will be forced to significantly reduce or suspend its operations or seek
protection under bankruptcy laws in the immediate future if it is unable to do
so.
On June 6, 1998, the Company received written notice from Vermont Research
Products, Inc. ("VRPI"), the holder of the Company's Series F and Series G
Preferred Stock and the Company's single largest creditor, of VRPI's decision
(which has not been agreed to by the Company) to surrender its Series F & Series
G Preferred Stock as a result of VRPI's contention that the Company failed to
timely file a registration statement covering the underlying Common Shares. On
June 11, 1998, the Company received a $100,000 loan from VRPI (the "VRPI Loan").
The VRPI Loan provides for interest at the rate of 15% per annum, is secured by
the Company's foreign accounts receivable and is due on July 11, 1998. During
the 30 day period ending July 11, 1998 (the "Study Period"), VRPI will conduct
an examination of the Company's technology and finances in order to determine if
an investment in the Company is warranted. The VRPI Loan contains certain
restrictions, including, among others, the use of the loan proceeds for only
those expenses necessary to continue the Company's operations during the Study
Period and the Company's agreement not to issue stock or incur debt, except for
the Company's proposed line of credit (described below) with any party other
than VRPI and those persons or entities who choose to participate with VRPI in
connection with any further financing of the Company. VRPI has informed the
Company that it has prepared, but not filed, a lawsuit against the Company and
certain of its officers and directors and has agreed not to file the complaint
during the Study Period. On July 7, 1998 VRPI provided an additional $100,000 of
financing to the Company. No assurances can be given that VRPI will provide
additional financing to the Company or that VRPI will not take legal action
against the Company.
On June 15, 1998, the Company entered into a commitment letter with ALCO
Financial Services, Inc. ("ALCO") pursuant to which ALCO has agreed, subject to
certain conditions, to
Page 31
<PAGE>
provide the Company with a maximum $750,000 line of credit. Under the proposed
terms of the line of credit, which would remain in effect for a period of one
year, the Company would be able to borrow from ALCO based on eligible accounts
receivable and inventory, at prime plus seven percent. The line of credit would
also include certain other fees and conditions and would grant to ALCO a blanket
lien on all assets of the Company. The line of credit is subject to a review by
ALCO of the Company's inventory and the execution of final documentation. There
can be no assurance that the line of credit will ultimately be effected, and the
Company will require additional financing to meet its near term obligations even
if the ALCO financing is consummated.
The Company is seeking additional public or private financing to meet its
longer term capital needs. If additional funds are raised through the issuance
of equity securities, it is likely that the Company will be required to sell
such securities at a substantial discount to the current market price for the
Common Stock, the percentage ownership of the then current shareholders of the
Company will be reduced, and such equity securities may have rights, preferences
or privileges senior to those of the holders of the Company's Common Stock. No
assurance can be given that additional financing will be available or that, if
available, it will be available on terms favorable to the Company or its
shareholders.
The Company has incurred operating losses in each of its last three fiscal
years, and has experienced operating losses for the past six consecutive fiscal
quarters and is continuing to incur operating losses subsequent to March 31,
1998. Any increase in the outstanding number of shares of the Common Stock or
other securities convertible or exercisable for Common Stock may have an adverse
effect on the market price of the Common Stock and may hinder efforts to arrange
future financing. Even if the Company successfully completes any debt or equity
financings it is currently attempting to consummate, 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 continue operations could be materially adversely
affected.
The Company had no material commitments for capital expenditures as of
March 31, 1998.
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. 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.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements appear on pages 41 to 66 of this Annual
Report on Form 10-KSB, following Part IV.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Previously reported.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Page 32
<PAGE>
The information required by this Item will be contained in the Company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders, and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders, and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders, and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANACTIONS
The information required by this Item will be contained in the Company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders, and is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements are included as part of this Annual
Report on Form 10-KSB:
Independent Auditors' Report - Grobstein, Horwath & Company, LLP
Independent Auditors' Report - Deloitte & Touche LLP
Balance Sheets as of March 31, 1998 and 1997.
Statements of Operations for the Years Ended March 31, 1998, 1997 and
1996.
Statements of Cash Flows for the Years Ended March 31, 1998, 1997 and
1996.
Statements of Stockholders' Equity for the Years Ended March 31, 1998,
1997 and 1996.
Notes to Financial Statements.
The following exhibits are filed with this Form 10-KSB or are
incorporated herein by reference to the document described:
3.1 Articles of Incorporation of Astro Systems and Engineering, Inc.,
filed March 22, 1982 are incorporated by reference to Exhibit
3(a) to the Company's Form 10 Registration Statement as amended
by Form 8, Amendment No. 2, dated January 22, 1993 (the
"Company's Form 10").
Page 33
<PAGE>
3.2 Certificate of Amendment of Articles of Incorporation filed March
26, 1984, is incorporated by reference to Exhibit 3(b) to the
Company's Form 10.
3.3 Certificate of Amendment of Articles of Incorporation filed May
28, 1985, is incorporated by reference to Exhibit 3(c) to the
Company's Form 10.
3.4 Certificate of Amendment of Articles of Incorporation filed
January 10, 1991, is incorporated by reference to Exhibit 3(d) to
the Company's Form 10.
3.5 Certificate of Determination filed with the California Secretary
of State on January 10, 1991, is incorporated by reference to
Exhibit 3(e) to the Company's Form 10.
3.6 Restated and Amended Bylaws, as of February 1, 1997, is
incorporated by reference to Exhibit 3(f) to the Company's Form
10-QSB for the quarter ended December 31, 1996, as filed with the
Commission on February 11, 1997.
3.7 Certificate of Amendment of Articles of Incorporation filed with
the California Secretary of State on December 6, 1993, is
incorporated by reference to the Company's 1994 Form 10-KSB.
3.8 Certificate of Amendment of Articles of Incorporation filed
Determination filed with the California Secretary of State on
February 14, 1996, is incorporated by reference to Exhibit 3.9 to
the Company's 1996 Form 10-KSB, as filed with the Commission on
July 1, 1996.
3.9 Certificate of Determination and Decrease for Series B Preferred
Stock filed with the California Secretary of State on March 19,
1996, is incorporated by reference to Exhibit 4(b) to the
Company's Registration Statement on Form S-3 (Registration No.
333-3792), as amended by Amendment No. 1 dated June 3, 1996 (the
"Registration Statement").
3.10 Certificate of Determination for Series C Preferred Stock filed
with the California Secretary of State on April 15, 1996, is
incorporated by reference to Exhibit 4(d) to the Registration
Statement.
3.11 Certificate of Determination for Series D Preferred Stock filed
with the California Secretary of State on December 6, 1996 is
incorporated by reference to the exhibit filed with the Company's
Annual Report on Form 10-KSB, as amended, for the year ended
March 31, 1997 (the "1997 10-KSB").
3.12 Certificate of Determination of Series E Convertible Redeemable
Preferred Stock is incorporated by reference to the exhibit filed
with the Company's Quarterly Report on Form 10-Q, as amended, for
the quarter ended September 30, 1997 (the "September 1997 10-Q").
Page 34
<PAGE>
3.13 Certificate of Determination of Series F Convertible Redeemable
Preferred Stock.
3.14 Certificate of Determination of Series G convertible Preferred
Stock.
10.1 Indemnification Agreement between the Company and A. Charles
Lubash, dated February 1, 1992, is incorporated by reference to
Exhibit 10(k) to the Company's Form 10.
10.2 Indemnification Agreement between the Company and George L.
Lazik, dated February 1, 1992, is incorporated by reference to
Exhibit 10(l) to the Company's Form 10.
10.3 Indemnification Agreement between the Company and Richard F.
Gordon, Jr., dated February 1, 1992, is incorporated by
reference to Exhibit 10(m) to the Company's Form 10.
10.4 Indemnification Agreement between the Company and Charles
Conrad, Jr., dated February 1, 1992, is incorporated by
reference to Exhibit 10(n) to the Company's Form 10.
10.5 Indemnification Agreement between the Company and James R.
Spievak, dated February 1, 1992, is incorporated by reference to
Exhibit 10(o) to the Company's Form 10.
10.6 Option Agreement between the Company and A. Charles Lubash,
dated May 8, 1992, is incorporated by reference to Exhibit 10(v)
to the Company's 1993 Form 10-KSB.
10.7 Option Agreement between the Company and George L. Lazik, dated
May 8, 1992, is incorporated by reference to Exhibit 10(w) to
the Company's 1993 Form 10-KSB.
10.8 Lease between HWL Properties, a California partnership, and the
Company, dated May 5, 1993, as amended June 1, 1993, is
incorporated by reference to Exhibit 10(x) to the Company's 1993
Form 10-KSB.
10.9 $3,500,000 Business Financing Agreement with Deutsche Financial
Services Corporation (formerly ITT Commercial Finance
Corporation), dated May 16, 1995, is incorporated by reference
to Exhibit 10(y) to the Company's 1995 Form 10-KSB, as filed
with the Commission on June 26, 1995.
10.10 1994 Stock Option Plan, dated August 31, 1994, as amended, is
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
December 31, 1996, as filed with the Commission on February 11,
1997.
10.11 Employment Agreement between A. Charles Lubash and the Company,
dated April 1, 1995, is incorporated by reference to Exhibit
10(dd) to the Company's 1995 Form 10-KSB, as filed with the
Commission on June 26, 1995.
Page 35
<PAGE>
10.12 Consulting Agreement between George L. Lazik and the Company,
dated March 11, 1996, is incorporated by reference to Exhibit
10.12 to the Company's 1996 Form 10-KSB, as filed with the
Commission on July 1, 1996.
10.13 Amended and Restated Employment Agreement between Russell
Jackson and the Company, effective April 1, 1993, is
incorporated by reference to Exhibit 10(ff) to the Company's
1995 Form 10-KSB, filed with the Commission on June 26, 1995.
10.14 Form of Stock Purchase Agreement for Series B Preferred Stock
and Series C Preferred Stock, entered into by the Company and
Julie Nordlicht, A. Ziskind, Tail Wind Fund, Ltd., Cassolette,
David Freund and Legong Investments N.V. is incorporated by
reference to Exhibit 10.14 to the Company's 1996 Form 10-KSB,
as filed with the Commission on July 1, 1996.
10.15 Employment Agreement between the Company and James B. Mariner
dated as of April 1, 1997 is incorporated by reference to the
exhibit filed with the Company's 1997 Form 10-KSB.
10.16 Form of Warrant Agreement, dated December 13, 1996, entered
into by ChatCom, Inc. and Maximum Partners, Ltd. is
incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
June 30, 1996, as filed with the Commission on August 14, 1996.
10.17 Purchase Agreement, dated as of December 9, 1996, regarding the
sale of Series D Preferred Stock and Warrants to purchase
Common Stock, is incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended December 31, 1996, as filed with the Commission
on February 11, 1997.
10.18 Form of Warrant Agreement, dated December 13, 1996, entered
into by ChatCom, Inc. and Strategic Growth International, Inc.
relating to warrants to purchase 100,000 shares of Common Stock
of ChatCom, Inc., is incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended December 31, 1996, as filed with the Commission
on February 11, 1997.
10.19 Indemnification Agreement between the Company and Gerald R.
Sayer, dated as of August 14, 1995 is incorporated by reference
to the exhibit filed with the Company's 1997 Form 10-KSB.
10.20 Indemnification Agreement between the Company and James D.
Edwards, dated as of October 9, 1995 is incorporated by
reference to the exhibit filed with the Company's 1997 Form 10-
KSB.
Page 36
<PAGE>
10.21 Indemnification Agreement between the Company and Sanford C.
Sigoloff, dated as of February 8, 1996 is incorporated by
reference to the exhibit filed with the Company's 1997 Form 10-
KSB.
10.22 Indemnification Agreement between the Company and Philip B.
Smith, dated as of February 8, 1996 is incorporated by
reference to the exhibit filed with the Company's 1997 Form 10-
KSB.
10.23 Indemnification Agreement between the Company and John R.
Grady, dated as of January 3, 1994 is incorporated by reference
to the exhibit filed with the Company's 1997 Form 10-KSB.
10.24 Indemnification Agreement between the Company and James B.
Mariner, dated as of March 5, 1996 is incorporated by reference
to the exhibit filed with the Company's 1997 Form 10-KSB.
10.25 Indemnification Agreement between the Company and Richard L.
Picheny, dated as of March 10, 1997 is incorporated by
reference to the exhibit filed with the Company's 1997 Form 10-
KSB.
10.26 Indemnification Agreement between the Company and Andrew M.
Brown, dated as of May 14, 1997 is incorporated by reference to
the exhibit filed with the Company's 1997 Form 10-KSB.
10.27 Indemnification Agreement between the Company and Russell
Jackson, dated as of February 8, 1996 is incorporated by
reference to the exhibit filed with the Company's 1997 Form 10-
KSB.
10.28 OEM Agreement between the Company and Vinca Corporation, dated
June 17, 1997 is incorporated by reference to the exhibit filed
with the Company's 1997 Form 10-KSB.
10.29 Letter of Agreement between the Company and Vermont Research
Products, Inc. dated September 30, 1997 is incorporated by
reference to the exhibit filed with the Company's September
1997 10-Q.
10.30 Stock Exchange and Settlement Agreement between the Company and
The High View Fund and The High View Fund, L.P. dated September
25, 1997 is incorporated by reference to the exhibit filed with
the Company's September 1997 10-Q.
10.31 Form of Warrant to purchase Common Stock issued to The High
View Fund and The High View Fund, L.P. is incorporated by
reference to the exhibit filed with the Company's September
1997 10-Q.
10.32 Form of Stock Purchase Agreement between the Company and the
purchaser of the Series E Preferred Stock dated September 26,
1997 is incorporated by reference to the exhibit filed with the
Company's September 1997 10-Q.
Page 37
<PAGE>
10.33 Letter of Intent between the Company and Macon Holdings (S) Pte
Ltd. Dated November 6, 1997 is incorporated by reference to the
exhibit filed with the Company's September 1997 10-Q.
10.34 Agreement between the Company and The High View Fund and The
High View Fund, L.P. dated December 30, 1997 is incorporated by
reference to the exhibit filed with the Company's Quarterly
Report on Form 10-Q, as amended, for the quarter ended December
31, 1997 (the "December 1997 10-Q").
10-35 Form of Convertible Subordinated Note issued to The High View
Fund, The High View Fund, L.P. and their affiliates is
incorporated by reference to the exhibit filed with the
company's December 1997 10-Q.
10.36 Form of Warrant to purchase Common Stock issued to The High
View Fund, The High view Fund, L.P. and their affiliates is
incorporated by reference to the exhibit filed with the
Company's December 1997 10-Q.
10.37 Letter of Employment, dated November 5, 1997, between the
Company and Gordon L. Almquist.
10.38 Letter of Employment, dated February 27, 1998, between the
Company and E. Carey Walters.
10.39 Indemnification Agreement, dated November 11, 1998, between the
Company and Gordon L. Almquist.
10.40 Indemnification Agreement, dated February 27, 1998, between the
Company and E. Carey Walters.
10.41 Agreement, dated February 26, 1998, between the Company and
James B. Mariner.
10.42 Settlement Agreement, dated as of February 1, 1998, between the
Company and Vermont Research Products, Inc.
10.43 Registration Rights Agreement, dated as of February 1, 1998,
between the Company and Vermont Research Products, Inc.
10.44 Common Stock Purchase Warrant, dated as of February 1, 1998,
issued by the Company to Vermont Research Products, Inc.
10.45 Investment Agreement, dated as of March 3, 1998, between the
Company and Barry Saxe.
10.46 Investment Agreement, dated as of March 9, 1998, between the
Company and Barry Saxe.
10.47 Settlement Agreement and Mutual Release, dated as of March 31,
1998, between the Company and Strategic Growth International,
Inc.
Page 38
<PAGE>
10.48 Registration Rights Agreement, dated as of March 31, 1998,
between the Company and Strategic Growth International, Inc.
10.49 Common Stock Purchase Warrant, dated as of November 19, 1997,
issued by the Company to Troy & Gould Professional corporation.
10.50 Letter of Agreement, dated June 15, 1998, between the Company
and Vermont Research Products, Inc.
10.51 Letter Agreement, dated June 15, 1998, between the Company and
ALCO Financial Services, Inc.
23.1 Consent of Deloitte & Touche LLP dated July 8, 1998, to the
incorporation by reference in the Registration Statements
(Form S-3, Nos. 333-50787, 333-3792 and 33-99668) and the
related prospectuses, with respect to the Financial Statements
of ChatCom, Inc. included in the Annual Report (Form 10-KSB)
for the year ended March 31, 1998.
23.2 Consent of Grobstein, Horwath & Company LLP, dated July 10,
1998, to the incorporation by reference in the Company's
Registration Statements23 (Form S-3, Nos. 333-50787, 333-3792
and 33-99668) and the related prospectuses, with respect to the
Financial Statements of ChatCom, Inc. included in the Annual
Report (Form 10-KSB) for the year ended March 31, 1998.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
Current report on Form 8-K dated February 2, 1998 reporting on Item 4,
as filed on February 6, 1998.
Current report on Form 8-K dated February 19, 1998 reporting on Item
4, as filed on February 26, 1998.
Page 39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHATCOM, INC.
a California corporation
Dated: July 8, 1998 By: /s/ E. Carey Walters
-----------------------------------
E. Carey Walters, President and
Chief Executive Officer
Dated: July 8, 1998 By: /s/ Gordon L. Almquist
-----------------------------------
Gordon L. Almquist, Vice President,
Chief Operating Officer and Chief
Financial Officer
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Dated: July 8, 1998 By: /s/ Richard F. Gordon, Jr.
-----------------------------------
Richard F. Gordon, Jr.,
Chairman of the Board
Dated: July 8, 1998 By: /s/ A. Charles Lubash
-----------------------------------
A. Charles Lubash, Director
Dated: July 8, 1998 By: /s/ James D. Edwards
-----------------------------------
James D. Edwards, Director
Dated: July 8, 1998 By: /s/ E. Carey Walters
-----------------------------------
E. Carey Walters, Director
Page 40
<PAGE>
FINANCIAL STATEMENTS
Page 41
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors of
ChatCom, Inc.
Chatsworth, California:
We have audited the accompanying balance sheet of ChatCom, Inc., (the "Company")
as of March 31, 1998, and the related statements of operations, stockholders'
equity (deficit), and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ChatCom, Inc. as of March 31,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses and negative cash flows
from operations raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
GROBSTEIN, HORWATH & COMPANY LLP
Sherman Oaks, California
July 6, 1998
Page 42
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors of
ChatCom, Inc.
Chatsworth, California:
We have audited the accompanying balance sheet of ChatCom, Inc., (the "Company")
as of March 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ChatCom, Inc. as of March 31,
1997, and the results of its operations and its cash flows for each of the two
years in the period ended March 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses and negative cash flows
from operations raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Los Angeles, California
June 20, 1997
Page 43
<PAGE>
CHATCOM, INC.
- -------------
<TABLE>
<CAPTION>
BALANCE SHEETS
MARCH 31, 1998 AND 1997 (in thousands)
- ---------------------------------------------------------------------------------------------------------------
Notes 1998 1997
----- ---- ----
<S> <C> <C> <C>
ASSETS 6
CURRENT ASSETS:
Cash and cash equivalents $ 381 $ 1,169
Accounts receivable, net of allowances of
$50,000 (1998) and $109,000 (1997) 849 1,334
Inventories 3 2,636 2,721
Prepaid expenses and other
current assets 92 108
-------- --------
Total current assets 3,958 5,332
EQUIPMENT AND FIXTURES, Net 4,17 388 651
DEPOSITS 22 24
-------- --------
TOTAL $ 4,368 $ 6,007
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable 7 $ 3,314 $ 1,427
Accrued expenses 5 1,074 687
Notes payable 10 890
Current portion of capital lease
obligations 17 15 23
-------- --------
Total current liabilities 5,293 2,137
-------- --------
CAPITAL LEASE OBLIGATIONS -
less current portion 17 22 12
-------- --------
COMMITMENTS AND CONTINGENCIES 6,7,17
REDEEMABLE PREFERRED STOCK:
Series E Convertible Redeemable Preferred Stock, $1,100,000
redemption value net of $163,000 of offering costs, authorized
2,000 shares; issued and outstanding 1,100 shares 11,13 937
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT) :
Preferred Stock, no par value, authorized 1,000,000 shares:
Series D Convertible Preferred Stock, $1,000 stated value per share,
authorized 5,000 shares, issued and outstanding
2,496 shares 10,13 1,407 1,407
Series F Convertible Preferred Stock, $1,000 stated value
per share, authorized 2,000 shares; issued and
outstanding 945 shares 7,13 945
Series G Convertible Preferred Stock, $1,000 stated value
per share, authorized 500 shares; issued and
outstanding 400 shares 7,13 400
Common Stock, no par value, authorized, 25,000,000 shares
issued and outstanding, 11,591,215
(1998) and 9,826,892 (1997) shares 12,13 11,025 10,090
Additional paid-in capital 17 2,839 2,404
Accumulated deficit (18,500) (10,043)
-------- --------
Total stockholders' equity (deficit) (1,884) 3,858
-------- --------
TOTAL $ 4,368 $ 6,007
======== ========
</TABLE>
See accompanying independent auditors' reports and notes to financial
statements.
Page 44
<PAGE>
CHATCOM, INC.
- -------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (in thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Notes 1998 1997 1996
----- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES:
Gross sales $ 10,341 $ 9,821 $ 16,046
Returns 2 (3,070) (718) (1,256)
----------- ---------- ----------
Net sales 7,271 9,103 14,790
----------- ---------- ----------
COST OF GOODS SOLD 6,671 6,894 9,882
----------- ---------- ----------
GROSS PROFIT 600 2,209 4,908
----------- ---------- ----------
OPERATING EXPENSES:
Selling expense 3,170 3,262 3,429
General and administrative expense 16,17 2,834 2,339 2,004
Research and development expense 2,041 1,246 914
Compensation expense related to stock options 13 20
Severance expense 14 100 322
----------- ---------- ----------
Total operating expenses 8,145 6,847 6,689
----------- ---------- ----------
LOSS FROM OPERATIONS (7,545) (4,638) (1,781)
INTEREST INCOME 4 49
INTEREST EXPENSE 7,10 (231) (12) (183)
----------- ---------- ----------
LOSS BEFORE PROVISION FOR
INCOME TAXES (7,772) (4,601) (1,964)
PROVISION FOR INCOME TAXES 15 (1) (4)
----------- ---------- ----------
NET LOSS (7,773) (4,601) (1,968)
DIVIDENDS ON PREFERRED STOCK (684) (894)
----------- ---------- ----------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS $ (8,457) $ (5,495) $ (1,968)
=========== ========== ==========
BASIC NET LOSS PER COMMON SHARE $ (0.84) $ (0.61) $ (0.26)
=========== ========== ==========
Weighted average number of common shares 10,068,865 8,965,743 7,536,629
</TABLE>
See accompanying independent auditors' reports and notes to financial
statements.
Page 45
<PAGE>
CHATCOM, INC.
- -------------
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (in thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
------------------------ ------------------------ Additional
Number of Number of Subscription Paid-in
Notes Shares Amount Shares Amount Receivable Capital
----- --------- ------- --------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1995 7,534,629 $ 5,859 $(100) $1,416
Exercise of stock options 13 2,000 1
Grant of stock options 20
Payment of subscription
receivable 100
Issuance of Series B
Preferred Stock 8 75 $ 1,294
Net loss
----- ------- ---------- ------- ----- ------
BALANCE, March 31, 1996 75 1,294 7,536,629 5,860 1,436
Issuance of Series C
Preferred Stock 9 75 1,277
Issuance of Series D
Preferred Stock 10 2,496 1,407
Issuance of stock purchase
warrants 13 968
Conversion of Series B
Preferred Stock 8 (75) (1,294) 1,024,768 1,294
Conversion of Series C
Preferred Stock 9 (75) (1,277) 907,098 1,277
Preferred Stock dividends 38,041 809
Exercise of stock options 13 30,000 37
Exercise of stock purchase
warrants 13 290,356 813
Net loss
----- ------- ---------- ------- ----- ------
BALANCE, March 31, 1997 2,496 1,407 9,826,892 10,090 2,404
Issuance of Series F
Preferred Stock 7 945 945
Issuance of Series G
Preferred Stock 7 400 400
Preferred Stock dividends 154,800 235
Additional paid in capital
arising from beneficial
conversion feature of
Series E Preferred Stock 368
Deemed dividend on Series E
Preferred Stock arising
from amortization of
beneficial conversion feature
Issuance of Common Stock 12 809,523 300
Issuance of Common Stock
in settlement of litigation 17 800,000 400 67
Net loss
--------------------------------------------------------------------------------------
BALANCE, March 31, 1998 3,841 $ 2,752 11,591,215 $11,025 $2,839
======================================================================================
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (in thousands, except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated Stockholders'
Deficit Equity(Deficit)
------------ ---------------
<S> <C> <C>
BALANCE, April 1, 1995 $ (2,580) $ 4,595
Exercise of stock options 1
Grant of stock options 20
Payment of subscription
receivable 100
Issuance of Series B
Preferred Stock 1,294
Net loss (1,968) (1,968)
-------- -------
BALANCE, March 31, 1996 (4,548) 4,042
Issuance of Series C
Preferred Stock 1,277
Issuance of Series D
Preferred Stock 1,407
Issuance of stock purchase
warrants 968
Conversion of Series B
Preferred Stock
Conversion of Series C
Preferred Stock
Preferred Stock dividends (894) (85)
Exercise of stock options 37
Exercise of stock purchase
warrants 813
Net loss (4,601) (4,601)
-------- -------
BALANCE, March 31, 1997 (10,043) 3,858
Issuance of Series F
Preferred Stock 945
Issuance of Series G
Preferred Stock 400
Preferred Stock dividends (316) (81)
Additional paid in capital
arising from beneficial
conversion feature of
Series E Preferred Stock 368
Deemed dividend on Series E
Preferred Stock arising
from amortization of
beneficial conversion feature (368) (368)
Issuance of Common Stock 300
Issuance of Common Stock
in settlement of litigation 467
Net loss (7,773) (7,773)
-------- -------
BALANCE, March 31, 1998 $(18,500) $(1,884)
======== =======
</TABLE>
See accompanying independent auditors' reports and notes to financial
statements.
Page 46
<PAGE>
CHATCOM, INC.
- -------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (in thousands)
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(7,773) $(4,601) $(1,968)
Adjustments to reconcile net loss
to net cash used in operating activities:
Grant/extension of stock options 20
Depreciation and amortization 350 253 312
Loss on disposal of assets 130 57
Provision for losses on accounts receivable 28 166 37
Interest on subordinated debt 52
Provision for inventory obsolescence 1,409 794 162
Interest on accounts payable 175
Value of common stock and stock options in
in connection with litigation settlement 467
Changes in operating assets and liabilities:
Accounts receivable 457 468 1,455
Inventories (1,324) (34) (521)
Prepaid expenses and other current assets 16 94 119
Deposits 2 (3) (1)
Accounts payable 3,057 (416) (768)
Accrued expenses 254 (294) 171
------- ------- -------
Net cash used in operating
activities (2,700) (3,573) (925)
------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES - Capital expenditures (187) (343) (190)
------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from short-term borrowings 938
Repayments of short-term borrowings (938) (1,075)
Change in restricted cash 500 (500)
Principal payments on capital leases (28) (35) (33)
Proceeds from sale of redeemable preferred stock 937
Proceeds from sale of common stock 300
Payment of preferred stock dividends (10)
Proceeds from issuance of convertible
subordinated debt 890
Collection of subscription receivable 100
Proceeds from issuance of Series B Preferred Stock 1,294
Proceeds from issuance of Series C Preferred Stock 1,325
Proceeds from issuance of Series D Preferred Stock 2,322
Proceeds from issuance of stock purchase warrants 4
Proceeds from exercise of stock purchase warrants 813
Proceeds from exercise of stock options 37 1
------- ------- -------
Net cash provided by financing
activities 2,099 4,018 725
------- ------- -------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (788) 102 (390)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,169 1,067 1,457
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 381 $ 1,169 $ 1,067
======= ======= =======
</TABLE>
See accompanying independent auditors' reports and notes to financial
statements.
(Continued)
Page 47
<PAGE>
CHATCOM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid for income taxes $ $ $ 2
Cash paid for interest $ $ 12 $ 196
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the fiscal years ended March 31, 1998 ("fiscal 1998") and 1997 ("fiscal
1997"), the Company acquired office equipment under capital leases in the
amount of $30,000 and $22,000, respectively.
During fiscal 1998, the Company accrued dividends related to the Series D
Convertible Preferred Stock of $250,000 and paid dividends of $235,000 through
the issuance of 154,800 shares of common stock which resulted in an increase in
common stock of $235,000 and a decrease in accrued expenses of $235,000.
During fiscal 1998, the Company accrued dividends related to the Series E
Convertible Redeemable Preferred Stock, Series F Convertible Preferred Stock
and Series G Convertible Preferred Stock of $45,000, $14,000 and $6,000,
respectively.
During fiscal 1998, the Company recognized the beneficial conversion feature
associated with the Series E Convertible Redeemable Preferred Stock of $368,000
as an increase in additional paid in capital. The related discount was
amortized over the minimum period in which the preferred shareholders could
realize that return as a deemed dividend.
During fiscal 1998, the Company granted to Strategic Growth International, Inc.
("SGI") 800,000 shares of Common Stock; options to purchase 200,000 shares of
Common Stock; and cash of $100,000 (of which $15,000 was paid to SGI through
March 31, 1998) as payment in connection with a lawsuit settlement. The
transaction resulted in an increase in Common Stock and additional paid-in
capital of $400,000 and $67,000, respectively, and a charge to general and
administrative expenses of $567,000 during the fourth quarter of fiscal 1998.
During fiscal 1997, the Company accrued dividends related to the Series D
Convertible Preferred stock of $75,000.
During fiscal 1997, 75 shares of Series B Preferred Stock and 75 shares of
Series C Preferred Stock were converted into 1,024,768 and 907,098 shares of
the Company's Common Stock (the "Common Stock"), respectively.
During fiscal 1997, the Company issued 38,041 shares of Common Stock in payment
of accrued dividends of $59,000 relating to Series B Preferred Stock and Series
C Preferred Stock.
During fiscal 1997, the Company recognized preferred stock dividends of
$750,000 as a result of the beneficial conversion features of the Series B
Preferred Stock and Series C Preferred Stock, which resulted in an increase in
accumulated deficit of $750,000 and an increase in Common Stock of $750,000.
(See note 8.)
During fiscal 1997, the Company granted warrants to purchase 100,000 shares of
Common Stock to SGI as partial compensation pursuant to a finders' fee
agreement in connection with the placement of the Series D preferred Stock.
The transaction resulted in an increase in additional paid-in capital of $1,000
and a decrease in Series D Preferred Stock of $1,000.
During fiscal 1996, the Company granted 15,000 options to purchase the Common
Stock to directors at an exercise price of $4.03 per share. The market price
on the date of grant was $5.37. The grant of the options resulted in the
recording of compensation expense and additional paid-in capital of $20,000.
During March 1995, the Company issued Common Stock and warrants in exchange for
the receipt of a personal check in the amount of $100,000. Subsequent to the
issuance of the securities, the check proved to be drawn on an account with
insufficient funds. During fiscal 1996, the Company received the $100,000
subscription receivable.
See accompanying independent auditors' reports and notes to financial
statements
Page 48
<PAGE>
CHATCOM, INC.
- -------------
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - ChatCom, Inc., a California corporation, is engaged in the
--------
business of developing, integrating, manufacturing and marketing highly-
efficient centralized server and storage management systems.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. During the years ended March 31,
1998, 1997 and 1996 the Company incurred net losses of $7,773,000,
$4,601,000 and $1,968,000, respectively, and negative cash flows from
operations of $2,700,000, and $3,573,000 and $925,000, respectively, which
raise substantial doubt about its ability to continue as a going concern.
Additionally, revenues during the fourth quarter of fiscal 1998 were lower
than that of the fourth quarter of the previous year. 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
provide additional liquidity to support its current level of operations or
any significant future increase in revenues and is actively seeking
additional financing to meet its immediate needs as well as its anticipated
requirements for the balance of the fiscal year ending March 31, 1999. The
Company, which currently does not have any bank debt, has received a
conditional commitment for a credit line (maximum of $750,000) and is in
the process of reviewing documentation for such a credit line. On June 11,
1998, the Company received $100,000 from its largest creditor (the
"Creditor") in exchange for issuing a 30 day promissory note. The note
agreement contains numerous conditions and restrictions including, among
others, the prior approval of the Creditor of any debt or equity financing.
The Company is continuing to discuss equity investments with several
potential sources. The Company has not effected the line of credit and has
not received a firm commitment for any equity financing, and there can be
no assurance that it will be able to consummate such transactions in the
future. If the Company does not raise sufficient financing to meet its
short term needs, the Company will more than likely be unable to continue
its operations. The financial statements do not include any adjustments
that might result should the Company be unable to continue as a going
concern.
Use of Estimates - The preparation of financial statements in conformity
----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents - The Company considers cash on hand, demand
-------------------------
deposits and short-term investments with original maturities of 90 days or
less to be cash equivalents. At March 31, 1998, the balance of cash and
cash equivalents consisted of cash on hand. At March 31, 1997, the balance
of cash and cash equivalents consisted of cash on hand, demand deposits,
and a certificate of deposit.
