<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 0-20462
CHATCOM, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 TOPANGA CANYON BOULEVARD, CHATSWORTH, CALIFORNIA 91311
(Address of principal executive offices)
818/709-1778
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---- ---
As of November 12, 1998 there were 14,000,969 shares of the issuer's common
stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
Page 1 of 18
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CHATCOM INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
BALANCE SHEETS (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
ASSETS NOTES 1998 1998
----- ---- ----
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 143 $ 381
Accounts receivable, net of allowances of $66,000
(September 30, 1998) and $50,000 (March 31, 1998) 353 849
Inventories 2,4,5 1,429 2,636
Prepaid expenses and other current assets 51 92
-------- --------
Total current assets 1,976 3,958
EQUIPMENT AND FIXTURES, Net 3,4 267 388
DEPOSITS 4 23 22
-------- --------
TOTAL $ 2,266 $ 4,368
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable 5 $ 2,425 $ 2,904
Accrued expenses 5 814 1,074
Current portion of notes payable 5 1,280
Current portion of capital lease obligations 15 15
Deferred income - sale of technology 5 4424
-------- --------
Total current liabilities 7,678 5,273
-------- --------
LONG-TERM LIABILITIES:
Notes payable - less current portion 5 20
Capital lease obligation - less current portion 10 22
-------- --------
Total long-term liabilities 10 42
-------- --------
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 6 937
-------- --------
SHAREHOLDERS' 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 5 1,407
Series E Convertible Preferred Stock, $1,000
stated value per share, authorized 2,000 shares,
issued and outstanding 950 shares 6 787
Series F Convertible Preferred Stock, $1,000
stated value per share, authorized 2,000 shares,
issued and outstanding 945 shares 5 945
Series G Convertible Preferred Stock, $1,000
stated value per share, authorized 500 shares,
issued and outstanding 400 shares 5 400
Common stock, no par value; authorized
25,000,000 shares; issued and outstanding
13,218,972 shares at September 30, 1998 and
11,591,215 shares at March 31, 1998 11,346 11,025
Additional paid-in capital 2,839 2,839
Accumulated deficit (20,394) (18,500)
-------- --------
Total shareholders' deficit (5,422) (1,884)
-------- --------
TOTAL $ 2,266 $ 4,368
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 2 of 18
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CHATCOM INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES:
Gross sales $1,001 $ 2,577 $ 1,968 $ 7,174
Returns (27) (455) (79) (593)
---------- --------- ---------- ---------
Net sales 974 2,122 1,889 6,581
---------- --------- ---------- ---------
COST OF GOODS SOLD 743 1,301 1,654 4,157
---------- --------- ---------- ---------
GROSS PROFIT 231 821 235 2,424
---------- --------- ---------- ---------
OPERATING EXPENSES:
Selling 235 822 515 1,891
General and administrative 402 1,087 848 1,551
Research and development 248 568 494 1,167
---------- --------- ---------- ---------
Total operating expenses 885 2,477 1,857 4,609
---------- --------- ---------- ---------
LOSS FROM OPERATIONS (654) (1,656) (1,622) (2,185)
INTEREST INCOME 2 9
INTEREST EXPENSE (26) (16) (70) (17)
---------- --------- ---------- ---------
LOSS BEFORE INCOME TAXES (680) (1,670) (1,692) (2,193)
PROVISION FOR INCOME TAXES (1) (1)
---------- --------- ---------- ---------
NET LOSS (680) (1,670) (1,693) (2,194)
---------- --------- ---------- ---------
DIVIDENDS ON PREFERRED STOCK (85) (113) (201) (175)
---------- --------- ---------- ---------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (765) $(1,783) $(1,894) $(2,369)
========== ========= ========== =========
BASIC NET LOSS PER COMMON SHARE $(0.06) $ (0.18) $ (0.16) $ (0.24)
========== ========= ========== =========
Weighted average number of Common
Shares 12,527,901 9,961,238 12,173,355 9,894,814
========== ========= ========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 3 of 18
<PAGE>
CHATCOM INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(1,693) $(2,194)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 121 179
Provision for losses on accounts receivable 16 559
Provision for inventory obsolescence 120 15
Changes in operating assets and liabilities:
Accounts receivable 480 (1,842)
Inventories 547 (584)
Prepaid expenses and other current assets 41 (44)
Accounts payable (185) 2,133
Accrued expenses (33) (46)
------- -------
Net cash used in operating activities (586) (1,824)
------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (176)
------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on capital leases (12) (13)
Proceeds from notes payable 400
Proceeds from line of credit 150
Repayment of line of credit (150)
Repayment of note payable (40)
Issuance of convertible subordinated debt 350
Proceeds from sale of preferred stock 940
------- -------
Net cash provided by
financing activities 348 1,277
------- -------
NET DECREASE IN CASH (238) (723)
CASH, BEGINNING OF PERIOD 381 1,169
------- -------
CASH, END OF PERIOD $ 143 $ 446
======= =======
</TABLE>
(CONTINUED)
Page 4 of 18
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CHATCOM INC.
STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the six months ended September 30, 1998 and 1997, the Company paid
interest of $0 and $2,336, respectively, and taxes of $0 and $8,253,
respectively.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended September 30, 1998, the Company accrued dividends
related to the Series D Convertible Preferred Stock of $104,000 and paid
previously accrued dividends of $125,000 through the issuance of 242,001
shares of Common Stock, which resulted in an increase in Common Stock of
$125,000 and a decrease in accrued expenses of $125,000.
During the six months ended September 30, 1998, the Company accrued dividends
related to the Series E Convertible Preferred Stock of $43,000 and paid
previously accrued dividends of $45,000 through the issuance of 98,709 shares
of Common Stock, which resulted in an increase in Common Stock of $45,000 and
a decrease in accrued expenses of $45,000.
During the six months ended September 30, 1998, holders of the Series E
Convertible Preferred Stock converted an aggregate total of 150 shares
($150,000 in stated value) and approximately $1,000 in accrued dividends
related thereto into a total of 1,287,047 shares of Common Stock, which
resulted in an increase in Common Stock of $151,000, a decrease of Series E
Convertible Preferred Common Stock of $150,000, and a decrease in accrued
expenses of $1,000.
During the six months ended September 30, 1998, the Company accrued dividends
related to the Series F Convertible Preferred Stock and Series G Convertible
Preferred Stock of $38,000 and $16,000, respectively.
During September 1998, the Company entered into a Sale Agreement and License
Agreement whereby the Company sold its recently announced BrightStar product
technology in exchange for the receipt of $200,000 in cash and the
cancellation of certain indebtedness and preferred stock totalling $4,224,000,
which resulted in a decrease in accounts payable of $20,000, a decrease in
accrued expenses of $258,000, a decrease in notes payable of $1,194,000, a
decrease in Series D Convertible Preferred Stock of $1,407,000, a decrease in
Series F Convertible Preferred Stock of $945,000, a decrease in Series G
Convertible Preferred Stock of $400,000 and an increase to Deferred Income
Sale of Technology of $4,424,000.
In connections with these transactions, the Company was also permitted to
return approximately $540,000 in inventory which resulted in a decrease to
accounts payable of $274,000, a decrease in notes payable of $266,000 and a
decrease to inventory of $540,000.
During the six months ended September 30, 1997, the Company accrued dividends
related to the preferred stock of $175,000 and paid previously accrued
dividends of $175,000 through the issuance of 156,564 shares of Common Stock,
which resulted in an increase in Common Stock of $175,000 and a decrease in
accrued expenses of $175,000.
During the six months ended September 30, 1997, the Company entered into
capital lease agreements for equipment totaling $29,000.
(CONCLUDED)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 5 of 18
<PAGE>
CHATCOM INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements of ChatCom, Inc. (the
"Company") have been prepared in accordance with instructions to Form 10-
QSB and, in the opinion of management, include all material adjustments
(consisting only of normal recurring accruals) which are necessary for the
fair presentation of results of operations for the interim periods. These
unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB, as amended, for the fiscal year ended March 31,
1998. The results of operations for the six month period ended September
30, 1998 are not necessarily indicative of the results to be expected for
the full fiscal year ending March 31, 1999.
Certain prior year amounts have been reclassified to conform with current
year classifications.
2. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
---- ----
<S> <C> <C>
Raw materials $ 1,133,000 $ 766,000
Work in process 61,000 469,000
Finished goods 2,006,000 3,192,000
----------- -----------
Inventory at cost 3,200,000 4,417,000
Less: Reserve for obsolescence (1,771,000) (1,781,000)
----------- -----------
$ 1,429,000 $ 2,636,000
=========== ===========
</TABLE>
3. EQUIPMENT AND FIXTURES, Net
Equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
---- ----
<S> <C> <C>
Equipment $ 694,000 $ 694,000
Software 75,000 75,000
Furniture and fixtures 33,000 33,000
Leasehold improvements 89,000 89,000
--------- ---------
891,000 891,000
Less: accumulated depreciation (624,000) (503,000)
--------- ---------
$ 267,000 $ 388,000
========= =========
</TABLE>
Page 6 of 18
<PAGE>
CHATCOM INC.
4. LINE OF CREDIT
On August 31, 1998, the Company entered into a line of credit agreement
with ALCO Financial Services, Inc. ("ALCO") (the "Credit Facility"). Under
the terms of the agreement, which remains in effect through August 31,
1999, the Company can borrow from ALCO up to $300,000 based on eligible
accounts receivable and inventory, at prime plus seven percent. The Credit
Facility granted ALCO a blanket lien on all assets of the Company and
includes certain financial covenants limiting mergers, acquisitions,
recapitalizations, dividends, loans to others, hypothecation of assets or
corporate guarantees. The Credit Facility was conditional upon the
Company's receipt of a cash infusion of $200,000 from High View Capital
(which was received by the Company during September 1998 - see Note 5)
prior to effecting the line of credit. Since the inception of the agreement
through September 30, 1998, the Company borrowed a total of $150,000 under
the Credit Facilty, but there were no outstanding borrowings under the
Credit Facility as of September 30, 1998.
5. CONVERSION OF UNSECURED DEBT, ADDITIONAL FINANCING AND SALE AGREEMENT
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"). 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 were 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 was
convertible into shares of Common Stock at a conversion price of $.35 per
share. The holder of the Series F Preferred Stock and Series G Preferred
Stock was entitled to equal preference with holders of the Company's
Series D and Series E Preferred Stock. As long as any amounts of Series F
Preferred Stock or Series G Preferred Stock remain outstanding, VRPI had
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 was
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 was required to remit 25%
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
Page 7 of 18
<PAGE>
CHATCOM INC.
financings. The Company also agreed to pay VRPI's expenses in connection
with this transaction.
Pursuant to the Settlement Agreement, the Company 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 $35,000 was
paid on May 1, 1998). Due to the Company's liquidity crisis, no further
payments were made to VRPI, including any amounts owed in connection with
the Company's issuance of Common Stock in March 1998 ($110,000) and in
connection with the Company's collection of foreign accounts receivable
(approximately $93,000 as of September 30, 1998).
On June 6, 1998, the Company received written notice from VRPI of VRPI's
decision (which the Company did not agree 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 September 11, 1998, the Company received a $100,000 loan
from VRPI (the "VRPI Loan"). The VRPI Loan provided for interest at the
rate of 15% per annum, was secured by the Company's foreign accounts
receivable and was due on July 11, 1998. During the 30 day period ending
July 11, 1998 (the "Study Period"), VRPI conducted an examination of the
Company's technology and finances in order to determine if an investment in
the Company was warranted. The VRPI Loan contained 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 had
informed the Company that it has prepared, but not filed, a lawsuit against
the Company and certain of its officers and directors and 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.
On August 26, 1998, the Company entered into a Purchase and Sale Agreement
(the "Sale Agreement") with VRPI and High View Capital ("HVC"). HVC
(including certain of its affiliates) is the holder of the Company's Series
D Convertible Preferred Stock and the Company's convertible subordinated
debt in the aggregate principal amount of $890,000. The Sale Agreement
provides for the sale by the Company of its recently announced BrightStar
product technology (the "New Product") to VRPI and HVC (collectively, the
"Purchasers") in exchange for $400,000 in cash ($200,000 of which was
advanced to the Company by VRPI through July 7, 1998 and the remaining
$200,000 was received by the Company on September 2, 1998), the
cancellation of all outstanding loans and convertible notes made to the
Company by the Purchasers or their affiliates including accrued interest
(approximately $966,000 at August 26, 1998), the cancellation of all trade
debt owing by the Company to the Purchasers (approximately $391,000 at
August 26, 1998), the return of certain equipment by the Company to VRPI in
the amount of approximately $289,000, the cancellation of all shares of
preferred stock (and accrued dividends thereon) owned by the Purchasers or
any of their affiliates (approximately $4.0 million in stated value at
August 26, 1998) and the cancellation of all warrants held by the
Purchasers or their affiliates to purchase shares of the Company's Common
Stock (835,000 shares). The Sale Agreement included certain other
conditions, which included the Company's receipt of a minimum of $300,000
from ALCO under a line of credit (which was effected on August 31, 1998 see
Note 5) and the execution of a license agreement under which the Purchasers
would grant the Company an exclusive license to the New Product (the
"License Agreement"). The License Agreement provides for royalty payments
to be made by the Company to the Purchasers in the amount of 5% of the
sales price of New Products sold by the Company. In the event of any sale
or merger of the Company or the licensing by the Company of the New Product
to a third party, the Company may elect to buy-back the New Product from
the Purchasers for $1, provided the sale or merger or licensing arrangement
generates at least $8
Page 8 of 18
<PAGE>
CHATCOM INC.
million in aggregate proceeds to the Company. In such an event, the Company
would be required to distribute the proceeds from such a transaction on the
following incremental basis: up to $1 million, 75% to Purchasers, 25% to
the Company; $1,000,000 to $5,999,999, 48.5% to Purchasers, 51.5% to the
Company; $6,000,000 to $7,999,999, 68% to Purchasers, 32% to the Company;
$8,000,000 to $9,999,999, 60% to Purchasers, 40% to the Company;
$10,000,000 to $12,999,999, 21% to Purchasers, 79% to the Company;
$13,000,000 to $16,000,000, 7.5% to Purchasers, 92.5% to the Company; over
$16,000,000, 100% to the Company. In the event the Company enters into a
sale, merger or licensing agreement that generates less than $8 million in
aggregate proceeds to the Company, the license granted to the Company under
the License Agreement would convert to a non-exclusive license. The
Purchasers have the right to rescind the Sale Agreement and License
Agreement for a period of one year (until August 31, 1999).
The accompanying balance sheet of the Company as of September 30, 1998 has
been adjusted to reflect the result of the Sale Agreement and License
Agreement and the cancellation of certain indebtedness and preferred stock
related thereto (as described above) in the aggregate amount of $4,424,000
and reflects a liability entitled Deferred Income Sale of Technology in
the amount of $4,424,000.
6. SERIES E CONVERTIBLE REDEEMABLE PREFERRED STOCK
The Company's Series E Convertible Redeemable Preferred Stock (the "Series
E Preferred Stock") contained a mandatory redemption feature which provided
that if on September 1, 1998 all of the shares of Common Stock issuable
upon conversion of the then outstanding shares of Series E Preferred Stock
were not at that time duly registered, the Company, at the demand of the
any investor, would be obligated to redeem such investor's shares of Series
E Preferred Stock for a total amount equal to the market price times the
number of shares of Common Stock into which such shares of Series E
Preferred Stock are convertible on the date of such demand, and would be
required to pay accrued dividends on such shares of Series E Preferred
Stock, whether or not declared, to the redemption date. On July 15, 1998,
the Company's Form S-3 (which registered certain shares of Common Stock of
the Company including those Common shares issuable upon conversion of the
Series E Preferred Stock) was declared effective (the "Registration"). As a
result of the Registration, the mandatory redemption feature of the Series
E Preferred Stock was eliminated and the Company reclassified the Series E
Preferred Stock to Shareholders' Deficit in the accompanying Balance Sheet
as of September 30, 1998.
The Series E Preferred Stock Registration Rights Agreement contains a late
registration penalty which requires the Company to pay the investors on
January 24, 1998 and on each successive date which is 30 days after the
previous payment (prorated for partial periods) until such registration
statement is declared effective, payments in the amount of 3% of the
purchase price of the outstanding Series E Preferred Stock ($1,100,000), in
cash or shares of the Company's Common Stock at the election of the
investor. Through the effective date of the Registration, the Company has
incurred approximately $227,000 in late registration penalties. The
investors have notified the Company that payment of the penalty shall be
made by the Company in cash. As of September 30, 1998, the Company's
financial statements reflect the accrual of $227,000 in late registration
penalties. The Company believes that the late registration penalty was a
result of the Company's severe cash flow constraints. Furthermore, the
Company is presently not capable of paying the registration penalty in
cash.
At various dates since the Registration through September 30, 1998, holders
of the Series E Preferred Stock converted an aggregate total of 150 shares
($150,000 in stated value) and approximately $1,000 in accrued dividends
related thereto into a total of 1,287,047 shares of the Company's Common
Stock.
Page 9 of 18
<PAGE>
CHATCOM INC.
7. RELATED PARTIES
One of the officers of the Company is also a shareholder of a law firm that
provides legal consultation to the Company. At September 30, 1998 and 1997,
the Company owed this law firm $18,000 and $12,000, respectively. During
the six months ended September 30, 1998 and 1997, fees relating to services
provided by this law firm in the amounts of $8,000 and $23,000,
respectively, were included in general and administrative expenses in the
accompanying statement of operations.
8. CREDITORS MORATORIUM
In September 1998, a meeting of the Company's creditors was held at Credit
Managers Association of California ("CMAC"). As an inducement for creditors
to enter into a moratorium and to discourage present and future creditors
from attempting to execute on The Company's assets, the Company pledged
substantially all of its assets to CMAC in its capacity as agent for the
creditors of The Company. An unofficial committee of creditors has been
formed to monitor the Company's operations and review its business plan, as
described under Liquidity and Capital Resources. Creditors are being
requested to forbear from seeking payment on all past due obligations
through February 1999, while efforts are undertaken to explore alternative
measures by which the Company can seek to realized moneys or other
consideration for its creditors and stockholders. No binding moratorium
agreement is currently in place, and it is possible that one or more
creditors will not honor this forbearance request. Absent creditor
cooperation, there is a significant possibility that the Company will be
forced to seek relief in the bankruptcy court.
Page 10 of 18
<PAGE>
CHATCOM INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters
discussed in this quarterly report are forward-looking statements, which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's business
operations and financial condition and other factors as described in the
Company's various filings with the Securities and Exchange Commission, including
without limitation the Company's Form 10-KSB for the fiscal year ended March 31,
1998, as amended.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Net sales during the three months ended September 30, 1998 (the "second
quarter of fiscal 1999") decreased approximately $1.1 million or 54% compared to
approximately $2.1 million for the three months ended September 30, 1997 (the
"second quarter of fiscal 1998"). The decline in net sales during the second
quarter of fiscal 1999 compared to the second quarter of fiscal 1998 resulted
primarily from decreased shipments to domestic Value Added Resellers ("VAR's")
($793,000) which the Company believes is attributable to the declining demand
for remote control type remote access solutions, and a continued decrease in
selling, advertising and marketing expenditures including marketing support for
VAR's during fiscal 1999 due to the Company's cash flow constraints, and a
decrease in net shipments to the Company's Singapore distributor ($272,000) as a
result of the Asian economic crisis in the later half of 1997.
