<PAGE>
As filed with the Securities and Exchange Commission on April 22, 1998
Securities Act File No. 333-_____ Exchange Act File No. 0-20462
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
CHATCOM, INC.
(Exact name of registrant as specified in its charter)
California 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Topanga Canyon Boulevard
Chatsworth, California 91311
(818) 709-1778
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
E. Carey Walters, Chief Executive Officer
ChatCom, Inc.
9600 Topanga Canyon Boulevard
Chatsworth, California 91311
(818) 709-1778
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copies to:
Sanford J. Hillsberg, Esq.
Young J. Kim, Esq.
Troy & Gould Professional Corporation
1801 Century Park East, Suite 1600
Los Angeles, California 90067
(310) 553-4441
Approximate date of commencement of proposed sale to public:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Proposed Proposed Maximum
Title of Each Class of Securities Amount To Be Maximum Aggregate Offering Amount of
To Be Registered Registered Offering Price Price(1) Registration Fee
Per Share(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock (no par value)......... 17,398,272 shares(2) $0.52 $9,047,101 $2,669
===========================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(c), solely for the purpose of calculating the
registration fee, based on the average of the high and low sale prices per
share of Common Stock, as reported on the Nasdaq SmallCap Market, on April
15, 1998.
(2) Plus an indeterminate number of additional shares of Common Stock that may
be issuable upon conversion of certain of the shares of preferred stock or
convertible notes, or upon exercise of certain of the stock purchase options
or warrants, as a result of antidilution provisions thereof.
____________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 22, 1998
PROSPECTUS
CHATCOM, INC.
17,398,272 SHARES OF COMMON STOCK
This Prospectus relates to the offer by the securityholders named herein
(the "Selling Securityholders") for sale from time to time of up to 17,398,272
shares (the "Shares") of common stock, no par value ("Common Stock"), of
ChatCom, Inc., a California corporation (the "Company"). To the extent required
by applicable law or Securities and Exchange Commission regulations, this
Prospectus shall be delivered to purchasers upon resale of the Shares by the
Selling Securityholders.
The Shares consist of (i) 1,609,523 currently outstanding shares of Common
Stock (the "Outstanding Shares"), (ii) 2,662,400 shares of Common Stock issuable
upon conversion of currently outstanding shares of Series D Convertible
Preferred Stock (the "Series D Preferred Shares") of the Company or in payment
of any dividends on the Series D Preferred Shares that the Company may pay in
shares of Common Stock, (iii) 4,400,000 shares of Common Stock issuable upon
conversion of currently outstanding shares of Series E Convertible Redeemable
Preferred Stock (the "Series E Preferred Shares") of the Company or in payment
of any dividends on the Series E Preferred Shares that the Company may pay in
shares of Common Stock, (iv) 3,213,000 shares of Common Stock issuable upon
conversion of currently outstanding shares of Series F Convertible Redeemable
Preferred Stock (the "Series F Preferred Shares") of the Company or in payment
of any dividends on the Series F Preferred Shares that the Company may pay in
shares of Common Stock, (v) 1,360,000 shares of Common Stock issuable upon
conversion of currently outstanding shares of Series G Convertible Preferred
Stock (the "Series G Preferred Shares") of the Company or in payment of any
dividends on the Series G Preferred Shares that the Company may pay in shares of
Common Stock, (vi) 2,843,804 shares of Common Stock issuable upon conversion of
currently outstanding 9.5% Convertible Subordinated Notes (the "Convertible
Notes") of the Company or in payment of any interest on the Convertible Notes
that the Company may pay in shares of Common Stock, (vii) 200,000 shares of
Common Stock issuable upon the exercise of currently outstanding options to
purchase shares of Common Stock (the "Options"), and (viii) 1,109,545 shares of
Common Stock issuable upon the exercise of currently outstanding warrants to
purchase shares of Common Stock (the "Warrants"). The Warrants consist of
warrants to purchase 400,000 shares of Common Stock (the "Series D Warrants")
issued in connection with the sale of the Series D Preferred Shares to the
holders of those shares, warrants to purchase 254,545 shares of Common Stock
(the "Series E Warrants") issued in connection with the sale of the Series E
Preferred Shares to the holders of those shares, warrants to purchase 285,000
shares of Common Stock (the "Series F Warrants") issued in connection with the
sale of the Series F Preferred Shares and the Series G Preferred Shares to the
holder of those shares, warrants to purchase 150,000 shares of Common Stock (the
"Convertible Note Warrants") issued in connection with the sale of the
Convertible Notes to the holders of the Convertible Notes, and warrants to
purchase 20,000 shares of Common Stock (the "T&G Warrants") issued for certain
legal services previously rendered to the Company. The number of shares of
Common Stock issuable upon the conversion of the Series D Preferred Shares, the
Series E Preferred Shares, the Series F Preferred Shares and the Series G
Preferred Shares (collectively, the "Preferred Shares") and the Convertible
Notes, and upon the exercise of the Options and the Warrants is subject to
adjustment.
The Company will not receive any proceeds from the sale of the Shares
offered hereby. The Company will receive an aggregate of $1,851,681 upon the
exercise of all of the Options and the Warrants, subject to adjustment as a
result of antidilution provisions in the case of certain of the Warrants. See
"Use of Proceeds" and "Selling Securityholders."
The Common Stock is quoted on the Nasdaq SmallCap Market under the symbol
"CHAT." The closing price of the Common Stock as quoted on the Nasdaq SmallCap
Market on April 21, 1998 was $0.75 per share. The Selling Securityholders have
advised the Company that they may sell, directly or through brokers, all or a
portion of the securities offered hereby in negotiated transactions or in one or
more transactions in the market at the price prevailing at the time of sale. In
connection with such sales, the Selling Securityholders and any participating
broker may be deemed to be "underwriters" of the Common Stock within the meaning
of the Securities Act of 1933, as amended. It is anticipated that usual and
customary brokerage fees will be paid by the Selling Securityholders in all open
market transactions. The Company will pay all other expenses of this offering.
See "Plan of Distribution."
__________________________
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES
A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON
PAGES 5 THROUGH 14 OF THIS PROSPECTUS.
__________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is _________, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy or information statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the following regional
offices: Seven World Trade Center, New York, New York 10048, and Citicorp
Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. In addition, the Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's Web site is http://www.sec.gov. The Common Stock of the
Company is quoted on the Nasdaq SmallCap Market. Reports, proxy statements and
other information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
Additional information regarding the Company and the securities offered
hereby is contained in the Registration Statement of which this Prospectus is a
part, and the exhibits thereto, filed with the Commission under the Securities
Act of 1933, as amended (the "Securities Act"). For further information
pertaining to the Company and the securities offered hereby, reference is made
to the Registration Statement and the exhibits thereto, which may be inspected
without charge at, and copies thereof may be obtained at prescribed rates from,
the office of the Commission at Judiciary Plaza, 450 Fifth Street, Washington,
D.C. 20549. Statements contained herein concerning the provisions of any
document are not necessarily complete and in each instance reference is made to
the copy of the document filed as an exhibit or schedule to the Registration
Statement. Each such statement is qualified in its entirety by reference to the
copy of the applicable documents filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated in this Prospectus by reference: (a) the
Company's Annual Report on Form 10-KSB for the year ended March 31, 1997, filed
with the Commission on July 15, 1997, as amended by Amendment No. 1 to Form 10-
KSB, filed on July 16, 1997, Amendment No. 2 to Form 10-KSB, filed on July 17,
1997, and Amendment No. 3 to Form 10-KSB, filed on July 29, 1997; (b) the
Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997,
filed with the Commission on August 19, 1997, as amended by Amendment No. 1 to
Form 10-QSB, filed on August 20, 1997; (c) the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1997, filed with the Commission
on November 19, 1997, as amended by Amendment No. 1 to Form 10-QSB, filed on
April 9, 1998; (d) the Company's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1997, filed with the Commission on February 23, 1998, as
amended by Amendment No. 1 to Form 10-QSB filed on April 9, 1998; (e) the
Company's Current Report on Form 8-K dated December 19, 1997, filed with the
Commission on December 29, 1997; (f) the Company's Current Report on Form 8-K
dated February 2, 1998, filed with the Commission on February 6, 1998; (g) the
Company's Current Report on Form 8-K dated February 19, 1998, filed with the
Commission on February 26, 1998; (h) all other reports filed with the Commission
pursuant to Section 13 and 15(d) of the Exchange Act subsequent to April 9,
1998; and (i) the description of the Common Stock set forth in the Company's
Registration Statement on Form 10 under the Exchange Act, including any
amendment or report subsequently filed by the Company for the purpose of
updating that description. The file number of each of the foregoing documents
is 0-20462.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the securities offered hereby shall be deemed
to be incorporated by reference into this Prospectus and to be a part of this
Prospectus from the date of filing of such documents. Any statement contained
in a document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein
2.