Page 49
<PAGE>
Financial Instruments - The carrying value of cash and cash equivalents,
---------------------
accounts receivable, accounts payable and short-term borrowings approximate
fair value due to the short maturities of such instruments.
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of its cash and cash equivalents, and
accounts receivable. The Company restricts its investment of cash and cash
equivalents to financial institutions with high credit standing. Credit
risk on accounts receivable is minimized to a certain extent as a result of
the large number and geographic dispersion of the Company's nationwide
customer base. The Company performs ongoing credit evaluations of its
customers' financial condition and maintains an allowance for potential
credit losses.
Inventories - Inventories are stated at the lower of cost (first-in, first-
-----------
out) or market. The Company reviews its inventories and assesses the
reserve for obsolete and excess inventories required to state inventories
at the lower of cost or market approximately quarterly. The charges to cost
of goods sold for the valuation of obsolete and excess inventories were
$1,409,000, $794,000 and $162,000 for the years ended March 31, 1998, 1997
and 1996, respectively.
Equipment and Fixtures - Equipment and fixtures are stated at cost.
----------------------
Depreciation and amortization are computed on the straight-line method over
the following estimated useful lives of the assets:
<TABLE>
<S> <C>
Equipment 5 years
Software 3 years
Furniture and fixtures 5 years
Leasehold improvements Lesser of lease
term or 5 years
</TABLE>
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of -
-----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,"
on April 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicates that the carrying amount of the asset
may not be recoverable. Recoverability of assets to be held and used in
the future is measured by a comparison of the carrying amount of the asset
to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. Adoption of
this statement did not have a material impact on the Company's financial
position or results of operations.
Advertising costs - Advertising costs are expensed as incurred.
-----------------
Advertising costs for the year ended March 31, 1998, 1997 and 1996 were
$304,000, $564,000 and $723,000, respectively.
Software Costs - The Company capitalizes the cost of purchased software.
--------------
These costs are amortized over three years.
Research and Development - All research and development costs are expensed
------------------------
as incurred.
Page 50
<PAGE>
Revenue Recognition - The Company records revenue for sales of hardware
-------------------
and software products at the time the title to the product is transferred
to the customer. The Company does not have significant obligations to
provide hardware or software upgrades or service beyond a standard warranty
period of one year. The cost to provide standard warranty services for
previously sold products is estimated quarterly and accrued.
At the time an extended warranty agreement is sold, the proceeds are
recorded as deferred revenue and amortized to income on a straight-line
basis over the extended warranty period. Sales of extended warranty
agreements began in February 1994. Extended warranty agreements in the
amounts of $85,000, $139,000 and $94,000 were sold during the years ended
March 31, 1998, 1997 and 1996, respectively. Deferred revenue related to
extended warranty agreements of $141,000 and $147,000 were included in
accrued expenses at March 31, 1998 and 1997, respectively.
Sales to Foreign Customers - Sales to foreign customers accounted for
--------------------------
approximately 16% and 13% of net sales for the year ended March 31, 1998
and 1997, respectively. Sales to foreign customers for the year ended March
31, 1996 were not material.
Major Customers - The Company had sales to individual customers in the
---------------
amount of $690,000, $1,177,000 and $853,000 during the years ended March
31, 1998, 1997 and 1996, respectively.
Income Taxes -Deferred income tax assets and liabilities are computed
------------
annually for differences between the financial statement and income tax
bases of assets and liabilities. Such deferred income tax asset and
liability computations are based on enacted tax law and rates applicable in
periods in which the differences are expected to reverse. If necessary, a
valuation allowance is established to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the year and the change in deferred income tax assets and
liabilities during the year.
Earnings per Share - Earnings per common share are computed in accordance
------------------
with SFAS No. 128 "Earnings per Share." Basic earnings per common share
are computed based on the weighted average number of common shares
outstanding during the periods. Diluted earnings per common share were
computed giving effect to all dilutive potential common shares outstanding
during the periods. The computation of diluted earnings per common share
was antidilutive in all periods; therefore, only basic earnings per common
share have been presented.
Securities which could potentially dilute basic earnings per common share
in the future that were not included in the computation of diluted earnings
per common share because to do so would have been antidilutive for the
periods presented include the Company's Series D, E, F and G convertible
preferred stocks (See Notes 7, 10 and 11), outstanding warrants and stock
options (See Note 13).
Stock Options - The Company adopted SFAS No. 123, "Accounting for Stock-
-------------
Based Compensation," on April 1, 1996. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on
fair value of the equity instrument awarded. Companies are permitted,
however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company continues to apply APB Opinion No. 25 to its stock-
based compensation awards to employees and has disclosed the required pro
forma effect on net loss and loss per share. (See Note 13).
2. SALES RETURNS
In January 1997, the Company executed a Memorandum of Understanding with
Macon Holdings (S) Pte. Ltd. ("Macon") whereby Macon, headquartered in
Singapore, was appointed a Master Distributor of the Company's products in
the Asia Pacific Region. The terms that governed the business dealings and
relationship between the Company
Page 51
<PAGE>
and Macon were subsequently memorialized in a Master Distributor Agreement
dated December 5, 1997 (the "Distribution Agreement"). The Distribution
Agreement also provided for the scheduled repayment of the outstanding
balance owed by Macon and granted Macon the exclusive rights to distribute
the Company's products in the Asia Pacific region provided that Macon
purchase a minimum of $3.0 million of equipment (net of returns) from the
Company through the period ending December 31, 1998. In the event Macon
does not purchase the required minimum, the Company retained the right to
sell directly into the territory and appoint additional distributors or
resellers in the territory.
During the quarterly periods ended June 30, 1997 and September 30, 1997,
the Company shipped equipment to Macon totaling $2.8 million and $.5
million, respectively ($3.3 million in the aggregate). These sales were
made to Macon on an "open account" basis with payment terms generally 30
days from date of invoice. Payments made by Macon for the quarterly periods
ended June 30, 1997, September 30, 1997 and December 31, 1997 totaled
$250,000, $257,000, and $80,000, respectively. No payments have been
received from Macon subsequent to December 31, 1997. 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 agreed to permit Macon to return to
the Company all equipment which remained unpaid and unsold 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 prices,
approximately $185,000 at cost was accrued for as of September 30, 1997)
and $2.2 million at sales price (approximately $1.4 million at cost) was
received during the quarter ended March 31, 1998 (of which $2.1 million at
sales prices, approximately $1.3 million at cost was accrued for during the
quarter ended December 31, 1997). The equipment received from Macon is a
type that can be readily sold to other customers in the event the Company
is able to secure additional orders for these products. As a result of the
significant increase in inventory due primarily to the product returns from
Macon described above as well as price decreases due to technological
obsolescence (and anticipated future price decreases) of certain components
associated with the returned equipment, the Company recorded an increase to
its reserve for obsolescence of approximately $400,000 during the quarter
ended December 31, 1997. Through March 31, 1998, approximately $1.1 million
(approximately $705,000 at cost) of the equipment returned from Macon had
been resold by the Company to other customers. The Company anticipates
selling the balance during the next twelve months and expects to recover
the carrying value of the returned equipment.
As a result of Macon's inability to remit timely on its prior obligations
to the Company, the Company anticipates that all future sales to Macon will
be on letter of credit or cash payment-in-full in advance of shipment.
Page 52
<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 766,000 $1,508,000
Work-in process 459,000 1,056,000
Finished goods 3,192,000 1,121,000
----------- ----------
Inventory at cost 4,417,000 3,685,000
Less: Reserve for obsolescence (1,781,000) (964,000)
----------- ----------
$ 2,636,000 $2,721,000
=========== ==========
</TABLE>
4. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Equipment $ 694,000 $1,006,000
Software 75,000 137,000
Furniture and fixtures 33,000 181,000
Leasehold improvements 89,000 74,000
--------- ----------
891,000 1,398,000
Less accumulated depreciation
and amortization (503,000) (747,000)
--------- ----------
$ 388,000 $ 651,000
========= ==========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Accrued payroll and related expenses $ 255,000 $252,000
Accrued bonuses and commissions 17,000 29,000
Accrued dividends on preferred stock 155,000 75,000
Reserve for severance 54,000
Accrued royalties 35,000 35,000
Legal settlement (Note 17B.) 85,000
Legal and accounting 61,000
Interest 52,000
Late penalty-share registration
(Series E Preferred Stock) 106,000
Deferred revenue 100,000 147,000
Accrued warranty expense 15,000 15,000
Other liabilities 193,000 80,000
---------- ----------
$1,074,000 $687,000
========== ==========
</TABLE>
Page 53
<PAGE>
6. LINE OF CREDIT
On June 15, 1998, the Company entered into a conditional commitment letter
with ALCO Financial Services, Inc. ("ALCO") pursuant to which ALCO has
agreed, subject to certain conditions, to provide the Company with a
maximum $750,000 line of credit. Under the proposed terms of the line of
credit, which would remain in effect for a period of one year, the Company
would be able to borrow from ALCO based on eligible U.S. accounts
receivable and inventory, at prime plus seven percent. The line of credit
would also include certain other fees and conditions and would grant ALCO a
blanket lien on all assets of the Company. The line of credit is subject to
a review by ALCO of the Company's inventory and the execution of final
documentation. There can be no assurance that the line of credit will
ultimately be effected.
7. CONVERSION OF UNSECURED DEBT
As of February 1, 1998, the Company entered into a Settlement Agreement
with Vermont Research Products, Inc. ("VRPI"), a major supplier of certain
products (which are resold by the Company), for the conversion of a portion
of the amount owed by the Company to VRPI (approximately $2.04 million at
February 1, 1998) into 945 shares of the Company's Series F Convertible
Redeemable Preferred Stock, $1,000 stated value per share, valued at
$945,000 (the "Series F Preferred Stock") and 400 shares of the Company's
Series G Convertible Preferred Stock, $1,000 stated value per share, valued
at $400,000 (the "Series G Preferred Stock"). The Settlement Agreement also
provided for payment terms with respect to the remaining balance owed to
VRPI (approximately $694,000 at February 1, 1998 (the "Remaining
Balance")). The Company has the option to redeem the Series F Preferred
Stock for a period of 120 days following the Closing Date (expiring on
July 18, 1998) for a total amount equal to the greater of (a) 115% of the
stated value of the Series F Preferred Stock, or (b) 115% of the aggregate
market value of shares of Common Stock into which the shares of Series F
Preferred Stock are convertible plus accrued dividends. As additional
consideration, the Company issued to VRPI a five-year warrant to purchase
285,000 shares of Common Stock at an exercise price of $.35 per share.
Dividends on the Series F Preferred Stock and Series G Preferred Stock are
payable in cash or shares of Common Stock, at the election of the Company,
at the rate of 9.5% per annum. The Series F Preferred Stock is convertible
into shares of Common Stock at any time through January 31, 2003 at a
conversion price equal to the market price at the time of conversion, but
at a conversion price no greater than $.95 per share and no less than $.35
per share. The Series G Preferred Stock is convertible into shares of
Common Stock at a conversion price of $.35 per share. The holders of the
Series F Preferred Stock and Series G Preferred Stock are entitled to equal
preference with holders of the Company's Series D and Series E Preferred
Stock. The Company agreed to use its best efforts to register the shares
issuable upon the conversion of the Series F Preferred Stock and Series G
Preferred Stock and upon the exercise of the warrants, with such
registration statement to be declared effective no later than April 29,
1998 (extended to May 29, 1998 under certain circumstances). As long as any
amounts of Series F Preferred Stock or Series G Preferred Stock remain
outstanding, VRPI shall have the right to approve any preferred stock
offering by the Company which rank equal to or senior to those of VRPI's,
and approve any debt offering contemplated by the Company, except for
commercial bank lines of credit or loans secured by the Company's U.S.
accounts receivable or inventory. Of the remaining balance owed to VRPI
after the conversion of certain amounts into the Series F Preferred Stock
and the Series G Preferred Stock, $274,000 represents equipment warehoused
by VRPI for the Company and is payable to VRPI at the time of shipment to
any customer of the Company. Of the remaining balance owed to VRPI
(approximately $420,000 together with interest at 9.5% effective February
1, 1998), $5,000 was payable upon execution of the Settlement Agreement,
$5,000 was payable on March 1, 1998, $5,000 was payable on April 1, 1998,
and $35,000 per month was payable commencing May 1, 1998. Additionally, the
Company is required to remit 25%
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<PAGE>
of its collections of foreign accounts receivable commencing 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
good inventory) effected by the Company subsequent to February 1, 1998 plus
the sum of $50,000 upon consummation of each of the first two such
financings. The Company also agreed to pay VRPI's expenses in connection
with this transaction.
During the quarter ended December 31, 1997 and in anticipation of entering
into the above agreement, the Company agreed to VRPI's invoicing the
Company $175,000 for interest charges related to its month-end balances
owed to VRPI throughout 1997. The effective rate of interest was
approximately 17%.
Pursuant to the Settlement Agreement, the Company has paid VRPI the sum of
$50,000 (of which $5,000 was paid upon the execution of the Settlement
Agreement, $5,000 paid on March 1, 1998 and April 1, 1998 and $15,000 was
paid on May 1, 1998). Due to the Company's liquidity crisis, no further
payments have been made to VRPI including any amounts owed in connection
with the Company's issuance of Common Stock in March 1998 ($110,000) (See
Note 12) and in connection with the Company's collection of foreign
accounts receivable (approximately $18,000 as of March 31, 1998) .
On June 6, 1998, the Company received written notice from VRPI of VRPI's
decision (which the Company has not agreed to) to surrender its
Series F & Series G Preferred Stock as a result of VRPI's contention that
the Company failed to timely file a registration statement covering the
underlying Common Shares. On June 11, 1998, the Company received a $100,000
loan from VRPI (the "VRPI Loan"). The VRPI Loan provides for interest at
the rate of 15% per annum, is secured by the Company's foreign accounts
receivable and is due on July 11, 1998. During the 30 day period ending
July 11, 1998 (the "Study Period"), VRPI will conduct an examination of the
Company's technology and finances in order to determine if an investment in
the Company is warranted. The VRPI Loan contains certain restrictions,
including, among others, the use of the loan proceeds for only those
expenses necessary to continue the Company's operations during the Study
Period and the Company's agreement not to issue stock or incur debt, except
for the Company's proposed line of credit (described above) with any party
other than VRPI and those persons or entities who choose to participate
with VRPI in connection with any further financing of the Company. VRPI has
informed the Company that it has prepared, but not filed, a lawsuit against
the Company and certain of its officers and directors and has agreed not to
file the complaint during the Study Period. On July 7, 1998 VRPI provided
an additional $100,000 of financing to the Company. No assurances can be
given that VRPI, or any other person or entity, will provide additional
financing to the Company or that VRPI will not take legal action against
the Company.
8. SERIES B PREFERRED STOCK
In March 1996, the Company sold 75 shares of Series B Preferred Stock,
$20,000 stated value per share (the "Series B Preferred Stock"), for gross
proceeds of $1,500,000. Offering costs of $206,000, consisting of finders'
fees, legal fees, accounting fees, listing fees and registration costs,
were incurred by the Company. Dividends were payable in cash or Common
Stock, at the option of the Company, at a rate of 6% per annum. The shares
were convertible into Common Stock with a conversion price equal to the
lesser of the average closing bid price for the five trading days prior to
the date of sale or 75%
Page 55
<PAGE>
of the average closing bid price for the five trading days prior to the
date of conversion or redemption. As a result of this beneficial conversion
feature, $375,000 was charged to additional paid-in capital and reflected
as a preferred stock dividend during fiscal 1997. During fiscal 1997, the
holders of the Series B Preferred Stock converted all of the outstanding
shares into 1,024,768 shares of Common Stock. The Company paid dividends of
$10,000 and 15,535 shares of Common Stock related to the Series B Preferred
Stock.
9. SERIES C PREFERRED STOCK
In May 1996, the Company sold 75 shares of Series C Preferred Stock,
$20,000 stated value per share (the "Series C Preferred Stock"), for gross
proceeds of $1,500,000. Offering costs of $175,000, consisting of finders'
fees, legal fees, accounting fees, listing fees and registration costs,
were incurred by the Company. Dividends were payable in cash or Common
Stock, at the option of the Company, at a rate of 6% per annum. The shares
were convertible into Common Stock with a conversion price equal to the
lesser of the average closing bid price for the five trading days prior to
the date of sale or 75% of the average closing bid price for the five
trading days prior to the date of conversion or redemption. As a result of
this beneficial conversion feature, $375,000 was charged to additional
paid-in capital and reflected as a preferred stock dividend during fiscal
1997. During fiscal 1997, the holders of the Series C Preferred Stock
converted all of the outstanding shares into 907,098 shares of Common
Stock. The Company paid dividends of 22,506 shares of Common Stock related
to the Series C Preferred Stock.
10. SERIES D PREFERRED STOCK AND CONVERTIBLE SUBORDINATED DEBT
In December 1996, the Company sold 2,496 shares of Series D Voting
Convertible Preferred Stock, $1,000 stated value per share (the "Series D
Preferred Stock") and warrants to purchase 400,000 shares of Common Stock
(the "Warrants"), for gross proceeds of $2,500,000. Offering costs of
$178,000, consisting of cash finders' fees, warrants issued as finders'
fees, legal fees, accounting fees, listing fees and registration costs,
were incurred by the Company. Dividends are payable in cash or Common
Stock, at the option of the Company, at a rate of 10% per annum. The Series
D Preferred Stock is also convertible at the election of the holders into
shares of Common Stock during the one-year period commencing on December
14, 1997. The actual number of shares of Common Stock into which the Series
D Preferred Stock and any dividends that are payable in shares of Common
Stock are convertible is variable, with the conversion value of the shares
being equal to the market price of the Common Stock (determined based on
the closing sale price of the Common Stock for the ten trading days
preceding the date of conversion). The conversion value of the Common Stock
has a cap of $4.50 per share and, commencing on December 14, 1997, has a
floor of $1.50 per share. The Company has agreed to register the shares
issuable upon conversion of Series D Preferred Stock or upon exercise of
the Warrants. The purchasers of the Series D Preferred Stock have voting
rights for each share of the Series D Preferred Stock outstanding
equivalent to that of 380 shares of Common Stock. Holders of the Series D
Preferred Stock also have the right to elect a majority of the Company's
directors in the event of default by the Company in the payment of
dividends on the Series D Preferred Stock or upon certain other defined
events of default.
On September 11, 1997, the Company, together with a majority of its Board
of Directors, were sued by The High View Fund and The High View Fund, L.P.
(collectively, "High View"), holders of 2,496 shares of the Company's
Series D
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<PAGE>
Preferred Stock and lenders of a $350,000 convertible subordinated loan
made to the Company in May 1997 (the "$350,000 Loan"). The lawsuits, filed
in U.S. Federal District Court, Southern District of New York and in the
State Court of New York, sought damages from the defendants for alleged
wrongful actions relating to securities fraud and not informing High View
regarding the extent of the Company's financial problems.
On September 25, 1997, the parties entered into settlement agreements
(comprised principally of a Stock Exchange Agreement, Registration Rights
and Lock-up Agreement and Warrant Agreements; collectively, the "Settlement
Agreements") related to both cases whereby High View agreed to exchange
their 2,496 shares of Series D Preferred Stock (representing the entire
Series D Preferred Stock issued by the Company) for a total of 2,000,000
shares of the Company's Common Stock and to convert the $350,000 Loan, plus
$15,173 of accrued interest thereon, into 292,138 shares of the Company's
Common Stock (the "Exchange Transaction"). The Exchange Transaction also
included the exchange of High View's warrants to purchase 400,000 shares of
Common Stock, exercisable at $3.125 per share (the "Old Warrants"), issued
to High View in connection with the issuance of the Series D Preferred
Stock in exchange for warrants to purchase 1,000,000 shares of the
Company's Common Stock at an exercise price of $1.75 per share. The
Settlement Agreements also required the Company to reimburse High View in
the amount of $15,000 for legal expenses incurred in connection with the
settlement.
During December 1997, High View alleged in a draft complaint (which was not
filed) that the Company and its directors fraudulently induced High View to
enter into the Exchange Transaction. On December 31, 1997, the Company
terminated and cancelled the Exchange Transaction effective as of September
25, 1997 pursuant to an agreement with High View and certain of its
affiliates (the "High View Group") dated December 30, 1997 (the "New
Agreement"). Pursuant to the New Agreement, the Settlement Agreements
entered into in connection with the Exchange Transaction were terminated
and cancelled and all transactions purported to be effected pursuant to the
Settlement Agreements were rescinded. As a result of the cancellation, (i)
High View continues to hold the Series D Preferred Stock and the Old
Warrants that were issued by the Company in December 1996; (ii) High View
continues to be the payee of the $350,000 Loan; and (iii) the Stock
Purchase Agreement by and among the Company and High View dated December 9,
1996 continues to be in full force and effect.
In addition, pursuant to the New Agreement, the High View Group made
additional loans to the Company in the amount of $540,000 (the "Additional
Loans") to help the Company meet its working capital shortfall. The
Additional Loans are evidenced by 9.5% convertible subordinated notes in
the aggregate principal amount of $540,000 (the "Additional Notes"). In
connection with the issuance of the Additional Notes, the Company also
issued to the High View Group warrants to purchase an aggregate of 150,000
shares of Common Stock (the "Additional Warrants"). The Additional Notes
mature on January 1, 1999 and bear interest on the outstanding principal
amount at the rate of 9.5% per annum, payable semiannually in cash or
shares of Common Stock at the election of the Company. The Additional
Notes are convertible into shares of Common Stock, at the election of the
holder, at a conversion price equal to the greater of (i) $0.35 or (ii) 75%
of the average market price of the Common Stock during the ten trading days
preceding the conversion date, subject to a maximum conversion price of
$0.95. Payment of the Additional Notes is subordinated to the prior
payment of indebtedness the Company may from time to time owe to any bank
or other financial
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<PAGE>
institution (but excluding trade creditors). The Additional Warrants expire
on December 13, 2001 and have an exercise price of $0.375 per share.
Pursuant to the New Agreement, the $350,000 Loan was evidenced by
convertible subordinated notes having terms substantially the same as the
terms of the Additional Notes. The Company has agreed to register the
shares of Common Stock issuable upon conversion of the Additional Loans,
the $350,000 Loan, and upon exercise of the Additional Warrants. Under the
terms of the New Agreement, High View released the Company and its officers
and directors from any claims that they might have arisen from the Exchange
Transaction contemplated by the Settlement Agreements. The New Agreement
also required the Company to reimburse High View in the amount of $40,000
for legal expenses incurred in connection with the settlement.
11. SERIES E CONVERTIBLE REDEEMABLE PREFERRED STOCK
On September 26, 1997, the Company entered into Stock Purchase Agreements
(the "Agreements") whereby the Company agreed to sell to two accredited
investors up to 1,700 shares of Series E Convertible Redeemable Preferred
Stock, $1,000 stated value per share (the "Series E Preferred Stock"), and
warrants to purchase 432,727 shares of Common Stock at a price of $1.25 per
share (the "Series E Warrants"). Pursuant to the Agreements, a total of
1,100 shares of Series E Preferred Stock and 254,545 of the Series E
Warrants were sold by the Company on September 26, 1997 for gross proceeds
of $1,100,000. The sale of the Series E Preferred Stock and the Series E
Warrants were exempt from the registration requirements of the Securities
Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.
The Company received various representations and warranties from the
investors, including a representation that the investors are "accredited
investors" within the meaning of Regulation D. Offering costs of $163,000,
consisting primarily of cash finders' fees and legal fees, were incurred by
the Company. Dividends on the Series E Preferred Stock are payable in cash
or Common Stock, at the option of the Company, at a rate of 8% per annum.
The sale of the additional 600 shares of Series E Preferred Stock and
178,182 Series E Warrants ($600,000 of gross offering proceeds) is
scheduled to occur within five days following the Company's satisfaction of
certain conditions which include, among others, a registration statement
covering the sale of the shares issuable upon conversion of the Series E
Preferred Stock and upon the exercise of the Series E Warrants is declared
effective; the market price of the Company's Common Stock for the ten
trading days preceding the additional closing date exceeds $1.00 per share;
and the funding from a strategic investor of at least $1,000,000 from the
sale of equity securities of the Company. One-half of the Series E
Preferred Stock is convertible at the election of the holder into shares of
the Company's Common Stock commencing on the 51st day after the closing
date and all of the Series E Preferred Stock is convertible commencing on
the 91st day after such closing date. The conversion value to determine
the number of shares of Common Stock into which the Series E Preferred
Stock is convertible is the lesser of $1.375 or 75% of the average of the
closing bid prices of the Common Stock during the five trading days
immediately preceding the conversion date. The Series E Warrants are
exercisable for five years commencing January 1, 1998. The Company has
agreed to register the shares issuable upon the conversion of the Series E
Preferred Stock and upon the exercise of the Series E Warrants. The
Registration Rights Agreement provides that in the event the registration
statement is not declared effective on or before December 25, 1997, the
Company shall pay the investors, on January 24, 1998 and on each successive
date which is 30 days after the previous payment date (pro rated for
partial periods) until such registration statement is declared effective,
payments in the amount of 3% of the purchase price of outstanding Series E
Preferred Stock
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<PAGE>
($1,100,000), in cash or shares of the Company's Common Stock at the
election of the investor. As of March 31, 1998, such registration statement
has not yet been filed, and the Company owed such investors payments in the
amount of $105,600.
The Series E Preferred Stock is subject to both a mandatory and voluntary
redemption. If on September 1, 1998 the resale of all of the shares of
Common Stock issuable upon conversion of the then outstanding shares of
Series E Preferred Stock is not at that time duly registered as described
above, the Company, at the demand of any investor, shall redeem such
investor's shares of Series E Preferred Stock for total amount equal to the
market price times the number of shares of Common stock into which such
shares of Series E Preferred Stock are convertible on the date of such
demand, and shall also pay accrued dividends on such shares of Series E
Preferred Stock, whether or not declared, to the redemption date.
Shares of the Series E Preferred Stock may also be redeemed, at the option
of the Company in whole or in part, upon fifteen days written notice, at
any time after the later of January 31, 1998 or 50 days after the effective
date of the registration statement described above, for a total amount
equal to 133% of the stated value of Series E Preferred Stock, and shall
also pay accrued dividends on such shares of Series E Preferred Stock,
whether or not declared, to the redemption date. In case of the redemption
of a part only of the outstanding shares of Series E Preferred Stock, the
shares to be redeemed shall be selected pro rata from each record holder of
such shares. During the first ten business days of such fifteen-day
period, each record holder of shares of the Series E Preferred Stock shall
have the right to convert such shares as provided above.
No assurance can be given that the Company will be able to satisfactorily
meet the conditions required for the sale of the additional 600 shares of
Series E Preferred Stock.
12. COMMON STOCK
During March 1998, the Company completed a sale of 809,523 shares of Common
Stock to an accredited investor at an average price of $0.37 per share
($300,000 of proceeds in the aggregate).
13. STOCK OPTIONS AND WARRANTS
Stock Options
-------------
The Company applies APB Opinion 25 in accounting for its Stock Options
Plans (the "Plans"). Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net loss would have increased to the pro forma amounts
indicated below.
Page 59
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
Net loss As reported $(7,773,000) $(4,601,000) $(1,968,000)
per share $ (0.84) $ (0.61) $ (0.26)
Pro Forma $(8,496,000) $(5,315,000) $(2,546,000)
per share $ (0.91) $ (0.69) $ (0.34)
</TABLE>
The Company had an incentive stock option plan that expired in April 1995
(the "1985 Plan"), under which options to purchase 400,000 shares of Common
Stock could be granted to officers and employees. Options granted were at
100% of the estimated fair market value on the dates of grant. On November
22, 1994, the shareholders of the Company approved and adopted the
Company's 1994 Stock Option Plan (the "1994 Plan") to replace the expiring
1985 Plan. Under the 1994 Plan, options to purchase up to 2,000,000 shares
of Common Stock may be granted to officers, employees, directors and
consultants of the Company. On February 8, 1996, and on November 21, 1996
the shareholders of the Company approved and adopted amendments to the 1994
Plan, which revised the provision for the granting of formula options to
non-employee directors of the Company. A summary of the status of the
Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
Fiscal Years Ending March 31,
------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 1,244,350 $2.26 1,003,600 $2.22 339,100 $2.30
beginning of year
Granted 1,859,483 $0.64 392,500 $2.33 798,750 $2.19
Exercised 2,000 $0.45
Lapsed or canceled (1,112,350) $2.06 (151,750) $2.20 (132,250) $2.27
---------- --------- ---------
Outstanding at year end 1,991,483 $0.86 1,244,350 $2.26 1,003,600 $2.22
========== ========= =========
Options exercisable at
year end 1,069,483 803,100 459,600
Options available for
future grant 8,517 755,650 996,400
Weighted average fair
value of options
granted during the year $1.82 $1.98 $0.41
</TABLE>
The following table presents summarized information about stock options
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Outstanding Exercise
Range of Exercise Price at 3/31/98 Life Price at 3/31/98 Price
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.38 - $.99 1,471,150 9.92 $0.40 549,150 $0.40
$1.00-$1.99 193,333 2.80 1.75 193,333 1.75
$2.00-$2.99 309,500 7.59 2.34 309,500 2.34
$3.00-$3.99 12,500 0.43 3.49 12,500 3.49
$4.00-$4.03 5,000 7.00 4.03 5,000 4.03
--------- ---------
1,991,483 8.80 0.86 1,069,483 1.26
========= =========
</TABLE>
The fair value of the options granted during the years ended March 31,
1998, 1997 and 1996 was estimated using the Black-Scholes option pricing
model based on groups of
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<PAGE>
options with identical terms (including actual contractual lives ranging
from 3 to 10 years) assuming a volatility rates ranging from of 93% and
117% and zero dividend yield, and a discount rate of 5.6 to 6.7%.
At March 31, 1998, no options were outstanding under the 1985 Plan.
During February 1998, the Company cancelled and re-issued 414,400 stock
options at an exercise price of $0.40 per share under the 1994 Plan.
Exercise prices of the cancelled options ranged from $1.25 per share to
$5.00 per share. Of the 414,400 re-issued stock options, 56,400 options
became exercisable immediately. Of the balance of the re-issued options
(358,000), one-third vested at date of issuance, one-third on the first
anniversary of the date of grant, and one-third on the second anniversary
of the date of grant. Of the remaining options granted during fiscal 1998
(1,056,750), 31,750 options became exercisable immediately. Of the balance
of these options (1,025,000), one-third vested at date of issuance, one-
third on the first anniversary of the date of grant, and one-third on the
second anniversary of the date of grant. All options granted during fiscal
1998 expire ten years from date of grant.
Pursuant to a provision contained in the Series D Preferred Stock purchase
agreement, certain of the options which were granted during fiscal 1998
are subject to the approval by the holders of the Series D Preferred Stock.
As of March 31, 1998, the Company has not received such approval from the
holders of the Series D Preferred Stock.
All outstanding options under the 1994 Plan expire between three and ten
years from the date of grant. Pursuant to the terms of the 1994 Plan, the
options granted to employees have an exercise price equal to the market
value of the Common Stock on the date of grant. Accordingly, no
compensation expense was recorded with respect to the granting of employee
options.
Pursuant to the terms of a settlement agreement, the Company, during
February 1998, issued 200,000 non-qualified stock options at an exercise
price of $0.50 per share. The non-qualified stock option is fully
exercisable and expires three years from date of grant (see Note 17 B.)
In August 1994, the Company extended the exercise terms of 744,000 non-
qualified options (which consisted of 44,000 options granted to directors
in fiscal 1992 for service on the Board of Directors, 400,000 options
granted to officers of the Company in fiscal 1992 pursuant to the terms of
their employment agreements, and 300,000 options that were granted to
directors in fiscal 1991 in connection with loan guarantees) to expire at a
date ten years from the original grant date. All of the options were
originally granted to directors and officers, some of whom are major
shareholders, of the Company prior to the end of fiscal 1992 and have an
exercise price of $0.60 per share. All of the 744,000 options are
exercisable as of March 31, 1998 of which 700,000 expire on January 31,
2002 and 44,000 expire on March 31, 2003.
In fiscal 1993, the Company granted options to purchase 30,000 shares of
Common Stock to a consultant, which were exercisable at a price of $1.25
per share. On April 15, 1996, the consultant exercised all of the options.
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<PAGE>
Stock Purchase Warrants
-----------------------
In connection with the private placement of Series E Preferred Stock, the
Company issued warrants to purchase 254,545 shares of Common Stock at a
price of $1.25 per share. The foregoing warrants expire on December 31,
2002.
During fiscal 1998, the Company issued warrants to purchase 20,000 shares
of Common Stock at a price of $1.375 per share, to Troy & Gould
Professional Corporation, the Company's principal law firm, in
consideration of extending credit to the Company in connection with
rendering legal services. The foregoing warrants expire on November 19,
2000.
In connection with the issuance of the $890,000 in convertible subordinated
notes during fiscal 1998, the Company issued warrants to purchase 150,000
shares of Common Stock at a price of $0.375 per share. The foregoing
warrants expire on December 13, 2001.
In connection with the issuance of the Series F Preferred Stock and Series
G Preferred Stock, the Company issued warrants to purchase 285,000 shares
of Common Stock at a price of $0.35 per share. The foregoing warrants
expire on January 31, 2003.