In December 1997, the Company and its Singapore distributor, Macon
Holdings(S) Pte. Ltd. ("Macon") entered into an agreement whereby the Company
agreed to permit Macon to return a majority of the equipment (approximately $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 these products. Through September 30, 1998,
approximately $1.2 million (approximately $761,000 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 first half of the December 31, 1998 fiscal quarter continue to be adversely
impacted as a result of reduced expenditures for advertising and marketing
programs and the postponement of hiring or replacement of certain sales
personnel due to the Company's continuing and deepening 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
Page 11 of 18
<PAGE>
CHATCOM INC.
normally required to ship finished goods and may not be able to meet delivery
requirements of certain customers.
Cost of goods sold were approximately $743,000 or 76% of net sales during
the second quarter of fiscal 1999 compared to $1.3 million or 61% of net sales
in the second quarter of fiscal 1998. The decrease in gross margin in fiscal
1999 (24% vs. 39%, respectively) was primarily the result of continued price
discounting due to competition and continued fixed manufacturing overhead costs
which did not decrease proportionately with the lower sales during the second
quarter of fiscal 1999. Although the cost of certain components (i.e.,
microprocessors and random access memory components) during the second quarter
of fiscal 1999 were somewhat lower than the comparable prior year quarter, the
Company has not been able to achieve further reductions in component costs due
to the lower quantities purchased during fiscal 1999 as a result of the
decrease in sales described above. Furthermore, as a result of the Company's
cash flow constraints, the Company has incurred and may continue to incur
additional costs from vendors in order to expedite the procurement of components
in order to satisfy delivery requirements of certain customers. The Company's
gross margins are affected by several factors, including, among others, sales
mix and distribution channels and, therefore, may vary in future periods from
those experienced during the second quarter of fiscal 1999.
Selling expenses decreased $587,000 or 71% in the second quarter of fiscal
1999 compared to the second quarter of fiscal 1998, primarily as a result of
decreased salaries and related costs ($268,000) in all departments (selling,
marketing and technical support) as a result of resignations (and the subsequent
postponement of hiring replacement personnel due to cash flow constraints) and
reductions-in-force effected by the Company since November 1997, as well as
decreased advertising expenses ($84,000) and trade show expenses ($47,000) due
to certain cost reductions implemented during the second quarter of fiscal 1998;
decreased commissions ($40,000) as a result of significantly lower sales during
second quarter of fiscal 1999 compared to the second quarter of fiscal 1998; and
reduced travel costs associated with selling and equipment installation due to
the lower sales and fewer personnel, as described above.
General and administrative expenses decreased by $685,000, or 63%, to
$402,000 during the second quarter of fiscal 1999 from $1,087,000 during the
second quarter of fiscal 1998. The decrease in general and administrative
expenses consisted primarily of lower bad debt expense ($512,000) as the result
of the establishment of a reserve of $500,000 during the second quarter of
fiscal 1998 related to the payment delinquency of Macon; the elimination of
certain consulting expenses ($45,000) due to the termination during February
1998 of an employment contract with a former executive officer of the Company;
decreased salaries, bonuses and related costs ($60,000) as a result of
resignations (and the subsequent postponement of hiring replacement personnel
due to cash flow constraints) and reductions-in-force effected by the Company
since November 1997; lower investor relations expenses ($33,000); and lower
accounting fees ($34,000). These decreases were partially offset by increased
legal fees ($58,000). As a result of the Company's continuing liquidity
problems, a number of vendors have either sued the Company or have forwarded
their accounts to collection. The Company anticipates that it will continue to
incur substantial legal expenses in the December 31, 1998 quarter as well as
possible interruption in the receipt of goods and services due to its liquidity
problems.
Research and development expenses during the second quarter of fiscal 1999
decreased $320,000 or 56% compared to the second quarter of fiscal 1998. The
decrease in the second quarter of fiscal 1999 was primarily attributable to
lower payroll and related expenses ($104,000), decreased use of consultants
($96,000); and decreased expenditures for prototypes ($102,000); all of which
were due to cost reductions implemented by the Company as a result of its poor
financial condition and cash flow constraints.
The Company did not earn interest income during the second quarter of
fiscal 1999 compared to $2,000 earned during the second quarter of fiscal 1998
as a result of lower investment balances due primarily to cash used for
operating activities.
Page 12 of 18
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CHATCOM INC.
Interest expense increased to $26,000 during the second quarter of fiscal
1999 from $16,000 in the second quarter of fiscal 1998 primarily as a result of
interest in connection with a line of credit (which was effected during
September 1998) and interest associated with convertible subordinated notes of
$350,000 and $540,000 issued by the Company in May 1997 and December 1997,
respectively, as well as interest related to the VRPI Loan and outstanding trade
indebtedness to VRPI.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THE SIX MONTHS ENDED SEPTEMBER 30, 1997
Net sales during the six months ended September 30, 1998 (the "first half
of fiscal 1999") decreased $4.7 million or 71% compared to the six months ended
September 30, 1997 (the "first half of fiscal 1998"). The decline in net sales
during the first half of fiscal 1999 compared to the first half of fiscal 1998
resulted primarily from a decrease in net shipments to the Company's Singapore
distributor ($3.0 million) as a result of the Asian economic crisis in the later
half of 1997 and decreased shipments to domestic Value Added Resellers ("VAR's")
($1.4 million), which the Company believes is attributable to the declining
demand for remote control type remote access solutions, and a continued decrease
in selling, advertising and marketing expenditures including marketing support
for VAR's during fiscal 1999 due to the Company's cash flow constraints.
Cost of goods sold was $1.7 million or 88% of net sales during the first
half of fiscal 1999 compared to $4.2 million or 63% of net sales in the first
half of fiscal 1998. The decrease in gross margin in fiscal 1999 compared to the
first six months of fiscal 1998 (12% vs. 37%) was primarily the result of
continued price discounting due to competition; continued fixed manufacturing
overhead costs which did not decrease proportionately with the lower sales
during the first half of fiscal 1999; and an increase in inventory obsolescence
($249,000) due mainly to the recording of a provision during fiscal 1999
($120,000) as a result of the significantly lower sales and reduced inventory
turnover during fiscal 1999 compared to a decrease in inventory reserves during
the first half of fiscal 1998 ($129,000, of which $109,000 was recorded during
the quarter ended June 30, 1997).
Selling expenses decreased $1.4 million or 73% during the first half of
fiscal 1999 compared to the first half of fiscal 1998, primarily as a result of
decreased salaries and related costs ($518,000) in all departments (selling,
marketing and technical support) as a result of resignations (and the subsequent
postponement of hiring replacement personnel due to cash flow constraints) and
reductions-in-force effected by the Company since November 1997, as well as
decreased advertising expenses ($263,000) and trade show expenses ($129,000) due
to certain cost reductions implemented during the second quarter of fiscal 1998;
decreased commissions ($112,000) as a result of significantly lower sales during
first half of fiscal 1999 compared to the first half of fiscal 1998; and reduced
travel costs associated with selling and equipment installation due to the lower
sales and fewer personnel, as described above.
General and administrative expenses decreased by $703,000, or 45%, to
$848,000 during the first half of fiscal 1999 from $1.6 million during the first
half of fiscal 1998. The decrease in general and administrative expenses
consisted primarily of lower bad debt expense ($543,000) as the result of the
establishment of a reserve of $500,000 during the second quarter of fiscal 1998
related to the payment delinquency of Macon; the elimination of certain
consulting expenses ($90,000) due to the termination during February 1998 of an
employment contract with a former executive officer of the Company; decreased
salaries, bonuses and related costs ($120,000) as a result of resignations and
reductions-in-force effected by the Company since November 1997; and lower
investor relations expenses ($59,000). These decreases were partially offset by
increased legal fees ($109,000) and the accrual of a penalty ($121,000 during
the first first half of fiscal 1999) due to the delay in registering shares in
connection with the Company's Series E Preferred Stock (which was primarily due
to the Company's liquidity problems).
Page 13 of 18
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CHATCOM INC.
Research and development expenses during the first half of fiscal 1999
decreased $673,000 or 58% compared to the first half of fiscal 1998. The
decrease in the first half of fiscal 1999 was primarily attributable to lower
payroll and related expenses ($188,000); decreased use of consultants
($205,000); and decreased expenditures for prototypes ($194,000); all of which
were due to cost reductions implemented by the Company as a result of its poor
financial condition and cash flow constraints.
The Company did not earn interest income during the first half of fiscal
1999 compared to $9,000 earned during the first half of fiscal 1998 as a result
of lower investment balances due primarily to cash used for operating
activities.
Interest expense increased to $70,000 during the first half of fiscal 1999
from $17,000 during the first quarter of fiscal 1998, primarily as a result of
interest in connection with a line of credit (which was effected during
September 1998), interest associated with convertible subordinated notes of
$350,000 and $540,000 issued by the Company in May 1997 and December 1997,
respectively, as well as interest related to the VRPI Loan and outstanding trade
indebtedness to VRPI.
Liquidity and Capital Resources
- -------------------------------
The Company recorded net losses of $7.8 million and $4.6 million during
fiscal years ended March 31, 1998 and 1997, respectively, and recorded a net
loss of $1.7 million during the first half of fiscal 1999. During the first half
of fiscal 1999, cash decreased $238,000 primarily due to the negative cash flow
from operations of $586,000. The negative cash flow from operations during the
first half of fiscal 1999 was comprised primarily of the net loss ($1.7 million)
and a decrease in accounts payable ($185,000). These decreases to cash flow were
partially offset by a decrease in accounts receivable ($480,000) as a result of
collections; a decrease in inventories ($547,000) due primarily to shipment of
components returned from Macon; and by non cash charges primarily related to
depreciation and amortization ($121,000) and inventory obsolescence ($120,000).
Net cash provided by financing activities during first half of fiscal 1999
($348,000) was primarily the result of the proceeds from High View Capital and
the VRPI loans in connection with the sale of the Company's BrightStar
technology in September 1998 (see below).
As of September 30, 1998 and March 31, 1998, the Company had negative working
capital of $5.7 million and $1.3 million, respectively. The Company must obtain
additional liquidity to meet its current obligations and maintain its operations
and is actively seeking additional financing to meet its immediate needs. The
Company does not have any commitments for this financing, and there can be no
assurance that it will able to secure any financing on commercially reasonable
terms or at all. Should the Company be unable to obtain sufficient financing, it
will be forced to significantly reduce or suspend its operations or seek
protection under bankruptcy laws in the immediate future. 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.
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 September 11, 1998, the Company received a $100,000 loan from VRPI
(the "VRPI Loan"). The VRPI Loan provided for interest at the rate of 15% per
annum, is secured by the Company's foreign accounts receivable and was due on
July 11, 1998. During the 30 day period ending
Page 14 of 18
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CHATCOM INC.
July 11, 1998 (the "Study Period"), VRPI conducted an examination of the
Company's technology and finances in order to determine if an investment in the
Company was warranted. The VRPI Loan contained 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 also informed the Company that it had
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.
On August 26, 1998, the Company entered into a Purchase and Sale Agreement
(the "Sale Agreement") with VRPI and High View Capital ("HVC"). HVC (including
certain of its affiliates) is the holder of the Company's Series D Convertible
Preferred Stock and the Company's convertible subordinated debt in the aggregate
principal amount of $890,000. The Sale Agreement provides for the sale by the
Company of its recently announced BrightStar product technology (the "New
Product") to VRPI and HVC (collectively, the "Purchasers") in exchange for
$400,000 in cash ($200,000 of which was advanced to the Company by VRPI through
July 7, 1998 and the remaining $200,000 was received by the Company on September
2, 1998), the cancellation of all outstanding loans and convertible notes made
to the Company by the Purchasers or their affiliates including accrued interest
(approximately $966,000 at August 26, 1998), the cancellation of all trade debt
owing by the Company to the Purchasers (approximately $391,000 at August 26,
1998), the return of certain equipment by the Company to VRPI in the amount of
approximately $289,000, the cancellation of all shares of preferred stock (and
accrued dividends thereon) owned by the Purchasers or any of their affiliates
(approximately $4.0 million in stated value at August 26, 1998) and the
cancellation of all warrants held by the Purchasers or their affiliates to
purchase shares of the Company's Common Stock (835,000 shares). The Sale
Agreement included certain other conditions, which included the Company's
receipt of a minimum of $300,000 from ALCO under a line of credit (which was
effected on September 2, 1998) and the execution of a license agreement under
which the Purchasers would grant the Company an exclusive license to the New
Product (the "License Agreement"). The License Agreement provides for royalty
payments to be made by the Company to the Purchasers in the amount of 5% of the
sales price of New Products sold by the Company. In the event of any sale or
merger of the Company or the licensing by the Company of the New Product to a
third party, the Company may elect to buy-back the New Product from the
Purchasers for $1, provided the sale or merger or licensing arrangement
generates at least $8 million in aggregate proceeds to the Company. In such an
event, the Company would be required to distribute the proceeds from such a
transaction on the following incremental basis: up to $1 million, 75% to
Purchasers, 25% to the Company; $1,000,000 to $5,999,999, 48.5% to Purchasers,
51.5% to the Company; $6,000,000 to $7,999,999, 68% to Purchasers, 32% to the
Company; $8,000,000 to $9,999,999, 60% to Purchasers, 40% to the Company;
$10,000,000 to $12,999,999, 21% to Purchasers, 79% to the Company; $13,000,000
to $16,000,000, 7.5% to Purchasers, 92.5% to the Company; over $16,000,000, 100%
to the Company. In the event the Company enters into a sale, merger or licensing
agreement that generates less than $8 million in aggregate proceeds to the
Company, the license granted to the Company under the License Agreement would
convert to a non-exclusive license. The Purchasers have the right to rescind the
Sale Agreement and License Agreement for a period of one year (until August,
1999).
On September 15, 1998, the Company entered into a line of credit agreement
with ALCO Financial Services, Inc. ("ALCO") (the "Credit Facility"). Under the
terms of the agreement, which remains in effect through August 31, 1999, the
Company can borrow from ALCO up to $300,000 based on eligible accounts
receivable and inventory, at prime plus seven percent. The Credit Facility
granted ALCO a blanket lien on all assets of the Company and includes certain
financial covenants limiting mergers, acquisitions, recapitalizations,
dividends, loans to others, hypothecation of assets or corporate guarantees. The
Credit Facility was conditional upon the Company's receipt of a cash infusion of
$200,000 from High View Capital (which was received by the Company during
September 1998 - see Note 5) prior to effecting the line of credit. Since the
inception of the agreement through September 30,
Page 15 of 18
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CHATCOM INC.
1998, the Company borrowed a total of $150,000 under the Credit Facility, but
there were no outstanding borrowings under the Credit Facility as of September
30, 1998.
As a result of the Company's continuing liquidity problems, 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. The Company has settled certain of these complaints whereby
the vendors have agreed to accept a substantial discount from the balance owed
of a 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. The
Company has also entered into agreements with several creditors (who had not
sued the Company) which provided for discounts equal to at least 40% of the
original debt with payments of the restated debt extended over several months.
At present, the Company is in default of most of the agreements described above.
In September of 1998, a meeting of the Company's creditors was held at
Credit Managers Association of California ("CMAC"). As an inducement for
creditors to enter into a moratorium and to discourage present and future
creditors from attempting to execute on The Company's assets, the Company
pledged substantially all of its assets to CMAC in its capacity as agent for the
creditors of The Company. An unofficial committee of creditors has been formed
to monitor the Company's operations and review its business plan, as described
in the following paragraph. Creditors are being requested to forbear from
seeking payment on all past due obligations through February 1999, while efforts
are undertaken to explore alternative measures by which the Company can seek to
realized moneys or other consideration for its creditors and stockholders. No
binding moratorium agreement is currently in place, and it is possible that one
or more creditors will not honor this forbearance request. Absent creditor
cooperation, there is a significant possibility that the Company will be forced
to seek relief in the bankruptcy court.
The Company has incurred operating losses in each of its last three fiscal
years, and has experienced operating losses for the past eight consecutive
fiscal quarters and is continuing to incur operating losses subsequent to
September 30, 1998. The Company is seeking financing to meet its current
obligations but has been unsuccessful to date in obtaining any of the
significant amount of capital that would be required to meet its longer term
capital needs as a viable entity. Accordingly, the Company is currently pursuing
a sale or merger of the Company as an alternative to continuing at its present
level of reduced operations (which will require additional short-term financing)
or discontinuing its operations. There can be no assurance, however, that the
Company will be able to consumate a sale on terms attractive to its shareholders
or at all.
During August 1998, the Company's Common Stock was delisted from the
Nasdaq SmallCap Market ("Nasdaq") as a result of the Company's inability to
sustain the listing requirements of Nasdaq. As a result of being delisted from
Nasdaq, the Company's Common Stock currently trades on the OTC Bulletin Board.
Lack of an established trading market for the Company's Common Stock such as
Nasdaq may limit Common Stock holders' ability to dispose of their shares and
may negatively affect the prevailing price of the Common Stock, and may
adversely impact the Company's ability to arrange future financing.
The Company had no material commitments for capital expenditures as of
September 30, 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. The Company's
internal accounting and other information and certain non-information systems
will need to be upgraded. The total hardware and software costs of such upgrade
are not expected to exceed $50,000. The Company intends to effect these upgrades
in order to avoid any delays or disruptions to its operations that could occur
should it be required to replace its current systems with manual systems in the
year 2000. The Company's server products incorporate chips of other
manufacturers that must be year 2000 compliant. In August 1997 the Company
commenced contacting its existing customers to alert them to the need to replace
certain of the chips in the Companies product that are not year 2000 compliant.
The cost to the customer for upgrading
Page 16 of 18
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CHATCOM INC.
these chips is relatively low and the Company does not anticipate that its own
costs in connection with this upgrade process will be material.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits. The folowing exhibits are filed with this Form 10-QSB
or are incorporated by reference to the document described:
10.1 Accounts Purchase Agreement between ALCO Financial
Services, LLC and ChatCom, Inc., dated August 31, 1998.
10.2 License Agreement between Vermont Research Products, Inc.,
High View Capital and ChatCom, Inc., dated August 28, 1998
27 Financial Data Schedule
b. Reports on Form 8-K.
A current report on Form 8-K dated July 15, 1998, under Item 5,
reporting that the Company's Form S-3, registering for potential
resale shares of the Company's Common Stock, had been declared
effective by the Securities and Exchange Commission on July 15,
1998.
A current report on Form 8-K dated September 2, 1998, under Item
5, reporting on the sale of the Company's recently announced
BrightStar product technology to Vermont Research Products, Inc.
and High View Capital.
No other information is required to be filed under Part II of this Form 10-QSB.
Page 17 of 18
<PAGE>
CHATCOM INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHATCOM, INC.,
a California corporation
Date: November 23, 1998 By: /s/ E. Carey Walters
----------------------------
E. Carey Walters, President,
Chief Executive Officer
Date: November 23, 1998 By: /s/ Dianna Saltmarch
----------------------------
Principal Accounting Officer
Page 18 of 18
<PAGE>
EXHIBIT 10.1
ALCO FINANCIAL SERVICES, LLC
ACCOUNTS PURCHASE AGREEMENT
---------------------------
This Accounts Purchase Agreement (the "Agreement") is made as of August 31,
1998, by and between ALCO FINANCIAL SERVICES, LLC, a California limited
liability company (together with its successors and assigns, "Factor"), and
CHATCOM, INC., a California corporation (together with its successors and
assigns, the "Company") concerning loans and other credit accommodations to be
made by Factor to Company.