<PAGE>
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated by reference (other than
exhibits to such documents that are not specifically incorporated by reference
in such documents). Written requests for such copies should be directed to
Dianna Saltmarch, Corporate Communications, ChatCom, Inc., 9600 Topanga Canyon
Boulevard, Chatsworth, California 91311. Telephone requests may be directed to
Ms. Saltmarch at (818) 709-1778.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
---------------------------------------------------------------------------
1995.
- ----
This Prospectus contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties, including, without limitation,
statements with respect to the Company's liquidity and capital resources,
strategy, proposed sales of the Company's products, markets for the Company's
products and the development of the Company's products, including consolidated
server products. The Company's actual results could differ materially from
those discussed in these forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, the ability
of the Company to obtaining additional financing, the uncertainty of market
acceptance of the Company's products, the risks relating to new product
development and new application of the Company's products, conducting business
with foreign customers and the competitive market for the Company's products and
those discussed in the following section as well as those discussed elsewhere in
this Prospectus and any document incorporated herein by reference.
THE COMPANY
ChatCom, Inc. ("ChatCom" or the "Company") develops, integrates,
manufactures and markets highly-efficient centralized servers and storage
management systems. Commencing in the fiscal year ended March 31, 1997, the
Company has worked to reposition itself into the rapidly growing consolidated
server market and has recently won a major industry award for the excellence of
its product line in meeting consolidated server requirements (LAN Times - Best
---------
of Times Award for Consolidated Servers, February 1997). In recent years, the
Company's products had been geared primarily toward the remote control segment
of the remote access market. However, increased competition from alternative
technologies, lower demand and changes in access topology caused by increased
dominance of the Internet have led to declining revenues in the remote control
segment of the remote access market and increased operating losses that have
significantly impaired the Company's liquidity and capital resources, and caused
the Company to shift its product development and marketing efforts to focus on
the consolidated server market.
The Company has taken significant steps to position itself in the
consolidated server, network test and simulation, clustering, computer
telephony, multi-user remote access and telecom Internet service markets,
refocusing its product development and marketing efforts to achieve this goal.
The Company considers its major strength to be its ability to deliver fault
resilient high and ultra-high density processing platforms, which deploy the
latest in processor and bus technology. Its product line features a highly
scaleable architecture, highly competitive power efficiency, fully functioned
management software and low Mean-Time-To-Repair (MTTR). The Company's primary
product line is the well known ChatterBox(TM) family of server consolidation and
clustering platforms, a fully open OSI (Open Systems Interconnect) architecture
that supports all major network operating systems. With five different models
in the family, the ChatterBox series has been designed to meet the needs of the
consolidated server market, and thereby addresses the needs of the high-density
applications server, Internet server and network simulation markets.
Designed from the outset for mission-critical applications, the ChatterBox
family performs in an arena where system failures or unrecoverable loss of data
are considered unacceptable. The addition of the integrated ChatRAID level 7
disk storage architecture provides multiple server access to a self-healing,
fault-tolerant storage
3.
<PAGE>
subsystem offering up to 1.1 Terabyte of high-availability data across multiple
redundant paths. Certain of the Company's products utilize a Redundant Array of
Independent Network Servers, or RAINS(TM), to provide turnkey solutions.
Each ChatterBox model is built around a selection of common server modules,
which makes the whole product line both functionally compatible and fully
scaleable. The open architecture of ChatterBox server platforms supports the
latest Pentium and Pentium Pro technology of Intel Corporation ("Intel"),
including the recently introduced Dual SMP Pentium Pro(TM), which ChatCom
believes provides the highest power to density ratio yet achieved with this
technology. Processor speeds of up to 266MHz and memory sizes of up to 512MB in
both single and dual processor designs are available in the ChatterBox server
platforms.
ChatterBox systems are in service worldwide supporting diverse
applications, including Internet, intranet and web server functions, database
and Groupware (E-mail, etc.) server systems from Lotus Notes(R) and Microsoft(R)
Exchange(TM) to Oracle environments, file servers, applications servers,
gateways, remote access, Citrix servers and numerous other applications. These
systems are also in service with a number of major peripheral manufacturers in
support of their various development and test programs. Configurations range in
price from approximately $5,000 up to approximately $30,000 for the Company's
Office series, while the Company's more powerful Corporate series range from
$7,500 to over $300,000. In creating the Corporate and Office Series product
lines, the Company has introduced significant new system management features.
These are composed of ChatCom's Intelli-Management monitoring and control
system, coupled with a major new version of the Company's ChatView(TM)
management software. Version 3 of this software operates in Microsoft's Windows
NT environment, and allows a ChatterBox system to be managed through industry-
standard SNMP-based products such as Hewlett-Packard's OpenView(R) or IBM's
Netview (TM). In addition, a line of servers featuring the Intel Pentium Pro
CPU was introduced by the Company in March 1997 and is positioned for high-
speed, high-bandwidth applications, such as Internet/intranet/web servers,
groupware applications and traditional file serving.
In order to generate additional working capital to fund the Company's
marketplace transition and its recent operating losses, the Company has
completed several private placements of its equity and debt securities during
the prior and current fiscal years. The Company at present has insufficient
liquidity to meet its obligations or to support its current level of operations
or any significant increase in revenues, and is actively seeking additional
financing to meet its short-term needs. Should the Company fail to obtain
additional financing in the immediate future, it will be forced to substantially
reduce or suspend its operations. There can be no assurance that the Company
will be able to obtain additional financing or will be able to generate
increased revenues or achieve profitability even if revenues do increase.
The Company was incorporated under the laws of the State of California in
March 1982. The Company was originally named "Astro Systems and Engineering,
Inc." and changed its name to "Astro Sciences Corporation" in 1985. In February
1996, the Company changed its name to "ChatCom, Inc." The Company currently
employs approximately 45 full-time employees, of which 12 are in manufacturing,
eight are in sales, six are in research and product development, eight are
classified as general and administrative, six are in technical support, two are
in quality assurance, two are in sustaining engineering and one is in marketing.
The Company's principal executive office is located at 9600 Topanga Canyon
Boulevard, Chatsworth, California 91311. Its telephone number is (818) 709-1778.
4.
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature, involve a high
degree of risk, and should not be purchased by any investor who cannot afford
the loss of his entire investment. Prior to making an investment decision with
respect to the securities offered hereby, prospective investors should carefully
consider, along with the other matters discussed in this Prospectus, the
following risk factors:
ABILITY TO CONTINUE AS A GOING CONCERN. As a result of the Company's net
losses and negative cash flow from operating activities in recent periods, the
Company's independent auditors have included in their report on the Company's
March 31, 1997 financial statements an explanatory paragraph regarding the
ability of the Company to continue as a going concern. The Company is seeking
additional debt and equity funds, in one or more private placements or loan
transactions, in order to obtain the funds necessary to meet its immediate
working capital needs. There can be no assurance that the Company will be able
to successfully complete the private placements or loan transactions or
otherwise obtain the necessary funds to continue the Company's operations.
LIQUIDITY. The Company's continuing losses and negative cash flow from
operations have created a liquidity problem for the Company. As of December 31,
1997, the Company had negative working capital of $590,000, as compared to
working capital of $3,195,000 as of March 31, 1997. The Company must
immediately provide additional liquidity to meet its current obligations and
maintain its current level of operations or any significant future increase in
revenues and is actively seeking additional financing to meet those needs. The
Company is currently negotiating debt and equity investments and debt
restructurings with several potential investors and trade creditors. However,
there can be no assurance that any such financings or restructurings will ever
be consummated, that such financings or restructurings if so consummated will be
on terms favorable to the Company or that such financings or refinancings will
be sufficient to meet the Company's immediate needs.
In September 1997, the Company completed a private offering of the Series E
Preferred Shares and the Series E Warrants in the aggregate amount of
$1,100,000. The purchasers of the Series E Preferred Shares have agreed to
purchase an additional $600,000 of such shares, subject to certain conditions
being met including, among others, the market price of the Company's Common
Stock for the ten trading days preceding the additional closing date exceeds
$1.00 per share and the receipt of at least $1,000,000 from the sale of equity
securities of the Company. No assurances, however, can be given that the sale
of additional shares of Series E Preferred Stock will be consummated or that the
proceeds from sale of such additional shares or any other financing will be
sufficient to permit the Company to continue its current operations. In
addition, the Company has agreed to pay the holders of the Series E Preferred
Shares certain payments until the registration of the shares of Common Stock
issuable upon conversion of the Series E Preferred Shares and upon exercise of
the Series E Warrants has been effected. As of March 31, 1998, the Company owed
the holders of the Series E Preferred Shares and the Series E Warrants such
payments in the amount of $105,600, which the Company will be required to pay in
cash or shares of Common Stock at the election of such holders.
In December 1997, the Company completed the issuance of certain of the
Convertible Notes in the aggregate principal amount of $540,000 and the
Convertible Note Warrants. Such Convertible Notes together with $350,000 of the
Convertible Notes issued by the Company in May 1997, mature on January 1, 1999.