In connection with the private placement of Series D Preferred Stock in
December 1996, the Company issued warrants to purchase 400,000 shares of
Common Stock at a price of $3.125 per share and the Company issued warrants
to purchase 100,000 shares of Common Stock at a price of $3.125 per share
pursuant to a finders' fee agreement. All of the foregoing warrants expire
on December 13, 2001.
In connection with the private placement of Series C Preferred Stock, the
Company issued warrants to purchase 30,000 shares of Common Stock at a
price of $3.00 per share pursuant to a finders' fee agreement The warrants
expire on May 31, 2000.
From December 1994 through March 1995, the Company sold units consisting of
Common Stock and warrants through a private placement. In conjunction with
this offering, warrants to purchase 1,877,500 shares at an exercise price
of $3.00 per share were issued. The warrants which originally expired on
December 31, 1997, were extended (during November 1997) to December 31,
1998, and may be called by the Company if certain conditions are met in the
future. The warrants become callable by the Company after the Common Stock
underlying the warrants is registered and the Common Stock has had a
closing bid price of at least $3.60 for the most recent ten consecutive
trading days. In May 1996, a private placement of preferred stock by the
Company caused the exercise price and the number of shares subject to such
warrants to be adjusted pursuant to the antidilution provisions contained
in the warrant agreements. The adjustments increased the number of shares
subject to the warrants to 2,011,604 and decreased the exercise price to
$2.80 per share. Subsequent to the adjustment pursuant to the antidilution
provisions, 290,356 warrants were exercised.
In fiscal 1992, the Company issued warrants to purchase 625,000 shares of
Common Stock at $0.80 per share in connection with the private placement of
1,250,000 shares of Common Stock. The warrants expire on March 5, 1999.
In May 1996, a private placement of preferred stock by the Company caused
the exercise price and the number of shares subject to such warrants to be
adjusted pursuant to the antidilution provisions contained in the warrant
agreements. The adjustments increased the number of shares subject to the
warrants to 666,667 and decreased the exercise price to $0.75 per share.
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<PAGE>
14. SEVERANCE EXPENSE
A. During fiscal 1998, the Company recorded severance expense of $100,000
related to the payments that the Company has agreed to pay to a former
executive officer of the Company pursuant to the remaining terms of his
employment contract. There were no terminations during fiscal 1997 that
involved similar agreements.
B. During the fourth quarter of fiscal 1996, the Company recorded severance
expense in the amount of $322,000 relating to a change in the executive
officers of the Company. The amount charged as severance expense relates to
the required payments remaining on the contracts of the former executive
officers of the Company.
15. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 0 $ 0 $ 0
State 1,000 0 4,000
------ ----- ------
Total current 1,000 0 4,000
------ ----- ------
Deferred:
Federal 0 0 0
State 0 0 0
------ ----- ------
Total deferred 0 0 0
------ ----- ------
Total income tax expense $1,000 $ 0 $4,000
====== ===== ======
</TABLE>
The reasons for the differences between income tax expense and the amount
computed by applying the federal statutory income tax rate to income before
income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Tax expense at federal
statutory rate 35% 35% 35%
State franchise tax, net of
federal income tax benefit 7 7 7
Extension of stock options
Addition of deferred income tax asset
valuation reserves (42) (42) (42)
Other
------ ----- ------
Actual tax expense 0% 0% 0%
====== ===== ======
</TABLE>
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<PAGE>
The components of deferred income tax assets (liabilities) at March 31
are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Deductible:
Net operating loss carryforward $5,870,000 $2,498,000
Alternative minimum tax credits 21,000 21,000
Uniform capitalization rules 33,000 33,000
Reserve for bad debts 17,000 37,000
Inventory reserves 605,000 328,000
Vacation accrual 28,000 29,000
Warranty reserves 5,000 5,000
State taxes (net of federal taxes) 717,000 479,000
--------------- -------------
$7,296,000 $3,430,000
=============== =============
1997
----------
Taxable:
Depreciation $ (43,000) $ (9,000)
State taxes (net of federal taxes) (11,000) (2,000)
---------- ----------
$ (54,000) $ (11,000)
========== ==========
</TABLE>
The net deferred tax asset at March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Deferred tax assets $ 7,296,000 $ 3,430,000
Deferred tax liabilities (54,000) (11,000)
---------------- ----------------
7,242,000 3,419,000
Valuation allowance (7,242,000) (3,419,000)
---------------- ----------------
$ 0 $ 0
================ ================
</TABLE>
The deferred tax asset valuation allowance increased $3,823,000, $1,855,000
and $761,000 in the fiscal years ended March 31, 1998, 1997 and 1996,
respectively.
At March 31, 1998, the Company had net operating loss carryforwards of
approximately $17,266,000 and $5,935,000 for federal income tax and state
franchise tax purposes, respectively. The federal net operating loss
carryforwards expire in the fiscal years ending March 31, 2005 through
2013, and state net operating loss carryforwards expire in the fiscal years
ending March 31, 1998 through 2003.
16. RELATED PARTY TRANSACTIONS
A. The Assistant Secretary of the Company is also a shareholder of a law
firm that provides legal consultation to the Company. At March 31,1998 and
1997, the Company owed this law firm $12,000 and $3,000, respectively.
During the years ended March 31, 1998 and 1997, fees relating to services
provided by this law firm in the amounts of $41,000 and $74,000,
respectively, were included in general and administrative expenses in the
accompanying statements of operations.
Page 64
<PAGE>
B. During fiscal 1998, the Company paid a finder's fee of $110,000 to
Maximum Partners, Ltd. ("Maximum"), an investment banking firm, in
connection with the Company's Series E Preferred Stock financing. Mark D.
Lubash, Managing Director of Maximum, is a shareholder of the Company and
son of A. Charles Lubash, a member of the Company's Board of Directors and
former Chief Executive Officer of the Company. During fiscal 1996, the
Company paid Maximum a finder's fee in the amount of $150,000 related to
the placement of the Series B Preferred Stock. In fiscal 1997, Maximum
received $150,000 and warrants to purchase 30,000 shares of Common Stock at
an exercise price of $3.00 per share as a finder's fee for the placement of
the Series C Preferred Stock.
17. COMMITMENTS AND CONTINGENCIES
A. The Company leases its primary operating facility in Chatsworth,
California under an operating lease expiring on November 30, 1998. The
Company leases sales offices in Ottawa, Canada which expires on October 31,
1998 and a vehicle and certain equipment under capital lease agreements
that expire at various times during the fiscal year ending March 31, 2000.
Rent expense under such lease agreements in fiscal years 1998, 1997 and
1996 was $137,000, $172,000 and $153,000, respectively.
The Company has financed the purchase of office equipment through capital
lease agreements. The obligations are collateralized by the leased
equipment, which had a net book value of $30,000 and $41,000 at March 31,
1998 and 1997, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending Operating Capital
March 31, Leases Leases
------------------------ -------------------------- ----------------
<S> <C> <C> <C>
1999 $101,000 $22,000
2000 0 10,000
2001 0 6,000
-------------------------- ----------------
$101,000 38,000
==========================
Less interest 1,000
Less current portion 15,000
----------------
$22,000
================
</TABLE>
B. On January 15, 1998, the Company was sued by Strategic Growth
International, Inc. ("SGI"), an investor relations consulting firm. The
lawsuit, filed in U.S. Federal District Court, Central District of
California, sought damages from the Company for the balance of certain
finder's fees ($191,500) alleged by SGI to be owed by the Company to SGI in
connection with the Company's financings from The High View Fund and The
High View Fund, L.P. and for amounts alleged by SGI to be owed to SGI for
consulting services ($75,841) and the economic value of stock options for
66,666 shares of the Company's Common Stock that SGI was to receive in
connection with SGI's consulting services. SGI also sought reimbursement
for its legal fees in connection with the lawsuit and obtained an
attachment order against certain of the Company's assets in connection with
this lawsuit. As of March 31, 1998, the parties agreed to settle the
lawsuit. The
Page 65
<PAGE>
terms of the settlement included the Company's issuance to SGI of 800,000
shares of Common Stock, the granting to SGI of options to purchase 200,000
shares of the Company's Common Stock at an exercise price of $.50 per share
(the closing bid price on February 5, 1998), the payment of $10,000 for
SGI's legal fees, and the payment of $100,000 in cash to SGI, $25,000 of
which was paid by the Company on February 9, 1998, with the balance
($75,000) payable in equal consecutive monthly installments of $15,000,
beginning April 9, 1998. The Company has agreed to register the foregoing
shares under the Securities Act of 1933, including shares issuable upon the
exercise of the stock options.
As a result of the settlement, the Company recorded a charge to general and
administrative expenses of approximately $567,000 (of which approximately
$67,000 is attributable to the value of the options issued to SGI) for the
estimated value of the settlement, during the quarter ending March 31,
1998.
C. As a result of the Company's continuing liquidity problems during fiscal
1998, the Company has been sued for non-payment by several suppliers of
products and services, and numerous other vendors have forwarded their
accounts with the Company to collection agencies. To date, the Company has
been successful in settling certain of these complaints whereby the vendors
have agreed to accept a substantial discount to the balance owed of at
least 40%, and allowing the Company a payment moratorium (typically two
months), and to accept payment of the restated debt over an extended period
of time. From January 1, 1998 through June 20, 1998, the Company had
settled seven lawsuits with its suppliers and vendors involving alleged
non-payment in an aggregate amount of approximately $352,000. In the event
the Company is unable to timely meet its payment obligations of these
restated debts, any discounts afforded the Company to date would be
cancelled and the original amount would be reinstated (less any payments
made by the Company). The Company has continued to purchase from
substantially all of its suppliers during its liquidity crisis, including
those who have initiated lawsuits for non-payment, provided that the
Company pay for products and services at time of receipt by the Company.
D. One of the Company's suppliers recently 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 a 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.
18. YEAR-END ADJUSTMENTS
The Company increased its reserve for inventory obsolescence by $1,100,000
during the fourth quarter ended March 31, 1998.
Page 66
<PAGE>
EXHIBIT 3.13
CERTIFICATE OF DETERMINATION
OF
CHATCOM, INC.
A CALIFORNIA CORPORATION
The undersigned, Richard F. Gordon, Jr. and James R. Spievak, hereby
certify that:
a. They are the duly elected and acting Chairman of the Board and
Assistant Secretary, respectively, of ChatCom, Inc., a California corporation
(the "Company").
b. The number of shares of Series F Convertible Redeemable Preferred
Stock of the Company is 2,000, of which no shares have been issued.
c. Pursuant to authority given by the Company's Articles of Incorporation,
as amended, the Board of Directors of the Company has duly adopted the following
recitals and resolutions:
WHEREAS, the Articles of Incorporation, as amended, of the Company provide
for a class of shares known as Preferred Stock, issuable from time to time in
one or more series; and
WHEREAS, the Board of Directors of the Company is authorized to determine
or alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock, to fix the number
of shares constituting any such series and to determine the designation thereof,
or any of them.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes
and determines the designation of, the number of shares constituting, and the
rights, preferences, privileges and restrictions relating to, a series of
Preferred Stock as follows:
1. Designation of Series; Rank of Series. The designation of such
-------------------------------------
series of Preferred Stock is Series F Convertible Redeemable Preferred Stock
("Series F Preferred Stock"). The number of shares constituting such series is
2,000, with a stated value of $1,000 per share. Shares of Series F Preferred
Stock converted, redeemed or purchased by the Company shall be canceled and
shall revert to authorized but unissued shares of Preferred Stock undesignated
as to series. Shares of the Series F Preferred Stock shall rank pari passu and
share in dividends and other distributions on a pro rata basis with the Series D
Convertible Preferred Stock, the
<PAGE>
Series E Convertible Redeemable Preferred Stock and with shares of any other
series of preferred stock hereafter issued by the Company with substantially
equivalent rights, preferences, privileges and restrictions as those of this
Series.
2. Dividends. Each holder of the outstanding Series F Preferred Stock
---------
shall be entitled to receive, in cash or shares of the Company's Common Stock
("Common Stock"), at the Company's option, cumulative dividends at the annual
rate of 9.5% of the stated value of the Series F Preferred Stock per share of
Series F Preferred Stock, payable semiannually on January 31 and July 31 of each
year after the Closing Date (as defined below) on which such shares were issued,
without any further action or declaration by the Company's Board of Directors or
shareholders of the Company, out of funds legally available therefor. Such
dividends shall be cumulative so that if such dividends shall not have been
declared and paid for all shares of Series F Preferred Stock at the time
outstanding, the deficiency shall be declared and paid for such shares before
the Company makes any Distribution (as hereinafter defined) to the holders of
Common Stock or Preferred Stock of any other series junior to the Series F
Preferred Stock. Accrued but unpaid dividends shall not bear interest.
"Distribution" in this paragraph 2 means the transfer of cash or property
without consideration, whether by way of dividend or otherwise (except a
dividend in shares of the Company) or the purchase or redemption of shares of
the Company for cash or property (except for shares acquired by the Company from
employees, officers or directors of the Company pursuant to the terms of any
employee incentive plan, agreement or arrangement of the Company existing as of
the Closing Date (as defined below), or a redemption of shares of the Company
for cash to the extent required to avoid loss of tax net operating loss
carryovers pursuant to Section 382 of the Internal Revenue Code of 1986, as
amended) including any such transfer, purchase or redemption by a subsidiary of
the Company. The time of any distribution by way of dividend shall be the date
of declaration thereof and the time of any distribution by purchase or
redemption of shares shall be the day cash or property is transferred by the
Company, whether or not pursuant to a contract of an earlier date; provided that
where a negotiable debt security is issued in exchange for shares the time of
the distribution is the date when the Company acquires the shares in such
exchange. The Board of Directors may fix a record date for the determination of
holders of Series F Preferred Stock entitled to receive payment of a dividend
declared thereon, which record date shall be no more than sixty (60) days prior
to the date fixed for the payment thereof. Upon notice of conversion or
redemption, if not previously declared, the Board of Directors shall declare,
out of funds legally available therefor, dividends on the Series F Preferred
Stock in shares of Common Stock, or at the Company's option if permitted by law,
in
2.
<PAGE>
cash, at the annual rate of 9.5% of the stated value of the Series F Preferred
Stock from the date of issuance to the date of conversion or redemption of such
shares of Series F Preferred Stock. If upon redemption or conversion of shares
of Series F Preferred Stock the Company elects to pay accrued dividends on such
shares in shares of Common Stock, the number of shares of Common Stock shall be
determined by dividing the amount of such accrued dividends as of the redemption
date or the Conversion Date (as defined below) by the Conversion Price (as
defined below) on the applicable redemption date or Conversion Date.
3. Voting Rights. The holders of Series F Preferred Stock shall not be
-------------
entitled to vote upon any matters presented to the shareholders, except as
provided by law and except that without the approval of holders of a majority of
the outstanding shares of Series F Preferred Stock, the Company shall not (a)
authorize, create or issue any shares of any class or series ranking senior to
the Series F Preferred Stock as to liquidation rights, (b) amend, alter or
repeal, by any means, the Articles of Incorporation if the powers, preferences,
or special rights of the Series F Preferred Stock would be adversely affected,
or (c) become subject to any restriction on the Series F Preferred Stock, other
than restrictions arising under the General Corporation Law of the State of
California or existing under the Articles of Incorporation as in effect on the
Closing Date (as defined below); provided, however, that the creation of
additional series of Preferred Stock with substantially equivalent rights,
preferences, privileges and restrictions as those of this Series F Preferred
Stock shall not be a violation of this Section 3.
4. Liquidation, Dissolution or Winding Up. In the event of a voluntary
--------------------------------------
or involuntary liquidation, dissolution or winding up of the Company, the
holders of Series F Preferred Stock shall be entitled to receive out of the
assets of the Company, whether such assets are capital or surplus of any nature,
an amount per share of Series F Preferred Stock equal to the stated value of
such share of Series F Preferred Stock and a further amount equal to any
dividends accrued and unpaid thereon, as provided in paragraph 2 hereof, to the
date that payment is made available to the holders of Series F Preferred Stock,
whether earned or declared or not, and no more, before any payment shall be made
or any assets distributed to the holders of shares of stock of the Company
junior in rank to the Series F Preferred Stock.
If upon such liquidation, dissolution or winding up, the assets thus
distributed among the holders of the Series F Preferred Stock and other series
of preferred stock that upon liquidation, dissolution or winding up share pari
passu with the Series F Preferred Stock shall be insufficient to permit the
payment to all such holders of the full preferential
3.
<PAGE>
amounts aforesaid, then the entire assets of the Company to be distributed shall
be distributed ratably among the holders of Series F Preferred Stock and such
other series of Preferred Stock.
A consolidation or merger of the Company with or into any other corporation
or corporations, or a sale of all or substantially all of the assets of the
Company, shall not be deemed to be a liquidation, dissolution or winding up
within the meaning of this paragraph 4.
5. Conversion Rights. Each holder of Series F Preferred Stock shall have
-----------------
the right, exercisable at the option of such holder at any time after the
Closing Date through and including January 31, 2003, to convert, subject to the
terms and provisions set forth herein, all or any portion of the outstanding
shares of Series F Preferred Stock into duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock at the Conversion Price (as
defined below) on the applicable Conversion Date (as defined below). The date
the shares of Series F Preferred Stock is issued is herein referred to as the
"Closing Date."
The Company shall have the right to redeem the Series F Preferred Stock, in
whole or in part, as provided in paragraph 12.
6. Conversion Price. The "Conversion Price" shall be the average of the
----------------
"Market Prices" (as defined below) for the five consecutive trading days
immediately preceding the Conversion Date (as defined below); provided, however,
that, in no event shall the Conversion Price be less than $0.35 (the "Floor
Price") or greater than $0.95 (the "Cap Price"), which Floor Price and Cap Price
shall be subject to further adjustments as set forth in paragraph 8. The
"Market Price" on any date shall be the last sale price of the Common Stock (or
if such information is not provided by such exchange or the National Association
of Securities Dealers, Inc. Automated Quotation System, the average of the
closing bid and asked prices of the Common Stock) as reported on the principal
national securities exchange on which the Common Stock of the Company is listed
or admitted to trading, or if the Common Stock of the Company is not listed or
admitted to trading on any national securities exchange, as furnished by the
National Association of Securities Dealers, Inc. Automated Quotation System, or
comparable system, or in the absence of the foregoing, the fair market value as
reasonably determined by the Board of Directors of the Company and the holders
of the Series F Preferred Stock.
7. Conversion Procedure. The holder of any shares of the Series F
--------------------
Preferred Stock may exercise its rights to convert all or any portion of such
shares into shares of Common Stock by surrendering the share certificates for
the Series F Preferred Stock to be converted to the Company, at its principal
office or at such other office or agency
4.
<PAGE>
maintained by the Company for that purpose, accompanied or preceded by a written
notice of the holder's election to convert such shares, or a specified portion
of such shares (as provided in the notice, but for not less than $50,000
aggregate stated value of Series F Preferred Stock), executed by such holder,
which notice shall specify a Conversion Date and accompanied, if required by the
Company, by proper assignment in blank. The date specified in any conversion
notice delivered by any holder of the Series F Preferred Stock, which date shall
be no earlier than the date of actual delivery of such notice, shall be defined
as the "Conversion Date," provided share certificates are delivered within three
business days to the Company or its transfer agent.
As promptly as practicable after the surrender as herein provided of a
certificate evidencing shares of Series F Preferred Stock for conversion, the
Company shall deliver or cause to be delivered to or upon the written order of
the holder of the certificate evidencing the Series F Preferred Stock so
surrendered certificates representing the number of fully paid and nonassessable
shares of Common Stock into which the Series F Preferred Stock, or such portion
thereof, may be converted in accordance with the provisions herein. Such number
shall be determined by dividing the product of $1,000 times the number of shares
of Series F Preferred Stock to be converted (plus any unpaid dividends on such
shares of Series F Preferred Stock to be converted accrued from the next
preceding dividend payment date, if such dividends are to be paid in shares of
Common Stock) by the Conversion Price on the applicable Conversion Date,
calculated to the nearest share of Common Stock (fractions of less than 1/2
being disregarded and fractions of 1/2 or greater being rounded up to the next
full share).
Any conversion of the Series F Preferred Stock shall be deemed to have been
made at the close of business on the Conversion Date specified in the applicable
conversion notice, so that the rights of the holder of the Series F Preferred
Stock as a holder thereof, or such portion thereof, shall cease at such time and
the person or persons entitled to receive any of the shares of Common Stock upon
conversion of the Series F Preferred Stock shall be treated for all purposes as
having become the record holder or holders of such shares of Common Stock at
such time.
The Company shall pay all unpaid dividends on any Series F Preferred Stock
so converted which has accrued through and including the date upon which such
conversion is deemed to have been effected in accordance with this paragraph 7,
such payment to be made in cash or in shares of Common Stock (calculated at the
Conversion Price then in effect) at the Company's option.
The issuance of certificates for Common Stock upon the conversion of Series
F Preferred Stock shall be made without charge to the holder of the Series F
Preferred Stock
5.
<PAGE>
converting such shares for any issue or stamp tax in respect of the issuance of
such certificates, and such certificates shall be issued in the respective names
of, or in such names as may be directed by, the holder of the Series F Preferred
Stock.
Upon the conversion in whole or in part of any shares of Series F Preferred
Stock, if only a portion of the Series F Preferred Stock is used in such
conversion, then the Company shall execute and deliver to or upon the order of
the holder thereof, at the expense of the Company, a new Series F Preferred
Stock certificate or certificates evidencing the unused portion of such Series F
Preferred Stock.
All Series F Preferred Stock certificates or portions thereof which have
been converted shall be canceled by the Company and no Series F Preferred Stock
certificates shall be issued in lieu of the portion of the Series F Preferred
Stock so converted.
Shares of the Series F Preferred Stock may be converted at any time up to
but not after the close of business on the tenth business day of the fifteen-day
redemption notice period for such shares pursuant to paragraph 12.
8. Conversion Price Adjustments. The Floor Price and the Cap Price shall
----------------------------
be subject to adjustment from time to time upon the occurrence of certain events
as follows:
(a) Reclassifications or Combinations. If the Company shall combine
---------------------------------
or reclassify the outstanding Common Stock into a smaller number of shares, the
Floor Price and the Cap Price shall be proportionately adjusted by multiplying
such price by a fraction, the numerator of which is the number of shares being
surrendered to the Company and the denominator of which is the number of shares
being issued by the Company in such combination or reclassification (i.e. in the
case of a 2-for-5 reverse stock split the Floor Price and the Cap Price would be
multiplied by five and divided by two). If such combination or reclassification
shall occur during the five-trading-day period used to calculate the Market
Price, a similar adjustment shall be made to the closing prices for the trading
days during such period prior to such combination or reclassification.
(b) Rounding of Calculations; Minimum Adjustment. All calculations
--------------------------------------------
under this paragraph 8 shall be made to the nearest cent. No adjustment in the
Floor Price and the Cap Price shall be made if the amount of such adjustment
would be less than $0.01, but any such amount shall be carried forward and an
adjustment with respect thereto shall be made at the time of and together with
any subsequent adjustment which, together with such amount and any other amount
or amounts so carried forward, shall aggregate $0.01 or more.
6.
<PAGE>
(c) Adjustments for Consolidation, Merger, etc. If the Company shall
------------------------------------------
at any time consolidate with or merge into another corporation (where the
Company is not the continuing corporation after such merger or consolidation),
the holder of Series F Preferred Stock shall thereafter be entitled to receive,
upon the conversion of the shares of Series F Preferred Stock, the securities or
property to which a holder of the number of shares of Common Stock then
deliverable upon the conversion thereof would have been entitled upon such
consolidation or merger had such holder converted immediately prior to such
consolidation or merger (subject to subsequent adjustments under paragraph 8
hereof), and the Company shall take such steps in connection with such
consolidation or merger as may be reasonably necessary to assure such holder
that the provisions of this Certificate of Determination, shall thereafter be
applicable in relation to any securities or property thereafter deliverable upon
the conversion of the Series F Preferred Stock, including, but not limited to,
obtaining a written acknowledgment from the continuing corporation of its
obligation to supply such securities or property upon such conversion. In the
event of such a consolidation or merger, the Company shall provide written
notice to each holder of the Series F Preferred Stock at least 30 days prior to
the consummation of such consolidation or merger, and such holder may convert
its shares of Series F Preferred Stock within such 30-day period. A sale of all
or substantially all of the assets of the Company shall be deemed a
consolidation or merger for the foregoing purposes.
9. Voluntary Adjustment. The Company may make, but shall not be
--------------------
obligated to make, such decreases in the Conversion Price so as to increase the
number of shares of Common Stock into which the Series F Preferred Stock may be
converted, in addition to those required by paragraph 8, as it considers to be
advisable in order to avoid federal income tax treatment as a dividend of stock
or stock rights.
10. Reservation of Shares of Common Stock for Conversion. The Company
----------------------------------------------------
shall at all times reserve and keep available out of its authorized and unissued
shares of Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all shares of Series F
Preferred Stock that are then outstanding. The Company shall use its reasonable
best efforts to take the action necessary to increase the number of reserved
shares from time to time if needed, and to increase the number of authorized
shares of Common Stock if such an increase should become necessary to effect
conversion of all shares of Series F Preferred Stock that are then outstanding.
11. Notice of Adjustment of Floor Price and Cap Price. Whenever the Floor
-------------------------------------------------
Price and the Cap Price are adjusted as herein provided, the Company shall
forthwith file with any transfer agent or agents, if any, for the Series F
Preferred Stock, and at the principal office of the Company, a statement signed
by the President or a Vice-President and by the Chief
7.
<PAGE>
Financial Officer or the Secretary or the Assistant Secretary of the Company
setting forth the adjusted Floor Price and Cap Price. The statement so filed
shall be open to inspection by any holder of record of shares of Series F
Preferred Stock. The Company shall also, at the time of filing any such
statement, mail notice to the same effect to the holders of shares of Series F
Preferred Stock at their addresses appearing on the books of the Company or
supplied by such holder to the Company for the purpose of notice.
12. Redemption. During the 120-day period after the Closing Date, shares
----------
of the Series F Preferred Stock may be redeemed by the Company for cash, at the
option of the Company by resolution of its Board of Directors, in whole or in
part, upon fifteen days written notice to the holder of the shares of Series F
Preferred Stock being redeemed, for a total amount equal to the greater of (a)
115% of the stated value of Series F Preferred Stock, or (b) 115% of the
aggregate market value of shares of Common Stock into which the shares of Series
F Preferred Stock are convertible (based on the Market Price for the five
consecutive trading days prior to the redemption date), and shall also pay to
such holder accrued dividends on such shares of Series F Preferred Stock,
whether or not declared, to the redemption date. In case of the redemption of a
part only of the outstanding shares of Series F Preferred Stock, the shares to
be redeemed shall be selected pro rata from each record holder of such shares.
During the first ten business days of such fifteen-day period, each holder of
shares of the Series F Preferred Stock shall have the right to convert such
shares as provided above.
At least fifteen days' previous notice by mail, postage prepaid, shall be
given to the holders of record of the shares of Series F Preferred Stock to be
redeemed, such notice to be addressed to each such holder at the address of such
holder appearing on the books of the Company or given by such holder to the
Company for the purpose of notice, or if no such address appears or is so given,
at the place where the principal office of the Company is located. Such notice
shall state the date fixed for redemption and the redemption price and shall
call upon such holder to surrender to the Company on said date at the place
designated in the notice such holder's certificate or certificates representing
the shares to be redeemed. On or after the date fixed for redemption and stated
in such notice, each holder of shares of Series F Preferred Stock called for
redemption shall surrender the certificate evidencing such shares to the Company
at the place designated in such notice and shall thereupon be entitled to
receive payment of the redemption price, together with accrued dividends to the
date fixed for redemption. If less than all the shares represented by any such
surrendered certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. If such notice of redemption shall have
been duly given, and if on the date fixed for redemption funds necessary for the
redemption shall be available therefor, then, notwithstanding that the
certificate evidencing any
8.
<PAGE>
shares of Series F Preferred Stock so called for redemption shall not have been
surrendered, the dividends with respect to the shares so called for redemption
shall forthwith after such date cease to accrue and all other rights pertaining
to such shares shall terminate, except only the right of the holders to receive
the redemption price, together with accrued and unpaid dividends to the date
fixed for redemption, without interest, upon surrender of their certificates
therefor. If such notice of redemption shall have been given, and if on the
date fixed for such redemption the Company shall fail for any reason (other than
force majeure) to redeem the shares of Series F Preferred Stock for which it
gave such notice, the Company shall no longer be entitled to redeem such shares.
RESOLVED FURTHER, that the Chairman of the Board and Assistant Secretary of
the Company be, and hereby are, authorized and directed to prepare, execute,
verify, and file in the Office of the California Secretary of State, a
Certificate of Determination in accordance with this resolution and as required
by law.
9.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: February 27, 1998 /s/ Richard F. Gordon, Jr.
--------------------------
Richard F. Gordon, Jr.
Chairman of the Board
10.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: February 27, 1998 /s/ James R. Spievak
---------------------------
James R. Spievak,
Assistant Secretary
11.
<PAGE>
EXHIBIT 3.14
CERTIFICATE OF DETERMINATION
OF
CHATCOM, INC.
A CALIFORNIA CORPORATION
The undersigned, Richard F. Gordon, Jr. and James R. Spievak, hereby
certify that:
a. They are the duly elected and acting Chairman of the Board and
Assistant Secretary, respectively, of ChatCom, Inc., a California corporation
(the "Company").
b. The number of shares of Series G Convertible Preferred Stock of the
Company is 500, of which no shares have been issued.
c. Pursuant to authority given by the Company's Articles of Incorporation,
as amended, the Board of Directors of the Company has duly adopted the following
recitals and resolutions:
WHEREAS, the Articles of Incorporation, as amended, of the Company provide
for a class of shares known as Preferred Stock, issuable from time to time in
one or more series; and
WHEREAS, the Board of Directors of the Company is authorized to determine
or alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock, to fix the number
of shares constituting any such series and to determine the designation thereof,
or any of them.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes
and determines the designation of, the number of shares constituting, and the
rights, preferences, privileges and restrictions relating to, a series of
Preferred Stock as follows:
1. Designation of Series; Rank of Series. The designation of such
-------------------------------------
series of Preferred Stock is Series G Convertible Preferred Stock ("Series G
Preferred Stock"). The number of shares constituting such series is 500, with a
stated value of $1,000 per share. Shares of Series G Preferred Stock converted,
redeemed or purchased by the Company shall be canceled and shall revert to
authorized but unissued shares of Preferred Stock undesignated as to series.
Shares of the Series G Preferred Stock shall rank pari passu and share in
dividends and other distributions on a pro rata basis with the Series D
Convertible Preferred Stock, the Series E Convertible
<PAGE>
Redeemable Preferred Stock, the Series F Convertible Redeemable Preferred Stock
and with shares of any other series of preferred stock hereafter issued by the
Company with substantially equivalent rights, preferences, privileges and
restrictions as those of this Series.
2. Dividends. Each holder of the outstanding Series G Preferred Stock
---------
shall be entitled to receive, in cash or shares of the Company's Common Stock
("Common Stock"), at the Company's option, cumulative dividends at the annual
rate of 9.5% of the stated value of the Series G Preferred Stock per share of
Series G Preferred Stock, payable semiannually on January 31 and July 31 of each
year after the Closing Date (as defined below) on which such shares were issued,
without any further action or declaration by the Company's Board of Directors or
shareholders of the Company, out of funds legally available therefor. Such
dividends shall be cumulative so that if such dividends shall not have been
declared and paid for all shares of Series G Preferred Stock at the time
outstanding, the deficiency shall be declared and paid for such shares before
the Company makes any Distribution (as hereinafter defined) to the holders of
Common Stock or Preferred Stock of any other series junior to the Series G
Preferred Stock. Accrued but unpaid dividends shall not bear interest.
"Distribution" in this paragraph 2 means the transfer of cash or property
without consideration, whether by way of dividend or otherwise (except a
dividend in shares of the Company) or the purchase or redemption of shares of
the Company for cash or property (except for shares acquired by the Company from
employees, officers or directors of the Company pursuant to the terms of any
employee incentive plan, agreement or arrangement of the Company existing as of
the Closing Date (as defined below), or a redemption of shares of the Company
for cash to the extent required to avoid loss of tax net operating loss
carryovers pursuant to Section 382 of the Internal Revenue Code of 1986, as
amended) including any such transfer, purchase or redemption by a subsidiary of
the Company. The time of any distribution by way of dividend shall be the date
of declaration thereof and the time of any distribution by purchase or
redemption of shares shall be the day cash or property is transferred by the
Company, whether or not pursuant to a contract of an earlier date; provided that
where a negotiable debt security is issued in exchange for shares the time of
the distribution is the date when the Company acquires the shares in such
exchange. The Board of Directors may fix a record date for the determination of
holders of Series G Preferred Stock entitled to receive payment of a dividend
declared thereon, which record date shall be no more than sixty (60) days prior
to the date fixed for the payment thereof. Upon notice of conversion or
redemption, if not previously declared, the Board of Directors shall declare,
out of funds legally available therefor, dividends on the Series G Preferred
Stock in shares of Common Stock, or at the Company's option if permitted by law,
in
2.
<PAGE>
cash, at the annual rate of 9.5% of the stated value of the Series G Preferred
Stock from the date of issuance to the date of conversion or redemption of such
shares of Series G Preferred Stock. If upon redemption or conversion of shares
of Series G Preferred Stock the Company elects to pay accrued dividends on such
shares in shares of Common Stock, the number of shares of Common Stock shall be
determined by dividing the amount of such accrued dividends as of the redemption
date or the Conversion Date (as defined below) by the Conversion Price (as
defined below) on the applicable redemption date or Conversion Date.