1. PURCHASE OF CERTAIN ACCOUNTS AND OTHER CREDIT ACCOMMODATIONS.
1.1 Sale of Certain Accounts. Company hereby agrees to sell and assign to
------------------------
Factor as absolute owner all of its right, title and interest in and to such of
its Accounts which Company submits to Factor and Factor, in its discretion,
agrees to purchase. As used in this Agreement, "Accounts" shall include all
accounts that Company may own from time to time and any and all general
intangibles, chattel paper and instruments derived therefrom or related thereto
and all other obligations owing to Company in connection with the sale of goods
by Company or the performance of services by Company constituting the basis for
such accounts, and all books, records and other property at any time evidencing
or related to the foregoing and all products and proceeds of any of the
foregoing in any form including, without limitation, any claims against third
parties for loss or damage to, or destruction of, any or all of the foregoing
claims under any and all insurance policies with respect thereto. As used herein
"Accounts" shall also include all rights, remedies, guaranties, security
interests and liens in respect of such Accounts, including, without limitation
(i) rights of stoppage in transit, replevin, repossession and reclamation and
all other rights and remedies of an unpaid vendor, lienor or secured party with
respect to all goods relating to or the sale of which generated such Accounts,
including without limitation, all returned, reclaimed or repossessed goods; (ii)
all rights of a loss payee or a policy holder under any credit insurance policy
relating to such Accounts; and (iii) all rights to the proceeds of the foregoing
in any form, including, but not limited to, insurance proceeds of any nature or
kind pertaining thereto or covering such Accounts of the goods and services
underlying such Accounts. To evidence the potential liability of the Company for
the "Purchased Accounts" (as defined below in Section 3.1), the Company shall
execute and deliver to Factor a certain Accommodation Note (the "Accommodation
Note") in the maximum principal amount of the "Maximum Purchased Account Limit"
(as defined below in Section 18.1.1) payable to the order of Factor.
1.2 Loans Against Eligible Inventory. Factor shall, subject to the terms
--------------------------------
and conditions contained herein, including the Inventory Rider attached to this
Agreement and incorporated herein, make revolving loans to Company pursuant to
the Inventory Rider attached hereto ("Inventory Advances") in amounts requested
by Company from time to time, but not in excess of the Net Availability existing
immediately prior to the making of the requested loan and provided that the
requested loan, together with any such "Inventory Advances" made pursuant to the
Inventory Rider attached hereto and incorporated herein by this reference, would
not cause the aggregate outstanding Obligations to exceed the Maximum Amount (as
defined in Section 18
<PAGE>
below) at any one time. Amounts advanced as part of the Inventory Advances shall
be evidenced by a certain Promissory Note (the "Promissory Note") in the
maximum principal amount of $300,000 to evidence the Inventory Advances made by
Factor from time to time pursuant to the Inventory Rider to this Agreement.
1.3 Closing Requirements. Prior to the initial purchase of Eligible
--------------------
Accounts or the first advance of funds pursuant to the Inventory Rider, Company
shall have satisfied the closing requirements set forth in Exhibit "D" attached
-----------
hereto.
2. PRESENTATION OF ACCOUNTS.
2.1 From time to time Company shall submit a list of "Eligible Accounts"
(as defined below in Section 2.2) Company wishes to sell to Factor. Upon the
payment from time to time by Factor of the "Purchase Price" for each such
Eligible Account by Factor as provided in Section 4 below, each such "Purchased
Account" (as defined below in Section 3.1) shall be deemed automatically to be
assigned, transferred and sold to Factor. Details regarding each Purchased
Account shall be accompanied by the following:
2.1.1 original invoices, or legible photocopies thereof (and, if
photocopies are provided, originals when Factor so request), relating to the
Selected Accounts and copies of such original contracts and purchase orders
relating to the Selected Accounts as Factor may from time to time request;
2.1.2 bills of lading, evidence of shipment and such other documents
and proof of delivery as Factor may from time to time require;
2.1.3 letters in the form attached hereto as Exhibit "C" or in such
-----------
other form as Factor from time to time provide ("Letters"), signed by Company
and addressed to each obligor, customer or debtor (each, an "Account Debtor") in
any way obligated on or in connection with any Purchased Account, directing each
Account Debtors to make payment of its Accounts to a particular Lockbox address
to be designated by Factor (as provided in Section 6 hereof); alternatively,
Factor may forward such Letters under its name to the Account Debtor upon at
least five (5) days prior notice to Company;
2.1.4 such UCC-3 releases and/or inter-creditor agreements as Factor
may require, in form and substance acceptable to Factor, signed by any and all
third parties claiming an interest in or to its Collateral.
2.1.5 credit memos or similar documentation or correspondence from
Company to Factor providing notice to Factor of any commissions, discounts or
similar accounting relating to or affecting any of the Accounts, including
without limitation contracts, agreements, or similar instruments; and
2
<PAGE>
2.1.6 such other agreements, memoranda, instruments, invoices and
documents relating to any of the Accounts, whether or not Selected Accounts, as
Factor may require in Factor's sole discretion.
2.2 As used in this Agreement, "Eligible Accounts" are Accounts created by
Company in the ordinary course of its business which are and remain acceptable
to Factor for purchasing purposes. General criteria for Eligible Accounts are
set forth below but may be revised from time to time by Factor, in its sole
judgment, on ten (10) days prior written notice to Company. Factor shall, in
general, deem Accounts to be Eligible Accounts if:
2.2.1 such Accounts arise from bona fide completed transactions and
have not remained unpaid for more than the number of days after the invoice date
set forth in Section 18.2.2;
2.2.2 each invoice representing an Account is accompanied by its
underlying purchase order issued to "ChatCom, Inc.";
2.2.3 the amounts of the Accounts reported to Factor are absolutely
owing to Company and do not arise from sales on consignment, guaranteed sale or
other terms under which payment by the Account Debtors may be conditional or
contingent;
2.2.4 the Account Debtor's chief executive office or principal place
of business is located in the United States; provided, however, that Factor may
consider purchasing Accounts with an Account Debtor outside of the United States
on such terms and conditions as Factor, in its sole discretion, may determine
(such as a favorable payment history), including a lower Purchase Price (as
hereinafter defined) than for Accounts with Account Debtors located in the
United States;
2.2.5 such Accounts do not arise from progress billings, guaranteed
sales, retainages or bill and hold sales;
2.2.6 there are no adverse relationships, setoffs, counterclaims or
disputes existing with respect thereto and there are no other facts existing or
threatened which would impair or delay the collectibility of all or any portion
thereof;
2.2.7 the goods giving rise thereto were not at the time of the sale
subject to any liens or security interests except those permitted in this
Agreement, as shown in Exhibit B attached hereto;
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2.2.8 such Accounts are not Accounts with respect to which the Account
Debtor or any officer or employee thereof is an officer, employee or agent of or
is affiliated with Company, directly or indirectly, whether by virtue of family
membership, ownership, control, management or otherwise;
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2.2.9 such Accounts are not Accounts with respect to which the
Account Debtor is the United States or any State or political subdivision
thereof or any department, agency or instrumentality of the United States, any
State or political subdivision of any of the foregoing, unless there has been
compliance with any law, rule or regulation applicable to The Federal Assignment
of Claims Act of 1940, to the Factor's satisfaction;
2.2.10 there are no facts existing or threatened which might result
in any adverse change in the Account Debtor's financial condition;
2.2.11 such Accounts owed by a single Account Debtor or its
affiliates do not represent more than twenty (20%) percent of all otherwise
Selected Accounts (Accounts excluded from Selected Accounts solely by reason of
this subsection 2.2.11 shall nevertheless be considered Eligible Accounts to the
extent of the amount of such Accounts which does not exceed fifty (50%) percent
of all otherwise Eligible Accounts);
2.2.12 such Accounts are not owed by an Account Debtor who is or
whose affiliates are past due upon other Accounts owed to Company comprising
more than twenty-five (25%) percent of the Accounts of such Account Debtor or
its affiliates owed to Company;
2.2.13 such Accounts are owed by Account Debtors whose total
indebtedness to Company does not exceed the amount of any customer credit limits
as established, and changed, from time to time by Factor on notice to Company
(Accounts excluded from Eligible Accounts solely by reason of this subsection
2.2.13 shall nevertheless be considered Eligible Accounts to the extent the
amount of such Accounts does not exceed such customer credit limit); and
2.2.14 such Accounts are owed by Account Debtors deemed creditworthy
at all times by Factor.
2.3 As used herein the term "Ineligible Account" means any Account which
does not fully qualify under Section 2.2 above or any of the following:
2.3.1 any Account with respect to which a representation or warranty
contained herein or in accompanying documents and instruments was not or does
not continue to be materially true and accurate, including without limitation,
any Account that is subject to a potential claim or set-off;
2.3.2 any Account in connection with which the Account Debtor has
reported or reports that its balance as set forth as due and owing by Company is
incorrect or disputed;
2.3.3 any Account for which the term of payment exceeds 30 days from
the date of invoice;
2.3.4 any Account constituting partial billings and returns that
provide that the Account Debtor need make no payment prior to full shipment or
full performance;
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2.3.5 any Account for which Company has secured any instrument or
chattel paper or with respect to all or part of which a check, promissory
note, draft, trade acceptance or other instrument has been received, presented
for payment and returned uncollected for any reason, unless the foregoing shall
have been acknowledged and approved by Factor prior to the sale and purchase of
such Account;
2.3.6 any Account on which Company has extended the time for
payment, unless such extension shall have been acknowledged and approved by
Factor prior to the sale and purchase of such Account;
2.3.7 any Account of any Account Debtor that directly or indirectly
is controlled by Company or that either owns in whole or material part or
directly or indirectly controls Company or is under common control with Company,
including without limitation Account of its sales or marketing representatives
for which goods or services are intended for resale;
2.3.8 any Account to which any one or more of the following events
occurs with regard to the Account, the Account Debtor or any other party
primarily liable on the Account (including without limitation any guarantor of
the Account or any general partners of Account Debtors who are individuals):
(a) death or judicial declaration of incompetence; (b) filing by or against
any Account Debtor or any such other party of a request or a petition for
liquidation, reorganization, arrangement, adjustment of debts, adjudication as a
bankrupt, or other relief under the bankruptcy, insolvency or similar laws now
or hereafter in effect of the United States, any state or territory thereof or
any foreign jurisdiction; (c) the making of any general assignment by any
Account Debtor or any such other party for the benefit of creditors; (d) the
appointment of a receiver or trustee for any of the assets of any Account Debtor
or any such other party including without limitation the appointment or taking
possession by custodian as defined by the United States Bankruptcy Code, or any
formal or informal proceeding for the dissolution, liquidation or settlement of
claims or winding up of affairs of any Account Debtor; (d) any such other party;
the sale, assignment or transfer of all or any substantial part of the assets of
the Account Debtor or any such other party; (e) the non-payment by any Account
Debtors or any such other party of its debts as they become due; or (f) the
cessation of business of any Account Debtor or any such other party as a going
concern;
2.3.9 any Account if Company is not in compliance with the
provisions of this Agreement; or
2.3.10 any Account more than 5 business days from the date of
issuance or as designated on the face of the invoice and/or issued on any date
later than the date so designated on the face of the invoice.
2.4 Treatment of Ineligible Accounts. Any Account which fails to meet any
--------------------------------
of the requirements of Section 2.2 or any Account as to which any of the
foregoing subsections 2.3.1 through 2.3.10 inclusive, is or becomes true or
occurs shall be referred to in this Agreement as
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an "Ineligible Account." In the event that Company shall offer and sell to
Factor an Account that is or becomes an Ineligible Account or otherwise becomes
uncollectible, Company shall immediately (or it cannot be effected by book entry
settlement within 5 days of request) repurchase said Account from Factor for the
"Replacement Amount" which shall be equal to the Purchase Price plus and
Reimbursable Costs (as defined in subsection 4.1.6 below) then outstanding,
whereupon Factor shall reassign such Account to Company and thereafter Factor
will pay to Company any proceeds from the collection of such Purchased Account
Factor may have received after Factor has received payment in full from Company
of the Repayment Amount, and provided there are no subsequent lienors claiming
an interest therein and Company has no other outstanding obligations to Factor
hereunder or under any other agreement between Factor and Company.
3. SELECTION OF ACCOUNTS.
3.1 Purchased Accounts. Upon receipt of any Assignment with the
------------------
aforementioned accompanying documents, Factor, at Factor's sole discretion,
shall determine which, if any, of the Eligible Accounts Factor wishes to
purchase (the "Purchased Accounts"). Upon Factor's determination that it shall
obtain title to the Purchased Accounts free and clear of all liens, encumbrances
and conflicting claims, Factor shall pay Company, by bank check or wire
transfer, the "Purchase Price" (as defined below in Section 4.1.2) for the
Purchased Account(s) in accordance with Section 4 hereof.
4. PURCHASE OF SELECTED ACCOUNTS.
4.1 The purchase price for any Purchased Account shall be determined and
paid as follows:
4.1.1 On the business day mutually agreed upon for the sale of the
Purchased Accounts (the "Purchase Date"), the parties to this Agreement will
determine the aggregate Net Value of the Purchased Accounts. The "Net Value" of
each Purchased Account shall be equal to the aggregate unpaid face amount of the
Account on the Purchase Date, less all authorized discounts, credits and other
similar deductions.
4.1.2 The "Purchase Price" of each Purchased Account shall be equal
to the Net Value of such Account less (i) a discount to reflect the costs of
carrying the Purchased Accounts (the "Basic Discount"); (ii) Reimbursable Costs
as set forth in subsection 4.1.6, if any (iii) payment of any liabilities or
obligations Company has to Factor pursuant to this Accounts Purchase Agreement
and any other written agreement between Company and Factor whether or not
arising from or relating to the transactions contemplated herein, and (iv)
subject to adjustments as set forth in this Section 4 and otherwise as Factor
may determine. For most Eligible Accounts, the Basic Discount shall be equal to
twenty percent (20%) of the face amount of a Purchased Account.
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4.1.3 Provided that Company complies with the representations, warranties
and covenants made by Company in Section 9 hereof, and all other undertakings,
promises and agreements made by Company in this Agreement, after Factor has
received collections on a Purchased Account equal to the Repayment Amount,
Factor will pay Company any remaining collections Factor thereafter receives on
the Purchased Account after adjustments including set-offs, collection costs and
other credits due Factor, if any (the "Remaining Collections"). Such settlements
shall take place daily; provided that all remittances from Company or an Account
Debtor to Factor shall be credited 5 days after receipt of payment by Factor so
long as such payment instrument is fully honored in the ordinary course of its
initial presentment by Factor. As additional security for the payment of the
Obligations hereunder, the Company hereby grants to Factor a continuing first
priority security interest in and to all of the Remaining Collections, and
agrees that if Factor so determines, it may retain possession of the Remaining
Collections if it determines that either the anticipated Obligations will exceed
the Remaining Collections or an event or occurrence has occurred which, with the
giving of notice or the passage of time, or both, will ripen into an Event of
Default hereunder.
4.1.4 Factor shall be entitled to offset against the Purchase Price of any
purchased Account any amounts owed by Company to Factor under any provision of
this or any other agreement between Factor and Company. Factor shall have the
right, which may be exercised in Factor's sole and absolute discretion at any
time and from time to time after the execution of this Accounts Purchase
Agreement, to apply all amounts collected with respect to Purchased Accounts, as
follows, before any payment from such collections shall be made to Company: (i)
first, to the payment of all fees accrued with respect to Purchased Accounts,
whether or not such fees have become due and payable pursuant to agreements
between us; (ii) next, to the payment of any Reimbursable Costs relating to any
Purchased Accounts; and (iii) finally, to the payment of any other Obligations
Company has to Factor whether or not relating to any agreements between Company
or the Purchased Accounts.
4.1.5 Factor may change the terms of Basic Discount as to any Selected
Account not theretofore purchased by Factor, provided Factor shall have
delivered to Company notice of such change. Upon receipt of such notice, Company
may withdraw any Eligible Accounts previously submitted to Factor, but not yet
purchased by Factor.
4.1.6 Company will pay and reimburse Factor, and indemnify, defend, and
hold Factor harmless as to and in respect of, all of Factor's reasonable costs,
expenses, filing fees and taxes incurred in connection with (i) the preparation,
execution, delivery, recording, amendment, supplement or modification to this
Agreement or other agreement with Company, and in respect of any transactions
contemplated under this Accounts Purchase Agreement and related documents, (ii)
the administration, collection, liquidation, enforcement and defense of the
Obligations, Factor's rights in the Collateral, this Agreement and all other
existing and future agreements or documents contemplated herein or related
hereto, including any amendments, waivers, supplements or consents which may
hereafter be made or entered into in respect hereof, or in any way involving
claims by or against Factor directly or indirectly arising out of or related to
the relationship between Company and Factor or any guarantor and Factor, (iii)
the enforcement
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or preservation of any rights under this Accounts Purchase Agreement or any
other document or instrument prepared in connection with, whether or not arising
from or relating to the purchase by Factor of any Purchased Account, including
without limitation, verification of any account, whether a Purchased Account or
an Ineligible Account or for any other reason; (iv) any recording and filing
fees and any liabilities with respect to, or resulting from, any delay in paying
stamp, excise and other taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or consummation of any
of the transactions contemplated by, or any amendment, supplement to or
modification of, this Accounts Purchase Agreement or any other document or
instrument prepared in connection with, arising from or relating to the purchase
by Factor of any Purchased Account and/or respecting its ongoing credit,
business or prospects or any direct charges for activities undertaken at its
request; (v) any cost or expense of any kind or nature incurred by Factor by way
of being an actual or potential plaintiff, defendant, witness, custodian of
documents or in any other capacity arising from or relating to any claims,
counterclaims, assertions, liabilities, obligations, losses, damages, penalties,
actions, causes of action, judgments, legal equitable or regulatory process of
any kind or nature and/or disbursements of any kind or nature related to the
aforesaid in connection with arising from or relating to the execution and
delivery of, or consummation of any of any transactions rights or interests
contemplated by, effected under or asserted, or any amendment, supplement to or
modification of, this Accounts Purchase Agreement or any other document or
instrument prepared in connection with, arising from or relating to the purchase
by Factor of any Account, including without limitation all of the agreements,
instruments or documents made by Company of any kind or nature relating to the
conduct of business with Factor; (vi) any fees, costs, charges or expenses,
direct or indirect, of any kind or nature arising from or relating to any claim,
action, cause of action, arbitration, mediation and/or any legal or equitable
proceeding in or to which Factor is a party arising from or relating to any
agreement or transaction(s) between Company and Factor; (vii) any costs or
expenses incurred by Factor arising from or related to the failure to pay,
insolvency or bankruptcy of an Account Debtor; and (viii) the employment by
Factor of attorneys' in connection with any of the foregoing, and including all
expenses of such attorneys, including court costs, and including all fees
incurred in any appellate or bankruptcy proceedings (all of the aforesaid from
time to time are collectively referred to in this Accounts Purchase Agreement as
the "Reimbursable Costs"). In the event any Reimbursable Cost is not paid on
demand, such Reimbursable Costs shall bear interest at a rate of interest the
"Default Rate" (as defined in Exhibit "A" attached hereto).