Existence of the Convertible Notes may make new equity investments or debt
investments in the Company less attractive to potential investors. The Company
is negotiating with the holders of the Convertible Notes to convert these notes
into preferred stock of the Company, but there can be no assurance that this
conversion will be consummated.
In March 1998, the Company completed a conversion of $1,345,000 in
unsecured debt owed to a supplier into the Company's Series F Preferred Shares
and Series G Preferred Shares and the Series F Warrants. The agreement with the
supplier also provides for periodic cash payments by the Company to the supplier
and the remittance of 25% of the Company's collections of foreign accounts
receivable after February 1, 1998, as well as 20% of the net proceeds to the
Company of any equity financings (other than commercial bank loan financing or
asset based lending against United States accounts receivable and finished or
assembled goods inventory) effected by the Company subsequent to February 1,
1998 upon consummation of such financings, plus the sum of $50,000 upon
consummation of each of the first two such financings, until all amounts due to
the supplier (approximately $410,000 as of March 31, 1998) is paid in full. The
agreement also provides that as long as any amounts of Series F Preferred Shares
and Series G Preferred Shares remain outstanding, the supplier shall have the
right to approve (with such right to not be unreasonably withheld) any preferred
stock offering by the Company which ranks equal to or senior to those of the
supplier's, and approve any debt offering contemplated by the Company, except
for commercial bank lines of credit or loans secured by the Company's United
States accounts receivable or inventory.
5.
<PAGE>
In the event the Company engages in a bankruptcy proceeding or reorganization,
composition with creditors or like transaction on or before June 30, 1998, the
agreement provides that the supplier shall have the option to surrender its
rights under the agreement and be reinstated as an unsecured creditor for the
full amount of the debt, less any payments which have been made by the Company.
The Company's ability to obtain any future financing may be adversely affected
by the need to obtain approval from the supplier pursuant to the agreement.
There can be no assurance that the supplier will approve any such future
financing or that such approval will not be subject to certain conditions as may
be requested by the supplier.
The Company has incurred operating losses in each of its last three fiscal
years. Even if the Company successfully completes the debt and equity
financings it is currently attempting to consummate, if the Company continues to
experience operating losses in the future that result in a significant
utilization of its liquid resources, the Company's liquidity and its ability
over the long-term to sustain operations at current levels could be materially
adversely affected.
The Company may seek additional public or private financing to meet its
longer term capital needs if market conditions are favorable. If additional
funds are raised through the issuance of equity securities, it is likely that
the Company will be required to sell such securities at a substantial discount
to the current market price for the Company's Common Stock, the percentage
ownership of the then current shareholders of the Company will be reduced, and
such equity securities may have rights, preferences or privileges senior to
those of the holders of the Common Stock. No assurance can be given that
additional financing will be available or that, if available, it will be
available on terms favorable to the Company or its shareholders. Any increase
in the outstanding number of shares of Common Stock or options and warrants to
acquire Common Stock may have an adverse effect on the market price of the
Common Stock and may hinder efforts to arrange future financing. If adequate
funds are not available to satisfy capital requirements, the Company may be
required to curtail its operations significantly or to obtain funds through
arrangements with strategic partners or others that may require the Company to
relinquish material rights to certain of its technologies or potential markets.
PRIOR OPERATING LOSSES; FLUCTUATIONS IN OPERATING RESULTS. The Company has
reported net losses of $4,601,000 and $1,968,000 for the fiscal years ended
March 31, 1997 ("fiscal 1997") and 1996 ("fiscal 1996"), respectively, due
primarily to a decrease in revenue during fiscal 1997, flat revenues during
fiscal 1996 and increases in operating expenses and cost of goods sold,
including inventory obsolescence reserves. The Company also incurred operating
losses for each of the three-month periods during the fiscal year ended March
31, 1998. There can be no assurance that the Company's operations will be
profitable in the future.
The Company's reported results of operations are subject to considerable
fluctuations due to changes in demand for the Company's products, timing of
product shipments, status of world economic conditions and other factors, and
there can be no assurance that the Company will be profitable in any particular
period. Demand for the Company's products in each of the markets it serves can
vary significantly from quarter to quarter due to revisions in budgets or
schedules for customer projects requiring the Company's products, changes in
demand for systems that incorporate the Company's products, general business and
economic factors, fluctuations in foreign currency exchange rates and other
factors beyond the control of the Company. In addition, as sales of the
Company's products shift from the remote access to the consolidated server
market, the Company believes its revenues will be increasingly dependent upon
larger orders and its products will have higher average selling prices. Such
increase in size of order and selling price of products may materially
contribute to the fluctuations in the Company's results of operations. For
example, the current United States list price of the Company's most powerful
system exceeds $300,000. The acceleration or delay of a number of shipments
from one quarter to the next can significantly affect the Company's results of
operations for that quarter. The higher average selling prices have resulted in
longer sales cycles and may pose significant barriers to the purchase of the
Company's products for potential customers.
LEGAL PROCEEDINGS. On January 15, 1998, the Company was sued by Strategic
Growth International, Inc. ("SGI"), an investor relations consulting firm. The
lawsuit, filed in the United States District Court, Central District
6.
<PAGE>
of California, sought damages from the Company for the balance of certain
finder's fees ($191,500) alleged by SGI to be owed by the Company to SGI in
connection with the Company's financings from certain investors and for amounts
alleged by SGI to be owed to SGI for consulting services ($75,841) and the
economic value of stock options for 66,666 shares of the Company's Common Stock
that SGI was to receive in connection with SGI's consulting services. SGI also
sought reimbursement for its legal fees in connection with the lawsuit and
threatened to obtain an attachment order against certain of the Company's assets
in connection with this lawsuit. As of March 31, 1998, the parties entered into
a Settlement Agreement and Mutual Release to settle the lawsuit. The terms of
the settlement include the Company's issuance to SGI of 800,000 shares of Common
Stock, the granting to SGI of options to purchase 200,000 shares of the
Company's Common Stock at an exercise price of $.50 per share, and the payment
of $100,000 in cash to SGI, $40,000 of which was paid by the Company in February
and April, 1998, with the balance ($60,000) payable in equal consecutive monthly
installments of $15,000, beginning May 9, 1998. The Company and SGI have
entered into a stipulation for entry of judgment pursuant to which the Company
shall be liable for the full amount claimed by SGI under the lawsuit, less any
amounts paid by the Company, in the event the Company fails to perform its cash
payment obligations under the settlement agreement. The Company has agreed to
register the foregoing shares under the Securities Act, including shares
issuable upon the exercise of the stock options. The Company recorded a loss
provision of approximately $568,000 (of which approximately $68,000 is
attributable to the value of the options granted to SGI) for the estimated value
of the settlement during the quarter ended March 31, 1998.
As a result of the Company's continuing liquidity problems during fiscal
1998, the Company also has been sued for non-payment by several suppliers of
products and services. Several other vendors have forwarded their accounts with
the Company to collection agencies. Certain of the trade creditors have
instituted legal proceedings to obtain attachment orders on the Company's
assets. The Company has entered into settlements with several of the trade
creditors and is negotiating settlements with the other trade creditors.
However, there can no assurance that any settlements will be obtained by the
Company with such other trade creditors. In the event any trade creditor
obtains a writ of attachment on the Company's assets, the Company may have to
commence bankruptcy proceedings and any settlement discussions with other trade
creditors will most likely terminate. The Company has incurred, and anticipates
continuing to incur, substantial legal expenses in connection with the foregoing
legal proceedings.
One of the Company's suppliers recently notified the Company of a certain
purchase commitment allegedly made by the Company to the supplier in the amount
of approximately $700,000. Although the Company believes that it has not
entered into such purchase commitment and has requested the supplier to provide
documents and information to support the alleged purchase commitment, there can
be no assurance that the Company is not obligated to purchase the parts and
components from the supplier. Although the supplier has not commenced legal
proceedings in connection with the alleged purchase commitment, the Company may
incur substantial legal expenses in the event such legal proceeding is
instituted. The Company believes that the majority of parts and components in
question is of a type that cannot be readily resold by the Company. The
supplier has not shipped the parts and components to the Company.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT. The markets served by the Company
are characterized by rapid technological advances, downward price pressure in
the marketplace as technologies mature, changes in customer requirements,
frequent new product introductions and enhancements, and price erosion. The
Company's business requires substantial ongoing research and development efforts
and expenditures, and its future success will depend on its ability to enhance
its current products, reduce product costs and develop and introduce new
products that both keep pace with technological developments in response to
evolving customer requirements and that also achieve market acceptance.
Although the Company has received orders for products implementing the Redundant
Array of Independent Network Servers, or RAINS(TM), during fiscal 1998, there
can be no assurance that the market demand for such products will continue.