3. Voting Rights. The holders of Series G Preferred Stock shall not be
-------------
entitled to vote upon any matters presented to the shareholders, except as
provided by law and except that without the approval of holders of a majority of
the outstanding shares of Series G Preferred Stock, the Company shall not (a)
authorize, create or issue any shares of any class or series ranking senior to
the Series G Preferred Stock as to liquidation rights, (b) amend, alter or
repeal, by any means, the Articles of Incorporation if the powers, preferences,
or special rights of the Series G Preferred Stock would be adversely affected,
or (c) become subject to any restriction on the Series G Preferred Stock, other
than restrictions arising under the General Corporation Law of the State of
California or existing under the Articles of Incorporation as in effect on the
Closing Date (as defined below); provided, however, that the creation of
additional series of Preferred Stock with substantially equivalent rights,
preferences, privileges and restrictions as those of this Series G Preferred
Stock shall not be a violation of this Section 3.
4. Liquidation, Dissolution or Winding Up. In the event of a voluntary
--------------------------------------
or involuntary liquidation, dissolution or winding up of the Company, the
holders of Series G Preferred Stock shall be entitled to receive out of the
assets of the Company, whether such assets are capital or surplus of any nature,
an amount per share of Series G Preferred Stock equal to the stated value of
such share of Series G Preferred Stock and a further amount equal to any
dividends accrued and unpaid thereon, as provided in paragraph 2 hereof, to the
date that payment is made available to the holders of Series G Preferred Stock,
whether earned or declared or not, and no more, before any payment shall be made
or any assets distributed to the holders of shares of stock of the Company
junior in rank to the Series G Preferred Stock.
If upon such liquidation, dissolution or winding up, the assets thus
distributed among the holders of the Series G Preferred Stock and other series
of preferred stock that upon liquidation, dissolution or winding up share pari
passu with the Series G Preferred Stock shall be insufficient to permit the
payment to all such holders of the full preferential
3.
<PAGE>
amounts aforesaid, then the entire assets of the Company to be distributed shall
be distributed ratably among the holders of Series G Preferred Stock and such
other series of Preferred Stock.
A consolidation or merger of the Company with or into any other corporation
or corporations, or a sale of all or substantially all of the assets of the
Company, shall not be deemed to be a liquidation, dissolution or winding up
within the meaning of this paragraph 4.
5. Conversion Rights. Each holder of Series G Preferred Stock shall have
-----------------
the right, exercisable at the option of such holder at any time after the
Closing Date through and including January 31, 2003, to convert, subject to the
terms and provisions set forth herein, all or any portion of the outstanding
shares of Series G Preferred Stock into duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock at the Conversion Price (as
defined below) on the applicable Conversion Date (as defined below). The date
the shares of Series G Preferred Stock is issued is herein referred to as the
"Closing Date."
6. Conversion Price. The "Conversion Price" shall be $0.35, which
----------------
Conversion Price shall be subject to further adjustments as set forth in
paragraph 8.
7. Conversion Procedure. The holder of any shares of the Series G
--------------------
Preferred Stock may exercise its rights to convert all or any portion of such
shares into shares of Common Stock by surrendering the share certificates for
the Series G Preferred Stock to be converted to the Company, at its principal
office or at such other office or agency maintained by the Company for that
purpose, accompanied or preceded by a written notice of the holder's election to
convert such shares, or a specified portion of such shares (as provided in the
notice, but for not less than $50,000 aggregate stated value of Series G
Preferred Stock), executed by such holder, which notice shall specify a
Conversion Date and accompanied, if required by the Company, by proper
assignment in blank. The date specified in any conversion notice delivered by
any holder of the Series G Preferred Stock, which date shall be no earlier than
the date of actual delivery of such notice, shall be defined as the "Conversion
Date," provided share certificates are delivered within three business days to
the Company or its transfer agent.
As promptly as practicable after the surrender as herein provided of a
certificate evidencing shares of Series G Preferred Stock for conversion, the
Company shall deliver or cause to be delivered to or upon the written order of
the holder of the certificate evidencing the Series G Preferred Stock so
surrendered certificates representing the number of fully paid and nonassessable
shares of Common Stock into which the Series G Preferred Stock, or such portion
thereof, may be converted in accordance with the provisions herein. Such
4.
<PAGE>
number shall be determined by dividing the product of $1,000 times the number of
shares of Series G Preferred Stock to be converted (plus any unpaid dividends on
such shares of Series G Preferred Stock to be converted accrued from the next
preceding dividend payment date, if such dividends are to be paid in shares of
Common Stock) by the Conversion Price on the applicable Conversion Date,
calculated to the nearest share of Common Stock (fractions of less than 1/2
being disregarded and fractions of 1/2 or greater being rounded up to the next
full share).
Any conversion of the Series G Preferred Stock shall be deemed to have been
made at the close of business on the Conversion Date specified in the applicable
conversion notice, so that the rights of the holder of the Series G Preferred
Stock as a holder thereof, or such portion thereof, shall cease at such time and
the person or persons entitled to receive any of the shares of Common Stock upon
conversion of the Series G Preferred Stock shall be treated for all purposes as
having become the record holder or holders of such shares of Common Stock at
such time.
The Company shall pay all unpaid dividends on any Series G Preferred Stock
so converted which has accrued through and including the date upon which such
conversion is deemed to have been effected in accordance with this paragraph 7,
such payment to be made in cash or in shares of Common Stock (calculated at the
Conversion Price then in effect) at the Company's option.
The issuance of certificates for Common Stock upon the conversion of Series
G Preferred Stock shall be made without charge to the holder of the Series G
Preferred Stock converting such shares for any issue or stamp tax in respect of
the issuance of such certificates, and such certificates shall be issued in the
respective names of, or in such names as may be directed by, the holder of the
Series G Preferred Stock.
Upon the conversion in whole or in part of any shares of Series G Preferred
Stock, if only a portion of the Series G Preferred Stock is used in such
conversion, then the Company shall execute and deliver to or upon the order of
the holder thereof, at the expense of the Company, a new Series G Preferred
Stock certificate or certificates evidencing the unused portion of such Series G
Preferred Stock.
All Series G Preferred Stock certificates or portions thereof which have
been converted shall be canceled by the Company and no Series G Preferred Stock
certificates shall be issued in lieu of the portion of the Series G Preferred
Stock so converted.
8. Conversion Price Adjustments. The Conversion Price shall be subject
----------------------------
to adjustment from time to time upon the occurrence of certain events as
follows:
5.
<PAGE>
(a) Reclassifications or Combinations. If the Company shall combine
---------------------------------
or reclassify the outstanding Common Stock into a smaller number of shares, the
Conversion Price shall be proportionately adjusted by multiplying such price by
a fraction, the numerator of which is the number of shares being surrendered to
the Company and the denominator of which is the number of shares being issued by
the Company in such combination or reclassification (i.e. in the case of a 2-
for-5 reverse stock split the Conversion Price would be multiplied by five and
divided by two).
(b) Rounding of Calculations; Minimum Adjustment. All calculations
--------------------------------------------
under this paragraph 8 shall be made to the nearest cent. No adjustment in the
Conversion Price shall be made if the amount of such adjustment would be less
than $0.01, but any such amount shall be carried forward and an adjustment with
respect thereto shall be made at the time of and together with any subsequent
adjustment which, together with such amount and any other amount or amounts so
carried forward, shall aggregate $0.01 or more.
(c) Adjustments for Consolidation, Merger, etc. If the Company shall
------------------------------------------
at any time consolidate with or merge into another corporation (where the
Company is not the continuing corporation after such merger or consolidation),
the holder of Series G Preferred Stock shall thereafter be entitled to receive,
upon the conversion of the shares of Series G Preferred Stock, the securities or
property to which a holder of the number of shares of Common Stock then
deliverable upon the conversion thereof would have been entitled upon such
consolidation or merger had such holder converted immediately prior to such
consolidation or merger (subject to subsequent adjustments under paragraph 8
hereof), and the Company shall take such steps in connection with such
consolidation or merger as may be reasonably necessary to assure such holder
that the provisions of this Certificate of Determination, shall thereafter be
applicable in relation to any securities or property thereafter deliverable upon
the conversion of the Series G Preferred Stock, including, but not limited to,
obtaining a written acknowledgment from the continuing corporation of its
obligation to supply such securities or property upon such conversion. In the
event of such a consolidation or merger, the Company shall provide written
notice to each holder of the Series G Preferred Stock at least 30 days prior to
the consummation of such consolidation or merger, and such holder may convert
its shares of Series G Preferred Stock within such 30-day period. A sale of all
or substantially all of the assets of the Company shall be deemed a
consolidation or merger for the foregoing purposes.
9. Voluntary Adjustment. The Company may make, but shall not be
--------------------
obligated to make, such decreases in the Conversion Price so as to increase the
number of shares of Common Stock into which the Series G Preferred Stock may be
converted, in addition to those required by paragraph 8, as it
6.
<PAGE>
considers to be advisable in order to avoid federal income tax treatment as a
dividend of stock or stock rights.
10. Reservation of Shares of Common Stock for Conversion. The Company
----------------------------------------------------
shall at all times reserve and keep available out of its authorized and unissued
shares of Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all shares of Series G
Preferred Stock that are then outstanding. The Company shall use its reasonable
best efforts to take the action necessary to increase the number of reserved
shares from time to time if needed, and to increase the number of authorized
shares of Common Stock if such an increase should become necessary to effect
conversion of all shares of Series G Preferred Stock that are then outstanding.
11. Notice of Adjustment of Conversion Price. Whenever the Conversion
----------------------------------------
Price is adjusted as herein provided, the Company shall forthwith file with any
transfer agent or agents, if any, for the Series G Preferred Stock, and at the
principal office of the Company, a statement signed by the President or a Vice-
President and by the Chief Financial Officer or the Secretary or the Assistant
Secretary of the Company setting forth the adjusted Conversion Price. The
statement so filed shall be open to inspection by any holder of record of shares
of Series G Preferred Stock. The Company shall also, at the time of filing any
such statement, mail notice to the same effect to the holders of shares of
Series G Preferred Stock at their addresses appearing on the books of the
Company or supplied by such holder to the Company for the purpose of notice.
RESOLVED FURTHER, that the Chairman of the Board and Assistant Secretary of
the Company be, and hereby are, authorized and directed to prepare, execute,
verify, and file in the Office of the California Secretary of State, a
Certificate of Determination in accordance with this resolution and as required
by law.
7.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: February 27, 1998 /s/ Richard F. Gordon, Jr.
--------------------------
Richard F. Gordon, Jr.
Chairman of the Board
8.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: February 27, 1998 /s/ James R. Spievak
---------------------------
James R. Spievak,
Assistant Secretary
9.
<PAGE>
EXHIBIT 10.37
[LETTERHEAD OF CHATCOM, INC.]
November 5, 1997
Mr. Gordon Almquist
19331 Vintage Street
Northridge, California 91324
Dear Mr. Almquist:
On behalf of my colleagues and associates, I am pleased to extend this offer of
employment to you for the position of Vice President and Chief Financial Officer
of ChatCom, Inc. The terms and conditions of this employment offer are set forth
below:
Start Date: November 14, 1997 or as soon as practicable thereafter, to be
- ---------- mutually agreed upon.
Base Salary: $130,000.00 per annum, paid at a rate of $5,000.00 bi-weekly.
- ----------- Your salary will be reviewed annually according to standard
corporate practice. This is an exempt level position.
Discretionary You will be eligible for receipt of an annual bonus of up to
- ------------- 25% of your base salary based on company and individual
Bonus Program: performance, the precise level of which will be recommended by
- ------------- the CEO and subject to the approval of the Board of Directors.
Stock Options: You will receive an initial option grant of 125,000 options
- ------------- with the strike price to be the average closing price of the
stock the 10 days prior to your employment commencement. These
options will vest over a 36 month period in three 1/3
increments, the first third vesting 1 year from your
employment commencement. Complete details of the vesting plan
and related information are included in the options agreement
which is attached.
Auto Allowance: You will receive an auto allowance of $500 per month.
- --------------
Cellular: The company will provide you with a cellular telephone and
- -------- pager and will reimburse all business related wireless
communication expenses.
<PAGE>
Gordon Almquist
November 5, 1997
Page Two
Vacation: You will accrue vacation at the rate of 4 weeks per year.
- --------
Benefits: You will participate in our fringe benefit programs on the
- --------
same basis as other eligible officers of the company. The
details of our benefits program are attached.
If you are in agreement with the terms and conditions described in this letter,
please sign the enclosed copy and return to the Davis M. Lewis Company by fax at
818-595-3234 no later than November 10, 1997, and the original to me by mail.
Gordon, I am extremely pleased to have you joining me and helping this
organization fulfill its potential. We expect you to play a pivotal role
in managing the organization toward a successful 1998 and beyond.
Welcome aboard.
Sincerely,
/s/ James B. Mariner
James B. Mariner
President/CEO
I accept this offer of employment and the terms set forth in this letter.
Date: 11/7/97 /s/ Gordon Almquist
------- -------------------
Gordon Almquist
ChatCom, Inc.
<PAGE>
EXHIBIT 10.38
[LETTERHEAD OF CHATCOM, INC.]
February 27, 1998
Mr. E. Carey Walters
1096 Horizon Drive
Ventura, CA 93003
Dear Carey:
ChatCom, Inc. (the "Company") is please to offer you the position of President
and Chief Executive Officer starting February 27, 1998. The terms and
conditions of this employment offer are set forth below:
Base Salary: $170,000 per annum, paid at a bi-weekly rate of $6,538.46.
Your salary will be reviewed annually by the Compensation
Committee of the Board of Directors.
Bonus Program: You will be eligible for receipt of a bonus of up to $25,000
per quarterly period beginning April 1, 1998 ($100,000 per
year in the aggregate). This bonus is payable only upon the
Company's attainment of at least 90% of the Company's
targeted revenues and net income for each quarterly period.
For purposes of this bonus program, both revenue and net
income have equal weighting. In the event revenues and net
income fall between 90% and 100%, you will be paid on a
prorata basis (minimum payable would be 90% of $25,000 or
$22,500). In the event revenues and net income exceed 100%
per any quarterly period, any excess can be applied towards
the earliest of any prior shortfall periods or to the
subsequent quarter (in the event of no prior shortfalls).
Stock Options: You will receive an initial option grant of 500,000 shares
with an exercise price equal to the closing price on
February 27, 1998. These options will vest at the rate of
one-third (or 166,666.67 shares) on your start date and
one-third at each anniversary date beginning one year from
the date of grant. The granting of these options are subject
to the approval of the Option Committee of the Board of
Directors.
Auto Allowance: You will receive an auto allowance of $500 per month.
Additionally, the Company will reimburse you for closing
<PAGE>
E. Carey Walters
February 27, 1998
Page two
costs (consisting of sales tax and vehicle registration and
license fees) associated with your entering into an
automobile lease.
Cellular: The Company will reimburse all business related wireless
communications expenses.
Vacation: You will accrue vacation at the rate of four weeks per year.
Benefits: You will be eligible to participate in our fringe benefit
programs according to the terms of each program and plan
document. Our benefit programs include medical, dental,
vision care, life insurance, long-term disability and 401(k)
plan. Enroll in the Company's medical and dental programs
will be accelerated to April 1, 1998.
At-Will Employment: You understand and agree that your employment with the
Company is at-will and either you or the Company can
terminate the employment relationship at any time for any
reason.
It is a pleasure to make you this offer to join ChatCom. If you are in agreement
with the terms and conditions contained in this letter, please sign and return a
copy of this letter to me. I look forward to your association with the Company
and know you will find it both personally and professionally rewarding.
Sincerely,
ChatCom, Inc.
/s/ Richard F. Gordon
Richard F. Gordon
Chairman of the Board
cc: Jim Edwards Agreed and Accepted:
Gerry Sayer /s/ E. Carey Walters 2/27/98
Phil Smith E. Carey Walters Date
<PAGE>
EXHIBIT 10.39
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between Gordon Almquist and ChatCom, Inc., a California
Corporation (the "Company"), is effective as of November 11, 1997.
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available;
WHEREAS, Indemnitee is an Officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers in
today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitees' continued service to
the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) permitted by law as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when (i)
there has been a change in control of the Company, not approved by a resolution
of the Company's Board of Directors, of a nature that would be required to be
reported by a company subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); in response to Schedule
14A of Regulation 14A promulgated under the Exchange Act, including in any event
the acquisition by any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) of beneficial ownership, directly or indirectly,
of securities of the Company representing twenty-five percent (25%) or more of
the combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two (2) years by a change in the
identity of a majority of the members of the Company's Board of Directors
otherwise than through death, disability or retirement in accordance with the
Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnity
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty (30) days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company bylaw now or
hereafter in effect relating to claims for Indemnifiable Events, the Company
shall seek legal advice only from special, independent counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company within
the last ten (10) years (other than in connection with such matters) or for the
Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of
-----------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of any
--------------
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall be
--------------------
in addition to any other rights Indemnitee may have under the Company's bylaws
or the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an
-------------------
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors or
personal or legal representatives after the expiration of two (2) years from the
date of accrual of such cause of action, and any claim or cause of action of the
Company or its affiliate shall be extinguished and deemed released unless
asserted by the timely filing of a legal action within such two (2) year period;
provided however, that if any shorter period of limitations is otherwise
applicable to any such cause of action such shorter period shall govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement the Company
-----------
shall be subrogated to the extent of such payment of all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure to
-------------------
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable
------------
in the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of California applicable
to contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
CHATCOM, INC.,
a California corporation
/s/ Gordon Almquist By: [ILLEGIBLE]
-------------------------------- -----------------------------
GORDON ALMQUIST
6
<PAGE>
EXHIBIT 10.40
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement between E. Carey Walters and ChatCom, Inc., a California
Corporation (the "Company"), is effective as of February 27, 1998.
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available;
WHEREAS, Indemnitee is an Officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers in
today's environment;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitees' continued service to
the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) permitted by law as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly, or, at the Company's request, with
another enterprise, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Certain Definitions.
-------------------
a. Change in Control: shall be deemed to have occurred when (i) there
has been a change in control of the Company, not approved by a resolution of the
Company's Board of Directors, of a nature that would be required to be reported
by a company subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), in response to Schedule 14A of
Regulation 14A promulgated under the Exchange Act, including in any event the
acquisition by any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act) of beneficial ownership, directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two (2) years by a change in the
identity of a majority of the members of the Company's Board of Directors
otherwise than through death, disability or retirement in accordance with the
Company's normal retirement policies.
1
<PAGE>
b. Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether conducted by the Company or
any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise.
c. Expenses: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
d. Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
e. Reviewing party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Claim for which Indemnity
is seeking indemnification.
f. Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
a. In the event Indemnitee was, is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty (30) days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim initiated by Indemnitee
against the Company or any director or officer of the Company unless the Company
has joined in or consented to the initiation of such Claim. If so requested by
Indemnitee, the Company shall advance
2
<PAGE>
(within two (2) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").
b. Notwithstanding the foregoing (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control, the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the State of California having
subject matter jurisdiction thereof and in which venue is proper challenging any
such determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company bylaw now or
hereafter in effect relating to claims for Indemnifiable Events, the Company
shall seek legal advice only from special, independent counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company within
the last ten (10) years (other than in connection with such matters) or for the
Indemnitee. Such counsel, among
3
<PAGE>
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the special, independent counsel referred to above and to fully indemnify
such counsel against any and all expenses (including attorney's fees), claims,
liabilities and damages arising out of or relating to this agreement or its
engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorney's fees) and, if
requested by Indemnitee, shall (within two (2) business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company bylaw now or hereafter in effect
relating to claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity. If Indemnitee is entitled under any provision of this
-----------------
Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination of any
--------------
claim, action, suit or proceeding, by judgement, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
7. Non-Exclusivity, Etc. The rights of the Indemnitee hereunder shall be in
--------------------
addition to any other rights Indemnitee may have under the Company's bylaws or
the California General
4
<PAGE>
Corporation Law or otherwise. To the extent that a change in the California
General Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
8. Liability Insurance. To the extent the Company maintains an insurance
-------------------
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director of officer.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors or
personal or legal representatives after the expiration of two (2) years from the
date of accrual of such cause of action, and any claim or cause of action of the
Company or its affiliate shall be extinguished an deemed released unless
asserted by the timely filing of a legal action within such two (2) year period;
provided however, that if any shorter period of limitations is otherwise
applicable to any such cause of action such shorter period shall govern.
10. Amendments, Etc. No supplement, modification or amendment of this
---------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement the Company
-----------
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure to
-------------------
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger,
5
<PAGE>
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company, spouses, heirs, and personal and legal representatives.
This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or of any other
enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, even though all parties
do not sign the same counterparts.
16. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
Executed as of the date first above written.
"INDEMNITEE" "COMPANY"
CHATCOM, INC.,
a California corporation
/s/ E. Carey Walters By: /s/ Gordon L. Almquist
- -------------------- ----------------------
E. CAREY WALTERS
6
<PAGE>
EXHIBIT 10.41
AGREEMENT
---------
This Agreement ("Agreement") is entered into as of February 26, 1998, by
and between James B. Mariner ("Mariner") and ChatCom, Inc., a California
corporation ("ChatCom") with reference to the following facts:
A. Mariner served as the President and Chief Executive Officer of ChatCom
from March 1996 to the date hereof pursuant, in part, to that certain Employment
Agreement, dated April 1, 1997, by and between Mariner and ChatCom (the
"Employment Agreement").
B. Mariner and ChatCom desire to terminate the Employment Agreement in
accordance with the terms and conditions of this Agreement.
C. Mariner and ChatCom desire to continue Mariner's relationship with
ChatCom as an independent sales representative in accordance with the terms and
conditions of this Agreement.
D. The parties intend by this Agreement to terminate the Employment
Agreement and to settle fully and finally any claims by Mariner against ChatCom
and its officers, directors, employees, agents, attorneys and other
representatives that in any way are related to or arise out of the Employment
Agreement or Mariner's employment with ChatCom, the termination of any such
arrangement and any written, oral or implied contract of any kind whatsoever
concerning the foregoing (collectively, the "Outstanding Matters").
I. TERMINATION OF EMPLOYMENT AGREEMENT
-----------------------------------
1.1 Termination of Employment Agreement. The Employment Agreement
-----------------------------------
shall terminate effective as of the date hereof (the "Termination Date"). All
of the rights and obligations of the parties under the Employment Agreement
shall be null and void as of the Termination Date; provided, however, that
ChatCom shall not be deemed to have waived or in any way limited any rights that
it may have against Mariner in connection with his performance as an officer or
director of ChatCom. ChatCom and Mariner each hereby waives any notice
requirement or restriction for termination under the Employment Agreement.
1.2 Resignation of Mariner. Mariner shall voluntarily resign as the
----------------------
President and Chief Executive Officer of ChatCom effective as of the Termination
Date. Mariner hereby agrees that he will not be nominated by the Company for
re-election as a director of ChatCom at ChatCom's next shareholders
1.
<PAGE>
meeting and will not otherwise seek such re-election or serve as a director of
ChatCom subsequent to that meeting.
1.3 Termination Payments. In consideration of the termination of the
--------------------
Employment Agreement, Mariner's agreement to resign as the President and Chief
Executive Officer of ChatCom and Mariner's agreement to assist and cooperate
with ChatCom after the Termination Date as set forth in Section 3.5, and as
payment in full for any and all amounts that may be owing to Mariner in the form
of cash, stock options, benefits or otherwise in connection with the Outstanding
Matters, ChatCom agrees to make the following payments and take the actions set
forth in this Section 1.3:
1.3.1 Cash Payment. Within 30 days after the Termination
------------
Date, ChatCom and Mariner shall reconcile any amounts owed by ChatCom to Mariner
for any accrued bonuses, vacation pay or reimbursable expenses and any amounts
owed by Mariner to ChatCom for advances or other similar items, and such amounts
shall be paid by the respective parties. ChatCom and Mariner agree that any
amounts owed by ChatCom or Mariner shall be paid only to the extent that such
amounts are reasonable and customary and are evidenced by appropriately detailed
and supported expense statements, including receipts. All of the other rights
to compensation and any other benefits granted or contemplated to be granted to
Mariner under the Employment Agreement, including, without limitation, any
amounts stated to be owed to Mariner in the event of his termination under the
Employment Agreement, or under any other agreement, expressed or implied, shall
be null and void as of the Termination Date.
1.3.2 Options. All options to purchase stock of ChatCom that
-------
were granted to Mariner and are outstanding but unvested as of the Termination
Date, shall be cancelled, and any other obligation of ChatCom to grant stock
options to Mariner under the Employment Agreement shall terminate effective as
of the Termination Date.
Mariner acknowledges and agrees that, after the parties have executed this
Agreement and have properly completed any and all performance required by the
terms herein, ChatCom shall not have any further obligations or duties of any
kind whatsoever to Mariner as a result of the Outstanding Matters.
II. ENGAGEMENT AS INDEPENDENT SALES REPRESENTATIVE
----------------------------------------------
2.1 Independent Sales Representative Services. ChatCom hereby
-----------------------------------------
engages Mariner during the term set forth below as an exclusive independent
sales representative (the "Engagement"). During the first six months of the
Engagement (or until such date as ChatCom hires a national sales manager),
Mariner shall coordinate and be responsible for all
2.
<PAGE>
of ChatCom's sales and marketing activities (this period being referred to as
the "First Phase"). Following completion of the First Phase (the subsequent
phase being referred to as the "Second Phase"), Mariner's sole responsibility
and authority shall be to introduce, promote and develop the sales of ChatCom's
products to customers (a) based in Canada and other markets outside the United
States; and (b) based in United States to the extent such customers engage in
the computer-based telephony business or Internet infrastructure business,
including businesses engaged in providing Internet services. Mariner agrees to
serve as an exclusive independent sales representative to ChatCom upon the
foregoing terms and conditions. Mariner shall report to the Chairman of the
Board or the then Chief Executive Officer of ChatCom in matters relating to the
Engagement. The parties agree that the Engagement may be assigned by Mariner to
an entity to be designated by Mariner if Mariner is employed by such entity and
ChatCom consents in writing to such assignment, and references in this Agreement
to Mariner shall be deemed to include such entity.
2.2 Term. The term of the Engagement shall commence on the date
----
hereof and end on March 31, 1999, unless ChatCom and Mariner mutually agree in
writing, at least three months in advance of March 31, 1999, to extend the term
of the Engagement. Notwithstanding the foregoing, ChatCom may terminate the
Engagement by providing Mariner a thirty-day prior written notice in the event
of termination for cause, which shall be defined for purposes hereof as a
continuing failure or refusal to perform his duties as required under the
Engagement; a material breach of the terms of this Agreement; gross negligence
or wilful misconduct in the performance of such duties; conviction by, or entry
of a plea of guilty or nolo contendere in, a court of competent and final
jurisdiction for any crime involving moral turpitude or punishable by
imprisonment; or commission of an act of fraud, whether prior to or subsequent
to the date hereof, upon ChatCom, all as determined in good faith by the Board
of Directors of ChatCom. Any payments required by ChatCom to Mariner as set
forth in Article II of this Agreement (except for amounts accrued through the
date of termination) shall terminate upon the termination for cause.
If Mariner dies or becomes disabled during the Engagement, such Engagement
shall automatically terminate upon death or such disability, as the case may be.
"Disability" shall mean any physical or mental illness that renders Mariner
unable to perform his agreed-upon services as required under the Engagement for
any 60 consecutive days.
2.3 Payment as Independent Sales Representative. As consideration
-------------------------------------------
for his services in connection with the Engagement during the First Phase,
ChatCom shall pay Mariner
3.
<PAGE>
a base salary of $85,000 per annum commencing January 15, 1998 and a commission
commencing January 1, 1998 equal to 1% of all orders generated by ChatCom during
the First Phase plus an additional commission amount equal to 1% of the amounts
actually collected by ChatCom with respect to the foregoing orders. Orders
(with shipping dates no later than 30 days) and collections shall be calculated
net of returns, discounts, allowances, sales tax, freight and insurance and
other costs of collection (including without limitation, collection agency fees
or similar costs). Commissions will be paid within 30 days after the end of the
calendar month in which the applicable order is received or collection is made.
The payment of the foregoing commissions for each month of the First Phase will
be subject to and conditioned upon ChatCom achieving revenues for each such
quarter during the First Phase equal to at least 90% of the revenues projected
for that quarter in the Business Plan attached hereto as Exhibit A (the "Plan").
Accordingly, no commission will be earned by Mariner for any orders generated or
collections received on such quarter's orders with respect to a quarter that
does not achieve at least 90% of the Plan's revenues for that quarter. During
the first three months of the First Phase, ChatCom shall pay Mariner a monthly
recoverable draw against the foregoing commissions, with such draw to be
calculated on the assumption that orders and collections for those three months
are at 50% of those projected for those months in the Plan. In the event the
commissions actually earned by Mariner for the first three months are less than
the recoverable draw paid to Mariner for those three months, Mariner shall
reimburse the difference to ChatCom within 30 days following the determination
of the amount.
As consideration for his services in connection with the Engagement during
the Second Phase, ChatCom shall pay Mariner at the rate of $85,000 per annum,
such payment to be paid pro rata each month over the term of the Engagement. As
additional consideration for his services in connection with the Engagement,
ChatCom shall pay Mariner commissions based on the percentage of the invoice
amount of sales (net of returns, discounts, allowances, sales tax, freight and
insurance) of ChatCom's products directly effected by Mariner during the Second
Phase of the Engagement ending March 31, 1999 to the extent collected by ChatCom
according to the following commission schedule: (a) commission of 1% on the
first $1,000,000 of sales; (b) commission of 2% on the second $1,000,000 of
sales; (c) commission of 3% on the third $1,000,000 of sales; (d) commission of
4% on the fourth $1,000,000 of sales; and (e) commission of 5% on any additional
sales beyond $4,000,000 (i.e. in the event Mariner effects sales of ChatCom's
products in the invoice amount of $5,000,000, the amount of commission due shall
be $150,000). The commission shall be payable within 30 days after the end
4.
<PAGE>
of the calendar month in which ChatCom has collected the invoice amount of
sales.
Mariner acknowledges and agrees that during the Engagement and in
connection with the introduction, promotion and development of sales of
ChatCom's products as set forth in Section 2.1, he shall not deviate from the
standard sales discount or current credit practices allowed by ChatCom without
the written approval of ChatCom's Chief Executive Officer or Chairman of the
Board.
2.4 Automobile and other Allowance. During the Engagement, ChatCom
------------------------------
shall allow Mariner to use ChatCom's GMC Suburban van until the termination of
the lease period for such van. Thereafter and during the Engagement, ChatCom
shall pay Mariner $500 per month as an automobile allowance. ChatCom shall also
provide Mariner during the Engagement a cellular telephone, a pager and a
standard personal computer; provided, however, Mariner shall be responsible for
providing his own off-site office space. Mariner acknowledges and agrees that
he shall return all such equipment provided by ChatCom upon the termination of
the Engagement, and that the cost of such equipment in excess of $500 in any
calendar month shall be paid by Mariner.
2.5 Expenses. ChatCom shall reimburse Mariner for out-of-pocket
--------
expenses authorized by ChatCom's Chief Executive Officer or Chairman of the
Board in writing, in advance and necessarily and reasonably incurred by Mariner
in providing services in furtherance of the Engagement. Reimbursement of
expenses shall be made by ChatCom within ten business days after submission to
ChatCom of appropriately detailed and supported expense statements, including
receipts.
2.6 Medical Insurance. ChatCom shall continue to provide COBRA
-----------------
medical insurance coverage to Mariner, without any obligation to pay any
deductibles, until August 31, 1998. The terms of such coverage will be as
currently in force or, if ChatCom reduces the coverage it generally provides to
its other executives, consistent with such reduced coverage; provided, however,
such coverage shall exclude Mariner's dependents.
2.7 Independent Contractor Status. The parties hereto acknowledge
-----------------------------
and agree that during the Engagement, Mariner shall not be an agent or employee
of ChatCom for any purpose whatsoever, but shall be an independent contractor.
During the Engagement, Mariner shall not have, nor shall Mariner hold himself
out as having, any right, power, or authority to create any contract or
obligation, either expressed or implied, on behalf of, in the name of, or
binding upon ChatCom, or to pledge ChatCom's credit, or to extend
5.
<PAGE>
credit in ChatCom's name unless ChatCom shall have previously authorized Mariner
to do so in advance in writing.
2.8 Work for Others. Mariner may represent, perform services for,
---------------
and be employed by other clients, persons, or companies; provided, however, that
Mariner may not, during the Engagement, represent, perform services for, or be
employed by any clients, persons, or companies, for the purpose of introducing,
promoting, developing, selling or distributing products or services that compete
directly or indirectly with ChatCom, unless Mariner obtains the prior written
approval of ChatCom's Chief Executive Officer or Chairman of the Board with
respect thereto.
III. NONCOMPETITION AND CHATCOM PROPRIETARY RIGHTS
---------------------------------------------
3.1 Noncompetition. Mariner agrees that, during the two-year period
--------------
commencing on the Termination Date, he shall not engage or participate in any
state of the United States, directly or indirectly, either as an owner, partner,
director, trustee, officer, employee, consultant, advisor or in any other
individual or representative capacity, in any activity which is the same as,
similar to or competitive in any manner with the business of ChatCom or its
affiliates (a "Competing Activity") or have any investment in a business which
is engaged in a Competing Activity (other than an ownership interest of less
than 5% of any company whose securities are listed on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market or Nasdaq
SmallCap Market).
