<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-QSB
___
| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
Commission file number 0-20462
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
(Address of principal executive offices)
818/709-1778
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
As of January 31, 1998, there were 9,981,692 shares of the Registrant's
Common Stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
---- ----
Page 1 of 19
EXHIBIT INDEX ON PAGE 19
<PAGE>
CHATCOM, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
BALANCE SHEETS (in thousands)
- -----------------------------------------------------------------------------------------------------------
(UNAUDITED)
DECEMBER 31, MARCH 31,
ASSETS NOTES 1997 1997
--------- ----------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 557 $ 1,169
Accounts receivable, net of allowances of $265,000
(December 31, 1997) and $109,000 (March 31, 1997) 2 853 1,334
Inventories 2,3 4,503 2,721
Prepaid expenses and other
current assets 102 108
-------- --------
Total current assets 6,015 5,332
EQUIPMENT AND FIXTURES, Net 4 593 651
DEPOSITS 24 24
-------- --------
TOTAL $ 6,632 $ 6,007
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 7 $ 4,865 $ 1,427
Accrued expenses 827 687
Notes payable 5 890
Current portion of capital lease
Obligations 23 23
-------- --------
Total current liabilities 6,605 2,137
-------- --------
CAPITAL LEASE OBLIGATIONS
-less current portion 22 12
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value,
authorized 1,000,000 shares: 7
Series D Convertible Preferred Stock, $1,000 stated value
per share, authorized 5,000 shares, issued and
outstanding 2,496 shares at December 31, 1997
and March 31, 1997 5 1,407 1,407
Series E Convertible Redeemable Preferred Stock,
$1,000 stated value per share, authorized 2,000 shares,
issued and outstanding 1,100 shares at December 31, 1997 6 937
Common Stock, no par value, authorized,
25,000,000 shares, issued and outstanding
9,981,692 shares at December 31, 1997 and
9,826,892 shares at March 31, 1997 5,8 10,325 10,090
Additional paid-in capital 2,404 2,404
Accumulated deficit (15,068) (10,043)
-------- --------
Total stockholders' equity 5 3,858
-------- --------
TOTAL $ 6,632 $ 6,007
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 2 of 19
<PAGE>
CHATCOM, INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (unaudited) (in thousands, except share and per share data)
- --------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SALES:
Gross sales $ 1,781 $ 3,055 $ 8,955 $ 8,182
Returns (2,302) (305) (2,895) (538)
---------- ---------- ---------- ----------
Net sales (returns) (521) 2,750 6,060 7,644
---------- ---------- ---------- ----------
COST OF GOODS SOLD 328 1,723 4,485 5,057
---------- ---------- ---------- ----------
GROSS PROFIT (LOSS) (849) 1,027 1,575 2,587
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling 769 810 2,660 2,386
General and administrative 372 515 1,922 1,720
Research and development 449 310 1,616 763
Severance expense 61
---------- ---------- ---------- ----------
Total operating expenses 1,590 1,635 6,198 4,930
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (2,439) (608) (4,623) (2,343)
INTEREST INCOME 11 9 39
INTEREST EXPENSE (182) (1) (199) (12)
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (2,621) (598) (4,813) (2,316)
PROVISION FOR INCOME TAXES (1)
---------- ---------- ---------- ----------
NET LOSS $ (2,621) $ (598) $ (4,814) $ (2,316)
DIVIDENDS ON PREFERRED
STOCK (85) (14) (260) (838)
---------- ---------- ---------- ----------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (2,706) $ (612) $ (5,074) $ 3,154)
========== ========== ========== ==========
LOSS PER SHARE:
Primary and fully diluted
loss per share $ (0.27) $ (0.06) $ (0.51) $ (0.36)
========== ========== ========== ==========
Weighted average number of
common shares and common
share equivalents (primary and
fully diluted) 9,934,190 9,746,066 9,893,585 8,683,912
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 3 of 19
<PAGE>
CHATCOM, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
- ------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
DECEMBER 31,
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(4,814) $(2,316)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 271 178
Provision for losses on accounts receivable 302 145
Provision for inventory obsolescence 306
Interest on subordinated debt 20
Interest on accounts payable (Note 7) 175
Changes in operating assets and liabilities:
Accounts receivable 179 6
Inventories (2,088) 461
Prepaid expenses and other current assets 6 8
Deposits (2)
Accounts payable 3,438 (629)
Accrued expenses (31) (233)
------- -------
Net cash used in operating activities (2,236) (2,382)
------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES-
Capital expenditures (183) (194)
------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments of notes payable (939)
Change in restricted cash 500
Principal payments on capital leases (20) (28)
Proceeds from sale of preferred stock 937 3,667
Proceeds from issuance of stock purchase warrants 5
Payment of dividends on preferred stock (10)
Proceeds from issuance of convertible subordinated debt 890
Exercise of stock options and warrants 850
------- -------
Net cash provided by financing activities 1,807 4,045
------- -------
NET (DECREASE) INCREASE IN CASH (612) 1,469
CASH, BEGINNING OF PERIOD 1,169 1,067
------- -------
CASH, END OF PERIOD $ 557 $ 2,536
======= =======
(CONTINUED)
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 4 of 19
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) CONTINUED
CHATCOM, INC.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATON:
During the nine months ended December 31, 1997 and 1996, the Company paid
interest of $2,336 and $10,473, respectively, and taxes of $8,253 and $425,
respectively.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended December 31, 1997 and 1996, the Company acquired
office equipment under capital leases in the amount of $30,000 and $22,000,
respectively.