5. GRANT OF SECURITY INTEREST.
5.1 To induce Factor to purchase the Purchased Accounts, and as
additional security for any and all of its obligations to Factor under this
Agreement and all other agreements, instruments and documents executed by
Company in favor of or for the benefit of Factor, Company hereby assigns to
Factor and grants to Factor a continuing senior security interest in its
Purchased Accounts (including all Remaining Collections) and the other
Collateral. In all events, this Agreement shall be deemed to be a security
agreement pursuant to the California Uniform Commercial Code (the "Code") and
Company waives any defenses to enforcement hereof by
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Factor as such and undertake to do all things necessary to secure assignment
transfer and a perfected security interest in and to such Accounts.
5.2 Grant Clause. To induce Factor to purchase the Purchase Accounts, and
------------
as additional security for the payment and performance in full of all
Obligations, Company hereby grants to Factor a continuing first priority
security interest in and lien upon, and a right of setoff against, and Company
hereby assigns and pledges to Factor, all of the Collateral, including all
Purchased Accounts.
5.3 Definition of Obligations. "Obligations" shall mean any and all
-------------------------
indebtedness, liabilities and obligations of every kind, nature and description,
owing by Company to Factor and/or its affiliates, including principal, interest,
charges, fees and expenses, however evidenced, whether as principal, surety,
endorser, guarantor or otherwise, whether arising under this Agreement, under
any other agreement, instrument or document (including without limitation, the
Accommodation Note and the Promissory Note) now or from time to time hereafter
executed by Company for the benefit of or in favor of Factor, or otherwise,
whether now existing or hereafter arising, whether arising before, during or
after the initial or any renewal Term or after the commencement of any case with
respect to Company under Title 11 United States Code Section 101 et seq. or any
-- ---
similar statute, whether direct or indirect, absolute or contingent, joint or
several, due or not due, primary or secondary, liquidated or unliquidated,
secured or unsecured, original, renewed or extended and whether arising directly
or howsoever acquired by Factor including from any other entity outright,
conditionally or as collateral security, by assignment, merger with any other
entity, participants of Company to others, assumption, operation of law,
subrogation or otherwise and shall also include all amounts chargeable to
Company under this Agreement or in connection with any of the foregoing.
5.4 Definition of Collateral. "Collateral" shall mean all of the
------------------------
following property and interests in property of Company:
5.4.1 All now owned and hereafter acquired right, title and interest
of Company in, to and in respect of all: Accounts, including without
limitation, the Purchased Accounts, interests in goods represented by Accounts,
returned, reclaimed or repossessed goods with respect thereto and rights as an
unpaid vendor; contract rights; chattel paper; general intangibles (including,
but not limited to, all rights of Company under that certain License Agreement
by and among High View Capital and Vermont Research Products, Inc. (or their
successor or assign), as licensor, and Company, as licensee relating to the
manufacturing and sale of the "BrightStar Product Line" (as defined below), tax
and duty refunds, registered and unregistered patents, trademarks, service
marks, copyrights, trade names, applications for the foregoing, trade secrets,
goodwill, processes, drawings, blueprints, customer lists, licenses, whether as
licenser or licensee, chooses in action and other claims, and existing and
future leasehold interests in equipment, real estate and fixtures); documents;
instruments; letters of credit, bankers' acceptances or guaranties; cash monies,
deposits, securities, bank accounts, deposit accounts, credits and other
property now or hereafter held in any capacity by Factor, its affiliates or any
entity which, at any time, participates in Factor's financing of Company or at
any
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other depository or other institution; agreements or property securing or
relating to any of the items referred to above;
5.4.2 All now owned and hereafter acquired right, title and interest
of Company in, to and in respect of goods, including, but not limited to:
5.4.2.1 All inventory, wherever located, whether now owned or
hereafter acquired, of whatever kind, nature or description, including all raw
materials, work-in-process, finished goods, returns and materials to be used or
consumed in Company's business; and all names or marks affixed to or to be
affixed thereto for purposes of selling same by the seller, manufacturer, lessor
or licenser thereof;
5.4.2.2 All equipment and fixtures, wherever located, whether
now owned or hereafter acquired, including, without limitation, all machinery,
equipment, motor vehicles, furniture and fixtures, and any and all additions,
substitutions, replacements (including spare parts), and accessions thereof and
thereto (and including all warranties and operations manuals);
5.4.2.3 All consumer goods, farm products, crops, timber,
minerals or the like (including oil and gas), wherever located, whether now
owned or hereafter acquired, of whatever kind, nature or description;
5.4.2.4 All now owned and hereafter acquired right, title and
interests of Company in, to and in respect of any real or other personal
property in or upon which Factor has or may hereafter have a security interest,
lien or right of setoff;
5.4.2.5 All present and future books and records relating to
any of the above including, without limitation, all computer programs, printed
output, computer readable data, and storage disks, tapes and drives in the
possession or control of the Company, any computer service bureau or other third
party; and
5.4.2.6 All products and proceeds of the foregoing in whatever
form and wherever located, including, without limitation, all insurance proceeds
and all warranty, tort and other claims against third parties for loss or
destruction of or damage to any of the foregoing.
BUT EXCLUDING THE FOLLOWING:
BrightStar Product Line
- -----------------------
BrightStar is a modular consolidated server system incorporating Borrower's
RAINS (Redundant Array of Independent Network Servers) technology. Provides for
the collocating of multiple servers within a single, standard-size 19 inch
chassis and allows for an environment of disparate server technologies.
Packaging consists of multiple servers sharing peripherals, power supplies
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and other resources delivering enhanced management and easier upgrades or
replacements. The midplane is designed for "hot-swappable" modules, isolated
from system peripherals providing a flexible, open architecture computing
environment.
6. PAYMENT TO LOCKBOX.
6.1 Company agrees to send over its signature, letters in form and
substance satisfactory to Factor in respect of Section 2.1.3 hereinabove. In
addition to sending the letters, Company shall, upon Factor's request, telephone
the accounts payable clerk (or such other officer or employee as may be
appropriate) of each Account Debtor of each of its Accounts to direct said
Account Debtor to make payment of all sums due under every Account to the
Lockbox address set forth in the letters. If any Account Debtor shall make
payment of any Accounts to other than said Lockbox, Company immediately shall
effect collection of such payments from any other party claiming an interest
therein or having possession of the same. Company shall be deemed to hold any
payments obtained by it on the Accounts in express trust for Factor in a
segregated manner and Company shall deliver all such payments immediately to
Factor through Factor's Lockbox or as otherwise instructed by Factor. In
general, Company shall fully cooperate in any way reasonably requested by Factor
to collect each Account, including all Purchased Accounts. Factor may require as
a further condition to the purchase of the Purchased Accounts an intercreditor
agreement, release, with any other entity currently having or previously having
a claim against the Accounts, which agreement shall provide specifically for the
safekeeping and delivery to Factor of any and all payments on Accounts that for
any reason are forwarded to such entity by the Account Debtor or otherwise
obtained by such entity in form received with appropriate endorsements which the
Company agree to make. Company expressly acknowledges and agrees to Factor's
right to access the Lockbox and related account(s) and withdraw or do otherwise
with it; no interest shall accrue or be due Company on sums in the Lockbox and
related account(s).
7. NATURE OF RECOURSE.
7.1 Recourse Liability. Company acknowledges that it has and shall
continue to have the full liability for the warranties, representations,
agreements and covenants, including without limitation, representation and
warranties as to collectibility, made by Company herein and in the event of
breach thereof by Company, its financial obligations to Factor shall be the
total of (i) the balance of any amounts due Company from the purchase of the
Purchased Accounts aggregately, (ii) the Inventory Advances made pursuant to the
Inventory Rider; and (iii) Reimbursable Costs. Factor shall have the rights and
remedies with respect thereto provided for in this Accounts Purchase Agreement
and under applicable law.
7.2 Insurance. Company shall at all times maintain, with financially
---------
sound and reputable insurers, casualty insurance with respect to the Collateral
and other assets. Company shall at request of Factor, name Factor as sole loss
payee of such insurance. All such insurance policies shall be in such form,
substance, amounts, coverage and issued by insurance carriers, as may be
satisfactory to Factor and shall provide for thirty (30) days' prior written
notice to Factor of cancellation or reduction of coverage. Company hereby
irrevocably appoints Factor and any
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designee of Factor as attorney-in-fact for Company to obtain at Company's
expense, and, after an Event of Default, to adjust or settle any claim or other
matter under or arising pursuant to such insurance or to amend or cancel such
insurance. Company shall deliver to Factor, in kind, all instruments
representing proceeds of insurance received by Company. The foregoing power of
attorney is coupled with an interest and is therefore irrevocable until all of
the Obligations have been paid and this Agreement has been terminated. Factor
may apply any insurance proceeds received at any time to the costs of repairs to
or replacement of any portion of the Collateral and/or, at Factor's option, to
payment of or as security for any of the Obligations, whether or not due, in
any order or manner as Factor determines. If for any reason, Company fails to
maintain any required insurance in effect at all times, Factor, may in its sole
discretion, but shall not be obligated to, procure such insurance for the
Account of Company, and the cost thereof shall be added to the Obligations and
bear interest at the Default Rate specified in Exhibit A attached hereto until
---------
repaid to Factor.
8. INTEREST AND FEES. Company shall pay to Factor the interest, charges and
fees in the amounts and at the time as specified and detailed in the attachment
to this Agreement as Exhibit A incorporated herein as though set forth in full.
---------
9. REPRESENTATIONS, WARRANTIES AND COVENANTS.
9.1 Representations, Warranties and Covenants. Company hereby represents,
-----------------------------------------
warrants and covenants to Factor the following, the truth, accuracy, and
completeness of which, and compliance with which, shall be continuing conditions
of the purchasing Accounts by Factor from Company and to providing Inventory
Advances to Company pursuant to the Inventory Rider hereto:
9.2 Maintenance of Books and Records. Company shall keep and maintain its
--------------------------------
books and records in accordance with generally accepted accounting principles,
consistently applied. Company shall, at its sole expense, deliver to Factor the
following reports and information by the date indicated:
9.2.1 on or before the 5th business day after each calendar month
end: true, accurate and complete monthly agings of its Accounts and Accounts
payable, monthly inventory reports and, on or before the 5th business day after
the receipt thereof, bank statements;
9.2.2 on or before the 20th day after each calendar month end:
monthly internally prepared interim financial statements;
9.2.3 on or before the 20th day after the end of each fiscal quarter,
payroll tax deposit reports;
9.2.4 annually, within 20 days of filing, the income tax returns of
Company;
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9.2.5 annually, not later than 90 days after fiscal year end: the
annual certified financial statements of Company prepared according to generally
accepted accounting principles (prepared by an independent certified public
accountant acceptable to Factor), and the financial statements of each guarantor
of the Obligations or Accounts; and
9.2.6 as requested from time to time by Factor, such other
information with respect to the business of Company or any guarantor, as Factor
may request.
9.3 Invoices. Company may from time to time render invoices to Account
--------
Debtors under its trade names set forth in Section 18.5.9 after Factor has
received prior written notice from Company of the use of such trade names.
9.4 Notice of Certain Events. Company shall promptly notify Factor
------------------------
in writing of any loss, damage, investigation, action, suit, proceeding or claim
relating to a material item of the Collateral, including without limitation any
Purchased Account, or which may result in any material adverse change in
Company's business, assets, liabilities or condition, financial or otherwise.
9.5 Location of Books and Records. Company's books and records concerning
-----------------------------
the Collateral and its chief executive office are and shall be maintained only
at the address set forth in Section 18.5.3. Company's only other places of
business and the only other locations of Collateral, if any, are and shall be
the addresses set forth in Section 18.5.8 hereof, except Company may change such
locations or open a new place of business after thirty (30) days prior written
notice to Factor. Prior to any change in location or opening of any new place of
business, Company shall execute and deliver or cause to be executed and
delivered to Factor such financing statements, financing documents and security
and other agreements as Factor may require.
9.6 Title. Company has and at all times will continue to have good and
-----
marketable title to all of the Collateral, free and clear of all liens, security
interests, claims or encumbrances of any kind except, if any, those set forth on
Schedule "B" hereto.
- ------------
9.7 Prohibition on Certain Transactions. Company shall not without prior
-----------------------------------
written consent of Factor directly or indirectly:
9.7.1 sell, lease, transfer, assign, abandon or otherwise dispose of
any part of the Collateral or any material portion of its other assets (other
than sales of inventory to buyers in the ordinary course of business and other
than the sale of the Selected Accounts to Factor);
9.7.2 consolidate with or merge with or into any other entity, or
permit any other entity to consolidate with or merge with or into Company; or
9.7.3 form or acquire any interest in any firm, corporations or other
entity.
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9.8 Compliance with Laws. Company is and at all times will continue to
--------------------
be in compliance with the requirements of all material laws, rules, regulations
and orders of any governmental authority relating to its business (including
laws, rules, regulations and order relating to taxes, payment and withholding of
payroll taxes, employer and employee contributions and similar items,
securities, employee retirement and welfare benefits, employee health and
safety, or environmental matters). All of Company's inventory shall be produced
in accordance with the requirements of the Federal Fair Labor Standards Act of
1938, as amended and all rules, regulations and orders related thereto. Company
shall pay and discharge all taxes, assessments and governmental charges against
Company or any Collateral prior to the date on which penalties are imposed or
liens attach with respect thereto, unless the same are being contested in good
faith.
9.9 Maintenance of Eligibility. With respect to each Account deemed an
--------------------------
Eligible Account (including all Purchased Accounts), except as immediately
reported in writing to Factor, Company has no knowledge that any of the criteria
for eligibility are not or are no longer satisfied as to each Account, except as
disclosed in writing to Factor at the time such Account arises.
9.10 Prior Assignments. No prior assignments nor any prior security
-----------------
interest have been made, granted or arisen in any of its Accounts to anyone
except as has been released by the parties holding such adverse interest or as
to which Company and Factor (in its sole discretion) have entered into a valid
intercreditor agreement or release in form acceptable to Factor prior to or
contemporaneously with Factor's purchase of the Purchased Accounts.
9.11 Bona Fide Indebtedness. Each and every Eligible Account does and
----------------------
will represent a bona fide indebtedness wholly collectible on the terms and
conditions set forth in the invoice and each document representing such account
and presented to Factor and arising from the actual sale and delivery of goods
or performance of services in the ordinary course of its business which has been
finally accepted by the Account Debtor and which will be unconditionally owning
to Factor in the amount and at the time stated in each invoice or document
relating to the Eligible Account (which will not be changed without Factor's
written consent) in United States funds at par, without dispute, offset, credit,
deduction, defense or counterclaim of any kind, whether bona fide or otherwise
except as disclosed to and approved by Factor prior to the sale and purchase;
except, however, such disclosure will not limit Factor's right of collection,
off-set or any right or remedy granted hereunder, under any agreement with
Company or at law or in equity.
9.12 Covenants.
---------
9.12.1 Execution of Additional Documents. Company and interested
third parties will execute such financing statements, affidavits and other
instruments and documents as Factor may request from time to time to verify
Factor's full title to and interest in the Purchased Accounts, and Factor shall
have all the ownership, title, rights, security interest and guarantees with
respect thereto and in respect of the property evidenced thereby free from any
lien, security interest, claim or encumbrance of any kind, except in Factor's
favor, and Company will forever defend the same against the claims of all
persons. In addition, Company shall execute and deliver an/or provide such
waivers, consents and subordination agreements from mortgages or other
14
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holders of security interests or liens, landlords or bailees, and do or cause to
be done such further acts as Factor, in its discretion, deems necessary or
desirable to create, preserve, perfect or validate any security interest of
Factor or the priority thereof in the Collateral and otherwise to effectuate the
provisions and purposes of this Agreement. Company hereby authorizes Factor to
file financing statements or amendments against Company in favor of Factor with
respect to the Collateral, without Company's signature and to file as financing
statements any carbon, photographic or other reproductions of this Agreement or
any financing statements signed by Company.
9.12.2 If any allowance or credit on any Purchased Account should be
given by Company then Company will pay an amount equal to the same immediately
to Factor.
9.12.3 If any property relating to or the sale of which gave rise to
a Purchased Account should be returned to Company, Company will hold the same in
trust in a segregated manner for Factor's exclusive benefit as security for its
obligations to Factor hereunder and subject to Factor's orders and Company will
repurchase from Factor such property by paying the Repayment Amount immediately
to Factor.
9.12.4 Company will upon Factor's request make proper entries in its
internal books reflecting Factor's rights and title as assignee of the Purchased
Accounts and Factor's security interest in the Accounts and take whatever action
Factor may reasonably request in order to secure Factor's rights and interests
hereunder.
9.12.5 Factor, any corporate trustee acting on Factor's behalf, and
Factor's agent or Factor's representative are hereby constituted and designated
as its attorney-in-fact with irrevocable power of attorney coupled with interest
to endorse or sign its name on financing statements relating to the Accounts and
remittances in respect to Accounts, to sign its name on assignments, checks,
drafts or other instruments or documents and on invoices, notices to Account
Debtors, bills of lading and storage receipts in respect of its Accounts or the
property covered thereby (the foregoing power is coupled with an interest and is
therefore irrevocable).
9.13 Performance of Warranties. Company shall promptly honor each
-------------------------
warranty claim which falls within Company's warranty policy in effect from time
to time.
9.14 Delivery of Documentation. At such times as Factor may request and
-------------------------
in the manner specified by Factor, Company shall deliver to Factor or Factor's
representative original invoices, agreements, proofs of rendition of services
and delivery of goods and other documents evidencing or relating to the
transactions which gave rise to Accounts or other Collateral, together with
customer statements, schedules describing the Accounts or other Collateral
and/or statements of account and confirmatory assignments to Factor of the
Accounts or other Collateral, in form and substance satisfactory to Factor and
duly executed by Company.
9.15 Inspections. From time to time as requested by Factor, at the sole
-----------
expense of Company, Factor or its designee shall have access prior to an Event
of Default during reasonable
15
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business hours and on or after an Event of Default at any time, to all of the
premises where Collateral is located for the purposes of inspecting the
Collateral, including Company's books and records, and Company shall permit
Factor or its designee to make such copies of such books and records or extracts
therefrom as Factor may request. Without expense to Factor, Factor may use such
of Company's personnel, equipment, including computer equipment, programs,
printed output and computer readable media, supplies and premises for the
collection of Accounts and realization on other Collateral as Factor, in its
sole discretion, deems appropriate. Company hereby irrevocably authorizes all
accountants and third parties to disclose and deliver to Factor at Company's
expense all financial information, books and records, work papers, management
reports and other information in their possession regarding Company.
9.16 Credit Reports. Company hereby authorizes all duly constituted
--------------
federal, state and municipal authorities to furnish Factor copies of any
notices, claims, liens and reports of examinations of Company made by any such
authorities and further authorizes any credit reporting agencies to furnish
Factor copies of any reports dealing with its creditworthiness;
9.17 No Other Security Interests in Collateral. Without Factor's
-----------------------------------------
knowledge and either Factor's consent or payment of any outstanding balance due
Factor, except for the security interests identified in Exhibit "B" attached
hereto and as to which the secured party has executed and delivered an
intercreditor or subordination agreement in form and substance satisfactory to
Factor, Company will not pledge, mortgage or otherwise encumber any of the
Collateral or any other assets or suffer any involuntary lien thereon or allow
its corporate charter or any of its franchises to lapse. Company represents and
warrants that, as of the date hereof, the amount owing to Prototech does not
exceed $35,000.00.
9.18 No Change of Address. At no time will Company notify any Account
--------------------
Debtor to make payment except to an address Factor has instructed Company to
make payment to or request an account debtor to withhold or stop any payment
directed to Factor's address.