Mariner acknowledges that, given the nature of ChatCom's business, the
covenants contained this Section 3.1 contain reasonable limitations as to time,
geographical area and scope of activity to be restrained, and do not impose a
greater restraint than is necessary to protect the legitimate business interests
of ChatCom. If, however, this Section 3.1 is determined by any court of
competent jurisdiction, or in any arbitration, as the case may be, to be
unenforceable by reason of its extending for too long a period of time or over
too large a geographic area or by reason of its being too extensive in any other
respect or for any other reason, it will be interpreted to extend only over the
longest period of time for which it may be enforceable and/or over the largest
geographical area as to which it may be enforceable and/or to the maximum extent
in all other respects as to which it may be enforceable, all as determined by
such court, or in such arbitration, as the case may be.
Mariner understands that the restrictions in this Section 3.1 may limit his
ability to earn a livelihood in a business similar to the business of ChatCom,
but he nevertheless believes that he has received and will receive sufficient
6.
<PAGE>
consideration hereunder to justify such restrictions which, in any event, given
his education, abilities and skills, Mariner does not believe would prevent him
from earning a living.
3.2 Confidential Information. Mariner agrees that he shall treat as
------------------------
confidential and secret all nonpublic and confidential information, including
without limitation, all discoveries, customer lists, trade secrets, documents,
bids proposals, contracts, marketing plans and strategies, computer software,
pricing policies, financial information, Intellectual Property (defined below)
and other information and data (collectively referred to herein as "Confidential
Information") made available to him during the course of his employment with
ChatCom, that has not become public information, and that he shall not, directly
or indirectly, make known, divulge or use any such information, discovery,
secret, document, plan, policy, or data, other than as required by law. Mariner
acknowledges and agrees that he shall return to ChatCom within seven days of the
Termination Date all books, memoranda, records, documents and objects that
relate to the business and affairs of ChatCom.
3.3 Intellectual Property Assignment; Cooperation. Mariner agrees to
---------------------------------------------
grant and assign and hereby does grant and assign to ChatCom all of his right,
title and interest in and to any ideas, designs, techniques, processes,
trademarks, trade secrets, inventions, improvements, know-how, writings and
other intellectual property related to ChatCom's business including research and
development efforts of ChatCom, (collectively, "Intellectual Property")
conceived during the term of the his employment with ChatCom, together with all
patents that are pending or have been issued in the United States and in all
foreign countries during the term of his employment with ChatCom with respect to
such Intellectual Property (the "Proprietary Rights"). Mariner acknowledges and
agrees that all such Proprietary Rights shall be the sole and exclusive property
of ChatCom and shall remain such notwithstanding the termination of his
employment with ChatCom.
Mariner further agrees at ChatCom's request to execute any and all patent
applications, copyright applications, powers of attorney, affidavits and other
documents, reasonably deemed necessary or desirable by ChatCom's attorneys to
convey title in any of the Intellectual Property assigned hereunder, or to
record the same in any country of the world or to claim priority therefor, or to
apply for, secure, maintain, assert or enforce patent and copyright protection
therefor in any country of the world in the name of ChatCom. Mariner further
agrees to cooperate, and on ChatCom's request to testify in any proceeding to
apply for, secure, maintain, protect or enforce ChatCom's rights in any such
inventions, trade secrets, know-how, writings or other intellectual property,
7.
<PAGE>
but ChatCom shall reimburse Mariner for his time and reasonable expenses in
connection therewith.
3.4 Disclosure to Corporation; Works Made For Hire. Mariner
----------------------------------------------
represents that he has fully disclosed to ChatCom in writing any and all
inventions, trade secrets, know-how, writings and other intellectual property
(whether or not patentable or copyrightable) and including any and all
improvements, discoveries, test data and findings, and computer codes and/or
programs, and other contributions conceived, developed, or begun by Mariner, or
by him jointly or with others, which arose in any way from or as a result of
Mariner's services on behalf of ChatCom or which were conceived, developed, or
begun during the term of the Employment Agreement or any other term of
employment with ChatCom, and except as disclosed on Schedule A hereto, Mariner
will not directly or indirectly disclose or use any of such items for Mariner's
or any other party's benefit after the date hereof. Mariner further agrees that
except as disclosed on Schedule A hereto, all patents applied for or obtained as
well as copyrightable material written or authored in connection with Mariner's
services on behalf of ChatCom are, and are to be, deemed works made for hire,
and owned and authored by ChatCom.
3.5 Mariner Assistance and Cooperation. Mariner represents that he
----------------------------------
has disclosed to ChatCom all obligations, contracts and liabilities (contingent
or otherwise) of ChatCom known to Mariner. Mariner agrees at ChatCom's request
to promptly provide all information, documents and records to ChatCom and assist
ChatCom regarding any inquiry by ChatCom of its past or present accounting,
bookkeeping and other records, its business dealings, its operations and
affairs, its customer relationships and any other inquiries reasonably deemed
necessary or desirable by ChatCom. Mariner further agrees to cooperate, and on
ChatCom's request to testify in any proceeding to enforce ChatCom's rights in
connection with any of its past or present business dealings, but ChatCom shall
reimburse Mariner for his time and reasonable expenses in connection therewith.
IV. RELEASE
-------
4.1 Mariner's Release of ChatCom. In consideration of the terms and
----------------------------
provisions of this Agreement and ChatCom's engagement of Mariner as an
independent sales representative as set forth in Article II, Mariner, on behalf
of himself and his Related Entities (as defined in Section 6.1 hereof), hereby
agrees to the termination of the Employment Agreement upon the terms and
conditions set forth herein and generally and unconditionally, relieves,
releases, remises, acquits and forever discharges ChatCom and its Related
Entities, of and from any and all claims, demands, rights, actions, causes of
8.
<PAGE>
action, suits, contracts, debts, controversies, expenses, liabilities,
obligations, damages, losses, expenses (including, without limitation,
attorneys' fees, except as expressly set forth within this Agreement),
penalties, costs and allegations of any kind and character whatsoever, whether
legal, contractual, statutory, administrative or equitable in nature or
otherwise, whether known or unknown, suspected or unsuspected, direct or
indirect, absolute, fixed or contingent, that Mariner now owns, holds, has or
claims to have, or owned at any time, held, had or claimed to have had or may
come to own, hold, have or claim to have against ChatCom and its Related
Entities arising out of or in connection with the Employment Agreement. This
includes, without limitation, all claims, demands, causes of action, facts,
transactions, occurrences, circumstances, acts or omissions, or allegations of
any kind and character whatsoever asserted by the parties or which could have
been asserted by the parties in connection with the Employment Agreement,
including any and all facts in any manner arising out of, related or pertaining
to or connected with those claims or with the terms of or value of any
consideration paid to Mariner in connection with the Employment Agreement, or
any of its Related Entities, including, without limitation, any claims based on,
related to or arising from federal, state or local laws (including, but not
limited to, the Age Discrimination in Employment Act, the California Labor Code,
Title VII of the Civil Rights Act of 1964, as amended, and the Fair Labor
Standards Act) that prohibit employment discrimination on the basis of race,
national origin, religion, age, gender, marital status, pregnancy, handicap,
perceived handicap, ancestry, sexual orientation, family or personal leave or of
any other form of discrimination, or from laws such as workers' compensation
laws, which provide rights and remedies for injuries sustained in the workplace
or from any common law claims of any kind, including, without limitation,
contract, tort or property rights including, but not limited to, breach of
express or implied contract, breach of the implied covenant of good faith and
fair dealing, tortious interference with contract or current or prospective
economic advantage, fraud, deceit, breach of privacy, misrepresentation,
defamation, wrongful termination, tortious infliction of emotional distress,
loss of consortium, breach of fiduciary duty, violation of public policy and any
other common law claim of any kind whatsoever, any claims for severance pay,
sick leave, family leave, vacation, life insurance, bonuses, health insurance,
disability or medical insurance or any other fringe benefit or compensation, or
any claims relating to or arising out of any purported right to stock or stock
options in ChatCom, and all rights or claims arising under the Employment
Retirement Income Security Act of 1974 ("ERISA") or pertaining to ERISA
regulated benefits (all collectively defined as the "Released Claims").
9.
<PAGE>
4.2 Unknown Claims And Risks Released By Mariner. Mariner on his own
--------------------------------------------
behalf and on behalf of his respective Related Entities hereby knowingly,
voluntarily and expressly waives and relinquishes any and all rights and
benefits that they may have under Section 1542 of the California Civil Code, or
under any similar provision of law of any state or territory of the United
States or any other jurisdiction and under any similar or analogous principle of
common law. Mariner acknowledges that he expressly understands that Section
1542 of the California Civil Code provides as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release which, if known by him,
must have materially affected his settlement with the
debtor."
Mariner further agrees and acknowledges that his waiver of all rights or
any similar benefits under Section 1542 of the California Civil Code and under
any similar statutes of any other jurisdiction (to the full extent that he
lawfully may waive all such rights and benefits with respect to the subject
matter of this Agreement) are essential terms of this Agreement, without which
the consideration given pursuant to this Agreement would not have been given to
him.
4.3 Assumption of Risk Regarding Released Claims.
--------------------------------------------
4.3.1 Mariner acknowledges that there is a risk that, after
execution of this Agreement, he may discover, incur or suffer claims that were
unknown or unanticipated at the time of this Agreement, including, but not
limited to, unknown or unanticipated claims that arise from, are based upon or
are related to any facts underlying the Released Claims, which had they been
known or more fully understood, may have affected Mariner's decision to execute
this Agreement as it currently is written. Mariner knowingly and expressly
assumes the risk of these unknown and unanticipated claims and agrees that this
Agreement and the general releases set forth within it apply to all such
unknown, unanticipated or potential claims.
4.3.2 It is the intention of Mariner, by entering into this
Agreement, to settle and release fully, finally and forever all Released Claims
and any and all claims that now exist, or may have at any time existed or shall
come to exist in connection with the Employment Agreement. In furtherance of
Mariner's intention, his releases given within this Agreement (including,
without limitation, the waivers set forth in Section 4.2 hereof) shall be and
remain in effect as full and complete releases and discharges of the Released
Claims and of any related matters notwithstanding the discovery by Mariner of
the existence of any additional or different claims or the facts relative to any
such claims.
10.
<PAGE>
V. REPRESENTATIONS AND WARRANTIES
------------------------------
5.1 No Contracts and Liabilities. Mariner represents, warrants and
----------------------------
agrees that he has not entered into any contract, agreement, undertaking or
obligation, whether expressed or implied, on behalf of, in the name of, or
binding upon ChatCom or its Related Entities or pledged ChatCom's credit, or
extended credit in ChatCom's name, or otherwise incurred any contingent
liability on behalf of, in the name of, or binding upon ChatCom or its Related
Entities other than those reflected in the Quarterly Report on Form 10-QSB of
ChatCom for the quarter ended December 31, 1997 in the form attached hereto as
Exhibit 1, other reports of ChatCom filed with the Securities and Exchange
Commission or as set forth in Schedule B attached hereto. Mariner acknowledges
that he is aware of ChatCom's need to generate additional working capital in
order to continue its operations, that there can be no assurance that ChatCom
will be able to continue its operations for all or any part of the Engagement
period or that ChatCom's operations will generate significant commissions for
Mariner. Discontinuation of ChatCom's operations or the failure of those
operations to generate significant commissions to Mariner under the terms of
this Agreement shall not affect in any manner the release by Mariner provided
for by Section 4.1 hereof.
5.2 No Payments Received. Mariner represents, warrants and agrees
--------------------
that neither he nor any member of his immediate family has received any personal
payments or other form of consideration of any kind from Macon Holdings (S) PTE
LTD, N.N.T.I., any other customers or competitors of ChatCom, or any affiliates
of such entities, other than gifts in the aggregate amount of less than $500.
5.3 Independent Legal Advice. Each of the parties represents,
------------------------
warrants and agrees that he or it has received independent legal advice from his
or its attorneys with respect to the advisability of executing this Agreement,
and Mariner confirms that he has not relied upon the legal advice of Troy &
Gould Professional Corporation in connection with entering into this Agreement.
5.4 No Other Representation. Each of the parties represents,
-----------------------
warrants and agrees that, in executing this Agreement, he or it has relied
solely on the statements expressly set forth within this Agreement. Each of the
parties further represents, warrants and agrees that, in executing this
Agreement, he or it has placed no reliance whatsoever on any statement,
representation or promise of any other party, or any other person or entity,
that is not expressly set forth within this Agreement, or upon the failure of
any other party, or any other person or entity, to make any statement,
representation or disclosure of anything whatsoever. The
11.
<PAGE>
parties have included this clause: (a) to preclude any claim that any party was
without the advice of counsel; and (b) to preclude the introduction of parol
evidence to vary, interpret, supplement or contradict the terms of this
Agreement.
5.5 No Assignment. Mariner represents, warrants and agrees that
-------------
there has been no assignment or transfer, including, without limitation, by way
of subrogation or operation of law or otherwise, to any person or entity
whatsoever of claims released by Mariner or of any other claim, right, demand,
action or cause of action that Mariner may have had, has or might have arising
out of the Outstanding Matters. Mariner, to the extent he breaches this
representation or warranty, agrees to defend, to indemnify and to hold harmless
ChatCom from and against any and all claims, allegations, demands, liabilities,
losses, obligations, promises, damages, costs, expenses (including, without
limitation, attorneys' fees and costs of investigation), lawsuits, actions (in
law, equity or otherwise), causes of action, rights and privileges actually
incurred as a result of that breach.
VI. GENERAL
-------
6.1 Related Entities. For purposes of this Agreement, a party's
----------------
"Related Entities" shall be defined as his or its past, present and future
partners and partners of those partners, successors, predecessors, assignees,
beneficiaries, heirs, legatees, devisees, executors, administrators, legal
representatives, joint venturers, principals, agents, trustees, attorneys,
insurers, officers, directors, employees, shareholders, affiliates and
associates; its parent and subsidiary corporations, divisions, affiliated
companies and the officers, directors, partnerships, representatives, employees,
shareholders and affiliates of each of them; and any other agents, attorneys or
representatives of the party, including, without limitation, in the case of
ChatCom, Troy & Gould Professional Corporation and its officers, directors,
shareholders and employees.
6.2 Full Integration. This Agreement is the final written expression
----------------
and the complete and exclusive statement of all of the agreements, conditions,
promises, representations and covenants between the parties with respect to the
subject matter of this Agreement, and replaces and supersedes all prior, former
or contemporaneous agreements, negotiations, understandings, representations,
discussions or warranties between the parties, their respective representatives,
and any other person or entity, with respect to the subject matter of this
Agreement. Any modification, alteration or amendment of this Agreement shall be
nonbinding, ineffective or invalid unless it is in writing, specifically refers
to this Agreement and is signed by the party to be charged with the
modification,
12.
<PAGE>
alteration or amendment or by a duly authorized representative of that party.
6.3 No Admissions. Each of the parties expressly acknowledges and
-------------
agrees that this Agreement represents a settlement of disputed claims and is
not, in any respect, nor for any purpose, to be deemed or construed to be an
admission or concession of any liability or wrongdoing by any party whatsoever
or of the existence of any claim. Furthermore, this Agreement shall not be
deemed to be for the benefit of, or to confer any rights of any kind or nature
whatsoever upon, any third party (whether a person or entity) other than the
Related Entities.
6.4 Waiver And Severability. No waiver of any term, covenant or
-----------------------
condition of this Agreement shall be construed as a waiver of any other term,
covenant or condition, nor shall any waiver of any default under this Agreement
be construed as a continuing waiver of any term, condition or covenant or as a
waiver of any other default. Furthermore, in the event any portion of this
Agreement is found, judicially or otherwise, to be unlawful, void or, for any
other reason, unenforceable, that provision shall be deemed severable from this
Agreement and the invalidity or lack of enforceability shall not affect the
validity and enforceability of the remaining portions of this Agreement.
6.5 Remedy for Breach. In the event of a breach or threatened breach
-----------------
of this Agreement, ChatCom shall be entitled to institute and prosecute
proceedings in any court of competent jurisdiction, either at law or in equity,
to obtain damages for any breach of this Agreement, or to enforce the specific
performance thereof by Mariner, or to enjoin the breach or threatened breach by
Mariner of the provisions of this Agreement.
6.6 California Law Governs. This Agreement shall be construed and
----------------------
enforced in accordance with, and governed by, the internal, substantive laws of
the State of California. Any lawsuits filed to enforce any provision of this
Agreement by any party hereto shall be filed in the Superior Court for the State
of California, County of Los Angeles.
6.7 Attorneys' Fees. Except as otherwise provided in this Agreement,
---------------
each side is to bear its own legal expenses and attorneys' fees. In the event
any legal or governmental action or proceeding is commenced under or pursuant to
any other terms and conditions of this Agreement, or to interpret or enforce the
terms of or obligations arising out of this Agreement, or to recover damages for
the breach of this Agreement, the party prevailing in any such action or
proceeding shall be entitled, in addition to any other relief awarded by the
Court or other tribunal, to recover from the other party
13.
<PAGE>
all reasonable attorneys' fees, costs and expenses incurred by the prevailing
party. Notwithstanding anything in this Agreement to the contrary, the
provisions of the preceding sentence are intended to be severable from the
balance of this Agreement, shall survive any judgment rendered in connection
with the aforesaid legal action, and shall not be merged into any such judgment,
order or award.
6.8 Confidentiality of Agreement. The parties acknowledge and agree
----------------------------
that this Agreement is a confidential document, that it shall be maintained in
strict confidence and that neither this document, nor any information contained
within this document, shall be disclosed to any person or entity other than to
counsel for a party (including secretarial, clerical and paralegal personnel
regularly employed by that counsel), accountants, financial advisors or other
professionals employed by that party to the extent absolutely necessary for that
professional to perform his function for the party. The parties further
acknowledge and agree that this section regarding confidentiality of this
Agreement is an essential term such that a breach of this section shall be
deemed a material breach of this Agreement. Notwithstanding the above, the
parties further acknowledge and agree that upon the advice of its counsel,
ChatCom shall be permitted to disclose the entirety of this Agreement, or any
portion thereof, to the Securities and Exchange Commission, in connection with
any of ChatCom's filings therewith.
6.9 Counterparts and Copies. This Agreement may be executed in any
-----------------------
number of counterparts by the parties, and, when each party has signed and
delivered at least one counterpart to the other parties, each counterpart shall
be deemed an original and, taken together, shall constitute and be deemed to be
one and the same agreement, and shall be binding and effective as to all
parties. In addition, true and correct copies may be used in lieu of the
original agreement for any purpose whatsoever.
6.10 Headings. The headings to the sections of this Agreement are
--------
inserted for convenience only and will not be deemed a part of this Agreement,
nor will the heading affect the construction or interpretation of the provisions
contained within this Agreement.
6.11 Further Instruments. Following the Termination Date, Mariner
-------------------
shall execute such additional documents and take such further actions related to
his prior performance under the Employment Agreement and as a director of
ChatCom to assist ChatCom as shall reasonably be requested by ChatCom. The
parties shall execute and deliver further instruments, documents or papers and
shall perform all acts necessary or proper to carry out and effectuate the terms
of this Agreement
14.
<PAGE>
as may be required by the terms of this Agreement or as may be reasonably
requested by any party to this Agreement.
6.12 No Presumption From Drafting. This Agreement has been negotiated
----------------------------
at arm's-length between persons knowledgeable in the matters set forth within
this Agreement. Accordingly, given that each party has had the opportunity to
draft, review and edit the language of this Agreement, no presumption for or
against any party arising out of drafting all or any part of this Agreement will
be applied in any action relating to, connected with or involving this
Agreement. In particular, any rule of law, including, but not limited to,
Section 1654 of the California Civil Code Section, or any other statutes, legal
decisions, or common law principles of similar effect, that would require
interpretation of any ambiguities in this Agreement against the party that has
drafted it, is of no application and is hereby expressly waived. The provisions
of this Agreement shall be interpreted in a reasonable manner to effect the
intentions of the parties.
6.13 Benefits Successors. Except as limited by the terms hereof, this
-------------------
Agreement shall be binding upon and shall inure to the benefit of each of the
parties hereto and to their respective heirs, executors, administrators,
assigns, successors-in-interest, representatives, trustees, beneficiaries and
Related Entities. The obligations and duties of Mariner hereunder are personal
and not assignable, whether voluntarily or involuntarily or by operation of law
or otherwise.
6.14 Voluntary Execution of Agreement. Mariner represents that he has
--------------------------------
carefully read this entire Agreement and that he knows and understands its
contents. Mariner has had the opportunity to receive independent legal advice
from attorneys of his choice with respect to the preparation, review and
advisability of executing this Agreement. Mariner further represents and
acknowledges that he has freely and voluntarily executed this Agreement after
independent investigation and without fraud, duress, or undue influence, with
the full understanding of the legal and binding effect of this Agreement and
with the approval of his legal counsel. Mariner thereby knowingly waives the
21-day period under the Older Workers Benefits Protection Act to review this
Agreement with his attorney prior to signing.
6.15 Right of Revocation. With respect only to claims arising under
-------------------
the Age Discrimination in Employment Act ("ADEA"), Mariner has the right to
revoke this Agreement for any reason within seven days after he signs it. To be
effective, Mariner's notice of revocation must be in writing and must be hand
delivered or mailed to Richard F. Gordon, Jr., ChatCom, Inc., 9600 Topanga
Canyon Boulevard, Chatsworth, California 91311, within the seven-day period. If
mailed, the
15.
<PAGE>
revocation must be postmarked within the seven-day period, properly addressed
and sent by certified mail, return receipt requested. If hand-delivered, it
must be given to Richard F. Gordon, Jr. within the seven-day period.
IN WITNESS WHEREOF, the parties to this Agreement have approved and
executed this Agreement on the date first set forth above.
JAMES B. MARINER
/s/ James B. Mariner
--------------------
James B. Mariner
CHATCOM, INC.
By:/s/ Richard F. Gordon, Jr.
--------------------------
Richard F. Gordon, Jr.
Chairman of the Board
APPROVED AS TO FORM:
TROY & GOULD
Professional Corporation
By:Sanford J. Hillsberg
--------------------
Sanford J. Hillsberg, Esq.
Attorneys for ChatCom, Inc.
__________________________
By:
-----------------------
______________________________
Attorneys for James B. Mariner
16.
<PAGE>
EXHIBIT 10.42
SETTLEMENT AGREEMENT
--------------------
This Settlement Agreement (the "Agreement") is made and entered into as of
February 1, 1998 by and between Vermont Research Products, Inc. ("VRPI") and
ChatCom, Inc. ("ChatCom") in consideration of the mutual promises herein
contained:
RECITALS
--------
A. VRPI contracted to provide goods and services to ChatCom pursuant to
agreements between the parties.
B. As of the date hereof, ChatCom is indebted to VRPI for such goods and
services in the amount of $1,765,470.
C. As of the date hereof, VRPI has warehoused for the benefit of ChatCom
an additional $273,878 of goods.
IT IS HEREBY AGREED:
1. The $2,039,348 in goods and obligations set forth above shall be paid,
delivered and accepted as set forth below:
2. Cash Payments. Of the total due, $420,470 will be paid in cash.
-------------
2.1 Of that amount, $5,000 will be paid upon execution of this
Agreement.
2.2 From the proceeds, net of expenses, of each financing (other than
commercial bank loan financing or asset lending against United States
accounts receivable and finished or assembled goods inventory) by ChatCom,
twenty percent (20%) will be paid to VRPI.
2.3 In addition, at the time of the first such financing, VRPI shall
be paid the sum of $50,000 plus an amount equal to 25% of the amount of
non-United States
<PAGE>
receivables collected from February 1, 1998 to the date of such financing.
At the time of the second such financing, VRPI shall be paid the sum of
$50,000 plus an amount equal to 25% of the amount of such receivables
collected from the date of the next prior financing. At the time of each
subsequent such financing, VRPI shall be paid an amount equal to 25% of the
amount of such receivables collected from the date of the next prior
financing.
2.4 Monthly payments will be made on March 1, 1998 and April 1, 1998
of $5,000 each, and $35,000 will be paid on May 1, 1998 and on the first
day of each succeeding month.
2.5 All payments pursuant to this paragraph will end when full
payment of the $420,470 plus interest has been made.
3. Warehoused Goods. The goods now warehoused by VRPI shall be shipped
----------------
by VRPI to ChatCom customers, COD, payable to VRPI. Payments received by VRPI
from such customers for such goods shall be credited against the $273,878 sum
included in the $2,039,348 total set forth above.
4. Market Convertible Preferred. Nine hundred forty-five thousand
----------------------------
dollars will be converted to a convertible preferred stock, convertible into
common stock any time from now to January 31, 2003 at market, but not less than
$.35 per share nor more than $.95 per share, and otherwise having rights and
preferences substantially as set forth in Exhibit A hereto.
5. Fixed Rate Preferred. Four hundred thousand dollars will be converted
--------------------
into a convertible preferred stock convertible into common stock at any time
from now to January
-2-
<PAGE>
31, 2003 at a fixed conversion rate of $.35 per share, and otherwise having
rights and preferences substantially as set forth in Exhibit B hereto.
6. Date of Issuance. The issuance of the shares of convertible preferred
----------------
stock (the "VRPI Preferred Stock") and the warrants (the "Warrants") as
contemplated by paragraphs 4, 5 and 13 of this Agreement by ChatCom to VRPI
shall take place at such time within five business days following the execution
of this Agreement by the parties, as the parties to this Agreement shall
mutually agree. On the date of such issuance, ChatCom shall deliver to VRPI
such certificate(s) representing the shares of the VRPI Preferred Stock and the
Warrants and VRPI shall deliver to ChatCom receipts evidencing the conversion in
to the respective series of the VRPI Preferred Stock of amounts equal to
$945,000 and $400,000, respectively.
7. Representations and Warranties. VRPI hereby represents and warrants
------------------------------
to Chatcom that as of the date hereof and again as of the date of the issuance
of the VRPI Preferred Stock and the Warrants:
7.1 Investment Intent. The VRPI Preferred Stock and the Warrants and
-----------------
the shares of Common Stock issuable upon the conversion of the VRPI
Preferred Stock and upon exercise of the Warrants will be acquired by VRPI
hereunder for VRPI's own account and not with the view to, or for resale in
connection with, any distribution other than resales made in compliance
with the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended (the "Securities Act") or the rules
promulgated thereunder. VRPI understands that neither the VRPI Preferred
Stock, the Warrants nor the Common Stock issuable thereunder have been
-3-
<PAGE>
registered under the Securities Act by reason of available exemptions from
the registration and prospectus delivery requirements of the Securities
Act, that the securities must be held indefinitely unless such securities
are registered under the Securities Act or unless any transfer is exempt
from registration, and that the reliance of ChatCom upon these exemptions
is predicted in part upon these representations and warranties by VRPI.
7.2 Disclosure. VRPI has reviewed ChatCom's publicly disclosed
----------
reports and filings, including, without limitation, ChatCom's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1997, the Current
Reports on Form 8-K filed with the Securities and Exchange Commission (the
"Commission") on December 29, 1997 and February 6, 1998, and the
confidential preliminary report of operations of ChatCom for the quarter
ended December 31, 1997 and has made such investigation of ChatCom as it
deems necessary for the purpose of its evaluation of its investment in
ChatCom. Furthermore, VRPI has had a full opportunity to discuss with
ChatCom all material aspects of an investment in the VRPI Preferred Stock
and the Warrants, including the opportunity to ask, and to receive answers
to its full satisfaction, regarding such questions as it has deemed
necessary to evaluate this transaction, ChatCom and its operations and
prospects. VRPI is aware that ChatCom is attempting to procure certain
financing and to convert certain outstanding debt into equity investments
in ChatCom, although no assurance can be given that the foregoing
transactions will be consummated. In addition, VRPI is aware that ChatCom
has received certain inquiries from The Nasdaq Stock Market, Inc. regarding
ChatCom's
-4-
<PAGE>
ability to satisfy the continued listing requirements of the Nasdaq Small
Cap Market. VRPI also is aware that the return of certain equipment
previously purchased by a foreign distributor will result in a material
reduction to ChatCom's revenues and accounts receivable and an increase in
its inventories, and that ChatCom is reviewing the appropriate accounting
treatment for such transactions.
7.3 Legend. VRPI acknowledges and agrees that the VRPI Preferred
------
Stock, the Warrants and the certificates representing the Common Stock to
be issued thereunder shall bear the following (or substantially equivalent)
legend on the face or reverse side thereof:
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR CONVERSION OR
EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND
MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION
STATEMENT UNDER SAID ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH
REGISTRATION.
Any stock certificate issued at any time in exchange or substitution for
any warrant or certificate bearing such legend shall also bear such (or
substantially equivalent) legend unless, in the opinion of counsel for
ChatCom, the securities represented thereby need no longer be subject to
restrictions pursuant to the Securities Act or applicable state securities
laws. ChatCom shall not be required to transfer on its books any
certificate for securities in violation of the provisions of such legend.
8. Reimbursement of Selling Expenses. ChatCom will pay VRPI's reasonable
---------------------------------
and customary selling expenses, including printing, legal, accounting and other
expenses, in connection with any sale of ChatCom securities acquired pursuant to
this Agreement.
-5-
<PAGE>
9. Interest and Dividends. Amounts to be paid in cash, until paid, will
----------------------
bear interest at the rate of 9.5% per annum from February 1, 1998. The
preferred stock will bear a cumulative 9.5% dividend.
10. Restrictive Covenant.
--------------------
10.1 Except as to Series D and Series E Preferred Stock, and the
conversion of such preferred stock to common stock and stated accrued
dividends, so long as the VRPI Preferred Stock or any portion thereof is
outstanding ChatCom will not pay cash dividends, redeem stock, either
common or preferred, for cash (except to the extent required to avoid loss
of tax net operating loss carryovers pursuant to Section 382 of the
Internal Revenue Code), or make any other cash disbursements related to
stock.
10.2 The VRPI Preferred Stock will be entitled to (after trade
creditors) equal preference with Series D and Series E preferred
shareholders in liquidation or involuntary or voluntary reorganization.
10.3 So long as the VRPI Preferred Stock or any portion thereof is
outstanding, VRPI shall have the right of approval, not to be unreasonably
withheld, of any debt offering except commercial bank lines of credit or
asset lending against United States accounts receivable and finished or
assembled goods inventory, and of any preferred stock offering that would
adversely affect, or rank pari passu, with any of the rights and
preferences of the VRPI Preferred Stock. Such approval shall be deemed to
have been given for any transaction, in each case, if VRPI shall not have
objected within three business days of its receipt of a written request
from ChatCom
-6-
<PAGE>
for approval of a specific transaction described in detail in such request.
VRPI hereby consents to reduction of the conversion price of Series D
Preferred Stock to a price not less than $.50 per common share.
11. Security Interest. ChatCom hereby grants to VRPI a security interest
-----------------
in all non-United States accounts receivable to secure payment of the $420,470
cash portion as described in paragraph 1.
12. Conversion Back to Debt. Through June 30, 1998, in the event that
-----------------------
ChatCom engages in a bankruptcy proceeding or reorganization, composition with
creditors or like transaction, VRPI shall have the option to surrender its
rights under this Agreement and be reinstated as an unsecured creditor for the
full amount of debt, less any payments which have been made.
13. Warrants. VRPI will be issued five year warrants substantially in the
--------
form annexed as Exhibit C hereto to purchase 285,000 shares of ChatCom common
stock at $.35 per share.
14. Registration of Securities. All of the Common Stock underlying the
--------------------------
VRPI Preferred Stock and the Warrants will be registered pursuant to a
Registration Statement to be filed as soon as possible, and in any event not
later than March 31, 1998 (if Deloitte & Touche provides its consent for the
incorporation by reference of its report covering ChatCom's March 31, 1997
Financial Statements), or May 31, 1998 (if Deloitte & Touche does not provide
the foregoing consent). ChatCom and VRPI shall enter into a Registration Rights
Agreement in substantially the form annexed hereto as Exhibit D pursuant to
which ChatCom shall use its best efforts to cause such Registration Statement to
become effective
-7-
<PAGE>
as soon as possible, but in any event not later than May 31, 1998 (extended to
June 30, 1998 in the event that the Commission undertakes a substantive review
of the Registration Statement), if Deloitte & Touche provides the foregoing
consent, or July 31, 1998 (extended to August 31, 1998, in the event that the
Commission undertakes a substantive review of the Registration Statement), if
Deloitte & Touche does not provide the foregoing consent, and the Registration
Statement will be maintained effective for a minimum period of one year. In the
event that ChatCom fails to file the Registration Statement on or before April
15, 1998, VRPI shall have the right, which must be exercised by written
notification to ChatCom on or before June 5, 1998, to surrender any or all of
the VRPI Preferred Stock issued to it pursuant to this Agreement and to be
reinstated as a creditor to the extent of the consideration stated above for the
VRPI Preferred Stock..
15. Alienability. All stock and warrants will be freely transferable,
------------
subject only to securities law limitations.
16. Buyback Rights. For a period of 120 days, ChatCom shall have the
--------------
right to buy back the unconverted portion of the VRPI Market Preferred Stock
described in paragraph 4 at the higher of (i) 115% of the amount of debt
converted to acquire it, or (ii) 115% of the market value of the underlying
common stock, provided that 100% of the amount set forth in paragraph 2 then has
been paid in full.