The consolidated server market in particular is characterized by the
continuing advancement of technology, including technologies relating to the
increased efficiency of systems level management and the speed and efficiency of
microprocessors. The Company's strategy is to update its products to
accommodate new technologies; however, there can be no assurance that the new
technologies will not render the Company's products obsolete. The Company
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believes that it must continue to respond quickly to the needs of its customers
for broad product functionality and must respond to advances in hardware,
generic operating system software, applications software, and emerging
technologies and markets, such as Internet services, groupware services,
enterprise-wide remote communications and the test measurement and emulation
markets. There can be no assurance that the Company will be able to respond
effectively to technological changes or product announcements by its
competitors. If the Company is unable, for technological or other reasons, to
develop and introduce products and applications in a timely manner in response
to changing market conditions or customer requirements, the Company's operating
results and financial condition could be materially, adversely affected.
Additionally, the marketability of the Company's products is influenced to
a significant degree by the management capabilities and efficiency of
proprietary software that is an integral component of the remote access
solutions that are offered by the Company. The Company's strategy is to
continually update its consolidated server product line and technology to
increase its capabilities and efficiency as well as to maintain its
compatibility with application and operating software and network protocols that
proliferate in the marketplace. There can be no assurance that the Company's
competitors will not introduce functionally similar consolidated server
platforms or proprietary management software that could render the Company's
products obsolete or that the Company will be able to improve and advance its
consolidated server technology and management software so that it is compatible
with applications software, operating software and network protocols and market
demands that may be introduced in the future or that the Company's technology
and products will continue to be accepted in the marketplace. If the Company is
unable to develop new, or improve its current, products and technology in
response to changes in its operating environment or customer requirements, the
Company's operating results and financial condition could be materially,
adversely affected.
The Company has identified and increased its product development and sales
efforts in certain market segments in which the Company believes the demand for
its products will increase in the future. These include the computer telephony
market, the product testing and quality assurance market and the international
market in general. There can be no assurance that the Company's efforts in such
market segments will result in increased revenues or profitability in the
future. In addition, as part of the Company's sales and distribution strategy,
the Company has entered into strategic relationships and business alliances with
software developers, data processing companies and others, including Computer
Associates, StarVox Inc and Vinca Corporation. The success of such
relationships depend in part on the demand for the integration of products
provided by such alliances, the performance of such products, the compatibility
of the sales and distribution objectives of such companies and other factors.
There can be no assurance that any such strategic relationships and alliances
will provide the intended results.
NEED TO MANAGE PRODUCT TRANSITIONS. The introduction of new and enhanced
products requires the Company to manage the transition from older products in
order to minimize disruption in customer ordering patterns, avoid excessive
levels of older product inventories and ensure that adequate supplies of new
products can be delivered to meet customer demand. There can be no assurance
that the Company will successfully manage the transition to selling new
products, and the failure to do so could have a materially adverse effect on the
Company's operating results and financial condition. The Company believes that
its products have often allowed customers to implement new enhancements while
maintaining the existing technologies.
HIGHLY COMPETITIVE ENVIRONMENT. The market for consolidated servers,
including PC-based server technology is highly competitive. The Company
competes with leading vendors who provide both desktop PCs and high-end server
products. Such competitors, including but not limited to Hewlett-Packard
Company, Compaq Computer Corporation, Dell Computer Corporation, and to a lesser
extent, Cubix Corp. CommVision Corp. and EVERSYS Corp., who offer functionally
similar consolidated server solutions, have greater financial, marketing,
technical, and other resources than the Company. In the future, the Company
expects several of these companies to enter the consolidated server market, or
increase their presence, with their own additional consolidated server products
and solutions, and such competitive products and solutions could have a
materially adverse effect on the Company's results of operations.
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The Company's future success and its ability to remain competitive will
depend in significant part upon the technological quality of its products and
processes relative to those of its competitors and its ability both to develop
new and enhanced products and services and to introduce such products and
processes at competitive prices and in a timely and cost-effective manner. The
Company's products compete with its competitors' products based on ease of
implementation, fault tolerance, manageability and features. No assurance can
be given that the Company will be able to develop new and enhanced products and
services at competitive prices and in a timely manner.
In July 1995, the Company changed its pricing strategy for commodity-type
subassemblies (e.g. disk drives, fax servers, and random access memory)
purchased by the Company and incorporated into its products. Sales prices and
published list prices on these items were lowered by the Company in order to
discourage resellers and end-users from purchasing such products elsewhere and
installing them on systems provided by the Company. The installation of
components purchased from other vendors into systems sold by the Company had
caused compatibility problems in certain cases, potentially impacting the
Company's reputation for marketing reliable products. This change in pricing
strategy has resulted in lower margins on such subassemblies.
Increased competition could result in price reductions and loss of market
share, which would adversely affect the Company's results of operations. Many
of the Company's current and potential competitors have greater financial,
marketing, technical and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully with its
existing competitors or any new competitors.
RELIANCE ON CONSOLIDATION SERVER MARKET; EARLY STAGE OF MARKET. The
Company currently devotes a majority of its product development, manufacturing,
marketing and sales resources to providing product and services to the
enterprise consolidated server market. Although the Company believes that its
concentrated focus may provide it with certain competitive advantages in this
market, this focus may also leave the Company more vulnerable to any future
decline in the demand for the Company's consolidated servers. In addition, the
Company's future financial performance will depend in large part on continued
growth of the consolidated server market, which in turn will depend in part on
the number of organizations utilizing such products and the number of
applications developed for use with those products. There can be no assurance
that these markets will continue to grow or that the Company will be able to
respond effectively to the evolving requirements of these markets. Any
significant decline in, or significant decrease in the growth rate of, the
consolidated server market could have a materially adverse effect on the
Company's results of operations and financial condition. Additionally, many of
the Company's customers do not yet have a standard consolidated server solution,
and there can be no assurance that the Company's products will be the standard
adopted by its customers.
PRODUCT DEFECTS. New products, when first released by the Company, may
contain undetected design faults and software errors, or "bugs" that, despite
testing by the Company, are discovered only after a product has been installed
and used by customers. There can be no assurance that faults or errors in the
Company's existing products or in new products introduced by the Company will
not be discovered in the future, causing delays in product introductions and
shipments or requiring design modifications that could adversely affect the
Company's competitive position and results of operations. In addition, there
can be no assurance that new products or product enhancements developed by the
Company will achieve market acceptance or, if successful, will not adversely
impact the sales of the Company's existing products. On several occasions, the
Company has discovered minor design defects in its products that have caused
delays in the introduction of products. To date, however, the Company has not
experienced any significant problems in this regard and has not recalled
products as a result of a product defect.
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in large
part on the continued service of its key marketing, sales and management
personnel. The Company is dependent upon its ability to identify, hire, train,
retain and motivate high quality personnel, especially highly skilled engineers
involved in the ongoing hardware and software development required to refine the
existing products to introduce enhancements for future applications and to
develop new products. The Company is particularly dependent on the skills and
contributions of certain of its management personnel, although the Company does
not have long-term employment agreements within many of these individuals. The
Company hired Gordon L. Almquist as its new Vice President
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of Finance and Chief Financial Officer in November 1997 and appointed him as the
Chief Operating Officer in February 1998 and hired E. Carey Walters as its new
Chief Executive Officer in March 1998. Gary Dunham, the Company's Vice President
of Sales and Marketing, resigned in February 1998 and James B. Mariner, the
Company's former President, Chief Executive Officer and director, currently
serves as a sales and marketing consultant to the Company pursuant to a
consulting agreement. Robert Ruiz, the Company's Vice President of Engineering,
resigned in March 1998. In addition, Sanford C. Sigoloff, Philip B. Smith,
George L. Lazik and Andrew M. Brown each resigned as a director of the Company
during the prior fiscal year.
As part of its cost reduction program, the Company implemented a management
and personnel restructuring during the past and current fiscal years, which has
resulted in workforce reductions and the emphasis of certain departments of the
Company. Such restructuring and cost reduction may make it difficult for the
Company to retain its personnel. The Company plans to implement a further
substantial reduction of its workforce in the event its liquidity and capital
resources do not improve in the immediate future. There can be no assurance
that such restructuring and workforce reductions may not have a material adverse
effect on the business and operations of the Company. Competition for personnel
in the Company's industry, as well as in the computer hardware and software
industry, is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. There can be no assurance that the Company's
current employees will continue to work for the Company or that the Company will
be able to obtain the services of additional personnel necessary for the
Company's growth.
DEPENDENCE ON VALUE ADDED RESELLERS. The Company depends on its network of
independent value added resellers ("VARs") to market and sell the Company's
products. During the year ended March 31, 1997, and the nine month period ended
December 31, 1997, approximately 86.6% and 63.8%, respectively, of the Company's
revenues were generated from the Company's VARs. As a result of the Company's
liquidity problem and the reduction of its marketing and technical support of
its VARs, the Company has recently experienced difficulty in managing and
retaining the support of the Company's VARs. Any significant loss in the
Company's network of VARs may have a material adverse effect on the Company's
sales and results of operations.
DEPENDENCE ON TIMELY RECEIPT OF ACCEPTABLE COMPONENTS. The Company depends
on the timely receipt of non-defective components to meet its manufacturing
schedule. The Company's operating results or financial condition could be
adversely affected by the receipt of a significant number of defective
components or a delay in component delivery, an increase in component prices or
the inability of the Company to obtain lower component prices in response to
competitive pressures on the pricing of the Company's products.