9.19 Ongoing Expenses. Factor may charge Company during the term of this
----------------
Agreement for costs and expenses allocable to on-going credit reports and
invoice verifications. Additionally, Company authorizes Factor to obtain
verification of any invoice(s) submitted by Company to Factor. In the event of
any result which in Factor's opinion is unsatisfactory, Factor may charge
Company for additional independent verification at the rate then chargeable.
9.20 Change in Executives or Control of Company. Company shall promptly
------------------------------------------
report any change in the chief executive officer, chief operating officer, chief
financial officer or more than a ten percent (10%) change in the ownership of
Company. Company shall cause each such officer, including any replacements or
substituted officers, to execute and deliver to Factor validity indemnifications
regarding the Accounts, in form and substance substantially similar to those
signed by the present officers of Borrower in connection therewith (the
"Validity Indemnifications").
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10. NO ASSUMPTION OF OBLIGATIONS.
10.1 No Assumption. Factor does not, and shall not be deemed to, assume
-------------
any of Company's obligations relating to any of the transactions giving rise to
any of its Accounts. To the extent that Company has not completed performance of
any contract pursuant to which an Account was generated, Company hereby
covenants and agrees to complete such contract in order that the Account Debtor
will continue not to have any rights of set-off, counterclaim, right of
recoupment or dispute other than any discounts or allowances allowed by Company
in the ordinary course of its business.
11. NATURE OF TRANSACTION. Each transaction contemplated by this Agreement as
to Purchased Accounts will be a purchase of accounts pursuant to which Company
has sold the Purchased Accounts to Factor outright and unconditionally and the
Purchase Price paid for any Purchased Account is not intended to constitute a
loan to Company. Factor is not making any investment with the expectation of
profits to be derived from its entrepreneurial or managerial efforts, nor are
the parties hereto creating between them any partnership or joint venture. Under
no circumstances does or will Company consider Factor to be a lendor; at all
times hereunder Factor is and shall be a bona fide third-party purchaser for
value.
12. DEFAULT ON A PARTICULAR PURCHASED ACCOUNT. If any amount due under any
Purchased Account becomes past due according to its terms, then, at Factor's
option, notwithstanding any claim made by Factor with the insurer relating to
such Purchased Account, upon request by Factor, Company shall immediately (or if
it cannot be effected by book entry settlement within 5 days of request) pay
Factor the amount past due and the amount so paid shall, in the event Factor
shall eventually received collections on such Purchased Account equal to the
Repayment Amount, be paid to Company at the time that the balance of the
Repayment Amount for such Purchased Account is paid. These provisions refer to
and represent partial liquidated damages arising from or relating to an Account
and are in addition to any other remedies available to Factor and are not deemed
a repurchase by Company of the Purchase Account.
13. EVENTS OF DEFAULT AND REMEDIES.
13.1 All Obligations shall be immediately due and payable, without notice
or demand, and any provisions of this Agreement as to future purchases of
Accounts by Factor shall terminate automatically, upon the termination or
non-renewal of this Agreement or, at Factor's option, upon or at any time after
the occurrence or existence of any one or more of the following "Events of
Default":
13.1.1 Company fails to pay when due any of the Obligations,
including the repurchase obligation of Company under Section 12 above, or fails
to pay or perform any of the terms of this Agreement or any other existing or
future financing, security or other agreement between Company and Factor or any
affiliate of Factor.
17
<PAGE>
13.1.2 Any representation, warranty or statement of fact made by Company
to Factor in this Agreement or any other agreement, schedule, confirmatory
assignment or otherwise, or to any affiliate of Factor, shall prove inaccurate
or misleading in any material respect;
13.1.3 Any guarantor or any signer of a Validity Indemnification in favor
of Factor revokes, terminates or fails to perform any of the terms of any
guaranty, endorsement, Validity Indemnification other agreement of such party in
favor of Factor or any affiliate of Factor.
13.1.4 Any judgment or judgments aggregating in excess of $35,000 or any
injunction or attachment is obtained against Company or any guarantor which
remains unstayed or unsatisfied for a period of ten (10) days or is enforced.
13.1.5 Any guarantor (but not a signer of a Validity Indemnification)
dies, or Company or any guarantor which is a corporation fails to maintain its
corporate existence in good standing, or the usual business of Company or any
guarantor ceases or is suspended.
13.1.6 Company or any guarantor (or any signer of a Validity
Indemnification in favor of Factor) becomes insolvent, makes a general
assignment for the benefit of creditors, makes or sends notice of a bulk
transfer or calls a general meeting of its creditors or principal creditors.
13.1.7 Any petition or application for any relief under the bankruptcy
laws of the Unites States now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed by or against Company or any guarantor.
13.1.8 The indictment or threatened indictment of Company or any
guarantor under any criminal statute, or commencement or threatened
commencement of criminal or civil proceedings against Company or any guarantor,
pursuant to which statute or proceedings the penalties or remedies sought or
available include forfeiture of any of the property of Company or such
guarantor.
13.1.9 Any default or event of default under any financing, security or
other agreement, document or instrument at any time executed and/or delivered
to, with or in favor of Factor or any of its affiliates by an affiliate of
Company, and all applicable grace and cure periods have expired;
13.1.10 Factor in good faith believes the either (i) the prospect of
payment or performance of the Obligations is impaired or (ii) the Collateral
is not sufficient to secure fully the Obligations.
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<PAGE>
13.1.11 Company or any guarantor asserts the invalidity or
unenforceability of this Agreement, the Inventory Rider, any guaranty, or any
other agreement, document or instrument executed and delivered in connection
with this Agreement.
13.2 In the event that Company becomes obligated to pay Factor for any
reason, including without limitation for an Ineligible Account or an Account
that has otherwise become uncollectible or to pay any delinquency or upon the
occurrence of any Event of Default, Factor shall have, in addition to all
Factor's rights and remedies under this Agreement, the rights and remedies in
and to Company's Accounts of a secured party as provided in Section 13.3 below.
In particular, and without limiting the foregoing, Factor shall have the right
to make deductions from the Purchase Price payable for any other Purchased
Account and to apply payments with respect to Accounts (whether or not received
in the Lockbox pursuant to Section 6 hereof) in satisfaction of such obligations
or any other of its obligations to Factor hereunder or under any other agreement
between Factor and Company.
13.3 Upon the occurrence of an Event of Default and at any time
thereafter, Factor shall have all rights and remedies provided in this
Agreement, any other agreements between Company and Factor, the Code or other
applicable law, all of which rights and remedies may be exercised without notice
to Company, all such notices being hereby waived, except such notice as is
expressly provided for hereunder or is not waivable under applicable law. All
rights and remedies of Factor are cumulative and not exclusive and are
enforceable, in Factor's discretion, alternatively, successively, or
concurrently on any one or more occasions and in any order Factor any determine.
Without limiting the foregoing, Factor may:
13.3.1 accelerate the payment of all Obligations and demand
immediate payment thereof to Factor, upon which acceleration, all Obligations
shall bear interest at the Default Rate until paid in full;
13.3.2 cease any purchases hereunder without notice;
13.3.3 with or without judicial process or the aid or assistance of
others, enter upon any premises on or in which any of the Collateral may be
located and take possession of the Collateral or complete processing,
manufacturing and repair of all or any portion of the Collateral;
13.3.4 require Company, at Company's expense, to assemble and make
available to Factor any part or all of the Collateral at any place and time
designated by Factor;
13.3.5 collect, foreclose, receive, appropriate, setoff and realize
of, compromise or settle for cash, credit, return of merchandise, and upon any
terms or conditions, any and all Accounts or other Collateral which includes a
monetary obligation and discharge or release the Account Debtor or other
obligator, without affecting any of the Obligations;
13.3.6 sell, lease, transfer, assign, deliver or otherwise dispose
of any and all Collateral (including, without limitation, entering into
contracts with respect thereto, by public
19
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or private sales at any exchange, broker's board, any office of Factor or
elsewhere) at such prices or terms as Factor may deem reasonable, for cash, upon
credit or for future delivery, with the Factor having the right to purchase the
whole or any part of the Collateral at any such public sale, all of the
foregoing being free from any right or equity of redemption of Company, which
right or equity of redemption is hereby expressly waived and released by
Company. If any of the Collateral is sold or leased by Factor upon credit terms
or for future delivery, the Obligations shall not be reduced as a result thereof
until payment therefor is finally collected by Factor. If notice of disposition
of Collateral is required by law, seven (7) days prior notice by Factor to
Company designating the time and place of any public sale or the time after
which any private sale or other intended disposition of Collateral is to be
made, shall be deemed to be reasonable notice thereof and Company waives any
other notice. In the event Factor institutes any action to recover any
Collateral or seeks recovery of any Collateral by way of prejudgment remedy,
Company waives the posting of any bond which might otherwise be required.
13.4 Application of Proceeds. Factor may apply and reapply the cash
-----------------------
proceeds of Collateral actually received by Factor from any sale, lease,
foreclosure or other disposition of the Collateral to payment of any of the
Obligations, in whole or in part (including reasonable attorneys' fees and legal
expenses incurred by Factor with respect thereto or otherwise chargeable to
Company) and in such order as Factor may elect, whether or not then due. Company
shall remain liable to Factor for the payment of any deficiency owing on the
Obligations together with interest at the Default Rate and all costs and
expenses of connection or enforcement, including reasonable attorneys' fees and
legal expenses.
14. RETURNS AND DISPUTES.
14.1 Procedures for Returns and Disputes. Any goods relating to or which
-----------------------------------
by sale give rise to Accounts and which are returned by Account Debtors or
otherwise recovered will be Factor's property; they shall be set aside and held
by Company as Factor's trustee, to be disposed of in accordance with Factor's
instructions. Company shall notify Factor promptly of all such returns and
recoveries and of all disputes and claims by Account Debtors relating in any way
to the Accounts. If any dispute or claim is not promptly settled by Company
without loss or expense to Factor, Factor may litigate the same or settle it
directly with the Account Debtor on such terms and as Factor deem advisable; and
if Factor demands that the Account affected thereby be repurchased by Company,
Factor will credit Company with the net amount of cash received by Factor, after
payment of all costs and expenses including court costs and attorneys' fees.
Company waives presentment and protest and all other notices to which Company
may otherwise be entitled. Any funds realized by Factor from Factor's
liquidation of goods as provided hereinabove, after accounting, for Factor's
direct costs, shall be credited to Company.
15. JURY TRIAL WAIVER: CERTAIN OTHER WAIVER AND CONSENTS.
15.1 COMPANY AND FACTOR EACH WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM AGAINST THE OTHER WHICH
PERTAINS DIRECTLY OR INDIRECTLY TO THIS
20
<PAGE>
AGREEMENT, (INCLUDING WITHOUT LIMITATION ALL EXHIBITS, SCHEDULES, ADDENDA AND
RIDERS WHICH ARE PART OF THIS AGREEMENT), THE OBLIGATIONS, THE COLLATERAL, ANY
ALLEGED TORTIOUS CONDUCT BY COMPANY OR FACTOR, OR, IN ANY WAY, DIRECTLY OR
INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN COMPANY AND
FACTOR.
15.2 Company waives all rights to interpose any claims, deductions,
setoffs or counterclaims of any kind, nature or description in any action or
proceeding instituted by Factor with respect to this Agreement, the Obligations,
the Collateral or any matter arising therefrom or relating thereto, except
compulsory counterclaims.
15.3 Company hereby irrevocably submits and consents to the non-exclusive
jurisdiction of the State and Federal Courts located in California and any other
State where any Collateral is located with respect to any action or proceeding
arising out of this Agreement, the Obligations, the Collateral or any matter
arising therefrom or relating thereto. In any such action or proceeding, Company
waives personal service of the summons and complaint or other process and papers
therein and agrees that the service thereof may be made by mail directed to
Company at its chief executive office set forth herein or other address thereof
of which Factor has received notice as provided herein, service to be deemed
complete five (5) days after mailing, or as permitted under the rules of either
of such Courts. Any such action or proceeding commenced by Company against
Factor will be litigated only in a Federal Court located in the district, or a
State Court in the State and County, in which the office of Factor designated in
Section 18.4.2 is located and Company waive any objection based on forum non
convenes and any objection to venue in connection therewith. Company hereby
appoints any officer of Factor to accept service of process on behalf of Company
in the selected forum and such acceptance shall constitute personal service of
process on Company for all purposes. The officer of Factor accepting such
service of process is obligated by the terms of his or her employment to use
his/her best effort to forward the summons and complaint to Company at the last
known address showing in Factor's records.
15.4 Factor shall not, by any act, delay, omission or otherwise be deemed
to have expressly or impliedly waived any of its rights or remedies unless such
waiver shall be in writing and signed by an authorized officer of Factor. A
waiver by Factor of any right or remedy on any one occasion shall not be
construed as a bar to or waiver of any such right or remedy which Factor would
otherwise have on any future occasion, whether similar in kind or otherwise.
15.5 In consideration of Factor's entering into this Agreement and making
the accommodations provided for herein, to the extent permitted by applicable
law, Company hereby agrees that Factor shall be entitled to relief from any
automatic stay imposed by Section 362 of Title 11 of the U.S. Code, as amended
(the "Bankruptcy Code"), or otherwise, on or against the exercise of the rights
and remedies otherwise available to Factor as provided herein, or in any
documents related hereto, or as otherwise provided by law; in the event Company
shall:
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15.5.1 file with any bankruptcy court of competent jurisdiction, or
be the subject of, and petition under the Bankruptcy Code;
15.5.2 be the subject of any order for relief issued under the
Bankruptcy Code;
15.5.3 file or be the subject of any petition seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution, or similar relief under any present or future federal or state act
or law relating to bankruptcy, insolvency, or other relief for debtors;
15.5.4 have sought or consented to or acquiesced in the appointment
of any trustee, receiver, conservator, or liquidator;
15.5.5 be the subject of any order, judgment, or decree entered by
any court of competent jurisdiction approving a petition filed against such
party for any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future federal
or state act or law relating to bankruptcy, insolvency, or relief for debtors.
16. INDEMNIFICATION.
16.1 Company hereby indemnifies and holds harmless Factor, Factor's
officers, directors, agents, affiliates and attorneys, Factor's successors and
assigns, and their respective officers, directors, agents and attorneys against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, expenses and disbursements of any kind or
nature whatsoever which are incurred by or asserted against Factor, Factor's
officers, directors, agents and attorneys, Factor's successors and assigns, or
their respective officers, directors, agents, affiliates and attorneys by
Company or by any other party for any reason, including without limitation
whether due to any material breach by Company of its representations, warranties
or covenants provided for in this Agreement or any other agreement Company has
with Factor or of any material misrepresentation by or against Company or of the
commencement of any legal or equitable action by Company to which Factor is or
becomes a party. Company hereby releases and exculpates Factor, its officers,
employees, agents, representatives, attorneys and designees, from any liability
arising from any acts under this Agreement or in furtherance thereof, whether as
attorney-in-fact or otherwise, whether of omission or commission, and whether
based upon any error of judgment or mistake of law or fact, except for willful
misconduct. In no event will Factor have any liability to Company for lost
profits or other special or consequential damages. The indemnities contained in
this Section 16 shall survive any termination or expiration of this Agreement.
17. EFFECTIVE DATE, TERM AND TERMINATION.
17.1 Effective Date. This Agreement shall become effective upon
--------------
acceptance by Factor and shall continue in full force and effect until
terminated by either of Company giving to the
22
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other at least 30 days' prior written notice of termination by registered or
certified mail but not less than 12 months from the first day of the first full
month after the date hereof (the "Term"); notwithstanding the foregoing,
however, (i) Factor may elect at any time and in Factor's sole discretion not to
purchase additional Accounts and Factor shall have the right to terminate this
Agreement immediately at any time and without notice upon the occurrence of any
Default, and (ii) Company may terminate this Agreement upon payment of the fee
set forth below. Termination, however, shall not relieve or discharge Company of
its duties, obligations or covenants hereunder until all its obligations to
Factor has been paid in full, and all the terms, provisions and conditions of
this Agreement, including, without limitation, Factor's continuing right, title
and interest and other rights and remedies in and to its Accounts and security
interest in the Collateral shall, subject to Section 17.5 below, remain in
effect until all of the Obligations have been paid in full. In addition, Factor
shall have the right to retain payments with respect to its Accounts (whether
or not received in the Lockbox pursuant to Section 6 hereof) in such reasonable
amount and for such reasonable time as Factor determine is necessary to secure
the payment in full of all its Obligations, including without limitation
Obligations arising from its indemnification, to Factor.
17.1.1 If Company terminates this Agreement prior to the end of the
Term, Company shall pay to Factor upon the effective date of termination, 2.5%
of the Maximum Credit Facility available to Company at the time of termination.
17.2 Survival of Obligations. The provisions of this Section shall be and
-----------------------
remain effective notwithstanding any contrary action which may have been taken
by Factor in reliance upon such payment, and any such contrary action so taken
shall be without prejudice to Factor's rights under this Agreement, and shall be
deemed to have been conditioned upon such payment having become final and
irrevocable. The provisions of this Section shall survive the termination of the
Agreement.
17.3 Notices. Except as otherwise provided, all notices, requests and
-------
demands hereunder shall be:
17.3.1 made to Factor at its address set forth in Section 18.4.3 and
to Company at its chief executive office set forth in Section 18.5.3, or to such
other address as whether party may designate by written notice to the other in
accordance with this provision, and
17.3.2 deemed to have been given or made: if by hand, immediately
upon delivery; if by telex, telegram or telecopy (fax), immediately upon
receipt; if by overnight commercial courier delivery service, one day after
dispatch; and if by first class or certified mail, three (3) days after mailing.
17.3.3 If any provision of this Agreement is held to be invalid or
unenforceable, such provision shall not affect the Agreement as a whole, but
this Agreement shall be construed as though it did not contain the particular
provision held to be invalid or unenforceable.
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17.4 This Agreement, Exhibits, Riders, Addenda, and the Schedules attached
hereto if any, contain the entire agreement of the parties as to the subject
matter hereof, all prior commitments, proposals and negotiations concerning the
subject matter hereof being merged herein. Neither this Agreement nor any
provision hereof shall be amended, modified or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Factor. This Agreement shall be binding upon and inure to the benefit of each of
the parties hereto and their respective successors and assigns, except that any
obligation of Factor under this Agreement shall not be assignable nor inure to
the successors and assigns of Company.
17.5 No termination of this Agreement shall relieve or discharge Company of
its Obligations, grants of Collateral, duties and covenants hereunder or
otherwise until such time as all Obligations to Factor have been indefeasibly
paid and satisfied in full, including, without limitation, the continuation and
survival in full force and effect of all security interests and liens of Factor
in and upon all then-existing and thereafter-arising or acquired Collateral and
all warranties and waivers of Company. Upon the termination and expiration of
this Agreement, Company may request in writing to Factor to terminate its
security interests in the Collateral, and Company agrees to do so so long as
there are no outstanding liquidated, noncontingent Obligations remaining at such
time. If there are outstanding liquidated, noncontingent Obligations then owing
by Company to Factor, Factor shall describe such liquidated, noncontingent
Obligations in reasonable detail to Company, but shall not be obligated to
terminate its security interests in the Collateral until all such remaining
liquidated, noncontingent Obligations have been paid in full.
17.6 All terms used herein which are defined in the Code shall have the
meanings given therein unless otherwise defined in this Agreement and all
references to the singular or plural herein shall also mean the plural or
singular, respectively.
17.7 This Agreement shall be governed by and construed in accordance with
the internal laws of the State of California (without regard to its conflict of
laws principles).