17. ChatCom Release. ChatCom hereby releases and forever discharges VRPI
---------------
and its successors, assigns, related corporations, officers, directors,
employees, insureds, suretys, attorneys and agents (collectively the "VRPI
Release Parties") from any and all claims,
-8-
<PAGE>
causes of actions, demands, contributions and indemnities whatsoever, at law or
in equity, which ChatCom ever had, now has or may hereafter have against any of
the VRPI Release Parties with respect to or arising out of the provision of
goods and services to ChatCom through the date hereof or other aspects of the
subject matter of this Agreement; provided, however, the foregoing release shall
not eliminate or reduce any applicable product warranties by VRPI to ChatCom in
connection with products and services provided or to be provided by VRPI to
ChatCom, and shall not release officers, directors, attorneys and agents prior
to full performance by VRPI hereunder as to matters involving fraud.
18. VRPI Release. Effective upon full performance of this Agreement by
------------
ChatCom, VRPI hereby releases and forever discharges ChatCom and its successors,
assigns and related corporations (collectively the "ChatCom Release Parties")
from any and all claims, causes of actions, demands, contributions and
indemnities whatsoever, at law or in equity, which VRPI ever had, now has or may
hereafter have against any of the ChatCom Release Parties with respect to or
arising out of the provision of goods and services to ChatCom through the date
hereof or other aspects of the subject matter of this Agreement.
Notwithstanding the foregoing and regardless of the performance by ChatCom of
this Agreement or the related agreements that are attached hereto as exhibits,
except as to matters involving fraud, VRPI hereby releases and forever
discharges ChatCom's officers, directors, employees, insureds, suretys,
attorneys and agents (collectively, the "ChatCom Release Individuals") from any
and all claims, causes of actions, demands, contributions and indemnities
whatsoever, at law or in equity, which VRPI ever had, now has or may hereafter
have against any of the ChatCom Release Individuals with respect to or arising
out of the
-9-
<PAGE>
provisions of goods and services to ChatCom through the date hereof or other
aspects of the subject matter of this Agreement.
19. VRPI and ChatCom acknowledge that they are familiar with Section 1542
of the Civil Code of the State of California, which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release which if known by him must have materially affected his
settlement with the debtor."
The releasing parties respectively waive any relinquish to the fullest
extent possible every right or benefit which they have or may have under
Section 1542 and under any similar or analogous law of any other applicable
jurisdiction with regard to the subject matter of this Agreement. The
parties acknowledge they are aware they may hereafter discover facts in
addition to or different from those which they now know or believe to be
true with respect to the subject matter of this Agreement.
20. No Other Claims. Each Party has released the other as noted in
---------------
paragraphs 17 and 18. Neither party currently knows of any claim, demand, or
cause of action against one or both parties that is not covered by this
Agreement.
21. Survival. The limited Releases contained in this Agreement are not
--------
intended to release any obligations created by this Agreement.
22. No Third Party Beneficiaries. There are no intended third-party
----------------------------
beneficiaries of this Agreement, and this Agreement shall not give any third
party any right, claim, benefit or defense.
23. Integration. This Agreement and the Exhibits attached hereto
-----------
constitute the entire agreement and understanding regarding the parties' prior
relationship and present
-10-
<PAGE>
obligations, and supersedes any prior agreements, understandings or
representations by or between the parties, written or oral. The person signing
this Agreement on behalf of VRPI represents that he has the authority to execute
this document and thereby bind VRPI. The person signing this Agreement on
behalf of ChatCom represents that he has the authority to execute this document
and thereby bind ChatCom. This Agreement may be amended, modified or
supplemented only by a written agreement executed by the parties hereto.
24. Successors. The parties represent that this Agreement shall be
----------
binding upon and shall inure to their respective successors, assigns and related
corporations.
25. Governing Law. This Agreement shall be governed by and interpreted
-------------
and construed in accordance with, the laws of the Commonwealth of Massachusetts.
26. Counterparts. This Agreement may be executed in counterparts all of
------------
which when taken together shall constitute one and the same agreement of the
parties. Copies of
-11-
<PAGE>
signed counterparts of this Agreement shall be deemed to be authentic and valid
as an original of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first appearing above.
VERMONT RESEARCH PRODUCTS, INC. CHATCOM, INC.
By: /s/ By: /s/
------------------------------ -----------------------
duly authorized duly authorized
-12-
<PAGE>
EXHIBIT 10.43
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of February 1, 1998
("Agreement"), is made by and between CHATCOM, INC., a California corporation
(the "Company"), and Vermont Research Products, Inc., ("VRPI").
W I T N E S S E T H:
-------------------
WHEREAS, upon the terms and subject to the conditions of the Settlement
Agreement, dated as of February 1, 1998, by and between VRPI and the Company
(the "Settlement Agreement"), the Company has agreed to issue to VRPI shares of
Series F Convertible Redeemable Preferred Stock and shares of Series G
Convertible Preferred Stock of the Company (collectively, "Preferred Stock"),
and warrants (the "Warrants") to purchase up to 285,000 shares of common stock,
no par value ("Common Stock"), of the Company;
WHEREAS, the shares of Preferred Stock are convertible into shares of
Common Stock (the "Conversion Shares") upon the terms and subject to the
conditions of such Preferred Stock, and the Warrants are exercisable for shares
of Common Stock (the "Warrant Shares"); and
WHEREAS, to induce VRPI to execute and deliver the Settlement Agreement,
the Company has agreed to provide certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations thereunder, or
any similar successor statute (collectively, the "Securities Act"), with respect
to the Conversion Shares and the Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and VRPI hereby agree
as follows:
1. Definitions.
-----------
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investor" means VRPI and any permitted transferee or
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "Potential Material Event" means any of the following:
(a) the possession by the Company of material information not ripe for
disclosure in a registration statement, which shall be evidenced by
determinations in good faith by the Board of Directors of the Company that
disclosure of such information in the registration statement would be
detrimental to
<PAGE>
the business and affairs of the Company; or (b) any material engagement or
activity by the Company which would, in the good faith determination of the
Board of Directors of the Company, be adversely affected by disclosure in a
registration statement at such time, which determination shall be accompanied by
a good faith determination by the Board of Directors of the Company that the
registration statement would be materially misleading absent the inclusion of
such information.
(iii) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iv) "Registrable Securities" means the Conversion Shares and the
Warrant Shares.
(v) "Registration Statement" means a registration statement of
the Company under the Securities Act.
(b) Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Settlement Agreement.
2. Registration.
------------
(a) Mandatory Registration. The Company shall prepare and file with
----------------------
the SEC, no later than March 31, 1998 (if Deloitte & Touche provides its consent
for the incorporation by reference of its report covering the Company's March
31, 1997 Financial Statements), or May 31, 1998 (if Deloitte & Touche does not
provide the foregoing consent), either a Registration Statement on Form S-3
registering for resale by the Investor a sufficient number of shares of Common
Stock for the Investor (or such lesser number as may be required by the SEC, but
in no event less than the number of Conversion Shares into which the Preferred
Stock would be convertible and the number of Warrant Shares into which the
Warrants would be exercisable at the time of filing of the Form S-3), or an
amendment to any pending Company Registration Statement on Form S-3, and such
Registration Statement or amended Registration Statement shall state that, in
accordance with Rule 416 and Rule 457 under the Securities Act, it also covers
such indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Preferred Stock and exercise of the Warrants
resulting from adjustment in the conversion price, or to prevent dilution
resulting from stock splits, or stock dividends. If at any time the number of
shares of Common Stock
2
<PAGE>
into which the Preferred Stock may be converted or the Warrants are exercisable,
exceeds the aggregate number of shares of Common Stock then registered, the
Company shall, within 15 business days after receipt of a written notice from
any Investor, either (i) amend the Registration Statement filed by the Company
pursuant to the preceding sentence if such Registration Statement has not been
declared effective by the SEC at that time, to register all shares of Common
Stock into which the Preferred Stock may be converted or the Warrants are
exercisable, or (ii) if such Registration Statement has been declared effective
by the SEC at that time, file with the SEC an additional Registration Statement
on Form S-3 to register the shares of Common Stock into which the Preferred
Stock may be converted, or the Warrants are exercisable, that exceed the
aggregate number of shares of Common Stock already registered. If the staff of
the SEC determines that all of the Conversion Shares cannot be registered by the
Company for resale by the Investor because, in the view of the staff, such
registration would constitute a primary offering by the Company, than the
Company shall have an additional 30 days in which to amend such Registration
Statement to another available form.
(b) Payments by the Company. If the Registration Statement covering
-----------------------
the Registrable Securities required to be filed by the Company pursuant to
Section 2(a) hereof is not effective on May 31, 1998 (or June 30, 1998 in the
event the SEC undertakes a substantive review of the Registration Statement or
the SEC makes the determination as set forth in the last sentence of Section
2(a) hereof) if Deloitte & Touche provides its consent for the incorporation by
reference of its report covering the Company's March 31, 1997 Financial
Statements, or July 31, 1998 (or August 31, 1998 in the event the SEC undertakes
a substantive review of the Registration Statement or the SEC makes the
determination as set forth in the last sentence of Section 2(a) hereof) if
Deloitte & Touche does not provide the foregoing consent, then the Company shall
make payments to the Investor in such amounts and at such times as shall be
determined pursuant to this Section 2(b). The amount to be paid by the Company
to the Investor shall be determined as of each Computation Date, and such amount
shall be equal to one percent (1%) of the purchase price paid by the Investor
for the Preferred Stock purchased pursuant to the Settlement Agreement on the
first Computation Date, and on each Computation Date thereafter, to the date the
Registration Statement is declared effective by the SEC (pro rated for partial
periods) (the "Periodic Amount"). The full Periodic Amount shall be paid by the
Company within three business days after each Computation Date in cash, or
shares of Common Stock having an Aggregate Market Value equal to the amount of
the Periodic Amount, at the option of the Company.
As used in this Section 2(b), the following terms shall have the following
meanings:
3
<PAGE>
"Aggregate Market Value" of any shares of Common Stock as of any
Computation Date means the product obtained by multiplying (i) such number of
shares of Common Stock, by (ii) the average of the Market Price of the Common
Stock for the Measurement Period for such Computation Date.
"Market Price" of Common Stock shall be the last sale price of the Common
Stock (or if such information is not provided by such exchange or the National
Association of Securities Dealers, Inc. Automated Quotation System, the average
of the closing bid and asked prices of the Common Stock) as reported on the
principal national securities exchange on which the Common Stock of the Company
is listed or admitted to trading, or if the Common Stock of the Company is not
listed or admitted to trading on any national securities exchange, as furnished
by the National Association of Securities Dealers, Inc. Automated Quotation
System, or comparable system, or in the absence of the foregoing, the fair
market value as reasonably determined by the Board of Directors of the Company
and the Investor.
"Computation Date" means the date which is May 31, 1998 (or June 30, 1998
in the event the SEC undertakes a substantive review of the Registration
Statement or the SEC makes the determination as set forth in the last sentence
of Section 2(a) hereof) if Deloitte & Touche provides its consent for the
incorporation by reference of its report covering the Company's March 31, 1997
Financial Statements, or July 31, 1998 (or August 31, 1998 in the event the SEC
undertakes a substantive review of the Registration Statement or the SEC makes
the determination as set forth in the last sentence of Section 2(a) hereof) if
Deloitte & Touche does not provide the foregoing consent, and, if the
Registration Statement required to be filed by the Company pursuant to Section
2(a) has not theretofore been declared effective by the SEC, each date which is
30 days after the previous Computation Date (pro rated for partial periods)
until such Registration Statement is so declared effective.
"Measurement Period" means the period of five consecutive trading days for
the Common Stock ending on (or, if such Computation Date is not a trading day,
on the last trading day preceding) each Computation Date.
3. Obligations of the Company. In connection with the registration of
--------------------------
the Registrable Securities, the Company shall do each of the following.
(a) Prepare promptly, and file with the SEC not later than March 31,
1998 (if Deloitte & Touche provides its consent for the incorporation by
reference of its report covering the Company's March 31, 1997 Financial
Statements), or May 31, 1998 (if Deloitte & Touche does not provide the
foregoing consent), a Registration
4
<PAGE>
Statement with respect to not less than the number of Registrable Securities
provided in Section 2(a), above, and thereafter use its best efforts to cause
each Registration Statement relating to Registrable Securities to become
effective as soon as possible after such filing, but in any event not later than
May 31, 1998 (or June 30, 1998 in the event the SEC undertakes a substantive
review of the Registration Statement or the SEC makes the determination as set
forth in the last sentence of Section 2(a) hereof) if Deloitte & Touche provides
its consent for the incorporation by reference of its report covering the
Company's March 31, 1997 Financial Statements, or July 31, 1998 (or August 31,
1998 in the event the SEC undertakes a substantive review of the Registration
Statement or the SEC makes the determination as set forth in the last sentence
of Section 2(a) hereof) if Deloitte & Touche does not provide the foregoing
consent, and keep the Registration Statement effective pursuant to Rule 415 at
all times until the earliest (the "Registration Period") of (i) the date that is
one year after the date of effectiveness of the Registration Statement, (ii) the
date when the Investors may sell all Registrable Securities under Rule 144
promulgated under the Securities Act, or (iii) the date the Investors no longer
own any of the Registrable Securities, which Registration Statement (including
any amendments or supplements thereto and prospectuses contained therein) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including post-
effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) Permit a single firm of counsel designated by VRPI to review the
Registration Statement and all amendments and supplements thereto a reasonable
period of time prior to their filing with the SEC, and not file any document in
a form to which such counsel reasonably objects;
(d) Furnish to the Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel identified to the Company,
(i) promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the
5
<PAGE>
Company, one copy of the Registration Statement and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, and all amendments and
supplements thereto and such other documents, as VRPI may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by the
Investor;
(e) As promptly as practicable after becoming aware of such event,
notify each Investor of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be state therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Investor as such Investor may reasonably
request;
(f) As promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold of the issuance
by the SEC of any stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time;
(g) Use its commercially reasonable efforts, if eligible, to secure
designation of all the Registrable Securities covered by the Registration
Statement as a National Association of Securities Dealers Automated Quotations
System ("Nasdaq") "Small Capitalization" within the meaning of Rule 11Aa2-1 of
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the quotation of the Registrable Securities on the Nasdaq/Small Cap
Market; or if, despite the Company's commercially reasonable efforts to satisfy
the preceding clause, the Company is unsuccessful in doing so, to secure
Nasdaq/OTC Bulletin Board authorization and quotation for such Registrable
Securities and, without limiting the generality of the foregoing, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities;
(h) Provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(i) Cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Securities to be offered pursuant to the Registration Statement
and enable such
6
<PAGE>
certificates to be in such denominations or amounts as the case may be, as the
Investors may reasonably request and registered in such names as the Investors
may request; and, within three business days after a Registration Statement
which includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the Company to
deliver, to the transfer agent for the Registrable Securities (with copies to
the Investor whose Registrable Securities are included in such Registration
Statement) an appropriate instruction and opinion of such counsel; and
(j) Take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the Registration Statement.
4. Obligations of the Investors. In connection with the registration of
----------------------------
the Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of the Registrable
Securities held by it, as shall be reasonably required to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request. At
least five days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor of the information the Company
requires from each such Investor (the "Requested Information") if such Investor
elects to have any of such Investor's Registrable Securities included in the
Registration Statement. If at least two business days prior to the filing date
the Company has not received the Requested Information from an Investor (a "Non-
Responsive Investor"), then the Company may file the Registration Statement
without including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(e) or
3(f), above, such Investor shall
7
<PAGE>
immediately discontinue disposition of Registrable Securities pursuant to the
Registration Statement covering such Registrable Securities until such
Investor's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3(e) or 3(f) and, if so directed by the Company, such
Investor shall deliver to the Company (at the expense of the Company) or destroy
(and deliver to the Company a certificate of destruction) all copies in such
Investor's possession, of the prospectus covering such Registrable Securities
current at the time of receipt of such notice.
(d) If at any time or from time to time after the date of
effectiveness of the Registration Statement, the Company notifies the
Investor(s) in writing of the existence of a Potential Material Event, the
Investor(s) shall not offer or sell any Registrable Securities, or engage in any
other transaction involving or relating to the Registrable Securities, from the
time of the giving of notice with respect to a Potential Material Event until
such Investor receives written notice from the Company that such Potential
Material Event either has been disclosed to the public or no longer constitutes
a Potential Material Event; provided, however, that the Company may not so
------------------
suspend the right to such holders of Registrable Securities for more than two
20-day periods in the aggregate during any 12-month period ("Suspension Period")
with at least a 10 business day interval between such periods, during the period
the Registration Statement is required to be in effect.
5. Expenses of Registration. All reasonable expenses relating to the
------------------------
Registration of the Registrable Securities (other than any underwriting
discounts and underwriting commissions incurred in connection with the
registrations and fees and expenses of counsel for the Investors), including,
without limitation, all registration, listing, and qualification fees, printers
and accounting fees, and the fees and disbursements of counsel for the Company,
shall be borne by the Company.
6. Indemnification. In the event any Registrable Securities are included
---------------
in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company shall indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act (each, an "Indemnified Person"), against any
losses, claims, damages, liabilities or expenses (joint or several) incurred
(collectively, "Claims") to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are
8
<PAGE>
based upon any of the following statements, omissions or violations in the
Registration Statement, or any post-effective amendment thereof, or any
prospectus included therein: (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). The
Company shall reimburse the Investors, promptly as such expenses are incurred
and are due and payable, for any reasonable legal fees or other reasonable
expenses incurred by them in connection with investigating or defending any such
Claim. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a) shall not (I) apply to
a Claim arising out of or based upon a Violation which occurs in reliance upon
and in conformity with information furnished in writing to the Company by or on
behalf of any Indemnified Person expressly for use in connection with the
preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (II) be available to the extent such Claim is
based on a failure of the Investor to deliver or cause to be delivered the
prospectus made available by the Company; or (III) apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld. Each
Investor shall indemnify the Company and its officers, directors and agents
against any claims arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company, by or on behalf of such Investor, expressly for use in connection with
the preparation of the Registration Statement, subject to such limitations and
conditions as are applicable to the Indemnification provided by the Company to
this Section 6. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9.
9
<PAGE>
(b) Promptly after receipt by an Indemnified Person under this Section
6 of notice of the commencement of any action (including any governmental
action), such Indemnified Person shall, if a Claim in respect thereof is to be
made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person,
provided, however, that an Indemnified Person shall have the right to retain its
- ------------------
own counsel with the reasonable fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person and the
indemnifying party would be inappropriate due to actual or potential differing
interests between such Indemnified Person and any other party represented by
such counsel in such proceeding. In such event, the Company shall pay for only
one separate legal counsel for the Investors; such legal counsel shall be
selected by the Investors holding a majority in interest of the Registrable
Securities included in the Registration Statement to which the Claim relates.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person under this Section
6, except to the extent that the indemnifying party is prejudiced in its ability
to defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. Contribution. To the extent any indemnification by an indemnifying
------------
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
---------
however, that (a) no contribution shall be made under circumstances where the
- --------
maker would not have been liable for indemnification under the fault standards
set forth in Section 6; (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation; and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the net amount of proceeds received by such seller from the sale of such
Registrable Securities.
8. Reports under Exchange Act. With a view to making available to the
--------------------------
Investors the benefits of Rule 144 promulgated
10
<PAGE>
under the Securities Act or any other similar rule or regulation of the SEC that
may at any time permit the Investors to sell securities of the Company to the
public without registration ("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144:
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the Company
-------------------------------------
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of at least 30% of the
Conversion Shares or to the transferee of all of the Warrants only if: (a) the
Investor agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (b) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (i) the
name and address of such transferee or assignee and (ii) the securities with
respect to which such registration rights are being transferred or assigned, (c)
immediately following such transfer or assignment the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act and applicable state securities laws, and (d) at or before the time the
Company receives the written notice contemplated by clause (b) of this sentence
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions contained herein. In the event of any delay in filing or
effectiveness of the Registration Statement as a result of such assignment, the
Company shall not be liable for any damages arising from such delay, or the
payments set forth in Section 2(b) hereof.
10. Amendment of Registration Rights. Any provision of this Agreement may
--------------------------------
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold an 80% interest of the
11
<PAGE>
Registrable Securities. Any amendment or waiver effected in accordance with
this Section 10 shall be binding upon each Investor and the Company.
11. Miscellaneous.
-------------
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission, receipt
confirmed, or other means) or sent by certified mail, return receipt requested,
properly addressed and with proper postage pre-paid (i) if to the Company, at
ChatCom, Inc., 9600 Topanga Canyon Boulevard, Chatsworth, California 91311,
Attention: President or Chairman of the Board, with a copy to Troy & Gould
Professional Corporation, 1801 Century Park East, 16th Floor, Los Angeles,
California 90067, Attention: Sanford J. Hillsberg, Esq., (ii) if to VRPI, at the
address set forth under its name in the Settlement Agreement, and (iii) if to
any other Investor, at such address as such Investor shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 11(b), and shall be effective, when
personally delivered, upon receipt and, when so sent by certified mail, four
calendar days after deposit with the United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of California applicable to agreements made and to be
performed entirely within such State. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
city of Los Angeles or the state courts of the State of California sitting in
the city of Los Angeles in connection with any dispute arising under this
Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute
12
<PAGE>
or rule of law, then such provision shall be deemed inoperative to the extent
that it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not effect the validity or enforceability of
any other provision hereof.
(e) This Agreement and the Settlement Agreement constitute the entire
agreement among the parties hereto with respect to the subject matter hereof.
This Agreement and the Settlement Agreement supersede all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning thereof.
(i) The Company and VRPI agree and acknowledge that it would be
impracticable or extremely difficult to fix, prior to signing this Agreement,
the actual damages which would be suffered by the Investor if the Company fails
to perform its obligations under Section 2(a). Therefore the Company and VRPI
and agree that the Company shall be liable for only such Periodic Amount(s) as
are set forth in Section 2(b) arising out of any noncompliance by the Company of
Section 2(a) hereof. Neither party shall be liable for consequential damages.
(j) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
13
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
CHATCOM, INC.
By /s/ Gordon Almquist
---------------------------------
Name: Grodon Almquist
Title: CFO
VERMONT RESEARCH PRODUCTS, INC.
By /s/ James C. Louney
---------------------------------
Name: James C. Louney
Title: CFO
14
<PAGE>
EXHIBIT 10.44
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, OR AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS
EXEMPT FROM SUCH REGISTRATION.
CHATCOM, INC.
COMMON STOCK PURCHASE WARRANT
1. Issuance. For value received, the receipt of which is hereby
--------
acknowledged by CHATCOM, INC., a California corporation (the "Company"), Vermont
Research Products, Inc. or registered assigns (the "Holder"), is hereby granted
the right to purchase at any time commencing February 1, 1998 and continuing
until 5:00 P.M., Pacific Standard Time, on January 31, 2003 (the "Expiration
Date"), Two Hundred and Eighty-Five Thousand (285,000) fully paid and
nonassessable shares of the Company's Common Stock, no par value (the "Common
Stock") at an initial exercise price of $0.35 per share (the "Exercise Price"),
subject to further adjustment as set forth in Section 6 hereof.
2. Exercise of Warrants. This Warrant is exercisable in whole or in part
--------------------
at the Exercise Price per share of Common Stock payable hereunder, payable in
cash or by certified or official bank check. Upon surrender of this Warrant
with the annexed Notice of Exercise Form duly executed, together with payment of
the Exercise Price for the shares of Common Stock purchased, the Holder shall be
entitled to receive a certificate or certificates for the shares of Common Stock
so purchased.
3. Reservation of Shares. The Company hereby agrees that at all times
---------------------
during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares").
4. Mutilation or Loss of Warrant. Upon receipt by the Company of
-----------------------------
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will execute and deliver
a new Warrant of like tenor and date and any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a shareholder of the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except to the extent set
forth herein.
6. Protection Against Dilution.
---------------------------
6.1 Adjustments for Stock Splits, Stock Dividends Etc. If the number
-------------------------------------------------
of outstanding shares of Common Stock of the Company are increased or decreased
by a stock split, reverse stock split, stock dividend, stock combination,
recapitalization or the like, the Exercise Price and the number of shares
purchasable pursuant to this Warrant shall be adjusted proportionately so that
the ratio of (i) the aggregate number of shares purchasable by exercise of this
Warrant to (ii) the total number of shares outstanding immediately following
such stock split, reverse stock split, stock
1.
<PAGE>
dividend, stock combination, recapitalization or the like shall remain
unchanged, and the aggregate purchase price of shares issuable pursuant to this
Warrant shall remain unchanged.
6.2 Adjustments for Reorganization, Mergers, Consolidations or Sales
----------------------------------------------------------------
of Assets. If at any time there is a capital reorganization of the Common Stock
- ---------
(other than a recapitalization, combination, or the like provided for elsewhere
in this Section 6) or merger or consolidation of the Company with or into
another corporation, or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the Holder shall thereafter be entitled to receive upon exercise of this Warrant
(and only to the extent this Warrant is exercised), the number of shares of
stock or other securities or property of the Company, or of the successor
corporation resulting from such merger or consolidation or sale, to which a
holder of Common Stock, or other securities, deliverable upon the exercise of
this Warrant would otherwise have been entitled on such capital reorganization,
merger, consolidation or sale. In any such case, appropriate adjustments shall
be made in the application of the provisions of this Section 6 (including
adjustment of the Exercise Price then in effect and number of Warrant Shares
purchasable upon exercise of this Warrant) which shall be applicable after such
events.
7. Transfer to Comply with the Securities Act. This Warrant has not been
------------------------------------------
registered under the Securities Act of 1933, as amended, (the "Act") and has
been issued to the Holder for investment and not with a view to the distribution
of either the Warrant or the Warrant Shares. Neither this Warrant nor any of
the Warrant Shares or any other security issued or upon exercise of this Warrant
may be sold, transferred, pledged or hypothecated in the absence of an effective
registration statement under the Act relating to such security or an opinion of
counsel satisfactory to the Company that registration is not required under the
Act. Each certificate for the Warrant, the Warrant Shares and any other
security issued or issuable upon exercise of this Warrant shall contain a legend
in form and substance satisfactory to counsel for the Company, setting forth the
restrictions on transfer contained in this Section.
8. Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage pre-paid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission,
or, if mailed, two days after the date of deposit in the United States mails, as
follows:
(i) if to the Company, to:
CHATCOM, INC.
9600 Topanga Canyon Boulevard
Chatsworth, California 91311
Telecopier No. (818) 882-1424
Attention: President
with a copy to:
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067
Telecopier No. (310) 201-4746
Attention: Sanford J. Hillsberg, Esq.
2.
<PAGE>
(ii) if to the Holder, to:
Vermont Research Products, Inc.
(c/o Storage Computer Corporation)
11 Riverside Street
Nashua, NH 03062
Attention: James Louney, Vice President
with a copy to:
Peabody & Arnold
50 Bowes Wharf
Boston, Massachusetts 02110
Telecopier No. (617) 951-2125
Attention: Thomas A. Wooters, Esq.
Any party may designate another address or person for receipt of notices
hereunder by notice given to the other parties in accordance with this Section.
9. Supplements and Amendments; Whole Agreement. This Warrant may be
-------------------------------------------
amended or supplemented only by an instrument in writing signed by the parties
hereto. This Warrant contains the full understanding of the parties hereto with
respect to the subject matter hereof, and there are no representations,
warranties, agreements or understandings other than expressly contained herein.
10. Governing Law. This Warrant shall be deemed to be a contract made
-------------
under the laws of the State of California and for all purposes shall be governed
by and construed in accordance with the laws of such State applicable to
contracts to be made and performed entirely within such State.
11. Counterparts. This Warrant may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
12. Descriptive Headings. Descriptive headings of the several Sections of
--------------------
this Warrant are inserted for convenience only and shall not control or affect
the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the
1st day of February 1998.
CHATCOM, INC.
By: /s/ Gordon Almquist
-------------------------------------
Gordon Almquist
-------------------------------------
Its Chief Financial Officer
-------------------------------------
Attest:
/s/ D. Saltmarch
- ------------------------------
3.
<PAGE>
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant dated as of February 1, 1998 to purchase
_____________ shares of the Common Stock, no par value, of CHATCOM, INC., and
tenders herewith payment in accordance with Section 2 of said Common Stock
Purchase Warrant.
Please deliver the stock certificate to:
Dated:____________________________
By:_______________________________
[_] CASH: $____________________
4.
<PAGE>
EXHIBIT 10.45
INVESTMENT AGREEMENT
1. PURCHASE AND PAYMENT. Barry Saxe (the "Investor") hereby agrees to
purchase from ChatCom, Inc., a California corporation (the "Company"), 571,428
shares (the "Shares") of the Company's Common Stock, no par value ("Common
Stock"), at an aggregate purchase price of $200,000 (the "Purchase Price") and
the Company hereby agrees to issue the Shares upon receipt of the Purchase Price
as set forth below. The Investor agrees to tender the Purchase Price of the
Shares purchased hereby to the Company as follows: (i) the amount of $59,000, by
wire transfer to the Company no later than 2:30 P.M., Pacific Standard Time, on
March 5, 1998; (ii) a check in the amount of $41,000 to be received by the
Company no later than March 5, 1998; and (iii) the amount of $100,000 to the
Company, by wire transfer to the Company or by check to be received by the
Company, no later than 2:30 P.M., Pacific Standard Time, on March 13, 1998.
2. ISSUANCE OF SHARES. Upon confirmation of the transfer of the Purchase
Price to the Company, the Company shall promptly deliver, or shall cause its
transfer agent to deliver, to the Investor the stock certificate representing
the Shares. The Shares shall not be deemed issued to, or owned by, the Investor
until the aggregate Purchase Price of the Shares is delivered to the Company and
the stock certificate representing the Shares is delivered to the Investor. The
Investor's obligation to pay the entire Purchase Price is unconditional, subject
only to the issuance of the Shares to the Investor.
3. INVESTOR REPRESENTATIONS AND WARRANTIES. The Investor hereby
represents and warrants to the Company as follows:
(a) The Investor is an "accredited investor" within the meaning of
Regulation D under the United States Securities Act of 1933, as amended (the
"Act").
(b) The Investor is acquiring the Shares for the Investor's own
account, for investment purposes only, and not with a view to or for sale in
connection with any distribution of the Shares.
(c) The Investor acknowledges his understanding that the offer and
sale of the Shares is intended to be exempt from registration under the Act, and
exempt from qualification under the securities laws of certain states of United
States by virtue of exemptions from such registration and qualification for
transactions not involving any public offering. In furtherance thereof, the
Investor represents and warrants to and agrees with the Company as follows:
(i) The Investor has the financial ability to bear the economic
risk of his investment in the Company (including its possible loss), has
adequate means of providing for his current needs and contingencies and has no
need for liquidity with respect to his investment in the Company; and
(ii) The Investor has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of an
investment in the Shares and has obtained, in his judgment, sufficient
information from the Company to evaluate the merits and risks of an investment
in the Shares.
(d) The Investor:
1.
<PAGE>
(i) has received copies of the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1997, filed with the United
States Securities and Exchange Commission (the "Commission") on February 23,
1998 and any other report of the Company, filed with the Commission, that he has
requested from the Company (collectively, the "SEC Filings"), and has been
furnished any other documents requested from the Company by the Investor, and
understands and has evaluated the risks of a purchase of the Shares;
(ii) has been given the opportunity to ask questions of the
Company concerning the Company, the terms and conditions of this offering and
other matters pertaining to this investment, has received complete and
satisfactory answers to any such inquiries and has been given the opportunity to
obtain such additional information necessary to verify the accuracy of the
information which was provided in order for him to evaluate the merits and risks
of an investment in the Company to the extent the Company possesses such
information or can acquire it without unreasonable effort or expense; and
(iii) has read and is familiar with the SEC Filings and other
information provided to the Investor and has determined that the Shares are a
suitable investment for him.
(e) The Investor acknowledges his understanding that the Company has
incurred net losses for each of its fiscal years ended March 31, 1996 and March
31, 1997 and for each of its fiscal quarters ended June 30, 1997, September 30,
1997 and December 31, 1997. The Investor further acknowledges his understanding
that his investment in the Shares involves a high degree of risk.
(f) In making his decision to purchase the Shares, the Investor has
relied solely upon independent evaluations or investigations made by him. The
Investor is not relying on the Company with respect to tax or other economic
considerations involved in this investment.
(g) The Investor represents, warrants, and agrees that he will not
sell, transfer or otherwise dispose of the Shares (i) without registration under
the Act and any applicable state securities laws or (ii) without providing to
the Company a written opinion of counsel to the Investor reasonably satisfactory
to the Company opining that an exemption from registration or qualification is
available. The Investor fully understands and agrees that he must bear the
economic risk of his investment for an indefinite period of time because, among
other reasons, the Shares have not been registered under the Act or under the
securities laws of certain states and, therefore, cannot be resold, pledged,
assigned or otherwise disposed of unless they are subsequently registered under
the Act and under applicable securities laws of such states, or an exemption
from such registration is available.
(h) The Investor acknowledges and agrees that the certificate
representing the Shares shall bear the following (or substantially equivalent)
legends on the face or reverse side thereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE LAWS OF THE UNITED STATES OR ANY STATE THEREOF AND
NEITHER THE SHARES NOR ANY INTEREST THEREIN MAY BE SOLD OR TRANSFERRED
WITHOUT COMPLYING WITH SUCH LAWS AND PROVIDING TO THE ISSUER, A WRITTEN
OPINION OF
2.