RELIANCE ON CERTAIN SUPPLIERS. The Company purchases from various
independent suppliers numerous parts, supplies and other components, which the
Company assembles into products. Although there are at least dual suppliers for
many of such parts, supplies and components, the Company currently relies on
single sources of supply for certain parts and components, and the Company is
vulnerable to product changes by and variances in product quality from these
suppliers. Although the Company believes that such changes and quality
fluctuations could be accommodated, they may necessitate changes in the
Company's product design or manufacturing methods, and the Company could
experience temporary delays or interruptions in supply while such changes are
incorporated or a new source of supply is procured. Any future disruptions in
supply of suitable parts and components from the Company's principal suppliers
could have a materially adverse effect on the Company's operating results and
financial condition.
The Company purchases certain components (the Cirrus VGA integrated
circuits, Intel processors, Opti integrated circuits, Omega power supply modules
and 3Com application specific integrated circuits), which contain technology
that is proprietary to its manufacturer and is therefore unavailable from other
manufacturers. The Company has no written supply agreements covering any of
these components. Although the Company purchases the components manufactured by
Cirrus, Opti and 3Com from only a single distributor each, and these components
are available through numerous distributors, the Company could experience
additional development costs and production delays while developing alternate
solutions should any of these manufacturers cease to produce the
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components. During the fiscal quarter ended June 30, 1997, the Company's
operations and revenues were adversely effected by a constraint on the number of
Pentium Pro(R) chips allocated to the Company by Intel. Although such
constraint has been lifted, there can be no assurance that such future
disruption in supply will not adversely affect the operations of the Company.
A particular power supply module is purchased directly from a proprietary
sole source supplier and is an integral portion of one of the power supply
options offered by the Company. Should the supplier cease its production of
this component or cease sales of the component to the Company, a total redesign
of the particular power supply in which the component is utilized would be
required. While the Company's processor units may be sold with other power
supply systems, the sales of the affected model, and possibly a portion of the
Company's sales of other products, would be lost or delayed during the redesign
and production start-up period.
The Company licenses remote access related software from Symantec
Corporation ("Symantec"). Although the software licensed from Symantec contains
proprietary features, other companies offer similar software that is compatible
with the Company's products. Accordingly, the Company believes that termination
of the Company's ability to license software directly from Symantec would not
have a material adverse effect upon the Company's operations.
As a result of the Company's liquidity problems, certain suppliers may
demand payment in full before shipment or more accelerated payment terms than
previously allowed to the Company. There can be no assurance that any future
disruption in supply arising from the Company's liquidity problem will not
adversely affect the Company's operations.
MANAGEMENT OF INVENTORY; RISK OF INVENTORY OBSOLESCENCE. The marketplace
dictates that many of the Company's products be shipped very quickly after an
order is received. Since purchased parts and manufacturing lead times are
typically much longer than the short order fulfillment times allowed by the
marketplace, the Company is required to maintain adequate inventories of both
components and work-in-process goods, and must accurately forecast demand for
finished products. Historically, the Company has been unable to accurately
forecast specific future demand, requiring it to maintain relatively large
inventory levels, which has had an adverse effect on its financial condition.
The relatively high levels of inventories have also contributed to the Company
experiencing costs relating to obsolescence of inventories, which has had an
adverse effect on the Company's results of operations and financial condition.
The Company has incurred inventory writedowns in the past. While the
Company maintains valuation allowances for excess and obsolete inventories,
which it believes to be adequate, significant changes in the technology
prevailing in the industry could require the Company to record additional
valuation reserves. During fiscal 1997 and fiscal 1996, the Company recorded
additions to its valuation allowance for obsolete and excess inventories in the
amounts of $794,000, and $162,000, respectively, which adversely affected gross
profit and net income in the periods in which additional valuation allowances
were recorded. In addition, as a result of the significant increase in
inventory, due primarily to product returns from a foreign distributor as well
as price decreases due to technological obsolescence of certain components
associated with the returned equipment, the Company recorded an increase to its
valuation allowance for obsolete and excess inventories in the amount of
approximately $400,000 during the quarter ended December 31, 1997. See "Risk
Factors--International Risks." The Company believes that its allowance for
obsolete and excess inventories that are currently recorded are sufficient to
properly state inventories at their net realizable value. Material additions to
such allowance might be required in the future if market conditions affecting
the Company's product sales mix change significantly. Should future writedowns
become necessary, such writedowns could have a materially adverse effect on the
Company's operating results and financial condition.
INTERNATIONAL RISKS. During fiscal 1997 and the first three quarters of
fiscal 1998, sales outside the United States accounted for approximately
$1,206,000 and $940,000, or 13.2% and 15.5%, respectively, of the Company's
total sales. The Company believes that foreign sales will continue to account
for a significant portion of its future
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revenues. The Company's international business is subject to special risks,
including fluctuating currency exchange rates, uncertainties in patent
enforcement, changes in import and export controls, tariffs, changes in
governmental policies (including United States trade policy toward certain
countries), product safety and other regulatory requirements, currency controls,
political and economic instability and other factors which could have a material
adverse effect on the Company's business, financial condition and results of
operations. With respect to international sales that are denominated in U.S.
dollars, an increase in the value of the U.S. dollar relative to foreign
currencies could increase the effective price of, and reduce demand for, the
Company's products relative to competitive products priced in the local
currency.
Should the Company substantially increase its product sales in foreign
countries, the Company believes that it may be required to increase the amount
of credit it extends to purchasers or distributors in these markets. The
Company has had only limited experience in extending credit to foreign customers
and will encounter increased risks in extending credit to new customers in these
markets, including the creditworthiness of such customers and the difficulty of
collecting accounts receivable in these countries. During the first two
quarters of fiscal 1998, the Company shipped equipment in the amount of $3.3
million in the aggregate to Macon Holdings (s) Pte. Ltd. ("Macon"), a
distributor located in Singapore. The sales were made to Macon on an "open
account" basis with payment terms generally 30 days from date of invoice. As a
result of Macon's inability to effect timely payments of its obligations to the
Company, which Macon has attributed primarily to the Asian economic crisis
during the later part of 1997 as well as less than anticipated market acceptance
of the equipment, the Company and Macon collectively agreed in December
1997 to permit Macon to return to the Company all but $150,000 of the equipment
not already sold by Macon (approximately $2.6 million at sales price,
approximately $1.7 million at cost). Of the amount agreed upon to be returned,
approximately $505,000 (approximately $328,000 at cost) was received by the
Company as of December 31, 1997 and the remaining balance of the equipment
(approximately $2.1 million at sales price, approximately $1.4 million at cost)
was received by the Company as of March 31, 1998. The balance of the equipment
returned by Macon subsequent to December 31, 1997 ($2.1 million, $1.3 million at
cost) has been accrued and reflected in the Company's financial statements as of
December 31, 1997. The return of the equipment from Macon has resulted in a
substantial increase in the Company's finished goods inventory. Although such
returned equipment is of a type that can be readily resold to other customers,
there can be no assurance that the Company will be able to secure additional
orders for such equipment. See "Risk Factors--Management of Inventory; Risk of
Inventory Obsolescence."
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success and
competitive position is dependent partly upon its proprietary technology, and
the Company relies to a limited degree on trademark and copyright law and, may
in the future rely on patent law to protect its intellectual property. There
can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
future patent applications will be issued within the scope of the claims sought
by the Company, if at all. Furthermore, there can be no assurance that others
will not develop technologies that are similar or superior to the Company's
technology, duplicate the Company's technology or design around the patents
owned by the Company. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. The
Company has been issued two patents for its "Phone Busy Circuit" and "Hardware
Remote Reset Circuit." Although products marketed by third parties may infringe
on these patents, the Company may not proceed to enjoin the marketing of those
products by others in light of technological changes that are on-going and the
substantial expense that the Company may be required to incur to enforce these
patents with no certainty of success.
DIVIDENDS ON COMMON STOCK UNLIKELY. The Company has never declared or paid
dividends on its Common Stock. The Company does not currently intend to pay
dividends in the foreseeable future so that it may reinvest its earnings, if
any, in the development of its business. The payment of any dividends on the
Common Stock is subject to the prior payment of dividends on the outstanding
Preferred Shares and any other shares of preferred stock that may be issued.
The payment of dividends in the future will be at the discretion of its Board of
Directors.