17.8 This Agreement shall become effective when it is accepted and signed
by an authorized officer of Factor at Factor's Office.
18. ADDITIONAL DEFINITIONS AND TERMS.
18.1 Limitations, Terms and Rates:
----------------------------
18.1.1 Maximum Purchased Accounts Limit: $300,000.00 (but no
purchases of a face amount which exceeds 80.0% of Eligible Accounts). The
availability under the foregoing limit shall be reduced by the aggregate amount
of all Inventory Advances.
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18.2 Eligibility Parameters:
----------------------
18.2.1 Eligible Accounts Percentage: advance rate of Eligible
Accounts: 80.0%
18.2.2 Maximum days after Invoice Date for Eligible Accounts: 75
days
18.2.3 Term: One (1) year.
18.3 Rates and Fees:
--------------
18.3.1 Interest Rate: Prime Rate plus 7.0% per annum billed monthly,
but in no event less than the minimum monthly interest set forth in Section 1.1
on Exhibit A computed on a monthly basis, and billed and payable monthly on the
---------
first day of each month.
18.3.2 Administrative Fee Percent: .075% per month of the average
daily balance outstanding hereunder.
18.3.3 Facility Fee: 1.5% of Maximum Purchased Account Limit due
annually in advance.
18.4 Factor Information:
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18.4.1 Factor: ALCO Financial Services, LLC
18.4.2 Factor's Office: Larkspur, California
18.4.3 Factor's Office Address: 900 Larkspur Landing Circle, Suite
230, Larkspur, California 94939
18.4.4 Factor's Office Telephone: 415-925-9711
18.4.5 Factor's Office Fax: 415-925-9825
18.4.6 Factor's Bank: First Union National Bank
18.4.7 Factor's Bank Account Number: To be identified
18.4.8 Factor's Bank Address: 301 South Tryon Street
18.4.9 Factor's Bank City/State/Zip: Charlotte, North Carolina
28230-0337.
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18.5 Company Information:
-------------------
18.5.1 Company: ChatCom, Inc., a California corporation
18.5.2 Company's Chief Executive Office: Chatsworth, California
18.5.3 Company's Address: 9600 Topanga Canyon Boulevard
18.5.4 City/State/Zip: Chatsworth, California 91311
18.5.5 Company's Telephone: 818-709-1778
18.5.6 Company's Fax: 818-882-1424
18.5.7 Locations of Collateral: See Sections 18.5.3
18.5.8 Company's Other offices and Locations of Collateral: None.
18.5.9 Company's Trade Names for Invoicing: JL CHATCOM, J&L
INFORMATION SYSTEMS, CHATTWIN, CHATTERBOX, CHATPOWER PLUS, CHATRAINS, CHATRAID.
18.5.10 Lockbox Information (Payment to be made to:): Alco Financial
Services, LLC in care of C.I.T. Receivables Service, First Union National Bank,
301 South Tryon Street, Charlotte, North Carolina 28230-0337
18.5.11 Lockbox Name: C.I.T. Receivables Service
18.5.12 Lockbox Address: See Section 18.5.10
19. CLOSING REQUIREMENTS.
19.1 Delivery of Documents. Prior to the initial advance and as a
---------------------
condition to the Factor's obligation to make such advance, Company shall deliver
to Factor the following documents and information:
19.1.1 Duly executed originals of this Agreement, and all Schedules,
Addenda, Exhibits and Riders hereto.
19.1.2 Such financial statements and information as the Factor shall
require from Company and each guarantor.
19.1.3 Such Accounts and inventory information as the Factor
requires.
26
<PAGE>
19.1.4 Financing statement, tax and judgment search against Company
showing only security interests permitted in Schedule "B."
------------
19.1.5 Copies of Company's articles of incorporation and a current
good standing certificate certified by the California Secretary of State, and
bylaws certified by Company's secretary.
19.1.6 Corporate and shareholder resolutions authorizing the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
19.1.7 Validity guarantees executed and delivered by the chief
executive officer, the chief operating officer, and the chief operating officer
of Company.
19.1.8 Company shall have paid in good funds all of the fees required
to be paid hereunder.
20. SUBORDINATION. Reference is hereby made to a certain Purchase and
Sale Agreement dated as of the date hereof by and among Company and High View
Capital ("High View"), and Vermont Research Products, Inc. (collectively,
"Subordinate Creditor"), pursuant to which Company has agreed to sell to
Subordinate Creditor all of Company's right, title and interest in and to the
BrightStar product line and the "Product" (as defined therein). Pursuant to a
certain License Agreement dated as of August 31, 1998) (the "License
Agreement"), Subordinate Creditor (which, for purposes of this Agreement,
includes any successor entity or assignee of either High View and/or VRPI
established to own the Product, and any transferee of any of the foregoing
entities) has agreed to license the right to manufacture the Product to Company.
All of the Company's rights and interests under the License Agreement, including
the right to manufacture and sell the BrightStar Product and System, and all
rights to payment under the License Agreement, are included in the definition of
Collateral hereunder. Pursuant to a certain Agreement of Subordination dated as
of the date hereof (the "Subordination Agreement") by and among Factor and
Subordinate Creditor, Subordinate Creditor has agreed that all sums owing to
Subordinate Creditor under the License Agreement are subordinate in priority to
the prior payment in full of the Obligations hereunder. In connection therewith,
Company hereby agrees as follows:
20.1 Company consents to the terms and provisions of the Subordination
Agreement and covenants and agrees that it shall not take any action, omit to
take any action, nor permit any action to be taken, which would breach any of
the terms of the Subordination Agreement.
20.2 Company agrees to give Factor not less than ten (10) days prior
written notice prior to the payment of any monies to Subordinate Creditor under
the License Agreement. Company acknowledges and agrees, that upon demand by
Factor, all payments which would otherwise be made to Subordinate Creditor shall
be remitted to Factor for application to the Obligations.
27
<PAGE>
20.3 Company shall promptly notify Factor in writing of any proposed
rescission or proposed extension, amendment, or other modification of the
License Agreement.
20.4 Company shall deliver to Factor a copy of each notice sent by Company
to Subordinate Creditor or by Subordinate Creditor to Company under the License
Agreement at the same time as such notice is delivered to Subordinate Creditor.
20.5 Company shall not take any action or permit any action which is
inconsistent or adverse to the rights and interests of Factor under the
Subordination Agreement.
IN WITNESS WHEREOF, Company has executed and delivered this Agreement to
Factor, and Factor has accepted this Agreement at Larkspur, California, as of
the date first shown above.
COMPANY: CHATCOM, INC.
a California corporation
By: /s/ E. Carey Walters
----------------------------------
E. Carey Walters, CEO
----------------------------------
[Printed Name & Title]
FACTORS: ALCO FINANCIAL SERVICES, LLC,
a California limited liability company
By: /s/ James D. Kendall
----------------------------------
James D. Kendall Sr. V.P.
----------------------------------
[Printed Name & Title]
28
<PAGE>
List of Riders, Exhibits and Schedules
--------------------------------------
Inventory Rider and Borrowing Base Certificate
Exhibit "A" - Interest and Fees
Exhibit "B" - Permitted Security Interests, Liens, Claims and Encumbrances
Exhibit "C" - Letter to Account Debtors
Exhibit "D" - Closing Requirements
Addendum to Accounts Purchase Agreement
<PAGE>
The following Inventory Rider is attached to, made a part thereof as if fully
set forth in, and is incorporated in the attached ALCO Financial Services
Accounts Purchase Agreement dated as of August 31, 1998.
INVENTORY RIDER
(Revolving Advance)
THIS INVENTORY RIDER (hereinafter referred to as "this Rider") dated as of
August 31, 1998 is hereby made a part of and incorporated into that certain ALCO
FINANCIAL SERVICES, LLC Accounts Purchase Agreement (hereinafter referred to as
the "Agreement"), dated August 31, 1998, between ALCO FINANCIAL SERVICES, LLC,
a California limited liability company (the "Factor") and CHATCOM, INC., a
California corporation (the "Company"). Any initially capitalized term not
specifically defined in this Rider shall have the meaning ascribed to it in the
Agreement.
1. Inventory Line. At the request of Company, made at any time and from time
--------------
to time during the term of this Agreement, and so long as no Event of Default
has occurred and Company is in full, faithful and timely compliance with each
and all of the covenants, conditions, warranties and representations contained
in the Agreement, this Rider and/or any other agreement between Factor and
Company, Factor agrees to make Company advances, on a revolving basis
("Inventory Advances"), equal to: thirty-five percent (35%) of Company's
Eligible Inventory. In all events, the aggregate amount of the Inventory
Advances outstanding at any time shall not exceed the lesser of (i) One Hundred
Fifty Thousand Dollars ($150,000.00) or (ii) to: thirty-five percent (35%) of
the Eligible Inventory. In no event shall the aggregate Inventory Advances
outstanding at any one time exceed, when combined with the aggregate face
Purchase Prices of Purchased Accounts at any one time, the Maximum Purchased
Accounts Limit.
2. Funding. The Inventory Advances shall be conditioned upon Factor's receipt
-------
of a weekly designation of purchases and replacements (inventory) with invoices
to be attached. Company shall deliver to Factor a Borrowing Base Certificate to
be provided in form satisfactory to Factor.
3. Fees: Payment. Inventory Advances made by Factor to Company pursuant to
-------------
this Rider shall be added to and deemed part of the Obligations when made.
Interest on the Inventory Advances shall be payable by Company on the first day
of each month. Interest shall be calculated by taking the Monthly inventory Fee
Percent per month, computed on the basis of a 30 day month for actual days
elapsed, on the average daily balances of the Inventory Advances for the
immediately preceding month.
4. Definitions. As used herein, the following terms shall have the
-----------
corresponding meanings:
(a) The term "Eligible Inventory" shall mean all of Company's inventory
(purchases and replacements): (a) in which Factor maintains a first priority
perfected security interest and which are otherwise free and clear of all liens,
rights and claims of others, (b) which are not unmerchantable, spoiled, damaged,
or unfit for further processing, (c) which are held for sale or use in the
ordinary and usual course of Company's business, (d) are not packaging,
shipping, or
1
<PAGE>
advertising materials, and (e) which are not on consignment, in transit, or on
site at the intended purchaser's premises or otherwise not physically located on
the premises of Company. Eligible Inventory shall be valued at cost and may be
adjusted by Factor, in Factor's discretion, for age and seasonability or other
factors affecting the value of said inventory.
(b) The term "Inventory Borrowing Base" shall be the Eligible Inventory.
(c) The "Monthly Inventory Fee Percent" is the Prime Rate + 7% per
annum/divided by 12.
5. Miscellaneous. All of the terms, covenants, warranties, conditions,
-------------
agreements and representations of the Agreement are incorporated herein as
though set forth in their entirety and are hereby reaffirmed by Company and
Factor as though fully set forth herein. This Rider amends the Agreement. In the
event of any conflict between the provisions of the Agreement and the provisions
of this Rider, the provisions of this Rider shall control.
COMPANY: CHATCOM, INC.
a California corporation
By: /s/ E. Carey Walters
---------------------
E. Carey Walters, CEO
---------------------
[Printed Name & Title]
Accepted 8/31, 1998, at Larkspur, California:
----
FACTOR: ALCO FINANCIAL SERVICES, LLC,
a California limited liability company
By: /s/ James D Kendall
-------------------------
James D Kendall Sr. V.P.
-------------------------
[Printed Name & Title]
2
<PAGE>
BORROWING BASE CERTIFICATE
This Borrowing Base Certificate is being delivered by CHATCOM, INC., a
California corporation (the "Company") pursuant to that certain Inventory Rider
(Revolving Advances) which is attached to and forms a part of the ALCO Financial
Services, LLC Accounts Purchase Agreement dated as of August 31, 1998 (the
"Agreement") between Company and ALCO Financial Services, LLC, a California
limited liability company (hereinafter called "Factor"). Initially capitalized
terms used herein and not otherwise defined herein shall have the same meaning
as set forth in the Agreement. Company hereby certifies to Factor as follows:
1. The representations and warranties of Company contained in the
Agreement are true, correct, complete and accurate in all material respects on
and as of the date of this Borrowing Base Certificate.
2. No Event of Default has occurred and is continuing under the
Agreement.
3. Set forth below is a true, correct, complete and accurate calculation
of the Net Availability and the Inventory Borrowing Base applicable to Company
as of the end of the [week] [month] immediately preceding the date of this
Borrowing Base Certificate:
A. INVENTORY
---------
1. Inventory at cost $
---------------
2. Less Adjustments $
---------------
3. Plus purchases $
---------------
4. Eligible Inventory $
---------------
5. Eligible Inventory Borrowing:
Base - (8) multiplied by %
--
not to exceed $ $
------------ ---------------
6. Outstanding Inventory Advance $
---------------
7. Inventory Advance Availability -
lesser of (4) or (5) minus
(6) - if negative mandatory
repayment is necessary $
---------------
1
<PAGE>
B. NET AVAILABILITY
----------------
8. Borrowing Base (9) $
--------------
9. Maximum Commitment $
--------------
10. Less Obligations:
Inventory Advances $
--------------
Inventory Advances $
--------------
Total $
--------------
11. Net Availability - lesser
of (8) or (9) minus (10) $
--------------
Attached hereto as Schedule 1 is the inventory detail for the [week] [month]
-------- -
ending , 199 .
----------------- --
IN WITNESS WHEREOF, the undersigned has executed and delivered this Borrowing
Base Certificate as of this day of , 199 .
---------- --
COMPANY: CHATCOM, INC.
a California corporation
By: /s/ E. Carey Walters
---------------------
E. Carey Walters, CEO
---------------------
[Printed Name & Title]
2
<PAGE>
This Exhibit A is attached to, made a part thereof as if fully set forth in
Section 2 ("Interest and Fees") and is incorporated in the attached ALCO
Financial Services Accounts Purchase Agreement dated as of August 31, 1998.
EXHIBIT "A"
Interest and Fees
-----------------
1. Interest on the Inventory Advances shall be payable by Company on the
first day of each month, calculated upon the closing daily balances in the loan
Account of Company for each day during the immediately preceding month, at the
per annum rate set forth as the Interest Rate in Section 18.3). The Interest
Rate shall increase or decrease by an amount equal to each increase or decrease,
respectively, in the Prime Rate, monthly on the first day of the month. Company
agrees that, at a minimum, Company shall pay the lesser of the following as
minimum monthly interest on the Inventory Advances: (I) $300,00 times the per
annum rate set forth as the Interest Rate in Section 18.3, or (II) fifty percent
(50%) of the amount which the Eligible Accounts and Eligible Inventory formula
will permit, times the Interest Rate in Section 18.3.
On and after any Event of Default or termination or non-renewal hereof,
interest on all unpaid matured obligations shall accrue at a rate equal to ten
percent (10%) per annum in excess of the Interest Rate otherwise payable (the
"Default Rate") until such time as all Obligations are indefensibly paid in full
(notwithstanding entry of any judgment against Company or the exercise of any
other right or remedy by Factor), and all such interest shall be payable on
demand. As used herein, the term "Prime Rate" means 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 on each funding
date. In no event shall charges constituting interest exceed the rate permitted
under any applicable law or regulation, and if any provision of this Agreement
is in contravention of any such law or regulation, such provision shall be
deemed amended to conform thereto.
2. Company shall pay Factor on the first day of each month an
Administrative Fee for the immediately preceding month (or part thereof). The
Administrative Fee shall be calculated by taking the gross face value of an
Account and multiplying it by the Administrative Fee percent set forth in
Section 18.3
3. Company shall pay Factor on the date hereof a Facility Fee in the
amount set forth in Section 18.3, which fee is fully earned as of the date
hereof and shall be fully earned as of each renewal of the date hereof.
4. At Factor's option, all principal, interest, fees, costs, expenses and
other charges provided for in this Agreement, or in any other agreement now or
hereafter existing between Factor and Company may be charged to any loan Account
of Company maintained by Factor.
1
<PAGE>
Interest, fees for the Unused Line Fee and any other amounts payable by Company
to Factor based on a per annum rate shall be calculated on the basis of actual
days elapsed over a 360-day year.
COMPANY: CHATCOM, INC.,
a California corporation
By: /s/ E. Carey Walters
---------------------
E. Carey Walters, CEO
---------------------
[Printed Name & Title]
FACTOR: ALCO FINANCIAL SERVICES, LLC,
a California limited liability company
By: /s/ James D. Kendall
--------------------------
James D. Kendall, Sr. V.P.
--------------------------
[Printed Name & Title]
2
<PAGE>
[COUNTERPART SIGNATURE PAGE TO ACCOUNTS PURCHASE AGREEMENT
DATED AS OF AUGUST 31, 1998 BETWEEN ALCO FINANCIAL SERVICES, LLC,
AND CHATCOM, INC.]
CHATCOM, INC.,
a California corporation
By: /s/ Robert Holderness
--------------------------------
Robert Holderness, VP Operations
--------------------------------
[Printed Name & Title]
<PAGE>
This Exhibit B is attached to, made a part thereof as if fully set forth, and is
incorporated in, the attached ALCO Financial Services Account Purchase Agreement
dated as of August 31, 1998
Exhibit "B"
List of Permitted Security Interests, Liens, Claims or Encumbrances
-------------------------------------------------------------------
1. PROTOTECH CIRCUITRY, INC., a California corporation
2. AVNET, INC., a New York corporation.
3. THE DAVID M. LEWIS COMPANY, INC.
4. INTERWORKS COMPUTER PRODUCTS, INC.
================================================================================
<PAGE>
This Exhibit C is attached to, made a part thereof as if fully set forth, and is
incorporated in the attached ALCO Financial Services Accounts Purchase Agreement
dated as of August 31, 1998.
EXHIBIT "C"
-----------
[Account Debtor] __________, 199_
Re: Payment of Accounts Receivable
Dear Sir or Madam:
We are pleased to announce that we have engaged the assistance of Alco
Financial Services to assist with our working capital requirements and
receivables management. Please make all payments due on the scheduled accounts
with ChatCom, Inc. payable to Alco Financial Services, LLC, and send your
payments to:
ALCO FINANCIAL SERVICES, LLC,
in care of C.I.T. Receivables Service
First Union National Bank
P.0. Box ____________
301 South Tryon Street
Charlotte, North Carolina 28230-0337
Please continue to forward payments as set forth unless and until you are
notified of any change.
If there are presently any adjustments, holdbacks, setoffs, reductions,
discounts, defenses, allowances or qualifications of any kind applicable to our
existing accounts with you, or if any should arise in the future, please notify
us immediately in writing of their existence and specific nature and send your
communication to the above address.
Your assistance, cooperation, and support will assure our success and
continued growth.
CHATCOM, INC.
By: /s/ E. CAREY WALTERS
----------------------
Title: President & CEO
-------------------
ACKNOWLEDGED AND AGREED:
Name:___________________________
By:_____________________________
Title:__________________________
Date:___________________________
<PAGE>
EXHIBIT "D"
CLOSING REQUIREMENTS
1. Delivery of Documents. Prior to the initial advance and as a condition
to the Factor's obligation to make such advance, Company shall deliver to Factor
the following documents and information, all of which must be acceptable to
Factor in its sole discretion:
1.1 Duly executed originals of this Agreement, and all Schedules,
Addenda, Exhibits and Riders hereto, and UCC-1 Financing Statements for filing
in such jurisdictions as Factor shall require.
1.2 Such consents and acknowledgments to assignment from account
debtors (including foreign or domestic governmental agencies) as Factor shall
require.