<PAGE>
COUNSEL SATISFACTORY TO THE ISSUER THAT AN EXEMPTION FROM REGISTRATION OR
QUALIFICATION UNDER APPLICABLE LAWS IS THEN AVAILABLE.
Any certificate or other document issued at any time in exchange or substitution
for any security bearing such legends shall also bear such (or substantially
equivalent) legend unless, in the sole opinion of counsel for the Company, the
securities represented thereby need no longer be subject to such restrictions.
(i) The Investor is authorized and qualified to become an investor in
the Company. This Investment Agreement has been duly executed and delivered by
the Investor.
(j) No agency of the United States or any state thereof has passed
upon the Shares or made any findings or determination as to the fairness of this
investment.
(k) The representations, warranties, agreements, undertakings and
acknowledgements made by the Investor in this Investment Agreement are made with
the intent that they be relied upon by the Company and its agent (including,
without limitation, the Company's counsel) in determining the Investor's
suitability as a purchaser of the Shares.
4. REGISTRATION. The Company represents that it shall file a
registration statement covering the Shares under the Act on or before March 18,
1998 and shall use its best efforts to cause such registration statement to
become effective within 60 days after the date of such filing.
5. INDEMNITY. The Investor agrees to indemnify and hold harmless the
Company against any and all loss, liability, claim, damage, and expense
whatsoever (including, but not limited to, any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation commenced or threatened or any claim whatsoever) related to (i) any
false representation or warranty herein or (ii) any transfer of the Shares in
violation of any securities laws.
6. MODIFICATION. Neither this Investment Agreement nor any provision
hereof shall be modified, discharged or terminated except by an instrument in
writing signed by the party against whom any waiver, change, discharge or
termination is sought.
7. ASSIGNABILITY. This Investment Agreement shall be binding upon and
inure to the benefit of the parties and their heirs, executors, administrators,
successors and legal representatives. This Investment Agreement is not
transferable or assignable.
8. COUNTERPARTS. This Investment Agreement may be executed in any number
of counterparts, and each of such counterparts shall, for all purposes,
constitute one agreement binding on all the parties, notwithstanding that all
parties are not signatories to the same counterpart.
3.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Investment
Agreement as of March 3, 1998.
/s/ Barry Saxe
---------------------------------------
Barry Saxe
CHATCOM, INC., a California corporation
By: /s/
----------------------------------
Its: Vice Chairman
----------------------------------
4.
<PAGE>
EXHIBIT 10.46
INVESTMENT AGREEMENT
1. PURCHASE AND PAYMENT. Barry Saxe (the "Investor") hereby agrees to
purchase from ChatCom, Inc., a California corporation (the "Company"), 238,095
shares (the "Shares") of the Company's Common Stock, no par value ("Common
Stock"), at an aggregate purchase price of $100,000 (the "Purchase Price") and
the Company hereby agrees to issue the Shares upon receipt of the Purchase Price
as set forth below. The Investor agrees to tender the entire Purchase Price of
the Shares purchased hereby to the Company by delivering a check in the amount
of $100,000 no later than March 24, 1998.
2. ISSUANCE OF SHARES. Upon confirmation of the transfer of the Purchase
Price to the Company, the Company shall promptly deliver, or shall cause its
transfer agent to deliver, to the Investor the stock certificate representing
the Shares. The Shares shall not be deemed issued to, or owned by, the Investor
until the aggregate Purchase Price of the Shares is delivered to the Company and
the stock certificate representing the Shares is delivered to the Investor. The
Investor's obligation to pay the entire Purchase Price is unconditional, subject
only to the issuance of the Shares to the Investor.
3. INVESTOR REPRESENTATIONS AND WARRANTIES. The Investor hereby
represents and warrants to the Company as follows:
(a) The Investor is an "accredited investor" within the meaning of
Regulation D under the United States Securities Act of 1933, as amended (the
"Act").
(b) The Investor is acquiring the Shares for the Investor's own
account, for investment purposes only, and not with a view to or for sale in
connection with any distribution of the Shares.
(c) The Investor acknowledges his understanding that the offer and
sale of the Shares is intended to be exempt from registration under the Act, and
exempt from qualification under the securities laws of certain states of United
States by virtue of exemptions from such registration and qualification for
transactions not involving any public offering. In furtherance thereof, the
Investor represents and warrants to and agrees with the Company as follows:
(i) The Investor has the financial ability to bear the economic
risk of his investment in the Company (including its possible loss), has
adequate means of providing for his current needs and contingencies and has no
need for liquidity with respect to his investment in the Company; and
(ii) The Investor has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of an
investment in the Shares and has obtained, in his judgment, sufficient
information from the Company to evaluate the merits and risks of an investment
in the Shares.
(d) The Investor:
(i) has received copies of the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1997, filed with the United
States Securities and Exchange Commission (the "Commission") on February 23,
1998 and any other report of the
1.
<PAGE>
Company, filed with the Commission, that he has requested from the
Company (collectively, the "SEC Filings"), and has been furnished any other
documents requested from the Company by the Investor, and understands and has
evaluated the risks of a purchase of the Shares;
(ii) has been given the opportunity to ask questions of the
Company concerning the Company, the terms and conditions of this offering and
other matters pertaining to this investment, has received complete and
satisfactory answers to any such inquiries and has been given the opportunity to
obtain such additional information necessary to verify the accuracy of the
information which was provided in order for him to evaluate the merits and risks
of an investment in the Company to the extent the Company possesses such
information or can acquire it without unreasonable effort or expense; and
(iii) has read and is familiar with the SEC Filings and other
information provided to the Investor and has determined that the Shares are a
suitable investment for him.
(e) The Investor acknowledges his understanding that the Company has
incurred net losses for each of its fiscal years ended March 31, 1996 and March
31, 1997 and for each of its fiscal quarters ended June 30, 1997, September 30,
1997 and December 31, 1997. The Investor also acknowledges his understanding
that the Company has received certain inquiries from The Nasdaq Stock Market,
Inc. regarding the Company's ability to satisfy the continued listing
requirements of the Nasdaq SmallCap Market. The Investor further acknowledges
his understanding that his investment in the Shares involves a high degree of
risk.
(f) In making his decision to purchase the Shares, the Investor has
relied solely upon independent evaluations or investigations made by him. The
Investor is not relying on the Company with respect to tax or other economic
considerations involved in this investment.
(g) The Investor represents, warrants, and agrees that he will not
sell, transfer or otherwise dispose of the Shares (i) without registration under
the Act and any applicable state securities laws or (ii) without providing to
the Company a written opinion of counsel to the Investor reasonably satisfactory
to the Company opining that an exemption from registration or qualification is
available. The Investor fully understands and agrees that he must bear the
economic risk of his investment for an indefinite period of time because, among
other reasons, the Shares have not been registered under the Act or under the
securities laws of certain states and, therefore, cannot be resold, pledged,
assigned or otherwise disposed of unless they are subsequently registered under
the Act and under applicable securities laws of such states, or an exemption
from such registration is available.
(h) The Investor acknowledges and agrees that the certificate
representing the Shares shall bear the following (or substantially equivalent)
legends on the face or reverse side thereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE LAWS OF THE UNITED STATES OR ANY STATE THEREOF AND
NEITHER THE SHARES NOR ANY INTEREST THEREIN MAY BE SOLD OR TRANSFERRED
WITHOUT COMPLYING WITH SUCH LAWS AND PROVIDING TO THE ISSUER, A WRITTEN
OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT AN EXEMPTION FROM
2.
<PAGE>
REGISTRATION OR QUALIFICATION UNDER APPLICABLE LAWS IS THEN AVAILABLE.
Any certificate or other document issued at any time in exchange or substitution
for any security bearing such legends shall also bear such (or substantially
equivalent) legend unless, in the sole opinion of counsel for the Company, the
securities represented thereby need no longer be subject to such restrictions.
(i) The Investor is authorized and qualified to become an investor in
the Company. This Investment Agreement has been duly executed and delivered by
the Investor.
(j) No agency of the United States or any state thereof has passed
upon the Shares or made any findings or determination as to the fairness of this
investment.
(k) The representations, warranties, agreements, undertakings and
acknowledgements made by the Investor in this Investment Agreement are made with
the intent that they be relied upon by the Company and its agent (including,
without limitation, the Company's counsel) in determining the Investor's
suitability as a purchaser of the Shares.
4. REGISTRATION. The Company represents that it shall file a
registration statement covering the Shares under the Act on or before April 7,
1998 and shall use its best efforts to cause such registration statement to
become effective within 60 days after the date of such filing.
5. INDEMNITY. The Investor agrees to indemnify and hold harmless the
Company against any and all loss, liability, claim, damage, and expense
whatsoever (including, but not limited to, any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation commenced or threatened or any claim whatsoever) related to (i) any
false representation or warranty herein or (ii) any transfer of the Shares in
violation of any securities laws.
6. MODIFICATION. Neither this Investment Agreement nor any provision
hereof shall be modified, discharged or terminated except by an instrument in
writing signed by the party against whom any waiver, change, discharge or
termination is sought.
7. ASSIGNABILITY. This Investment Agreement shall be binding upon and
inure to the benefit of the parties and their heirs, executors, administrators,
successors and legal representatives. This Investment Agreement is not
transferable or assignable.
8. COUNTERPARTS. This Investment Agreement may be executed in any number
of counterparts, and each of such counterparts shall, for all purposes,
constitute one agreement binding on all the parties, notwithstanding that all
parties are not signatories to the same counterpart.
3.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Investment
Agreement as of March 9, 1998.
/s/ Barry Saxe
---------------------------------------
Barry Saxe
CHATCOM, INC., a California corporation
By: /s/
----------------------------------
Its: Vice Chairman
----------------------------------
4.
<PAGE>
EXHIBIT 10.47
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release (hereinafter "Agreement") is
made and entered into as of the 31st day of March 1998 by and between Strategic
Growth International, Inc., a Delaware corporation with its principal place of
business in Great Neck, New York ("SGI"), and ChatCom, Inc., a California
corporation with its principal place of business in Chatsworth, California
("ChatCom").
RECITALS
--------
This Agreement is made with reference to the following facts:
a. Effective August 1, 1995, SGI and ChatCom entered into an 18-month
written Independent Contractor's Agreement (hereinafter referred to as "the
Consultant Agreement"), pursuant to which SGI was to perform certain
professional services to ChatCom. As of the effective date of the Consultant's
Agreement, ChatCom was known as Astro Sciences Corporation. A true and correct
copy of the Consultant Agreement is attached hereto as Exhibit "A".
b. The 18-month term of the Consultant Agreement expired on January 31,
1997.
c. On or about January 15, 1998, SGI filed an action in United States
District Court, Central District of California, captioned Strategic Growth
----------------
International v. ChatCom, Civil Action No. 98-0376 WDK (CTx) (hereinafter
- ------------------------
referred to as the "Action"). In the Action, SGI alleged that ChatCom had
breached the terms of the Consultant Agreement by failing to pay to SGI certain
professional fees for services rendered by SGI. SGI further alleged that, on or
about the date in which the Consultant Agreement expired, the parties entered
into a separate oral agreement (hereinafter referred to as the "Services
Agreement"), pursuant to which SGI continued to provide
<PAGE>
certain professional services to ChatCom on a month-to-month basis commencing on
February 1, 1997. In addition to the claim for breach of the Consultant
Agreement, SGI asserted claims against ChatCom for breach of the Services
Agreement, and sought common counts, declaratory relief, and specific
performance related to the claims arising out of the Consultant Agreement and
the Services Agreement.
STATEMENT OF INTENT
-------------------
Except as otherwise provided in paragraph 3(c), in order to avoid further
litigation, attorneys' fees and aggravation, and to secure peace without
admission of any liability, fact, claim or defense by any party hereto, it is
the intent of the Parties that this Agreement finally and for all time settle,
terminate and extinguish any and all claims, counterclaims, demands and causes
of action, whether known or unknown, contingent or certain, past, present or
future, among or between SGI and ChatCom, related to any agreement, transaction,
occurrence, contact, slight, insult, controversy and/or dispute of any nature,
regardless of the circumstances, as if such agreement, transaction, occurrence,
contact, slight, insult, controversy and/or dispute had never occurred.
Further, it is the express purpose and intent of the Parties that this
Agreement supersede, extinguish and terminate the Parties' rights and
obligations, if any, under common law, statute and/or contract, written or oral,
express or implied, including, but not limited to, the contracts specifically
listed herein.
2
<PAGE>
Now therefore, in consideration of the foregoing and the promises and
covenants herein, the Parties agree as follows:
AGREEMENT
---------
i. Scope of Release.
-----------------
Except as otherwise provided in paragraph 3(c) herein, this Agreement
constitutes a full and final settlement and release as between SGI and ChatCom
of all actual claimed and/or potential, past, present and/or future claims
between SGI and ChatCom. This Agreement is made without the admission of any
liability, fact, claim or defense by any party hereto, and specifically without
admission of any of the material allegations of the Action, which are expressly
denied by ChatCom. The scope of this release shall include, but not be limited
to:
(1) all agreements, transactions, occurrences, contacts, slights, insults,
controversies, disputes and allegations with respect to which each has, either
directly or indirectly, been a party prior to the date hereof, including, but
not limited to, the Action, the Consultant Agreement, the Services Agreement, or
any other oral or written, express or implied, agreement between SGI and
ChatCom;
(2) all matters or claims with respect to which SGI, or any of the
officers, directors or shareholders of SGI has asserted, could have asserted, or
may assert in the future (except as provided in paragraph 3(c) below) against
ChatCom, including, but not limited to, claims for indemnification and/or
contribution for legal fees and expenses based upon such matters or claims
asserted or threatened at any time, past, present or future, whether such
indemnification claims arise from statute, common law, or agreement, or any
other oral or written, express or implied, agreement between SGI and ChatCom;
3
<PAGE>
(3) all matters or claims with respect to which ChatCom hereto has
asserted, could have asserted, or may assert in the future (except as provided
in paragraph 3(c) below) against SGI, including, but not limited to, claims for
indemnification and/or contribution for legal fees and expenses based upon such
matters or claims asserted or threatened at any time, past, present or future,
whether such indemnification claims arise from statute, common law, or
agreement, or any other oral or written, express or implied, agreement between
SGI and ChatCom; and
(4) any and all allegations that could have been made by SGI or ChatCom in
the Action.
ii. Terms of Settlement.
--------------------
In consideration of the general, irrevocable and unconditional release
provided by SGI pursuant to paragraph 3(a) hereof, ChatCom agrees to provide the
following consideration to SGI:
(1) Cash Payment to SGI. ChatCom shall make cash payments totaling
--------------------
$100,000 to SGI, payment of which shall be in accordance with the following
schedule:
(i) An initial payment of $25,000 was made by ChatCom to SGI by wire
transfer on February 9, 1998, receipt of which is hereby acknowledged by SGI;
(ii) The remaining $75,000 shall be paid in five (5) equal
installments of $15,000, payable on or before each of the following dates: April
9, 1998; May 9, 1998; June 9, 1998; July 9, 1998; and August 9, 1998. Each such
installment payment shall be made by wire transfer to the following SGI bank
account: c/o Citibank, N.A., Br. No. 199, 111 Great Neck Road, Great Neck, NY
11021, Account No. 45026693, Routing/ABA No. 021000089.
(iii) In the event that ChatCom fails to perform its obligations as
set forth in Paragraph 2(a)(ii), SGI and ChatCom have entered into a Stipulation
for Entry of Judgment ("Stipulated Judgment") in the form annexed hereto as
Exhibit "B." SGI warrants and agrees,
4
<PAGE>
however, not to file this Stipulated Judgment with a court of law or to
otherwise seek relief under the terms of this Stipulated Judgment, unless and
until each of the following events have occurred: (1) ChatCom has failed to make
payment(s) in accordance with the terms of Paragraph 2(a)(ii), above; (2) SGI
and/or its representative, has provided ChatCom with written notice of ChatCom's
breach of the terms of Paragraph 2(a)(ii), which notice shall advise ChatCom
that it may cure such breach within ten (10) business days from the date such
written notice is received by Chatcom; and (3) ChatCom has failed to cure such
breach within ten (10) business days from the date that such notice is received
by ChatCom.
(b) Legal Fees Incurred By SGI. In reimbursement of the legal fees
--------------------------
incurred by SGI in connection with its prosecution of the Action, ChatCom shall
make additional cash payments to SGI totaling $10,000. This total amount will
be paid in five (5) equal installments of $2,000, payable on or before each of
the following dates: April 9, 1998; May 9, 1998; June 9, 1998; July 9, 1998; and
August 9, 1998. Each such payment shall be made by wire transfer in the same
manner as set forth in paragraph 2(a)(ii), above.
(c) Delivery of Shares and Options to Purchase Shares of ChatCom Common
-------------------------------------------------------------------
Stock. Within five business days after execution of this Agreement, ChatCom
- ------
shall issue and deliver to SGI the following:
(i) 800,000 shares of ChatCom common stock ("Common Shares");
(ii) Three year options (the "Options") to purchase up to 200,000
shares of ChatCom common stock (the "Option Shares"), which Option Shares shall
be Nonqualified Options and shall be priced at $0.50 per share.
5
<PAGE>
(d) Registration of Common Shares and Option Shares Under the Securities
--------------------------------------------------------------------
Act of 1933. In connection with the issuance and delivery of the Common Shares
- -----------
and the Option Shares as described in paragraph 2(c), above, ChatCom shall
provide certain registration rights to SGI in accordance with the terms set
forth in the Registration Rights Agreement, executed by the Parties concurrently
herewith, and appended hereto as Exhibit "C." The Registration Rights Agreement
and each of the terms and conditions set forth therein, is hereby incorporated
into this Agreement by this reference.
(e) Dismissal of Actions. Within two (2) business days after execution of
---------------------
this Agreement, SGI shall file a Notice of Dismissal with prejudice of the
Action, in the form annexed hereto as Exhibit "D."
iii. Mutual Releases.
----------------
(1) Release of ChatCom. Except as provided in paragraph 3(c), SGI, for
-------------------
itself and for its respective predecessors, successors, owners, affiliates,
officers, directors, shareholders, representatives, trustees, agents, attorneys
and assigns, hereby irrevocably and unconditionally agree that they immediately
and fully release, acquit and forever discharge ChatCom and its respective
predecessors, successors, owners, affiliates, officers, directors,
shareholders, representatives, trustees, agents, attorneys and assigns from any
and all known and unknown, suspected or unsuspected, existing or potential
claims, counterclaims, contentions, demands, rights, liabilities, obligations,
debts, liens, promises, agreements, notes, expenses, torts, damages, injuries,
and causes of action at law or in equity, of any nature, character or
description whatsoever, related directly or indirectly to the matters that are
within the scope of this release as defined in paragraph 1, above.
6
<PAGE>
(2) Release of SGI. Except as provided in paragraph 3(c), ChatCom, and its
---------------
respective predecessors, successors, owners, affiliates, officers, directors,
shareholders, representatives, trustees, agents, attorneys and assigns, hereby
irrevocably and unconditionally agree that they immediately and fully release,
acquit and forever discharge SGI and its respective predecessors, successors,
owners, affiliates, officers, directors, shareholders, representatives,
trustees, agents, attorneys and assigns from any and all known and unknown,
suspected or unsuspected, existing or potential claims, counterclaims,
contentions, demands, rights, liabilities, obligations, debts, liens, promises,
agreements, notes, expenses, torts, damages, injuries, and causes of action at
law or in equity, of any nature, character or description whatsoever, related
directly or indirectly to the matters that are within the scope of this release
as defined in paragraph 1, above.
(3) No Release for Breach of Agreement. It is expressly understood and
-----------------------------------
agreed by the Parties that none of the releases set forth herein are intended to
or do release any claims arising out of a breach of this Agreement.
(4) Unknown Claims. SGI and ChatCom hereby waive the provisions and
---------------
protection of Section 1542 of the California Civil Code which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST
HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
SGI and ChatCom acknowledge the significance of their respective specific waiver
of Civil Code Section 1542 and expressly acknowledge their awareness that the
actual facts and circumstances surrounding this Agreement and the
representations and basis upon which the foregoing releases are
7
<PAGE>
given hereafter may be discovered to be different from the facts and
circumstances now known or believed by them to be true. SGI and ChatCom
expressly assume the risk that such facts and circumstances will be discovered
to be different from their current knowledge or belief, and further agree that
in such event this Agreement nevertheless shall be in all respects effective and
not subject to termination, rescission or modification for any reason.
iv. Knowing and Voluntary Release.
------------------------------
(1) The Parties hereto acknowledge that: (i) that they have been furnished
with copies of, and have read this Agreement, (ii) that they have been
represented by counsel in connection with this Agreement and have had the
opportunity to discuss its contents with counsel; and (iii) that they fully
understand the terms and effects of this Agreement and their rights and
obligations hereunder, (iv) that this Agreement has been freely and voluntarily
entered into by each of them without duress or undue influence, and they hereby
agree to be fully bound by the terms hereof.
(2) SGI further specifically acknowledges that: (i) it is aware that
ChatCom has received inquiries from the Nasdaq Stock Market concerning the
continued listing of ChatCom on the Nasdaq Stock Market; (ii) SGI has requested
that ChatCom furnish information regarding the substance of the Nasdaq Stock
Market inquiries as well as ChatCom's current financial status, and ChatCom has
heretofore furnished any and all information that has been requested by SGI;
(iii) ChatCom has further provided to SGI a copy of the Form 10-QSB filed by
ChatCom with the Securities and Exchange Commission ("SEC") for the fiscal
quarter ending December 31, 1997, as well as any other reports, documents or
other information requested by SGI for the purpose of evaluating an investment
in ChatCom; (iv) SGI is aware that ChatCom is attempting to procure certain
financing and to convert certain outstanding debt into equity investments in
ChatCom, although no assurance
8
<PAGE>
can be given that the foregoing transactions will be consummated; and (v)SGI
understands that it will be necessary for Chatcom to obtain additional financing
from one or more sources in the immediate future in order for it to continue its
operations and meet its obligations.
(3) The Common Shares and the Options and the shares of Common Stock
issuable upon exercise of the Options will be acquired by SGI hereunder for
SGI's own account and not with the view to, or for resale in connection with,
any distribution other than resales made in compliance with the Securities Act
of 1933, as amended (the "Securities Act"), or the rules promulgated thereunder.
SGI understands that neither the Common Shares, the Options nor the Common Stock
issuable thereunder have been registered under the Securities Act by reason of
available exemptions from the registration and prospectus delivery requirements
of the Securities Act, that the securities must be held indefinitely unless such
securities are registered under the Securities Act or unless any transfer is
exempt from registration, and that the reliance of ChatCom upon these exemptions
is predicated in part upon these representations and warranties by SGI.
(4) SGI acknowledges and agrees that the Common Shares, the Options and the
certificates representing the Common Stock to be issued thereunder shall bear
the following (or substantially equivalent) legend on the face or reverse side
thereof:
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR
EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN
EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT
THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.
9
<PAGE>
Any stock certificate issued at any time in exchange or substitution for
any certificate bearing such legend shall also bear such (or substantially
equivalent) legend unless, in the opinion of counsel for ChatCom, the securities
represented thereby need no longer be subject to restrictions pursuant to the
Securities Act or applicable state securities laws. ChatCom shall not be
required to transfer on its books any certificate for securities in violation of
the provisions of such legend.
v. No Admission.
------------
This Agreement settles disputed claims and does not constitute an admission
of any liability, fact, claim or defense by any party.
vi. Authority to Execute.
---------------------
The individuals whose signatures appear herein below represent and warrant
that they have the authority to execute this Agreement on behalf of those
entities on whose behalf they purport to execute this document, and shall be
personally liable for any loss or damage suffered by any other party resulting
from any breach of such warranty and representation, including attorneys' fees.
vii. Authority to Settle.
--------------------
Each party hereto represents and warrants that he, she or it has the
right and authority to execute this Agreement and that he, she or it has not
sold, assigned, conveyed or otherwise transferred any interest in any claim or
demand which said party had, now has, or may claim to have, against any other
party released hereunder and each party hereby agrees that he, she or it shall
not ever sell, assign, convey or otherwise transfer any such claim or demand.
viii. Warranty of Representations.
----------------------------
The Parties hereto and the individuals executing this document warrant
that all factual statements and representations contained in this Agreement are
true and correct and that no material
10
<PAGE>
information has been omitted or concealed from them that would render such
statements or representations false or materially misleading.
ix. Defense.
--------
The Parties may use this Agreement as a full and complete defense to, and
as the basis for an injunction against, any action, suit, claim or other
proceeding directly or indirectly relating to any matter released hereby which
may be prosecuted, initiated or attempted in violation of the terms of this
Agreement.
x. Entire Agreement.
-----------------
This Agreement and the stipulations and other agreements annexed hereto
comprise the sole and entire agreement and understanding of the Parties with
respect to the entire subject matter hereof and any and all prior discussions,
negotiations, commitments and understandings related hereto are hereby merged
herein. No representations, oral or otherwise, express or implied, other than
those contained herein have been made by any party hereto.
xi. Waiver, Modification and Amendment.
-----------------------------------
No provision hereof may be waived unless in writing signed by all Parties
hereto. Waiver of any one provision herein shall not be deemed to be a waiver
of any other provision herein. This Agreement may be modified or amended only
by a written agreement executed by all of the Parties hereto. Any such written
waiver, modification or amendment must state the Parties' intent to so waive,
modify or amend this Agreement.
xii. Attorneys' Fees.
---------------
Should any party hereto institute any action or proceeding to enforce any
provision hereof, or for damages by reason of any breach of any provision of
this Agreement, or for a declaration of
11
<PAGE>
such party's rights or obligations hereunder, or for any other judicial remedy,
the prevailing party shall recover from the losing party reasonable attorneys'
fees, costs and expenses.
xiii. Successors and Assigns.
-----------------------
This Agreement shall inure to the benefit of, and shall be binding upon,
the successors, heirs, executors, administrators, personal representatives and
assigns of the Parties hereto, and each of them.
xiv. Construction, Jurisdiction and Venue.
-------------------------------------
This Agreement shall be construed in accordance with the laws of the State
of California. Any arbitration proceeding commenced hereunder shall be in Los
Angeles County. In the event of vagueness or ambiguity, this Agreement shall
not be construed against the party preparing it, but shall be construed as if
all Parties prepared it jointly.
xv. Severability.
-------------
If any provision of this Agreement shall be adjudged void or unenforceable,
the same shall not affect the validity of the Agreement as a whole.
xvi. Titles and Captions.
--------------------
Paragraph titles or captions contained in this Agreement are inserted only
as a matter of convenience and for reference and in no way define, limit, extend
or describe the scope of this Agreement or the intent of any provision herein.
12
<PAGE>
xvii. Further Documents.
------------------
The Parties shall execute all additional documents reasonably necessary
to effectuate the terms of this Agreement.
xviii. Counterparts.
-------------
This Agreement may be executed in counterparts and shall be deemed fully
executed when each party has signed and transmitted a counterpart to the other.
All counterparts taken together shall constitute a single agreement. Signature
by fax shall have the same force and effect as if in original ink.
READ AND ACKNOWLEDGED:
STRATEGIC GROWTH INTERNATIONAL, INC.
By: /s/ Richard E. Cooper
----------------------------------------------
Richard E. Cooper, President
CHATCOM, INC.
By: /s/ E. Carey Walters
----------------------------------------------
E. Carey Walters, Chief Executive Officer
APPROVED AS TO FORM AND SUBSTANCE:
MILLER & HOLGUIN
By: /s/ Bryan M. Bourbin
-------------------------------
Bryan M. Bourbin
Attorneys for Strategic Growth International, Inc.
TROY & GOULD
By: /s/ Sanford J. Hillsberg
-------------------------------
Sanford J. Hillsberg
Attorneys for ChatCom, Inc.
13
<PAGE>
EXHIBIT 10.48
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 31, 1998
("Agreement"), is made by and between CHATCOM, INC., a California corporation
(the "Company"), and Strategic Growth International, Inc. ("SGI").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, upon the terms and subject to the conditions of the Settlement
Agreement, dated as of March 31, 1998, by and between SGI and the Company (the
"Settlement Agreement"), the Company has agreed to issue to SGI 800,000 shares
(the "Common Shares") of the Company's common stock, no par value ("Common
Stock"), and options (the "Options") to purchase up to 200,000 shares of Common
Stock (the "Option Shares"); and
WHEREAS, to induce SGI to execute and deliver the Settlement Agreement, the
Company has agreed to provide certain registration rights under the Securities
Act of 1933, as amended, and the rules and regulations thereunder, or any
similar successor statute (collectively, the "Securities Act"), with respect to
the Common Shares and the Option Shares.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and SGI hereby agree
as follows:
1. Definitions.
-----------
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investor" means SGI and any permitted transferee or assignee
who agrees to become bound by the provisions of this Agreement in accordance
with Section 9 hereof.
(ii) "Potential Material Event" means any of the following: (a)
the possession by the Company of material information not ripe for disclosure in
a registration statement, which shall be evidenced by determinations in good
faith by the Board of Directors of the Company that disclosure of such
information in the registration statement would be detrimental to the business
and affairs of the Company; or (b) any material engagement or activity by the
Company which would, in the good faith determination of the Board of Directors
of the Company, be adversely affected by disclosure in a registration statement
at such time, which determination shall be accompanied by a good faith
determination by the Board of Directors of the Company that the
<PAGE>
registration statement would be materially misleading absent the inclusion of
such information.
(iii) "Register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act (other than on Form S-8 or Form
S-4) in connection with the proposed offer and sale for money of any of the
Company's securities by the Company or any of its security holders, including,
without limitation, a Registration Statement filed pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iv) "Registrable Shares" means the Common Shares and the Option
Shares.
(v) "Registration Statement" means a registration statement of
the Company under the Securities Act.
(b) Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Settlement Agreement.
2. Registration.
------------
(a) Piggyback Registration Rights. If the Company shall at any time
-----------------------------
propose to file a Registration Statement under the Securities Act for the
registration of any shares of Common Stock, the Company shall give written
notice of such registration to the Investor no later than 30 days before its
filing with the SEC. If the Investor so requests within 15 days after the
giving of such notice, the Company shall include in any such registration the
Registrable Shares, but the Company shall not be obligated to so include the
Registrable Shares to the extent the underwriter or underwriters, if any, of the
securities being otherwise registered by the Company shall determine in good
faith that the inclusion of such Registrable Shares would interfere with the
successful sale of such other securities proposed to be sold by such underwriter
or underwriters, in which case the Investor shall be entitled to participate in
any such reduced number of Registrable Shares (if any) which may included in
such registration, prorated in proportion to the number of shares of Common
Stock proposed to be included in such registration by each holder of shares and
by the Company. The Investor shall, as a condition to the Company's obligation
to include the Registrable Shares held by the Investor in any such registration,
agree to execute an underwriting agreement, if any, in customary form as a
selling shareholder.
2
<PAGE>
(b) Demand Registration Rights. If a Registration Statement covering
--------------------------
the Registrable Shares is not effective by June 30, 1998, the Investor may by
written notice request the Company to effect the registration of the Registrable
Shares on a Registration Statement under the Securities Act ("Registration
Demand"). Upon receipt of a Registration Demand from the Investor, the Company
shall within 90 days after the receipt of the Registration Demand file a
Registration Statement with the SEC covering the Registrable Shares as to which
registration is requested in the Registration Demand. If the Investor gives one
Registration Demand pursuant to this Section 2(b) and if the Registration
Statement with respect to such Registration Demand becomes effective, then the
Investor may not give a second Registration Demand under this Section 2(b).