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POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS, PREFERRED STOCK
AND CONVERTIBLE NOTES. As of March 31, 1998, there were 6,562,943 shares of
Common Stock reserved for issuance upon exercise of stock options and warrants
that have been granted or issued. 2,255,594 of the outstanding options and all
of the 3,627,460 warrants are currently exercisable at exercise prices ranging
from $0.35 to $4.03 per share. An additional 8,517 shares of Common Stock are
reserved for issuance upon the exercise of options available for future grant
under the Company's 1994 Stock Option Plan, and additional shares of Common
Stock are reserved for issuance upon the conversion of the Company's Preferred
Shares, the Convertible Notes, the accrued but unpaid dividends related to the
Preferred Shares that may be paid in shares of Common Stock and the interest on
the Convertible Notes that may be paid in shares of Common Stock. Because the
Company anticipates that the trading price of Common Stock at the time of
exercise of any such options or warrants will exceed the exercise price, such
exercise will have a dilutive effect on the Company's shareholders. As the
number of shares issuable upon the conversion of certain of the Preferred
Shares, the Convertible Notes and dividends and interest related thereto may
increase based on a decline in the market price of the Common Stock on the date
of conversion, such conversions may have a dilutive effect on the Company's
shareholders.
MARKET PRICE FLUCTUATIONS. The trading price of the Common Stock has from
time to time fluctuated widely and in the future may be subject to similar
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, announcements of innovations or new products by the Company
or its competitors, general conditions in the computer or computer network
industries and other events or factors. In addition, in recent years broad
stock market indices, in general, and the securities of technology companies, in
particular, have experienced substantial price fluctuations. Such broad market
fluctuations may adversely affect the future trading price of the Common Stock.
LISTING ON THE NASDAQ SMALLCAP MARKET. The Company's Common Stock is
currently quoted on the Nasdaq SmallCap Market and, as a result, the Company is
subject to the continued listing requirements of the Nasdaq SmallCap Market. In
December 1997 and March 1998, the Company received certain inquiries from The
Nasdaq Stock Market, Inc. ("Nasdaq") regarding the Company's ability to satisfy
the continued listing requirements of the Nasdaq SmallCap Market. The Company
has been informed by Nasdaq that unless the Company's Common Stock trades at or
above the minimum bid price of $1.00 for at least ten consecutive trading days
before May 28, 1998, Nasdaq will issue a delisting letter to the Company. In
the event Nasdaq institutes any delisting proceedings, the Company may request
certain hearings to review such delisting initiatives. There can be no
assurance that the Company will satisfy the $1.00 minimum bid price or any other
continued listing requirements of the Nasdaq SmallCap Market, or that the
Company will prevail in any hearing to review any delisting proceedings by
Nasdaq. In addition, in the event the Company's Common Stock is delisted from
being quoted on the Nasdaq SmallCap Market, there can be no assurance that the
Company's Common Stock can be listed in any securities exchange or other trading
market. Lack of an established trading market for the Company's Common Stock
may limit Common Stock holders' ability to dispose of their shares and may
negatively affect the prevailing price of the Common Stock.
LOSS ON LIQUIDATION AND DISSOLUTION. In the event of a dissolution and
termination of the Company, distribution of the proceeds realized from
liquidation will be made according to the relative priority on liquidation of
the Company's creditors. Certain existing creditors of the Company have a
security interest in certain of the Company's assets, and the Company
anticipates that any line of credit it may obtain will be secured by the
Company's accounts receivable, inventory and intangible assets, therefore, the
lender will have a claim to the Company's assets on liquidation, which is prior
to that of the Company's shareholders. As a result of settlements of certain
claims instituted against the Company, additional creditors may obtain security
interests in certain of the Company's assets in the future. Additionally,
holders of the Convertible Notes, the Preferred Shares and any other notes or
shares of preferred stock that Company may issue have liquidation preference
over holders of Common Stock, whereby any proceeds from liquidation or
dissolution remaining after repayment of creditors would be used to repay
holders of the Convertible Notes and the Preferred Shares and any other notes or
shares of preferred stock their entire initial investment plus any accrued but
unpaid dividends or interest prior to distributing excess proceeds, if any,
among holders of Common Stock. Accordingly, the ability of a shareholder to
recover all or a portion of
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his investment under such circumstances will depend on the net amount of funds
available after senior creditors and holders of the Convertible Notes, the
Preferred Shares and any other notes or shares of preferred stock are satisfied.
AUTHORIZATION OF PREFERRED STOCK; PROVISIONS AFFECTING CHANGES IN CONTROL.
The Company's Articles of Incorporation authorizes the issuance of "blank check"
preferred stock with such designation, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue a new series
of preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Common Stock. In the event of issuance, the new series of
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
USE OF PROCEEDS
The Company will not receive any proceeds from the conversion of the
Preferred Shares or the Convertible Notes. The Options to purchase 200,000
shares of Common Stock, the Series D Warrants to purchase 400,000 shares of
Common Stock, the Series E Warrants to purchase 254,545 shares of Common Stock,
the Series F Warrants to purchase 285,000 shares of Common Stock, the
Convertible Note Warrants to purchase 150,000 shares of Common Stock and the T&G
Warrants to purchase 20,000 shares of Common Stock, may be exercised to purchase
Common Stock at a price of $0.50, $3.125, $1.25, $0.35, $0.375 and $1.375 per
share, respectively, subject to adjustment as a result of antidilution
provisions of certain of the Warrants. The Company intends to use any cash
proceeds that it may receive from the exercise of the Options or the Warrants (a
total of $1,851,681 if all of the Options and the Warrants are exercised,
subject in the case of certain of the Warrants to adjustment as a result of
antidilution provisions) for working capital purposes. The Company will not
otherwise receive any of the proceeds from the sale by the Selling
Securityholder of any of the Shares offered hereby. The Company will pay all of
the costs of this offering.
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SELLING SECURITYHOLDERS
The Shares offered hereby represent shares of (i) currently outstanding
Common Stock, (ii) Common Stock issuable upon conversion of the currently
outstanding Preferred Shares or in payment of any dividends on the Preferred
Shares that the Company may pay in shares of Common Stock, (iii) Common Stock
issuable upon conversion of the currently outstanding Convertible Notes or in
payment of any interest on the Convertible Notes that the Company may pay in
shares of Common Stock, (iv) Common Stock issuable upon the exercise of
currently outstanding Options, and (v) Common Stock issuable upon the exercise
of currently outstanding Warrants. In connection with the issuance of the
Outstanding Shares, the Preferred Shares, the Convertible Notes, the Options and
the Warrants, the Company has agreed to register the shares of Common Stock
issued or issuable to the Selling Securityholders. The Shares have been
registered pursuant to such registration rights provisions. The terms of the
issuance of the Outstanding Shares, the Preferred Shares, the Convertible Notes,
the Options and the Warrants were determined by arm's-length negotiations
between the Company and the Selling Securityholders. Neither the Selling
Securityholders nor any of their affiliates had or has any material relationship
with the Company or its officers, directors or affiliates except as noted in the
table below.
The following table sets forth as of the date of this Prospectus the number
and percent of shares of Common Stock beneficially owned by the Selling
Securityholders, the number of shares of Common Stock offered hereby by the
Selling Securityholders, and the number and percent of shares of Common Stock to
be held by the Selling Securityholders after the conclusion of this offering.
<TABLE>
<CAPTION>
Before Offering After Offering
---------------------- -------------------------
Number of Number of
Shares Number of Shares
Selling Beneficially Shares Beneficially
Securityholders Owned(1)(2) Percent Being Offered Owned(1)(3) Percent
--------------- ----------- ------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
The Tail Wind Fund Ltd.(4) 3,012,760 20.6 3,012,760 0 --
Martin Stern(4) 1,641,785 12.4 1,641,785 0 --
The High View Fund, L.P.(5) 3,165,617 21.5 3,113,217 52,400 *
The High View Fund(5) 2,732,887 19.1 2,680,487 52,400 *
The High View Fund II, L.P.(5) 156,814 1.3 156,814 0 --
The High View SSFI Fund, 105,686 * 105,686 0 --
LDC(5)
Vermont Research Products, 4,858,000 29.5 4,858,000 0 --
Inc.(6)
Strategic Growth International, 1,230,000 10.4 1,000,000 230,000 *
Inc.(7)
Barry Saxe 1,200,375 10.4 809,523 390,852 1.4
Troy & Gould Professional
Corporation(8) 20,000 * 20,000 0 --
----------
17,398,272
</TABLE>
______________
* less than 1%
(1) Pursuant to the rules promulgated under the Exchange Act, a person is
deemed to be the beneficial owner of a security if that person has the
right to acquire ownership of such security within 60 days.
(2) Since the Preferred Shares and the Convertible Notes are convertible into
shares of Common Stock and the Options and the Warrants are exercisable for
shares of Common Stock within 60 days of the date hereof,
15.
<PAGE>
this column also includes shares of Common Stock that may be issued upon
the conversion of the Preferred Shares and the Convertible Notes and upon
the exercise of the Options and the Warrants. Also includes shares of
Common Stock issuable as dividends on the Preferred Shares or issuable as
interest on the Convertible Notes. See Notes (4), (5) and (6) below.
(3) The table assumes that the Selling Securityholders will dispose of all
Shares owned or issuable to them that are being registered for sale by this
Prospectus.