1.3 Such written subordination agreements from each person holding a
security interest in any collateral as Factor shall require.
1.4 Such financial statements and information as the Factor shall
require from Company and each guarantor.
1.5 Such Accounts and Inventory information as the Factor requires.
1.6 Financing statement, tax and judgment search against Company
showing only security interests permitted in Schedule "B."
------------
1.7 Copies of Company's articles of incorporation and a current good
standing certificate certified by the California Secretary of State, and bylaws
certified by Company's secretary.
1.8 Corporate and shareholder resolutions authorizing the execution,
delivery and performance of this Agreement and the transactions contemplated
hereby.
1.9 Validity Indemnifications executed and delivered by E. Carey
Walters.
1.10 The payment in good funds all of the fees required to be paid to
Factor hereunder.
1.11 Factor shall have received lien waivers from each landlord of
any premises where any of the collateral is located.
1.12 Such other documents and information as Factor may require.
<PAGE>
This Addendum is attached to, made a part thereof as if fully set forth, and is
incorporated in the attached ALCO Financial Services Accounts Purchase Agreement
dated as of August 31, 1998.
ADDENDUM TO ACCOUNTS PURCHASE AGREEMENT
---------------------------------------
1. Company hereby waives any requirement that Factor protect, secure,
perfect or ensure any lien or security interest or any property subject thereto
or exhaust any right or take any action against any other obligor or any other
collateral which directly or indirectly secures the obligations of the Company
hereunder.
2. In the event of a default, Company waives notice prior to Factor's
taking possession or control of any collateral or any bond or security which may
be required by any court prior to allowing Factor to exercise any of Factor's
rights or remedies, the benefit of any and all valuation, appraisement or
exemption laws, notice of acceptance hereof, any and all notices in connection
with the execution, delivery, performance or enforcement of Company's
obligations hereunder, the right to notice of or consent to any compromise,
settlement, extension, renewal or release with respect to any collateral and
further agrees that its obligations hereunder shall be absolute, unconditional
and irrevocable, irrespective of any circumstance, act, claim or defense which
might otherwise constitute a defense available to or a discharge of Company or
any obligor.
IN WITNESS WHEREOF, the parties to the Accounts Purchase Agreement dated as
of August 31, 1998, have executed this Addendum thereto.
COMPANY: CHATCOM, INC.,
a California corporation
By: /s/ E. CAREY WALTERS
--------------------
E. CAREY WALTERS, CEO
-------------------------
[Printed Name & Title]
FACTOR: ALCO FINANCIAL SERVICES, LLC,
a California limited liability company
By: /s/ JAMES D. KENDALL
---------------------------
JAMES D. KENDALL, SR. V.P.
---------------------------
[Printed Name & Title]
<PAGE>
EXHIBIT 10.2
LICENSE AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of 8/28/98, by and
between [Newco], a _______________ corporation ("Licensor") and ChatCom, Inc., a
California corporation ("Licensee") with reference to the following facts:
A. Licensor is the sole owner of the BrightStar technology, which
technology is more fully described in Exhibit A hereto (the "Technology").
B. Licensor desires to license the Technology to Licensee and Licensee
is willing to license the Technology from Licensor on the terms and conditions
hereinafter set forth.
Section 1 License
1.1 Grant of License. Licensor hereby grants to Licensee the exclusive,
worldwide right and license to develop, practice and use the Technology,
including, without limitation, the right to manufacture, have manufactured, use
and sell, products based on the Technology (the "Licensed Products"), in any and
all applications throughout the world. Licensed Products shall not include RAID
or other peripherals.
1.2 Exclusivity. Subject to the terms and conditions hereinafter set
forth, the license granted pursuant to this Agreement is an exclusive license,
and Licensor accordingly shall have no right (i) to practice or use or to
license others to practice or use any of the Technology for any purpose; or (ii)
to manufacture, have manufactured, use, or sell any Licensed Product.
Section 2 Royalties
2.1 Within 30 days after the end of each calendar quarter during the term
of this Agreement, Licensee shall pay to Licensor a running royalty in an amount
equal to 5% of the net sales of the Licensed Products for such calendar quarter,
as determined in accordance with the books and records of Licensee (which books
and records are to be maintained in accordance with GAAP). Net sales of the
Licensed Products shall be equal to sales of Licensed Products to customers as
recorded by Licensee for the applicable period, less (i) shipping and transport
fees, (ii) duties and taxes and (iii) actual credits for returns or defective
merchandise. The Licensee may bill customary charges for installation,
separately.
Section 3 Term
This Agreement shall remain in effect in accordance with its terms;
provided, however, that Licensor shall have the right to terminate this
Agreement only under any of the following circumstances:
(a) the filing of any voluntary bankruptcy proceeding by the
Licensee.
(b) a failure on the part of Licensee to make any payment due under
Section 2 hereof which is not cured within five business days following written
notice from Licensor of such default.
<PAGE>
(c) a material default or breach on the part of the Licensee in the
performance or non-performance of its obligations under this Agreement which are
not cured by Licensee within thirty (30) days after its receipt of written
notice from Licensor specifying such default.
An involuntary bankruptcy filing against Licensee (whether or not
subsequently dismissed) will not terminate the term of this Agreement.
Section 4 Conversion to Non-exclusive License
The license granted to Licensee pursuant to this Agreement shall be
converted to a non-exclusive license with the same terms and conditions as
otherwise set forth in this Agreement upon any sale of all or substantially all
of Licensee's assets or the sale or license of the Technology by the Licensee
that does not generate for Licensee at least $8,000,000 in distributable
aggregate proceeds (in the form of cash or securities). Distributable aggregate
proceeds may include minimum cumulative guaranteed license fees or royalties
that are to be paid to Licensee (subject to the reasonable credit approval of
such third party by the Licensor and the present value of which shall be
calculated using an interest rate of twelve percent (12%) per annum, compounded
annually).
In the event that all or a part of the Licensee is sold through a merger
or stock transaction in which the stock issued to Licensee's shareholders is
registered under the Securities Act of 1933 and is issued by a company with a
net worth of at least $30,000,000 that is listed an the New York Stock Exchange,
American Stock Exchange or Nasdaq National Market System (a "Qualifying Stock
Transaction"), and in which the fair market value of such transaction is less
that $8,000,000, then the License granted herein shall become non-exclusive and
at Licensor's option, the Licensor shall have the right upon prior written
notice to the Licensee to, concurrently with the closing of such merger or stock
transaction, reinstate its equity, debt and warrant positions (with the $400,000
consideration paid by the Licensor at the Closing of its purchase of the
Technology being treated as a loan at 10% per annum interest from such Closing)
and, at Licensor's option, have all, or any portion of such notes, loan and
equity holdings become convertible into a demand note in the aggregate amount of
Licensor's investment in such equity, loan, debt and warrants being converted
(including accrued dividends and interest), with an interest rate of 12% per
annum (or such lower rate as required by law) and secured by the License.
In the event that all or a part of Licensee is sold through a merger or
stock transaction that is not a Qualified Stock Transaction and in which the
fair market value of the transaction is less than $8,000,000, then the License
granted herein shall become non-exclusive and at Licensor's option, the Licensor
shall have the right upon prior written notice to the Licensee to, concurrently
with the closing of such merger or stock transaction, reinstate its equity, debt
and warrant positions (with the $400,000 consideration paid by the Licensor at
the Closing of its purchase of the Technology becoming convertible into shares
of common stock at $.05 per share), and at Licensor's option, have all, or any
portion of such notes, consideration and equity holdings become convertible into
a demand note in the aggregate amount of Licensor's investment in such equity,
consideration, debt and warrants being converted (including accrued dividends
and interest), with an interest rate of 12% per annum (or such lower rate as may
be required by law), and secured by the License.
2.
<PAGE>
Section 5 Purchase Option
Licensor shall sell all of its right, title and interest in the Technology
to Licensee, free and clear of all liens, claims and encumbrances for one dollar
($1.00) in connection with (a) any asset sale by Licensee or any sale or
licensing of the Technology by Licensee to a third party that generates for
Licensee at least $8,000,000 in distributable aggregate proceeds (in the form of
cash or readily marketable securities), which may include minimum cumulative
guaranteed license fees or royalties that are to be paid to Licensee (subject to
the reasonable credit approval of such third party by the Licensor and the
present value of which shall be calculated using an interest rate of twelve
percent (12%) per annum, compounded annually) or (b) a merger having at least
$8,000,000 in fair market merger value. The distributable aggregate proceeds
value shall be distributed to Licensor in accordance with Exhibit B which is
attached hereto, unless Licensor elects to reinstate its equity, debt and
warrants positions as described below in this Section 5.
The closing of the sale of the Technology to Licensee shall occur
immediately prior to the scheduled closing of the asset sale, merger or
licensing by Licensee to a third party, and such sale of the Technology to
Licensee by Licensor shall be rescinded in the event the closing with the third
party is not consummated within 30 days of the closing of the sale of the
Technology to Licensee by Licensor. Licensor shall execute and deliver to
Licensee all such additional agreements, instruments, documents and materials
and take such other actions as Licensee may reasonably request to effectuate the
foregoing. Upon purchase of the Technology by Licensee pursuant to this Section
5, all of the provisions of this Agreement shall terminate, subject to the
rescission provisions set forth above.
In the event that all or a part of Licensee is sold through a merger or
stock transaction that is a Qualifying Stock Transaction and in which the fair
market value of the transaction is at least $8,000,000, then at Licensor's
option, the Licensor shall have the right upon prior written notice to the
Licensee to, concurrently with the closing of such merger or stock transaction,
reinstate its equity, debt and warrant positions (with the $400,000
consideration paid by the Licensor at the Closing of its purchase of the
Technology being treated as loan at 10% per annum interest from such Closing),
and at Licensor's option, have all, or any such portion of such notes, loan and
equity holdings become convertible into a demand note in the aggregate amount of
Licensor's investment in such equity, debt and warrants being converted
(including accrued dividends and interest), with an interest rate of 12% per
annum (or such lower rate as may be required by law), and secured by a security
interest in the Technology.
In the event that all or a part of Licensee is sold through a merger or
stock transaction that is not a Qualified Stock Transaction and in which the
fair market value of the transaction is at least $8,000,000, then at Licensor's
option, the Licensor shall have the right upon prior written notice to the
Licensee to, concurrently with the closing of such merger or stock transaction,
reinstate its equity, debt and warrant positions (with the $400,000
consideration paid by the Licensor at the Closing of its purchase of the
Technology becoming convertible into shares of common stock at $.05 per share),
and further, at option of the Licensor, have all, or any portion of such notes,
consideration and equity holdings become convertible into a demand note in the
aggregate amount of Licensor's investment in such equity, debt and warrants
being convened (including accrued dividends and interest), with an interest rate
of 12% per annum (or such lower rate as may be required by law), and secured by
a security interest in the
3.
<PAGE>
Technology.
Section 6 Additional Obligations of the Parties
6.1 Improvements. The parties shall disclose and communicate to each
other any improvements to the Technology acquired, discovered, invented,
originated, made or conceived after the date of this Agreement (and all such
improvements shall be included, on a royalty-free basis and without additional
consideration, within the scope of the license granted pursuant to this
Agreement). Each party to this Agreement shall take all measures and precautions
reasonably necessary to protect and ensure the secrecy, confidentiality and
value of the Technology and any improvements, excluding any portion of the
Technology or any improvements that shall have become generally known to the
public (other than as a result of the improper disclosure thereof by such
party).
6.2 Patent Applications, etc. Licensor shall file such United States or
foreign patent applications as Licensee may determine to be useful for the
purpose of protecting Licensee's interest in any patentable aspect of the
Technology and any improvements to the Technology, and licensor shall use
reasonable diligence in prosecuting all such patent applications with counsel
acceptable to Licensee. Any such patent application, and any patent that
ultimately issues therefrom, shall automatically become part of the license
granted under this Agreement (and, accordingly, shall automatically be included,
an a royalty-free basis and without additional consideration, within the scope
of the license granted pursuant to this Agreement). All expenses incurred by
Licensor or Licensee in connection with the applications referred to in this
Section 6.2 shall be borne and paid exclusively by Licensee.
6.3 Confidentiality. Licensor shall keep strictly and permanently
confidential all information obtained in connection with this Agreement and the
transactions contemplated by this Agreement. Without limiting the generality of
the foregoing, Licensor shall not use or disclose to any other person (i) any
financial of other information regarding sales of Licensed Products; (ii) any
information regarding sublicensees of Licensee; (iii) any other nonpublic
information regarding the business operations or financial or other affairs of
Licensee; or (iv) any of the terms and provisions of this Agreement, except as
required by law.
4.
<PAGE>
6.4 Development of Technology. Licensee shall use its best reasonable
efforts to complete an initial working prototype of the Licensed Product for
Phase I no later than November 1, 1998.
6.5 Marketing of Licensed Products. During the term of this Agreement,
Licensee shall use its best reasonable efforts to market Licensed Products to
the extent it is commercially feasible to do so, taking into account the severe
limitations on Licensee's ability to market Licensed Products caused by
Licensee's impaired financial condition,
Section 7 Claim and Legal Proceedings
7.1 Certain Claims against Licensor. If any claim is asserted or any
legal proceeding is commenced against Licensor relating to activities occurring
during the term of this Agreement, and such claim or legal proceeding involves
any allegation that (i) the use of the Technology or the manufacture, use, or
sale of any Licensed Product (other than any improvements or modifications to
the Technology or Licensed Product made by Licensor that are not made under the
direction of the Licensee) infringes or has infringed any patent or other
proprietary right of any person; or (ii) any patent right relating to the
Technology (other than any improvements or modifications to the Technology or
Licensed Product made by Licensor that are not made under the direction of the
Licensee) is invalid or unenforceable, then Licensor shall immediately provide
Licensee with written notice of the assertion of such claim or the commencement
of such legal proceeding and shall immediately furnish to Licensee copies of all
correspondence, pleadings and other materials relating to such claim or legal
proceeding. At Licensee's expense, Licensee shall assume the defense of any such
claim or legal proceeding. Once Licensee assumes the defense of any such claim
or legal proceeding, then:
(a) Licensee shall have the exclusive right to control the defense
of such claim or legal proceeding with counsel of its own choosing;
(b) Licensor shall, at Licensee's own expense, provide Licensee with
such information and assistance as Licensee may request regarding such claim or
legal proceeding;
(c) Licensee shall not enter into any settlement with respect to
such claim or legal proceeding without the consent of Licensor (which shall not
be unreasonably withheld or delayed);
(d) the amount payable to the complaining party in connection with
any settlement of such claim or legal proceeding, and the amount of any damages
or costs awarded to the complaining party by any court, arbitrator, or other
trier of fact, shall be borne and paid exclusively by Licensee;
(e) all expenses incurred by Licensor or Licensee in connection with
such claim or legal proceeding (including costs of investigation and attorneys'
fees, whether incurred before or after the commencement of any such legal
proceeding) shall be borne and paid exclusively by Licensee; and
5.
<PAGE>
Without limiting the generality of the foregoing, in the event such claim
or legal proceeding involves any allegation that the use of any of the
Technology or the manufacture, use, or sale of any Licensed Product infringes or
has infringed any patent or other proprietary right of any person, then
Licensee's obligation to make royalty payments under this Agreement shall not be
suspended as the result of such claim or legal proceeding.
7.2 Certain Claims against Licensee. If any claim is asserted or any
legal proceeding is commenced against Licensee, and such claim or legal
proceeding involves any allegation of the type referred to in the first sentence
of Section 7.1 of this Agreement, then:
(a) Licensor shall, at Licensee's expense, provide Licensee with
such information and assistance as Licensee may request for the purpose of
enabling Licensee to defend such claim or legal proceeding;
(b) Licensee shall have the exclusive right to control the defense
of such claim or legal proceeding with counsel of its own choosing, and shall
have the exclusive right to settle such claim or legal proceeding (without the
need to obtain any consent or approval of Licensor or any other person) on such
terms as Licensee, in its discretion, determines to be appropriate;
(c) the amount payable to the complaining party in connection with
any settlement of such claim or legal proceeding, and the amount of any damages
or costs awarded to the complaining party by any court, arbitrator or other
trier of fact, shall be borne and paid exclusively by Licensee;
(d) all expenses incurred by Licensee in connection with such claim
or legal proceeding (including costs of investigation and attorneys' fees,
whether incurred before or after the commencement of any such legal proceeding)
shall be borne and paid exclusively by Licensee.
Without limiting the generality of the foregoing, in the event such
claim or legal proceeding involves any allegation that the use of the Technology
or the manufacture, use, or sale of any Licensed Product infringes or has
infringed any patent or other proprietary right of any person, then Licensee's
obligation to make royalty payments under this Agreement shall not be suspended
as a result of such claim or legal proceeding.
6.
<PAGE>
7.3 Infringement of Technology by Third Parties.
(a) If Licensor becomes aware of any actual or possible infringement
of any of the Technology by any person, then Licensor shall immediately provide
Licensee with written notice of such actual or possible infringement and shall
immediately furnish to Licensee any available evidence of such actual or
possible infringement. Regardless of which party first becomes aware of the
possible infringement of any of the Technology, Licensee shall have the
exclusive right, in its discretion, to assert "Infringement Claims" (as
hereinafter defined) and to commence and control the prosecution of
"Infringement Proceedings" (as hereinafter defined), and Licensor shall not
assert any Infringement Claim or commence any Infringement Proceeding without
Licensee's prior written consent. If Licensee elects to assert any Infringement
Claim, Licensor shall provide Licensee with such information and assistance as
Licensee may request for the purpose of enabling Licensee to pursue such
Infringement Claim. If Licensee elects to commence any Infringement Proceeding,
then:
(i) Licensor shall provide Licensee with such information and
assistance as Licensee may request for the purpose of enabling Licensee to
prosecute such Infringement Proceeding;
(ii) in the event Licensee considers it appropriate to join
Licensor in such Infringement Proceeding, Licensor shall execute such documents
and take such other actions as Licensee may reasonably request for that purpose;
(iii) in the event Licensee determines that it lacks standing to
commence such Infringement Proceeding, Licensor shall execute such documents and
take such actions as Licensee may reasonably request for the purpose of
commencing such Infringement Proceeding in Licensor's name; and
(iv) Licensee shall, in all events, have the exclusive right to
control the prosecution of such Infringement Proceeding with counsel of its own
choosing, regardless of whether such Infringement Proceeding is commenced in its
own name or in the name of Licensor.
(b) If an Infringement Claim or an Infringement Proceeding is
asserted or commenced, then Licensee shall bear and pay all "Prosecution
Expenses" (as hereinafter defined) incurred by Licensee and Licensor in
connection with such Infringement Claim or Infringement Proceeding, as such
expenses are incurred (it being recognized, however, that Licensor's right to
incur expenses on its own in connection with any Infringement Claim or
Infringement Proceeding is limited by virtue of the provisions of Section 7.3(a)
of this Agreement, which give licensee the exclusive right to assert
Infringement Claims and to commence and control the prosecution of Infringement
Proceedings).
7.
<PAGE>
(c) If a "Net Recovery" (as hereinafter defined) is realized in
connection with any Infringement and Claim or Infringement Proceeding, and if
the amount of such Net Recovery exceeds the total of the parties' "Unreimbursed
Expense Amounts" (as hereinafter defined), then (1) such Net Recovery shall be
paid and applied first to reimburse the parties' Unreimbursed Expense Amounts in
full; and (2) the remaining portion of such Net Recovery shall be paid to and
shared equally by Licensee and Licensor. If the amount of such Net Recovery is
less than the total of the parties' Unreimbursed Expense Amounts, then such Net
Recovery shall be paid to and shared by Licensee and Licensor in proportion to
their respective Unreimbursed Expense Amounts.