3. Obligations of the Company. In connection with the registration of
--------------------------
the Registrable Shares, the Company shall do each of the following:
(a) With reasonable promptness prepare and file with the SEC a
Registration Statement with respect to the Registrable Shares pursuant to
Section 2, and thereafter use its reasonable efforts to cause each Registration
Statement relating to the Registrable Shares to become effective as soon as
possible after such filing, and keep the Registration Statement effective
pursuant to Rule 415 at all times until the earliest (the "Registration Period")
of (i) the date that is one year after the date of effectiveness of the
Registration Statement, (ii) the date when the Investor may sell all Registrable
Shares under Rule 144 promulgated under the Securities Act, or (iii) the date
the Investor no longer owns any of the Registrable Shares, which Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading;
(b) Prepare and file with the SEC such amendments (including post-
effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
reasonably necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during the Registration Period, comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Shares of the Company covered by the Registration Statement until
such time as all of such Registrable Shares have been disposed of in accordance
with the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement;
(c) Permit a single firm of counsel designated by SGI to review the
Registration Statement and all amendments and
3
<PAGE>
supplements thereto a reasonable period of time prior to their filing with the
SEC, and not file any document in a form to which such counsel reasonably
objects;
(d) Furnish to the Investor whose Registrable Shares are included in
the Registration Statement and its legal counsel identified to the Company, (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and each
amendment or supplement thereto, and (ii) such number of copies of a prospectus,
and all amendments and supplements thereto and such other documents, as the
Investor may reasonably request in order to facilitate the disposition of the
Registrable Shares owned by the Investor;
(e) As promptly as practicable after becoming aware of such event,
notify each Investor of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be state therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and use its reasonable efforts promptly to prepare a
supplement or amendment to the Registration Statement or other appropriate
filing with the SEC to correct such untrue statement or omission, and deliver a
number of copies of such supplement or amendment to each Investor as such
Investor may reasonably request;
(f) As promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Shares being sold of the issuance by
the SEC of any stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time;
(g) Use its commercially reasonable efforts, if eligible, to secure
designation of all the Registrable Shares covered by the Registration Statement
as a National Association of Securities Dealers Automated Quotations System
("Nasdaq") "Small Capitalization" within the meaning of Rule 11Aa2-1 of the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the quotation of the Registrable Shares on the Nasdaq/Small Cap Market; or if,
despite the Company's commercially reasonable efforts to satisfy the preceding
clause, the Company is unsuccessful in doing so, to use its commercially
reasonable efforts to secure Nasdaq/OTC Bulletin Board authorization and
quotation for such Registrable Shares and, without limiting the generality of
the foregoing, to arrange for at least two market makers to register with the
National Association of Securities Dealers, Inc. ("NASD") as such with respect
to such Registrable Shares;
4
<PAGE>
(h) Prior to any offering of Registrable Shares, to register or
qualify (or obtain an exemption therefrom) the Registrable Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions within the
United States as the Investors may request, and keep each such registration or
qualification (or exemption therefrom) effective during the Registration Period;
provided, however, that the Company will not be required to (i) qualify
generally to do business in any jurisdiction where it is not then so qualified,
or (ii) take any action that would subject it to general service of process in
any such jurisdiction where it is not then so subject;
(i) Provide a transfer agent and registrar, which may be a single
entity, for the Registrable Shares not later than the effective date of the
Registration Statement;
(j) Cooperate with the Investor who holds Registrable Shares being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Shares to be offered pursuant to the Registration Statement and
enable such certificates to be in such denominations or amounts as the case may
be, as the Investor may reasonably request and registered in such names as the
Investor may request; and, within three business days after a Registration
Statement which includes Registrable Shares is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the Company to
deliver, to the transfer agent for the Registrable Shares (with copies to the
Investor whose Registrable Shares are included in such Registration Statement)
an appropriate instruction and opinion of such counsel; and
(k) Take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Shares pursuant to the
Registration Statement.
4. Obligations of the Investor. In connection with the registration of
---------------------------
the Registrable Shares, the Investor shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Shares of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Shares held by
it, and the intended method of disposition of the Registrable Shares held by it,
as shall be reasonably required to effect the registration of such Registrable
Shares and shall execute such documents in connection with such registration as
the Company may reasonably request. At least ten days prior to the first
anticipated filing date of the Registration Statement, the Company shall notify
each Investor of the information the Company requires from each such Investor
(the "Requested Information") if such
5
<PAGE>
Investor elects to have any of such Investor's Registrable Shares included in
the Registration Statement. If at least two business days prior to the filing
date the Company has not received the Requested Information from an Investor (a
"Non-Responsive Investor"), then the Company may file the Registration Statement
without including Registrable Shares of such Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the Registrable
Shares agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable Shares
from the Registration Statement;
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(e) or
3(f), above, such Investor shall immediately discontinue disposition of
Registrable Shares pursuant to the Registration Statement covering such
Registrable Shares until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or 3(f) and, if
so directed by the Company, such Investor shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the prospectus
covering such Registrable Shares current at the time of receipt of such notice;
and
(d) If at any time or from time to time after the date of
effectiveness of the Registration Statement, the Company notifies the Investor
in writing of the existence of a Potential Material Event, the Investor shall
not offer or sell any Registrable Shares, or engage in any other transaction
involving or relating to the Registrable Shares, from the time of the giving of
notice with respect to a Potential Material Event until such Investor receives
written notice from the Company that such Potential Material Event either has
been disclosed to the public or no longer constitutes a Potential Material
Event.
5. Expenses of Registration. All reasonable expenses relating to the
------------------------
Registration of the Registrable Shares (other than any underwriting discounts
and commissions incurred in connection with the registrations and fees and
expenses of counsel for the Investor), including, without limitation, all
registration, listing, and qualification fees, printers and accounting fees, and
the fees and disbursements of counsel for the Company, shall be borne by the
Company. Fees of counsel, if any, for the Investor shall be borne by the
Investor.
6
<PAGE>
6. Indemnification. In the event any Registrable Shares are included in
---------------
a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company shall indemnify and
hold harmless each Investor who holds such Registrable Shares, the directors, if
any, of such Investor, the officers, if any, of such Investor, each person, if
any, who controls any Investor within the meaning of the Securities Act or the
Exchange Act, and the agents and representatives thereof (each, an "Indemnified
Person"), against any losses, claims, damages, liabilities or expenses (joint or
several) incurred (collectively, "Claims") to which any of them may become
subject under the Securities Act, the Exchange Act or otherwise, insofar as such
Claims (or actions or proceedings, whether commenced or threatened, in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations in the Registration Statement, or any post-effective
amendment thereof, or any prospectus included therein: (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or any post-effective amendment thereof or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state securities
law (the matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). The Company shall reimburse the Investor, promptly as such
expenses are incurred and are due and payable, for any reasonable legal fees or
other reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a) shall not
(i) apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Indemnified Person expressly for use in
connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, if such prospectus was timely made
available by the Company pursuant to Section 3(c) hereof; (ii) be available to
the extent such Claim is based on a failure of the Investor to deliver or cause
to be delivered the prospectus made available by the Company; or (iii) apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of
7
<PAGE>
the Company, which consent shall not be unreasonably withheld. Each Investor
shall indemnify the Company and its officers, directors, agents and
representatives against any claims arising out of or based upon a Violation
which occurs in reliance upon and in conformity with information furnished in
writing to the Company, by or on behalf of such Investor, expressly for use in
connection with the preparation of the Registration Statement, subject to such
limitations and conditions as are applicable to the indemnification provided by
the Company to this Section 6. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Shares by the Investor
pursuant to Section 9.
(b) Promptly after receipt by an Indemnified Person under this Section
6 of notice of the commencement of any action (including any governmental
action), such Indemnified Person shall, if a Claim in respect thereof is to be
made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person,
provided, however, that an Indemnified Person shall have the right to retain its
- -------- -------
own counsel with the reasonable fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person and the
indemnifying party would be inappropriate due to actual or potential differing
interests between such Indemnified Person and any other party represented by
such counsel in such proceeding. In such event, the Company shall pay for only
one separate legal counsel for the Investor; such legal counsel shall be
selected by the Investor holding a majority in interest of the Registrable
Shares included in the Registration Statement to which the Claim relates. The
failure to deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action shall not relieve such indemnifying
party of any liability to the Indemnified Person under this Section 6, except to
the extent that the indemnifying party is prejudiced in its ability to defend
such action. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as such expense, loss, damage or liability is incurred and is due
and payable.
7. Contribution. To the extent any indemnification by an indemnifying
------------
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under
8
<PAGE>
Section 6 to the fullest extent permitted by law; provided, however, that (a) no
-------- -------
contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in Section
6; (b) no seller of Registrable Shares guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Shares who was not guilty of such
fraudulent misrepresentation; and (c) contribution by any seller of Registrable
Shares shall be limited in amount to the net amount of proceeds received by such
seller from the sale of such Registrable Shares.
8. Reports under Exchange Act. With a view to making available to the
--------------------------
Investor the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investor to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144:
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns Registrable
Shares, promptly upon request, (i) a written statement by the Company that it
has complied with the reporting requirements of Rule 144, the Securities Act and
the Exchange Act, (ii) a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested to permit the
Investor to sell such securities pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the Company
-------------------------------------
register the Registrable Shares pursuant to this Agreement shall be
automatically assigned by the Investor to any transferee of at least 30% of the
Registrable Shares or to the transferee of all of the Options only if: (a) the
Investor agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (b) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (i) the
name and address of such transferee or assignee and (ii) the securities with
respect to which such registration rights are being transferred or assigned, (c)
immediately following such transfer or assignment the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act and applicable state securities
9
<PAGE>
laws, and (d) at or before the time the Company receives the written notice
contemplated by clause (b) of this sentence the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein.
In the event of any delay in filing or effectiveness of the Registration
Statement as a result of such assignment, the Company shall not be liable for
any damages arising from such delay.
10. Amendment of Registration Rights. Any provision of this Agreement may
--------------------------------
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold an 80% interest of the
Registrable Shares. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Investor and the Company.
11. Miscellaneous.
-------------
(a) A person or entity is deemed to be a holder of Registrable Shares
whenever such person or entity owns of record such Registrable Shares. If the
Company receives conflicting instructions, notices or elections from two or more
persons or entities with respect to the same Registrable Shares, the Company
shall act upon the basis of instructions, notice or election received from the
registered owner of such Registrable Shares.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission, receipt
confirmed, or other means) or sent by certified mail, return receipt requested,
properly addressed and with proper postage pre-paid (i) if to the Company, at
ChatCom, Inc., 9600 Topanga Canyon Boulevard, Chatsworth, California 91311,
Attention: President or Chairman of the Board, with a copy to Troy & Gould
Professional Corporation, 1801 Century Park East, 16th Floor, Los Angeles,
California 90067, Attention: Sanford J. Hillsberg, Esq., (ii) if to SGI, at the
address set forth in the Settlement Agreement, and (iii) if to any other
Investor, at such address as such Investor shall have provided in writing to the
Company, or at such other address as each such party furnishes by notice given
in accordance with this Section 11(b), and shall be effective, when personally
delivered, upon receipt and, when so sent by certified mail, four calendar days
after deposit with the United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
10
<PAGE>
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of California applicable to agreements made and to be
performed entirely within such State. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of Los Angeles or the state courts of the State of California sitting in
the City of Los Angeles in connection with any dispute arising under this
Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not effect the validity or enforceability
of any other provision hereof.
(e) This Agreement and the Settlement Agreement constitute the entire
agreement among the parties hereto with respect to the subject matter hereof.
This Agreement and the Settlement Agreement supersede all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
11
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
CHATCOM, INC.
By /s/
---------------------------------
Name:
Title:
STRATEGIC GROWTH INTERNATIONAL, INC.
By /s/
---------------------------------
Name:
Title: Chairman
12
<PAGE>
EXHIBIT 10.49
CHATCOM, INC.
WARRANT TO PURCHASE COMMON STOCK
This certifies that Troy & Gould Professional Corporation is entitled at
any time up to and including 5:00 p.m. California Time on the date 36 months
following the date of this Warrant (the "Expiration Date") to purchase from
ChatCom, Inc., a California corporation (hereinafter called the "Company),
20,000 fully paid and nonassessable shares of Common Stock of the Company at a
price ("Exercise Price") of $1.375 per share upon the surrender hereof to the
Company at its office at 9600 Topanga Canyon Boulevard, Chatsworth, California
91311, during its usual business hours of any business day, with simultaneous
payment therefor in lawful money of the United States of the purchase price set
forth above.
Exercise of Warrant. Subject to the terms and conditions hereof, this
-------------------
Warrant may be exercised in whole or in part, at any time during normal business
hours prior to the Expiration Date, by (i) delivery of a written notice, in the
form of the Notice of Exercise attached hereto, of such holder's election to
exercise this Warrant, which notice shall specify the number of shares to be
purchased upon exercise hereof, (ii) payment to the Company of an amount equal
to the Exercise Price multiplied by the number of shares as to which this
Warrant is being exercised (plus any applicable issue or transfer taxes) in cash
or by bank check, and (iii) the surrender of this Warrant at the principal
office of the Company. If this Warrant is being exercised only in part, the
Company shall issue a new Warrant identical in all respects to this Warrant
except that it shall represent the right to purchase the number of shares as to
which this Warrant is not then being exercised. No fractional share shall be
issued upon the exercise of rights to purchase hereunder.
Antidilution Adjustment. If the number of outstanding shares of capital
-----------------------
stock of the Company are increased or decreased by a stock split, reverse stock
split, stock dividend, stock combination, recapitalization or the like, the
Exercise Price and the number of shares purchasable pursuant to this Warrant
shall be adjusted proportionately so that the ratio of (i) the aggregate number
of shares purchasable by exercise of this Warrant to (ii) the total number of
shares outstanding immediately following such stock split, reverse stock split,
stock dividend, stock combination, recapitalization or the like shall remain
unchanged, and the aggregate purchase price of shares issuable pursuant to this
Warrant shall remain unchanged. No adjustment shall be made for any issuances
of shares other than as described above.
Registration of Underlying Common Stock. Upon notice by the holder of the
---------------------------------------
Warrant to the Company of its election to exercise its piggyback registration
rights, the Company shall include in a Registration Statement to be filed with
the Securities and Exchange Commission ("SEC") to register, under the Securities
Act of 1933, as amended (the "Securities Act"), the resale of the Common Stock
issuable upon exercise of this Warrant, and the Company shall use its best
efforts to cause such Registration Statement to become effective. The Company
shall maintain the effectiveness thereof until all shares registered thereunder
have been disposed of or are freely tradeable under Rule 144(k) under the
Securities Act. The Company shall provide notice to the holder of this Warrant
of the Company's filing with the SEC of a Registration Statement under the
Securities Act to register the Company's securities at least 20 days in advance
of such filing.
1.
<PAGE>
Notice of Adjustment of Exercise Price and Number of Warrant Shares. Upon
-------------------------------------------------------------------
any adjustment of the Exercise Price of this Warrant or the number of shares
issuable hereunder, the Company shall give notice thereof to the registered
holder of this Warrant which shall set forth the new Exercise Price in effect
after such adjustment and the increase or decrease, if any, in the number of
shares issuable upon exercise of this Warrant. All such notices shall set forth
in reasonable detail the method of calculation and the facts upon which such
calculation is based.
Notice of Certain Events. In case at any time (a) there shall be any
------------------------
reorganization or reclassification of the capital stock of the Company or
consolidation or merger of the Company with, or sale of all or substantially all
of its assets to, another corporation or entity; or (b) there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give notice to the
registered holder of this Warrant of the date on which such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place. Such notice shall be given not less than 20 days
prior to the action in question.
No Rights as Shareholder. Prior to the exercise of this Warrant the holder
------------------------
of this Warrant shall not be entitled to any rights of a shareholder of the
Company, including, without limitation, the right to vote, to receive dividends
or other distributions, or to receive notice of meetings of shareholders.
Lost, Stolen, Mutilated or Destroyed Warrants. If this Warrant is lost,
---------------------------------------------
stolen, mutilated or destroyed, the Company shall, on such terms as to indemnity
or otherwise as it may in its discretion impose (which in the case of a
mutilated Warrant shall include the surrender thereof), issue a new Warrant of
like denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen, mutilated
or destroyed Warrant shall be at any time enforceable by anyone.
Miscellaneous. This Warrant and any term hereof may be changed, waived,
-------------
discharged or terminated only by an instrument in writing signed by the Company
or holder hereof against which enforcement of such change, waiver, discharge or
termination is sought. The headings in this Warrant are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officer thereunto duly authorized as of November 19, 1997
CHATCOM, INC.
By /s/
----------------------------------------
Its
----------------------------------------
2.
<PAGE>
NOTICE OF EXERCISE
TO BE EXECUTED BY THE REGISTERED HOLDER
IN ORDER TO EXERCISE THIS WARRANT
CHATCOM, INC.
The undersigned hereby exercises the right to purchase
_____________________________ shares of Common Stock covered by this Warrant
according to the conditions thereof and herewith makes payment of
$______________________________, the aggregate Exercise Price of such shares of
Common Stock.
--------------------------------------------------
[Print or type name(s) of Holder. If Holder is a
trust, partnership, corporation or other entity,
print name and title of authorized signatory.]
--------------------------------------------------
--------------------------------------------------
Signature(s) of Holder or authorized signatory
3.
<PAGE>
EXHIBIT 10.50
June 15, 1998
ChatCom, Inc.
9600 Topanga Canyon Boulevard
Chatsworth, CA 91311
Attn: Mr. Gordon L. Almquist, Chief Financial Officer
Re: VRPI/ChatCom
Dear Gordon,
This is to confirm your discussions with Mr. Louney and the agreement
between our two companies as of June 11, 1998. Our agreement is as follows:
1. VRPI has transferred the sum of $100,000.00 to ChatCom, such sum to be
used solely for the payment of those expenses necessary to continue
the business of ChatCom for the thirty day period beginning on June
11, 1998. (the "Study Period").
2. During the Study Period, VRPI (and/or its parent, Storage Computer
Corporation) will examine the technology and finances of ChatCom to
evaluate whether investment is warranted.
3. VRPI may terminate the Study Period at any time, at its sole
discretion.
4. As of June 11, 1998, VRPI had prepared, but not filed, litigation
against ChatCom and certain of its officers and directors. VRPI agrees
that it will not file the complaint or otherwise pursue such
litigation during the Study Period.
5. On June 4, 1998, VRPI had advised ChatCom (I) that the proposed
financing was disapproved and (ii) that it was exercising its alleged
rights under the Settlement Agreement to convert Preferred Stock back
to debt based upon ChatCom's alleged default under the Settlement
Agreement. In entering into this agreement, ChatCom is not agreeing
that VRPI has the right to convert its Preferred Stock back to debt
under the Settlement Agreement.
A. Storage Computer agrees that, during the Study Period, it will not
insist upon redemption of the Preferred Stock and reissuance of its
debt obligations, or immediate payment of obligations owed by ChatCom
to Storage Computer under the Settlement Agreement.
<PAGE>
Mr. Gordon Almquist
Page 2
B. ChatCom agrees that, at the conclusion of the Study Period, unless the
parties agree to different financing arrangements, VRPI is entitled to
exercise or pursue any of its rights under the Settlement Agreement
which were in existence on June 11, 1998.
6. During the Study Period, ChatCom agrees that it will make no payments
to employees or officers other than payment of base salary, and shall
make no payments out of the ordinary course of business, except for
payments as required pursuant to litigation settlements and creditor
debt restructuring agreements. Additionally, Storage Computer agrees
that ChatCom may enter into a proposed credit facility with ALCO
Financial Services, LLC.
7. ChatCom agrees that it will not, during the Study Period, issue stock
or incur debt, except to its proposed bank line of credit, or
negotiate for financing for ChatCom with any party other than VRPI and
those persons or entities who choose to participate with VRPI in
connection with contemplated further financing for ChatCom.
8. ChatCom will promptly issue to VRPI a secured promissory note for the
$100,000.00 sent on June 11, 1998. Such note shall be in the amount of
$100,000.00, shall be payable on demand after thirty days from June
11, 1998, shall bear interest at the rate of 15% per annum, and shall
be secured by a security interest in all foreign receivables of
ChatCom. ChatCom will prepare and record financing statements
evidencing the security interest.
9. This will confirm that VRPI has been advised that the advance of
$100,000.00 is insufficient to address ChatCom's capital needs, that
ChatCom's stock will more than likely be delisted from the Nasdaq
SmallCap market, and that ChatCom could become a debtor in a
bankruptcy case, and that ChatCom and its directors and officers made
no representations to VRPI concerning ChatCom's financial condition
prior to or in connection therewith to VRPI's transfer of $100,000.00
made on June 11, 1998.
<PAGE>
Mr. Gordon Almquist
Page 3
Please sign and return the enclosed copy of this letter to confirm our
agreement.
Sincerely
By:
-------------------------------
Theodore J. Goodlander, CEO
Vermont Research Products, Inc.
AGREED AND ACCEPTED
CHATCOM, INC.
By: /s/ Gordon L. Almquist
----------------------
Gordon L. Almquist, Chief Financial Officer
<PAGE>
EXHIBIT 10.51
[LETTERHEAD OF ALCO FINANCIAL SERVICES LLC]
June 15, 1998
Mr. Gordon L. Almquist
Vice President, Chief Operating Officer
And Chief Financial Officer
ChatCom, Inc.
9600 Topanga Canyon Blvd.
Chatsworth, CA 91311
Subject: $750,000.00 SENIOR CREDIT FACILITY
Dear Mr. Almquist:
Based upon our discussions to date and the information you have provided us, we
are pleased to present the following commitment (the "Commitment") for a
proposed senior credit facility by ALCO Financial Services, LLC ("Lender") in
the aggregate principal amount of Seven Hundred Fifty Thousand Dollars
($750,000.00) to Chatcom, Inc., a California corporation ("Applicant"). The
outlined terms set forth herein is only a framework of the primary terms for the
proposed transaction and does not contain all of the terms and conditions of the
proposed facility, which will be based, in part, upon the results of our due
diligence and such other terms and conditions which Lender, in its sole
discretion, may require. Ultimately, the final form of our agreements will be
set forth conclusively in legal documents signed by both parties.
Applicant: ChatCom, Inc., a California Corporation
---------
Maximum Credit: Lender will purchase 80% of "Eligible Accounts" receivable (as
- --------------
defined in the attached Summary of Standard Terms) but in an aggregate amount
not to exceed $750,000 at any one time outstanding (the "Maximum Facility"),
which facility shall include the advance against "Eligible Inventory" (as
defined in the attached Summary of Standard Terms.) In no event shall advances
against Eligible Inventory exceed the lesser of (i) 30% the cost of re-salable
Eligible Inventory, or (ii) $300,000.00. The attached Summary of Standard Terms
is hereby incorporated by this reference.
Term: One Year, renewable at Lender's option.
Fees:
1. Facility Fee: 1.5% of the Maximum Facility Payable upon
initial funding.
2. Factoring Administrative Fee: .75% per month of the daily
average used on the Maximum Facility for purchase of
Eligible Accounts Receivable and advances against Eligible
Inventory.
3. Audit Fee: $750.00 per person, per day, after the initial
funding at lender's discretion.
4. Other Fees: Applicant would pay all exchanges on checks,
charges for returned items and all other bank charges as
well as Lender standard wire transfer fee for each wire
transfer and lock box fees.
5. Commitment Fee: $2,500.00 payable upon acceptance of this
commitment.
Rates:
Interest Rates on Purchase of Eligible Accounts Receivable and
--------------------------------------------------------------
Advances Against Eligible Inventory: A floating rate equal to "Prime Rate" on
- -----------------------------------
each funding date plus 7% per annum calculated daily based upon the number of
days elapsed over a year comprised of 360 days, and changing each day the Prime
Rate changes (the "Interest Rate"). As used herein, the term "Prime Rate" means
the rate of interest per annum as published from time to time by the Wall Street
Journal. The Interest Rate on each Eligible Account Receivable shall be
computed against the invoice amount less 20%. The Interest Rate on Eligible
Inventory shall be computed against the average daily loan balance for advances
against Eligible Inventory.
<PAGE>
In the event Applicant's financial condition improves significantly subsequent
to the date hereof, Lender agrees to review the terms herein and extend to
Applicant more favorable terms as appropriate under the circumstances. Any
change in terms would be at the sole discretion of Lender.
Prime rate shall mean a variable rate of interest per annum published by the
Board of Governors of the Federal Reserve System as the "Bank Prime Loan" rate
published in the Wall Street Journal.
Minimum Interest: Notwithstanding anything to the contrary contained
herein, the minimum monthly interest shall be fifty percent (50%) of the Maximum
Facility amount times the Interest Rate.
Recourse on Eligible Accounts Receivable: Seventy-five (75) days after
invoice/acceptance date, as selected by Lender.
Collateral: All of Applicant's obligations to Lender under the Credit
Facility would be secured by a first priority, senior, valid and perfected
security interest in and lien upon essentially all of Applicant's assets now
owned and all hereafter acquired, all insurance and other proceeds and all books
and records relating to any of the foregoing (including any computerized records
pertaining to the same). Security interest in the collateral in favor of persons
other than Lender would be prohibited except as expressly permitted by Lender in
writing. Lender acknowledges that it has been advised that there are existing
liens on the applicants assets, including accounts receivable and inventory
securing indebtedness in the amount of approximately $34,000 to Prototech, and
that there are additional existing security interests secured by Applicant's
inventory held by creditors of Applicants who have agreed to subordinate such
security interest to the security of Lender in such collateral.
Lender acknowledges Borrower's obligation to pay 25% of its collections of
foreign accounts receivable as referred to in ChatCom's Form 10-QSB for the
quarter ended December 31, 1997, as amended, Note 7 "Subsequent Event -
Conversion of Unsecured Debt". Any and all such receivables covered under this
obligation will be ineligible unless Lender otherwise agrees. Lender further
acknowledges that an advance made by Storage Computer on June 11, 1998 will be
secured by the Applicant's foreign receivables.
Guarantees: Lender will require validity indemnification guarantees from
the senior management.
Collections: All of Applicant's customers would be directed to make all
payments to a lock box depository account at a bank(s) acceptable to Lender.
Such payments from time to time may be deposited directly by the Applicant, due
to business practice that call for on site delivery of account debtors' payments
with the Lender's approval. The Lender will not unreasonably withhold said
approval. Such funds shall be applied to Applicant's obligations. For the
purpose of calculating interest, all proceeds received by Lender would be
credited to Applicant's loan account on the fifth banking day after Lender's
receipt of such payment in the lock box depository account provided that the
payment instrument is honored in the ordinary course of business.
Prepayments: Applicant may prepay the entire Credit Facility or line
amount in use, in full at any time, with thirty days written notice provided
that with such prepayment, Applicant pays, as liquidated damages to compensate
Lender for its lost earnings on the Maximum Facility, a termination fee equal to
two and one half (2 1/2) percent of the Maximum Credit Facility available to
Applicant at the time of termination.
Expenses: By acknowledgment of this commitment letter, Applicant agrees to
pay on demand all reasonable costs, fees and expense incurred or to be incurred
by Lender in connection with the examination, review, documentation and closing
of the Maximum Credit Facility, including but not limited
<PAGE>
to, per diem charges of Lender's auditors, and counsel, fees and expenses of
outside counsel; and all other reasonable out-of-pocket expenses relating to any
of the foregoing, including, without limitation, credit insurance, lien and
corporate search, filing and legal fees, estimated to be $10,000 including
commitment fees. The obligations of Applicant described in this section, are
independent of all other obligations of Applicant thereunder, and under the
documents evidencing and/or securing the Maximum Facility, and shall survive the
expiration or termination of this Commitment, and shall be payable whether or
not the secured financing transaction contemplated by this letter shall close.
The payment of the due diligence and documentation fee shall not limit
Applicant's liability for such expenses hereunder.
Indemnification and Limitation of Liability: By signing below Applicant
agrees to indemnify Lender and their directors, officers, agents, auditors,
accountants, and any consultants engaged by Lender to appraise or review the
Collateral, employees, counsel and affiliates from, and hold each of them
harmless against, any and all losses, liabilities, claims, damages or expense
incurred by any of them arising out of or by reason of any investigation,
litigation or other proceeding brought or threatened relating to any loan made
or proposed to be made to Applicant in connection with the matters herein
(including, but without limitation, any use made or proposed to be made by
Applicant or any of its affiliates of the proceeds of such loan(s), but
excluding any such losses, liabilities, claims, damages or expense incurred by
reason of the gross negligence or willful misconduct of the indemnitee),
including, without limitation, amounts paid in settlement, court costs and fees
and disbursements of counsel incurred in connection with any such investigation,
litigation or other proceedings. Applicant agrees that in any such action, the
only damages that can be sought are those that are direct and reasonably
feasible as the probable result of any breach of this agreement and any right in
indirect, special or punitive damages or lost anticipated profits is hereby
waived. Applicant agrees to use its best efforts to mitigate any damages that it
might suffer.
Accuracy of Information: This letter has been issued in reliance upon the
accuracy of all information furnished to Lender by or on behalf of Applicant.
Termination of Commitment under Certain Circumstances: In the event that
any law or regulation affecting Lender's entering into the secured financing
transaction contemplated hereby shall impose upon Lender any material
obligation, fee, liability, loss, costs, expense or damage which is not
contemplated by this letter, the proposal evidenced by this letter may be
terminated by Lender.
Confidential: This letter is delivered to you on the condition that
neither it nor its substance shall be disclosed to any third party except those
who are in a confidential relationship to you or where required by law. No
disclosure may be made to any other financial institution.
Subject to Due Diligence: The terms of this commitment for financing is
expressly made subject to the results of Lender's due diligence and the written
approval of Lender's internal credit authorities. This letter is a commitment, a
contract, or an offer to enter into a contract and should deem to obligate
Lender when and only when, the completion of the acceptable due diligence has
been completed by lender and or his agents, which includes and is not limited to
inventory evaluation, receipt and acceptance of accounts payable law suits, term
agreements to retire old accounts payable or debts, in any manner whatsoever,
receipt of borrower's letter of interest and approval to proceed with venture
capital company and any such other matters as Lender may elect.
Expiration: This commitment is available to you for acknowledgement only
through our close of business on June 20, 1998. Please confirm your request to
proceed by signing copy of this letter, where indicated, and return to my
attention, along with your check for $2,500 to the order of Lender at which
point we will proceed to complete our due diligence. If we do not hear from you
within 4 days, this commitment shall be considered withdrawn.
Modification of Commitment: The terms of this proposal may be modified
only in writing by a letter signed by the Lender.
We appreciate the opportunity to structure a financing package to meet your
needs, and we sincerely look forward to working with you.
<PAGE>
Sincerely,
/s/ Robert Weisberg
Robert Weisberg
President
The above proposal has been reviewed and we wish to further pursue the
consideration of a credit facility by ALCO Financial Services, LLC. We
understand that the above proposal sets forth some, but not all, of the terms
and conditions under which ALCO Financial Services, LLC will consider the
granting of a credit extension.
("Applicant")
ChatCom, Inc.
By: /s/ Gordon L. Almquist CFO Date: 6/18/98
---------------------------------------------- -------------------------
<PAGE>
Summary of Standard Terms
Eligible Invoices -- Eligible invoices are generally defined as
follows. Exceptions to these guidelines may be
negotiated on a case-by-case basis:
. Less than 75 days from the invoice date.
. Due from a customer that, in AFS's judgment, is creditworthy, up to
the credit limit established by AFS.
. Resulting from the shipment of a product or completion of a service
and not subject to counter-claim or offset (progress billings,
guaranteed sales, and "bill and hold" sales are ineligible).
. Due from a customer based in the USA
. Due from a customer that is not a government entity or unless approved
by lender and or customer who have had prior favorable payment history
with company, including exiting Canadian government entity.
. Invoices from a single customer that comprise less than 20% of all
invoices.
. Invoices from a customer of which less than 25% are over 75 days old.
. Each invoice must be accompanied by its underlying purchase order
issued to "ChatCom, Inc."
Eligible Inventory -- Eligible inventory must consist of, in Lender's
sole discretion, re-marketable chattel in good,
salable condition which are owned free and clear
of any security interests of liens except Lender's
perfected security interest.
Security -- AFS requires a perfected security interest in all assets and a
first priority UCC-1 filing on accounts receivable and inventory. Subject to
exceptions noted in the commitment letter.
Guaranties -- AFS ordinarily obtains Validity (Anti-Fraud) Guaranties of
senior executives.
Operational Mechanics -- Copies of all invoices, together with proof of
delivery and/or acceptance of product or service, are submitted to AFS as
generated. Each invoice will bear instructions to customers to mail payment to
a lock ox (PO Box) controlled by AFS.
Loan advances are tracked against specific eligible invoices that have
been identified for financing. New invoices are usually verified prior to
funding.
Receipts to the lock ox are accounted for daily. AFS repays its
advances, deducts its financing fees and remits any funds remaining together
with payments received on non-financed invoices. Financed invoices that become
ineligible, for any reason, are immediately "charged back" or repaid, together
with the financing fees, out of available funds (including funds advanced
against un-financed but eligible invoices).
Examination -- An on-site examination of accounting records is required
prior to AFS Credit Committee approval. Periodic examinations may be performed
by AFS while the credit facility is in place.
Ongoing Information -- The following information is to be periodically
provided to AFS:
. Accounts Receivable Aging -- monthly
(by the 5th day of following month).
. Business Financial Statements -- monthly
(by the 20th day of following month).
. Accounts Payable Aging -- monthly
<PAGE>
(by 5th day of following month).
. Bank Statements - monthly
(by 5th day following receipt).
. Payroll Tax Deposit Reports - quarterly
(by 20th day of the following month).
. Business Tax Returns - annually
(within 20 days after filing).
Reports from AFS- AFS generates and communicates reports daily, weekly and
monthly. Daily reports are prepared whenever a transaction occurs that affects
your loan balance or that results in a transfer of funds. Weekly, we send you an
aging and a delinquent invoice listing. Monthly, you will receive a billing
summary showing transactions for the month. Additionally, statements of unused
loan availability are prepared regularly and as needed.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT
We consent to the incorporation by reference in Registration Statement No.
333-3792 and No. 33-99668 of ChatCom, Inc. (the "Company") on form S-3 of our
report dated June 20, 1997 (which expresses an unqualified opinion and includes
an explanatory paragraph relating to substantial doubt regarding the Company's
ability to continue as a going concern), appearing in this Annual Report on Form
10-KSB of ChatCom, Inc. for the year ended March 31, 1998.
DELOITTE & TOUCHE LLP
Los Angeles, California
July 8, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-50787, No. 333-3792 and No. 33-99668 of ChatCom, Inc. on Form S-3 of our
report dated July 6, 1998 (which expresses an unqualified opinion and includes
an explanatory paragraph relating to substantial doubt regarding the Company's
ability to continue as a going concern), appearing in this Annual Report on Form
10-KSB of ChatCom, Inc. for the year ended March 31, 1998.
Grobstein, Horwath & Company LLP
Sherman Oaks, California
July 10, 1998
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<PAGE>
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<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
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