(4) The number of Shares issuable to The Tail Wind Fund Ltd. and Martin Stern
upon conversion of the Series E Preferred Shares is variable and depends
upon the market price of the Common Stock during the five trading days
preceding the applicable date of conversion. The table reflects the
issuance to The Tail Wind Fund Ltd. and Martin Stern of one and one-half
times the number of Shares issuable upon conversion of the Series E
Preferred Shares assuming the market price of the Common Stock during the
five trading days preceding the applicable date of conversion is $0.50,
although The Tail Wind Fund Ltd. and Martin Stern may be entitled to
receive fewer Shares than indicated in the table or to receive shares of
Common Stock in excess of the Shares shown in the table covered by the
Prospectus in the event the market price of the Common Stock during the
five trading days preceding the applicable date of conversion is
substantially above or below $0.50, respectively. Pursuant to agreements
with the Company, The Tail Wind Fund Ltd. and Martin Stern have each agreed
not to convert any of the Series E Preferred Shares held by each of them to
the extent the shares of Common Stock issuable upon such conversion and
other shares of Common Stock beneficially owned by such Selling
Securityholder and his or its affiliates (other than shares of Common Stock
which may be deemed beneficially owned through the ownership of the
unconverted portion of the Series E Preferred Shares) exceeds 4.9% of the
outstanding shares of Common Stock of the Company. The number of shares
indicated in the table does not include any shares of Common Stock issuable
upon conversion of any Series E Convertible Redeemable Preferred Stock or
upon exercise of any warrants that have not yet been issued but are
issuable to The Tail Wind Fund Ltd. and Martin Stern in the event certain
conditions for such issuance are satisfied.
(5) The High View Fund, L.P., The High View Fund, The High View Fund II, L.P.
and The High View SSFI Fund, LDC (collectively, the "High View Entities")
are affiliates of each other. The number of Shares issuable to The High
View Fund, L.P. and The High View Fund upon conversion of the Series D
Preferred Shares is variable and depends in part upon the market price of
the Common Stock during the ten trading days preceding the applicable date
of conversion, subject to a minimum conversion price of $1.50 and a maximum
conversion price of $4.50. The table reflects the issuance to The High
View Fund, L.P. and The High View Fund of the number of Shares issuable
upon conversion of the Series D Preferred Shares at the minimum conversion
price of $1.50 (and payment of dividends thereon for a two-year period in
shares of Common Stock at a market price of $0.50). The High View Fund,
L.P. and The High View Fund may be entitled to receive fewer Shares than
indicated in the table upon conversion of the Series D Preferred Shares.
The number of Shares issuable to each of the High View Entities upon
conversion of the Convertible Notes is variable and depends upon the market
price of the Common Stock during the ten trading days preceding the
applicable date of conversion, subject to a minimum conversion price of
$0.35 and a maximum conversion price of $0.95. The table reflects the
issuance to each of the High View Entities of the number of Shares issuable
upon conversion of the Convertible Notes (and payment of interest thereon
through maturity in shares of Common Stock) at the minimum conversion price
of $0.35. The High View Entities may be entitled to receive fewer Shares
than indicated in the table upon conversion of the Convertible Notes.
(6) The number of Shares issuable to Vermont Research Products, Inc. ("VRPI")
upon conversion of the Series F Preferred Shares is variable and depends
upon the market price of the Common Stock during the five trading days
preceding the applicable date of conversion, subject to a minimum
conversion price of $0.35 and a maximum conversion price of $0.95. The
number of Shares issuable to VRPI upon conversion of the Series G Preferred
Shares is fixed at $0.35. The table reflects the issuance to VRPI of the
number of Shares issuable upon conversion of both the Series F Preferred
Shares and the Series G Preferred Shares (and payment of dividends thereon
for a two-year period in shares of Common Stock) at the conversion price of
$0.35. Accordingly, VRPI may be entitled to receive fewer Shares than
indicated in the table.
16.
<PAGE>
(7) The number of shares beneficially owned includes 230,000 shares
beneficially owned by certain principals of Strategic Growth International,
Inc. Strategic Growth International, Inc. has provided certain consulting
services to the Company.
(8) Troy & Gould Professional Corporation has provided certain legal services
to the Company.
PLAN OF DISTRIBUTION
The Selling Securityholders may sell, directly or through brokers, the
Shares in negotiated transactions or in one or more transactions in the market
at the price prevailing at the time of sale. In connection with such sales, the
Selling Securityholders and any participating broker may be deemed to be
"underwriters" of the shares of Common Stock within the meaning of the
Securities Act, although the offering of these securities will not be under
written by a broker-dealer firm. Sales in the market may be made to broker-
dealers making a market in the Common Stock or other broker-dealers, and such
broker-dealers, upon their resale of such securities, may be deemed to be
"selling securityholders" in this offering. The Company will not receive any of
the proceeds from the sale of the Shares by the Selling Securityholders.
Pursuant to the terms under which certain of the Outstanding Shares, the
Preferred Shares, the Convertible Notes, the Options and certain of the Warrants
were sold, the Company has agreed to indemnify certain of the Selling
Securityholders who acquired those securities against such liabilities as they
may incur as a result of any untrue statement of a material fact in the
Registration Statement of which this Prospectus forms a part, or any omission
herein or therein to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading. Such indemnification includes liabilities that the Selling
Securityholders may incur under the Securities Act.
The Company will bear all costs and expenses of the registration under the
Securities Act and certain state securities laws of the Shares, other than fees
of counsel (if any) for the Selling Securityholders and any discounts or
commissions payable with respect to sales of the Shares.
From time to time this Prospectus will be supplemented and amended as
required by the Securities Act. During any time when a supplement or amendment
is so required, the Selling Securityholders are required to cease sales until
the Prospectus has been supplemented or amended.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon by Troy
& Gould Professional Corporation, Los Angeles, California. Troy & Gould
Professional Corporation owns warrants to purchase 20,000 shares of Common Stock
at $1.375 per share and is a Selling Securityholder.
EXPERTS
The audited financial statements contained in the Company's Annual Report
on Form 10-KSB for the year ended March 31, 1997, as amended, and incorporated
in this Prospectus by reference, have been so incorporated in reliance on the
report of Deloitte & Touche LLP, independent public accountants (which report
includes an explanatory paragraph regarding the ability of the Company to
continue as a going concern), given on the authority of said firm as experts in
auditing and accounting.
17.
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or make any representations, other than those contained in this
Prospectus, in connection with the offering hereby, and, if given or made, such
information and representations must not be relied upon as having been
authorized by the Company or the Selling Securityholders. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, any
securities to any person in any State or other jurisdiction in which such offer
or solicitation is unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or the facts herein set
forth since the date hereof.
_______________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information...... 2
Incorporation of Certain
Documents by Reference... 2
The Company................ 3
Risk Factors............... 5
Use of Proceeds............ 14
Selling Securityholders.... 15
Plan of Distribution....... 17
Legal Matters.............. 17
Experts.................... 17
</TABLE>
================================================================================
================================================================================
17,398,272 Shares of Common Stock
CHATCOM, INC.
____________
PROSPECTUS
____________
_____________, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company estimates that expenses in connection with the distribution
described in this Registration Statement will be as follows. All expenses
incurred with respect to the distribution will be paid by the Company, and such
amounts, with the exception of the Securities and Exchange Commission
registration fees, are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 2,669
Nasdaq listing fees......................................... 7,500
Accounting fees and expenses................................ 30,000
Legal fees and expenses..................................... 35,000
Miscellaneous............................................... 3,000
-------
Total...................................................... $78,169
-------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under California law, a California corporation may eliminate or limit the
personal liability of a director of the corporation for monetary damages for
breach of the director's duty of care as a director, provided that the breach
does not involve certain enumerated actions, including, among other things,
intentional misconduct or knowing and culpable violation of the law, acts or
omission which the director believes to be contrary to the best interest of the
corporation or its shareholders or which reflect an absence of good faith on the
director's part, the unlawful purchase or redemption of stock, payment of
unlawful dividends and receipt of improper personal benefits. The Company's
Board of Directors believes that such provisions have become commonplace among
major corporations and are beneficial in attracting and retaining qualified
directors, and the Company's Articles of Incorporation include such provisions.
The Company's Articles of Incorporation and Bylaws also impose a mandatory
obligation upon the Company to indemnify any director or officer to the fullest
extent authorized or permitted by law (as now or hereinafter in effect),
including under circumstances in which indemnification would otherwise be at the
discretion of the Company. In addition, the Company has entered into
indemnification agreements with each of its directors and officers providing for
the maximum indemnification permitted or authorized by law.
The foregoing indemnification provisions are broad enough to encompass
certain liabilities of directors and officers under the Securities Act of 1933,
as amended (the "Securities Act").
The registration rights agreements between the Company and certain of the
Selling Securityholders who purchased certain of the Outstanding Shares, the
Preferred Shares, the Convertible Notes, the Options and certain of the Warrants
provide that the Company shall indemnify such Selling Securityholders, and such
Selling Securityholders shall indemnify the Company and the officers and
directors of the Company, for certain liabilities, including certain liabilities
under the Securities Act.