(d) For purposes of this Section 7.3:
(i) "Infringement Claim" shall mean any claim involving any
allegation of infringement of any of the Technology Rights;
(ii) "Infringement Proceeding" shall mean any legal proceeding
(whether commenced on behalf of Licensor or on behalf of Licensee) involving any
allegation of infringement of any of the Technology Rights;
(iii) the "Prosecution Expenses" incurred in connection with an
Infringement Claim or Infringement Proceeding shall include all expenses
incurred by Licensee and all expenses incurred by Licensor in pursuing or
prosecuting such Infringement Claim or Infringement Proceeding (including costs
of investigation and legal fees incurred by Licensee, regardless of whether such
costs or fees are incurred before or after the commencement of any Legal
Proceeding);
(iv) the amount of the "Net Recovery" realized in connection
with any Infringement Claim or Infringement Proceeding shall be equal to the
gross dollar amount recovered (whether by judgment or settlement) in connection
with such Infringement Claim or Infringement Proceeding;
(v) Licensor's "Unreimbursed Expense Amount" as of any time
shall be equal to the excess (if any) of (1) all Prosecution Expenses previously
borne and paid by Licensor in connection with Infringement Claims and
Infringement Proceedings, over (2) all amounts previously paid to Licensor under
clause "(1)" of the first sentence of Section 7.3(c) of this Agreement and under
the second sentence of Section 7.3(c) of this Agreement; and
(vi) Licensee's "Unreimbursed Expense Amount" as of any time
shall be equal to the excess (if any) of (1) all Prosecution Expenses previously
borne and paid by Licensee in connection with Infringement Claims and
Infringement Proceedings, over (2) the total of all amounts previously paid to
Licensee under clause "(1)" of the first sentence of Section 7.3(c) of this
Agreement and under the second sentence of Section 7.3(c) of this Agreement.
8.
<PAGE>
(e) In the event the Licensee elects not to pursue a claim against a
third party as described, the Licensor may pursue such claim against a third
party and after the Licensor has been reimbursed for all of its Unreimbursed
Expense Amounts as set forth above, the distribution of any Net Recovery shall
be in accordance with the terms in Section 7.3(c) above.
Section 8 Representations and Warranties
8.1 Representation and Warranties by Licensor
Licensor hereby represents and warrants as follows:
8.1.1 Ownership of Technology. Licensor is the owner and has sole
and exclusive possession of, and has good and valid title to, all of the
Technology. Licensor owns the Technology free and clear of any liens, security
interests, licenses, charges, encumbrances, equities, claims, or restrictions.
Licensor is not a party to and is not bound by any agreement or understanding
(whether written, oral, express, or implied) relating to any of the Technology,
and there is no agreement, understanding, judgment, order, or decree to which
any of the Technology is subject. The Technology includes all proprietary rights
and all other rights, property, assets, information and knowledge necessary to
enable Licensee to develop, manufacture, use, and sell Licensed Products.
8.1.2 Binding Nature of Agreement. This Agreement and each
obligation of Licensor hereunder constitutes a valid and binding obligation of
Licensor. This Agreement is enforceable against Licensor in accordance with its
terms, except as may be limited by bankruptcy, insolvency or other creditors
rights laws.
8.1.3 Noncontravention. Neither the execution and delivery of this
Agreement nor the performance of this Agreement will result (with or without
notice or lapse of time) in (i) a violation of any law, rule, regulation,
judgment, order, or decree to which Licensor or any of the Technology is
subject; (ii) a breach or violation of any agreement or understanding (whether
oral, written, express, or implied) to which Licensor is a party or by which
Licensor is bound; or (iii) the termination of, or the imposition of any lien,
security interest, license, charge, encumbrance, equity, claim, restriction, tax
or assessment on or with respect to, any of the Technology.
8.2 Representations and Warranties by Licensee
Licensee hereby represents and warrants as follows:
8.2.1 Binding Nature of Agreement. This Agreement and each
obligation of Licensee hereunder constitutes a valid and binding obligation of
Licensee. This Agreement is enforceable against Licensee in accordance with its
term, except as may be limited by bankruptcy, insolvency or other creditors
rights laws:
9.
<PAGE>
8.2.2 Noncontravention. Neither the execution and delivery of this
Agreement nor the performance of this Agreement will result (with or without
notice or lapse of time) in (i) a violation of any law, rule, regulation,
judgment, order, or decree to which Licensee or any of the Technology is
subject; (ii) a breach or violation of any agreement or understanding (whether
oral, written, express, or implied) to which Licensee is a party or by which
Licensee is bound; or (iii) the termination of, or the imposition of any lien,
security interest, license, charge, encumbrance, equity, claim, restriction, tax
or assessment on or with respect to, any of the Technology.
Section 9 Indemnification by Licensee
Without in any way limiting any of the rights or remedies otherwise
available to any of the Indemnitees, Licensee shall indemnify and hold harmless
Licensor (including all of its officers, directors, affiliates, counsel and
other agents and representatives) against and from any losses, damages,
injuries, lost opportunities, liabilities, exposure, claims, demands,
settlements, judgments, awards, fines, penalties, taxes, fees, charges, or
expenses (including attorneys' fees) that are directly or indirectly suffered or
incurred at any time by such indemnitee, or to which such indemnitee may
otherwise become subject at any time, and that become payable or arise directly
or indirectly out of or by virtue of, or relate directly or indirectly to:
(a) any breach by Licensee or default by Licensee in the performance
of, or any failure on the part of Licensee to observe, perform or abide by, any
restriction, covenant, obligation, warranty or other provision contained in this
Agreement;
(b) the inaccuracy of any of the representations and warranties
contained in Section 8 of this Agreement;
(c) any legal proceeding relating to any of the foregoing; or
(d) any claim or legal proceeding of the type referred to in Section
7.1 or Section 7.2 of this Agreement.
Section 10 Indemnification by Licensor
Licensor shall indemnify and hold harmless Licensee (including all of its
officers, directors, affiliates, counsel and other agents and representatives)
against and from any losses, damages, injuries, lost opportunities, liabilities,
exposure, claims, demands, settlements, judgments, awards, fines, penalties,
taxes, fees, charges, or expenses (including attorneys' fees) that are directly
or indirectly suffered or incurred at any time by such indemnitee, or to which
such indemnitee may otherwise become subject at any time, and that become
payable or arise directly or indirectly out of or by virtue of, or relate
directly or indirectly to, any breach by Licensor or default by Licensor in the
performance of, or any failure on the part of Licensor to observe, perform, or
abide by, any covenant, obligation, or other provision contained in this
Agreement or the inaccuracy of any of the representations and warranties
contained in Section 8 of the Agreement or any legal proceeding relating to any
of the foregoing.
10.
<PAGE>
Section 11 Miscellaneous Provisions
11.1 Notices. Any notice, demand, consent, request, or other
communication required or permitted to be delivered hereunder to either party
hereto (the "receiving party") shall be in writing and shall be deemed properly
delivered, given, and received on the earlier of (i) the date of actual delivery
of such notice, demand, consent, request, or other communication to the
receiving party at the address set forth beneath the name of the receiving party
below (or at such other address as the receiving party shall have specified in a
written notice delivered to the other party hereto); or (ii) the date three
business days after the date on which such notice, demand, consent, request, or
other communication is deposited in the United States mail as registered or
certified mail, postage prepaid, with return receipt requested, addressed to
the receiving party at the address set forth beneath the name of the receiving
party below (or at such other address as the receiving party shall have
specified in a written notice delivered to the other party hereto):
Licensor: President
[Newco]
c/o Vermont Research Products, Inc.
11 Riverside Street
Nashua, New Hampshire 03062
Licensee: President
ChatCom, Inc.
9600 Topanga Canyon Blvd.
Chatsworth, California 91311
11.2 Headings. The underlined headings contained in this Agreement are
for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
11.3 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
11.4 Governing Law. This Agreement shall be construed and interpreted in
accordance with, and shall be governed in all respects by, the laws of the state
of California (without giving effect to principles of conflicts of laws).
11.
<PAGE>
11.5 Dispute Resolution. Subject to Section 11.6 of this Agreement, any
controversy, claim, or dispute (referred to collectively as a "claim" for
purposes of this Section 11.5) arising out of or relating to this Agreement, or
the breach of any provision of this Agreement, shall be settled by arbitration,
and in connection therewith the parties hereto agree that:
(a) Either Licensor or Licensee may initiate arbitration of a claim
by giving written notice to the other party (the "Arbitration Notice").
(b) Within ten days after the date on which the Arbitration Notice
is given, Licensor and Licensee shall agree upon a single arbitrator or, if they
fail to do so for any reason, at any time after the expiration of such ten-day
period, either party may request the American Arbitration Association to
designate an arbitrator. Any arbitration proceeding shall be held in Los
Angeles, California; provided, however, that if (i) the claim being arbitrated
relates exclusively to a breach by Licensee of its obligation to make royalty
payments to Licensor under Section 2 of this Agreement; and (ii) Licensor shall
have stated in the Arbitration Notice that the arbitration proceeding relating
to such claim is to be held in Boston, Massachusetts, provided, however, then
the arbitration proceeding relating to such claim shall be held in Boston,
Massachusetts.
(c) The arbitrator shall promptly consider the facts in dispute and
resolve the same in accordance with the American Arbitration Association (or any
successor organization if the American Arbitration Association no longer
exists). The decision of the arbitrator shall be final, conclusive, and binding
upon Licensor and Licensee.
(d) The fees and expenses of the arbitrator in any such proceeding
(including the fees and expenses of any person retained by the arbitrator) and
the fees and expenses of counsel for Licensor and of counsel for Licensee shall
be borne by the respective parties as follows:
(i) the party that did not initiate such proceeding shall bear
the portion of such fees and expenses represented by the fraction having a
numerator equal to the net dollar amount of any recovery actually awarded to the
initiating party by the arbitrator in such proceeding and having a denominator
equal to the maximum aggregate dollar amount originally sought to be recovered
by the initiating party in connection with the claim being arbitrated; and
(ii) the initiating party shall bear the remaining portion of
such fees and expenses.
In the event that multiple claims shall be involved in any such proceeding, the
fees and expenses of such proceeding shall be allocated as provided above based
on the outcome of the claim having the largest dollar amount originally sought
to be recovered.
12.
<PAGE>
(e) The arbitrator shall have the power to grant injunctive relief
and other provisional remedies and to issue such orders as may be deemed
necessary in connection therewith.
(f) Judgment upon any decision by or award of the arbitrator in any
such proceeding may be entered by any court of competent jurisdiction, and
Licensor hereby irrevocably consents and submits to the jurisdiction of all
courts of the State of California and all federal courts sitting in the Central
District of California over any suit, action or other legal proceeding commenced
for the purpose of enforcing or entering judgment upon any such decision or
award.
11.6 Specific Performance. The parties acknowledge that the obligations
and other provisions contained in this Agreement are reasonable and necessary to
protect their legitimate business interests, and that any breach or violation of
any of such obligations or other provisions will result in irreparable injury to
the non-breaching party for which damages will not be an adequate remedy. The
parties therefore acknowledge and agree that, notwithstanding anything to the
contrary in Section 11.5 of this Agreement, if any party hereto breaches or
violates or threatens to breach or violate any of the obligations or other
provisions contained in this Agreement, then (in addition to any compensatory,
punitive, or other damages that the non-breaching party shall be entitled to
recover) the non-breaching party shall be entitled to obtain preliminary and
permanent injunctive relief and shall be entitled to obtain other equitable
relief and exercise other equitable remedies in connection with such breach or
violation or threatened breach or violation, at the non-breaching party's
election, either through an arbitration proceeding described in Section 11.5 of
this Agreement or by application to any court having jurisdiction, or both. If
either party is required to post a bond or provide any other security in
connection with any suit, action, or other legal proceeding in which the non-
breaching party seeks to obtain equitable or other relief in connection with any
such breach or violation or threatened breach or violation, then the breaching
party shall reimburse the non-breaching party for the cost of such bond or other
security in the event that the non-breaching patty obtains equitable or other
relief (other than ex parte relief or preliminary injunctive relief) in
connection with such suit, action, or other Legal Proceeding. The parties hereby
irrevocably consent and submit to the jurisdiction of all courts of the State of
California and all federal courts sitting in the Central District of California
over any suit, action or other legal proceeding commenced on behalf of either
party for the purpose of obtaining any equitable relief or exercising any
equitable remedy of any nature.
11.7 Assignment and Sublicense.
(a) Licensor may sell, transfer or assign the Technology or any part
of or interest therein provided that the assignee provides reasonable assurances
to the Licensee that such assignee will be bound by all of the terms and
conditions of this agreement and will not pledge or encumber any part of the
Technology or otherwise subject the Technology or any part thereof to any lien
or security interest. In the event the license granted herein shall become non-
exclusive pursuant to the provisions of Article IV, the Licensor would not be
required to provide any assurances to the Licensee whatsoever.
13.
<PAGE>
(b) In accordance with Sections 4 and 5 above and with the prior
written consent of the Licensor which shall not be unreasonably withheld (such
consent shall be deemed given if Licensor fails to object within five (5) days
after Licensor receives written notice), the Licensee may, assign any or all of
its rights or delegate any or all of its obligations under this Agreement to any
person or entity that acquires or otherwise succeeds to (whether by acquisition
of assets, or otherwise) all or substantially all of Licensee's assets or
business. In the event Licensee assigns its rights and delegates its obligations
under this Agreement as permitted by this Section 11.7(b), Licensee shall
automatically (and without the necessity of any further action on the part of
Licensor) be fully and unconditionally released and discharged from all of its
obligations under this Agreement.
(c) With Licensor's prior written consent which shall not be
unreasonably withheld (such consent shall be deemed given if Licensor fails to
object within five (5) days after Licensor's receipt of written notice), the
Licensee may grant sublicenses to such persons, for such territories and on such
reasonable business terms as Licensee determines to be appropriate.
(d) Any attempted transfer, assignment or delegation which does not
fully comply with the provisions set forth in Sections 11.7 (a), (b) and (c)
above, shall be deemed null and void and of no force and effect.
11.8 Successors and Assigns. Subject to the provisions of Section 11.7 of
this Agreement, this Agreement shall inure to the benefit of Licensor and to the
benefit of Licensee and the other Indemnitees. Subject to the provisions of
Section 11.7 of this Agreement, this Agreement shall be binding upon (a)
Licensor and its successors and assigns; and (b) Licensee and its successors and
assigns.
11.9 Severability. In the event that any provision of this Agreement, or
the application of such provision to any Person or set of circumstances, shall
be determined to be invalid, unlawful, void, or unenforceable to any extent, the
remainder of this Agreement, and the application of such provision to Persons or
circumstances other than those as to which it is determined to be invalid,
unlawful, void, or unenforceable, shall not be affected and shall continue to be
valid and enforceable to the fullest extent permitted by law.
11.10 Entire Agreement. This Agreement sets forth the entire understanding
of the parties hereto with respect to the subject matter of this Agreement and
supersedes all prior agreements and understandings between the parties hereto
relating to the subject matter of this Agreement.
11.11 Waiver. No failure on the part of either party hereto to exercise any
power, right, privilege, or remedy hereunder, and no delay on the part of either
party hereto in exercising any such power, right, privilege, or remedy, shall
preclude any other or further exercise thereof or of any other power, right,
privilege, or remedy.
11.12 Construction. Each party hereto agrees that any rule of construction
to the effect that ambiguities are to be resolved against the drafting party
shall not be applied in the construction or interpretation of this Agreement. As
used in this Agreement, the words "include" and "including," and variations
thereof, shall not be deemed to be terms of limitation.
14.
<PAGE>
11.13 Additional Documents and Actions. At Licensee's expense, Licensor
agrees to execute and deliver, or cause to be executed and delivered, such
agreements, instruments and documents (including, without limitation, a
memorandum of license suitable for recording in the U.S. Patent and Trademark
Office and satisfactory in form and substance to Licensee), and to take such
other actions, as Licensee reasonably determines to be necessary or appropriate
for the purpose of effectuating, evidencing, implementing, or facilitating the
consummation of any of the transactions contemplated by this Agreement or for
the purpose of enabling Licensee to enforce any of its rights under this
Agreement.
IN WITNESS WHEREOF, Licensor and Licensee have caused this Agreement to be
executed as of the date first above written.
VERMONT RESEARCH PRODUCTS, INC.
Licensor:
--------------------------
a corporation
----------------------
By:
--------------------------------
Licensee; CHATCOM, INC.
a California corporation
By: /s/ E. CAREY WALTERS, CEO
--------------------------------
E. CAREY WALTERS, CEO
15.
<PAGE>
EXHIBIT A
---------
BrightStar
----------
BrightStar is a modular consolidated server system incorporating Seller's
RAINS (Redundant Array of Independent Network Servers) technology. Provides for
the collocating of multiple servers within a single, standard-sized 19 inch
chassis and allows for an environment of disparate server technologies.
Packaging consists of multiple servers sharing peripherals, power supplies and
other resources delivering enhanced management and easier upgrades or
replacements. The midplane is designed for "hot-swappable" modules, isolated
from system peripherals providing a flexible, open architecture computing
environment.
-------------END EXHIBIT A-------------
1.
<PAGE>
EXHIBIT B
---------
DISTRIBUTION OF PROCEEDS
------------------------
<TABLE>
<CAPTION>
Distribution of % of Incremental % of Incremental
Proceeds Proceeds Proceeds
- -------------------------- ---------------- ----------------
<S> <C> <C>
Up to $1,000,000 75%-Licensor 25%-Licensee
$1,000,000 to $5,999,999 48.5%-Licensor 51.5%-Licensee
$6,000,000 to $7,999,999 68%-Licensor 32%-Licensee
$8,000,000 to $9,999,999 60%-Licensor 40%-Licensee
$10,000,000 to $12,999,999 21%-Licensor 79%-Licensee
$13,000,000 to $16,000,000 7.5%-Licensor 92.5%-Licensee
Over $16,000,000 All to Licensee
</TABLE>
Example:
A sale generating $9,000,000 of proceeds will be distributed as follows:
Licensor $5,135,000
Licensee $3,865,000
2.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-START> JUL-01-1998 APR-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 143 143
<SECURITIES> 0 0
<RECEIVABLES> 419 419
<ALLOWANCES> (66) (66)
<INVENTORY> 1,429 1,429
<CURRENT-ASSETS> 1,976 1,976
<PP&E> 891 891
<DEPRECIATION> (624) (624)
<TOTAL-ASSETS> 2,266 2,266
<CURRENT-LIABILITIES> 3,254 3,254
<BONDS> 0 0
0 0
787 787
<COMMON> 11,346 11,346
<OTHER-SE> (17,555) (17,555)
<TOTAL-LIABILITY-AND-EQUITY> 2,266 2,266
<SALES> 974 1,889
<TOTAL-REVENUES> 974 974
<CGS> 231 231
<TOTAL-COSTS> 231 231
<OTHER-EXPENSES> 885 1,857
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 26 70
<INCOME-PRETAX> (680) (1,692)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (680) (1,692)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (680) (1,692)
<EPS-PRIMARY> (0.06) (0.16)
<EPS-DILUTED> (0.06) (0.16)
</TABLE>