(i)
<PAGE>
ITEM 16. EXHIBITS
The following exhibits, which are furnished with this Registration
Statement or incorporated by reference, are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ----------------------------------------------------------------------------
<C> <S>
4.1 Form of Common Stock certificate(1).
5.1 Opinion of Troy & Gould Professional Corporation.
15.1 Letter of Grobstein, Horwath & Company LLP.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit 5.1).
24.1 Power of Attorney (contained in Part II).
</TABLE>
______________
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3, as amended (Registration No. 33-99668), filed with the Commission
on November 21, 1995, which exhibit is hereby incorporated herein by
reference.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(ii)
<PAGE>
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement.
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this Registration
Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that (i) and (ii) do not apply if the Registration Statement
is on Form S-3, and the information required to be included in a post-effective
amendment is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(iii)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Chatsworth, State of California, on April 20, 1998.
CHATCOM, INC.
By /s/ E. Carey Walters
-------------------------------------
E. Carey Walters
President and Chief Executive Officer
<PAGE>
POWER OF ATTORNEY
The officers and directors of ChatCom, Inc., whose signatures appear below,
hereby constitute and appoint E. Carey Walters and Gordon L. Almquist, and each
of them, their true and lawful attorneys and agents, each with power to act
alone, to sign, execute and cause to be filed on behalf of the undersigned any
amendment or amendments, including post-effective amendments, to this
Registration Statement of ChatCom, Inc. on Form S-3. Each of the undersigned
does hereby ratify and confirm all that said attorneys and agents shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ E. Carey Walters President and Chief Executive Officer April 22, 1998
- --------------------------- (Principal Executive Officer)
E. Carey Walters
/s/ Gordon L. Almquist Vice President-Finance and Chief April 22, 1998
- --------------------------- Operating Officer (Principal
Gordon L. Almquist Financial and Accounting Officer)
/s/ Richard F. Gordon, Jr. Chairman of the Board April 22, 1998
- ---------------------------
Richard F. Gordon, Jr.
/s/ A. Charles Lubash Director April 22, 1998
- ---------------------------
A. Charles Lubash
/s/ Gerald R. Sayer Director April 22, 1998
- ---------------------------
Gerald R. Sayer
/s/ James D. Edwards Director April 22, 1998
- ---------------------------
James D. Edwards
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -------------------------------------------------------------------------------
<C> <S>
4.1 Form of Common Stock certificate(1).
5.1 Opinion of Troy & Gould Professional Corporation.
15.1 Letter of Grobstein, Horwath & Company LLP.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit 5.1).
24.1 Power of Attorney (contained in Part II).
</TABLE>
______________
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3, as amended (Registration No. 33-99668), filed with the Commission
on November 21, 1995, which exhibit is hereby incorporated herein by
reference.
<PAGE>
EXHIBIT 5.1
April 22, 1998
ChatCom, Inc.
9600 Topanga Canyon Boulevard
Chatsworth, California 91311
Gentlemen:
We have acted as counsel for ChatCom, Inc., a California corporation (the
"Company"), in connection with the preparation and filing with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, of a Registration Statement on Form S-3 (the "Registration Statement").
The Registration Statement relates to the offer and sale by the selling
securityholders named therein (the "Selling Securityholders") of 1,609,523
currently outstanding shares (the "Outstanding Shares") and up to 15,788,749
shares (the "Issuable Shares") of Common Stock, no par value ("Common Stock"),
of the Company that are issuable (i) upon conversion of currently outstanding
shares of Series D Convertible Preferred Stock (the "Series D Preferred Shares")
of the Company or in payment of any dividends on the Series D Preferred Shares
that the Company may pay in shares of Common Stock, (ii) upon conversion of
currently outstanding shares of Series E Convertible Redeemable Preferred Stock
(the "Series E Preferred Shares") of the Company or in payment of any dividends
on the Series E Preferred Shares that the Company may pay in shares of Common
Stock, (iii) upon conversion of currently outstanding shares of Series F
Convertible Redeemable Preferred Stock (the "Series F Preferred Shares") of the
Company or in payment of any dividends on the Series F Preferred Shares that the
Company may pay in shares of Common Stock, (iv) upon conversion of currently
outstanding shares of Series G Convertible Preferred Stock (the "Series G
Preferred Shares") of the Company or in payment of any dividends on the Series G
Preferred Shares that the Company may pay in shares of Common Stock, (v) upon
conversion of currently outstanding 9.5% Convertible Subordinated Notes (the
"Convertible Notes") of the Company or in payment of any interest on the
Convertible Notes that the Company may pay in shares of Common Stock, (vi) upon
exercise of currently outstanding options to purchase 200,000 shares of Common
Stock (the "Options"), and (vii) upon exercise
<PAGE>
of currently outstanding warrants to purchase shares of Common Stock (the
"Warrants"). The Warrants consist of warrants to purchase 400,000 shares of
Common Stock issued in connection with the sale of the Series D Preferred Shares
to the holders of those shares, warrants to purchase 254,545 shares of Common
Stock issued in connection with the sale of the Series E Preferred Shares to the
holders of those shares, warrants to purchase 285,000 shares of Common Stock
issued in connection with the sale of the Series F Preferred Shares and the
Series G Preferred Shares to the holder of those shares, warrants to purchase
150,000 shares of Common Stock issued in connection with the sale of the
Convertible Notes to the holders of the Convertible Notes, and warrants to
purchase 20,000 shares of Common Stock issued to us for certain legal services
previously rendered to the Company.
In acting as counsel to the Company, we have examined originals or copies,
certified to our satisfaction, of such documents, corporate records and other
instruments as we have deemed necessary, and we are familiar with the
proceedings heretofore taken by the Company in connection with the
authorization, issue and sale by the Company to the Selling Securityholders of
the Outstanding Shares, the Series E Preferred Shares, the Series F Preferred
Shares, the Series G Preferred Shares, the Convertible Notes, the Options and
the Warrants. In addition, we have examined such books and records of the
Company as in our judgment is necessary or appropriate to enable us to render
the opinions expressed below.
We are opining herein only as to the effect of the federal laws of the
United States and the internal laws of the State of California, and we express
no opinion with respect to the applicability thereto, or the effect thereon, of
the laws of any other jurisdiction. In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to originals of all documents submitted to us as
certified, photostatic or conformed copies, and the authenticity of originals of
all such latter documents. We have also assumed the due execution and delivery
of all documents where due execution and delivery are prerequisites to the
effectiveness thereof. To the extent that all or a substantial number of the
Issuable Shares are issued, an increase in the authorized number of shares of
the Company's Common Stock may be required, and we have assumed that any
required increase will have been effected by an amendment to the Company's
Articles of Incorporation prior to such issuance.
Based on the foregoing, it is our opinion that, subject to effectiveness
with the Commission of the Registration
<PAGE>
Statement, the Outstanding Shares are and the Issuable Shares will be, when
issued and paid for in accordance with the terms of the Certificates of
Determination for the Series D Preferred Shares, the Series E Preferred Shares,
the Series F Preferred Shares and the Series G Preferred Shares, the Convertible
Notes, the Options and the Warrants, as applicable, and when sold by the Selling
Securityholders in the manner contemplated in the Prospectus made part of the
Registration Statement, legally issued, fully paid and nonassessable.
We call to your attention the fact that this firm owns warrants to purchase
20,000 shares of Common Stock at $1.375 per share as disclosed in the Prospectus
under "Legal Matters" and that we are one of the Selling Securityholders listed
therein.
We consent to the use of this opinion as an exhibit to the Registration
Statement and the use of our name in the Registration Statement and Prospectus
of the Company made a part thereof. By giving you this opinion and consent, we
do not admit that we are experts with respect to any part of the Registration
Statement or Prospectus within the meaning of the term "expert" as used in
Section 11 of the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder, nor do we admit that we are in the category
of persons whose consent is required under Section 7 of said Act.
Very truly yours,
/s/ Troy & Gould
TROY & GOULD
Professional Corporation
<PAGE>
EXHIBIT 15.1
LETTER OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of ChatCom, Inc.:
We acknowledge the use of our independent accountants' review report
incorporated herein by reference, as filed as an Exhibit to ChatCom, Inc.'s
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1997, as
amended by Amendment No. 1 to Form 10-QSB filed with the Securities and Exchange
Commission on April 9, 1998.
/s/ Grobstein, Horwath & Company LLP
GROBSTEIN, HORWATH & COMPANY LLP
Sherman Oaks, California
April 20, 1998
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Shareholders and Board of Directors of ChatCom, Inc.:
We consent to the incorporation by reference in this Registration Statement of
ChatCom, Inc. on Form S-3 of our report, dated June 20, 1997 (which report
contains an explanatory paragraph regarding the ability of the Company to
continue as a going concern) appearing in the Annual Report on Form 10-KSB of
ChatCom, Inc. for the year ended March 31, 1997, as amended, incorporated by
reference in the Prospectus, which is a part of this Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Los Angeles, California
April 20, 1998