During the nine months ended December 31, 1997, the Company accrued dividends
related to the Series D Convertible Preferred Stock of $187,000 and paid
dividends of $235,000 through the issuance of 154,800 shares of common stock
which resulted in an increase in common stock of $235,000 and a decrease in
accrued expenses of $235,000.
During the nine months ended December 31, 1997, the Company accrued dividends
related to the Series E Convertible Redeemable Preferred Stock of $24,000.
During the nine months ended December 31, 1996, the Company accrued dividends
on preferred stock of $81,000. Dividends of $10,000 were paid in cash,
dividends of $59,000 were paid through the issuance of 38,041 shares of the
Company's common stock and dividends of $12,000 were accrued but unpaid at
December 31, 1996.
(CONCLUDED)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 5 of 19
<PAGE>
CHATCOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements of ChatCom, Inc. (the
"Company") have been prepared in accordance with instructions to Form 10-
QSB and, in the opinion of management, include all material adjustments
(consisting only of normal recurring accruals) which are necessary for the
fair presentation of results of operations for the interim periods. These
unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB, as amended, for the fiscal year ended March 31,
1997. The results of operations for the nine month period ended December
31, 1997 are not necessarily indicative of the results to be expected for
the full fiscal year ending March 31, 1998.
Certain prior year amounts have been reclassified to conform with current
year classifications.
2. ACCOUNTS RECEIVABLE AND INVENTORY
In January 1997, the Company executed a Memorandum of Understanding with
Macon Holdings (S) Pte. Ltd. ("Macon") whereby Macon, headquartered in
Singapore, was appointed a Master Distributor of the Company's products in
the Asia Pacific Region. On December 5, 1997, the Company and Macon
executed a Master Distribution Agreement (the "Distribution Agreement")
which detailed the terms of the relationship between the parties.
During the quarterly periods ended June 30, 1997 and September 30, 1997,
the Company shipped equipment to Macon totaling $2.8 million and $.5
million, respectively ($3.3 million in the aggregate). These sales were
made to Macon on an "open account" basis with payment terms generally 30
days from date of invoice. Payments made by Macon for the quarterly periods
ended June 30, 1997, September 30, 1997 and December 31, 1997 totaled
$250,000, $257,000, and $80,000, respectively. No payments have been
received from Macon subsequent to December 31, 1997. As a result of Macon's
inability to effect timely payments of its obligations to the Company,
which Macon has attributed primarily to the Asian economic crisis during
the later part of 1997 as well as less than anticipated market acceptance
of the equipment, the Company and Macon have agreed to permit Macon to
return to the Company all but $150,000 of unsold equipment (approximately
$2.6 million). Of the amount agreed upon to be returned, approximately
$505,000 was received by the Company as of December 31, 1997 and $1.6
million was received between January 1, 1998 and February 20, 1998. The
Company anticipates receiving the remaining balance (approximately
$495,000) by no later than February 28, 1998. The balance of the equipment
to be 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.
Page 6 of 19
<PAGE>
CHATCOM, INC.
3. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Raw materials $ 567,000
Work in process 971,000
Finished goods 3,914,000
----------
Inventory at cost 5,452,000
Less: reserve for obsolescence (949,000)
----------
$4,503,000
==========
</TABLE>
4. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Equipment $ 1,199,000
Software 138,000
Furniture and fixtures 185,000
Leasehold improvements 89,000
-----------
1,611,000
Less: accumulated depreciation and amortization (1,018,000)
-----------
Equipment and fixtures, net $ 593,000
===========
</TABLE>
5. CONVERTIBLE SUBORDINATED DEBT AND SERIES D PREFERRED
STOCK AND SETTLEMENT
On September 11, 1997, the Company, together with a majority of its Board
of Directors, were sued by The High View Fund and The High View Fund, L.P.
(collectively, "High View"), holders of 2,496 shares of the Company's Series D
Convertible Preferred Stock (the "Series D Preferred Stock") and lenders of a
$350,000 convertible subordinated loan made to the Company in May 1997 (the
"$350,000 Loan"). The lawsuits, filed in U.S. Federal District Court, Southern
District of New York and in the State Court of New York, sought damages from the
defendants for alleged wrongful actions relating to securities fraud and not
informing High View regarding the extent of the Company's financial problems.
On September 25, 1997, the parties entered into settlement agreements
(comprised principally of a Stock Exchange Agreement, Registration Rights and
Lock-up Agreement and Warrant agreements; collectively, the "Settlement
Agreements") related to both cases whereby High View agreed to exchange their
2,496 shares of Series D Preferred Stock (representing the entire Series D
Preferred Stock issued by the Company) for a total of 2,000,000 shares of the
Company's Common Stock and to convert the $350,000 Loan, plus $15,173 of accrued
interest thereon, into 292,138 shares of the Company's Common Stock (the
"Exchange Transaction"). The Exchange Transaction also included the exchange of
High View's warrants to purchase 400,000 shares of Common Stock, exercisable at
$3.125 per share (the "Old Warrants"), issued to High View in connection with
the issuance of the Series D Preferred Stock in exchange for warrants to
purchase 1,000,000 shares of the Company's Common Stock at an exercise price of
$1.75 per share. The Settlement Agreements also required the Company to
reimburse High View in the amount of $15,000 for legal expenses incurred in
connection with the settlement.
Page 7 of 19
<PAGE>
CHATCOM, INC.
During December 1997, High View alleged in a draft complaint (which was
not filed) that the Company and its directors had fraudulently induced High View
to enter into the Exchange Transaction. On December 31, 1997, the Company
terminated and cancelled the Exchange Transaction effective as of September 25,
1997 pursuant to an agreement with High View and certain of its affiliates (the
"High View Group") dated December 30, 1997 (the "New Agreement"). Pursuant to
the New Agreement, the Settlement Agreements entered into in connection with the
Exchange Transaction were terminated and cancelled and all transactions
purported to be effected pursuant to the Settlement Agreements were rescinded.
As a result of the cancellation, (i) High View continues to hold the Series D
Preferred Stock and the Old Warrants that were issued by the Company in December
1996; (ii) High View continues to be the payee of the $350,000 Loan; and (iii)
the Stock Purchase Agreement by and among the Company and High View dated
December 9, 1996 continues to be in full force and effect.
In addition, pursuant to the New Agreement, the High View Group made
additional loans to the Company in the amount of $540,000 (the "Additional
Loans") to help the Company meet its working capital shortfall. The Additional
Loans are evidenced by 9.5% convertible subordinated notes in the aggregate
principal amount of $540,000 (the "Additional Notes"). In connection with the
issuance of the Additional Notes, the Company also issued to the High View Group
warrants to purchase an aggregate of 150,000 shares of Common Stock (the
"Additional Warrants"). The Additional Notes mature on January 1, 1999 and bear
interest on the outstanding principal amount at the rate of 9.5% per annum,
payable semiannually in cash or shares of Common Stock at the election of the
Company. The Additional Notes are convertible into shares of Common Stock, at
the election of the holder, at a conversion price equal to the greater of (i)
$0.35 or (ii) 75% of the average market price of the Common Stock during the ten
trading days preceding the conversion date, subject to a maximum conversion
price of $0.95. Payment of the Additional Notes is subordinated to the prior
payment of indebtedness the Company may from time to time owe to any bank or
other financial institution (but excluding trade creditors). The Additional
Warrants expire on December 13, 2001 and have an exercise price of $0.375 per
share. Pursuant to the New Agreement, the $350,000 Loan was evidenced by
convertible subordinated notes having terms substantially the same as the terms
of the Additional Notes. The Company has agreed to register the shares of
Common Stock issuable upon conversion of the Additional Loans, the $350,000
Loan, and upon exercise of the Additional Warrants. Under the terms of the New
Agreement, High View released the Company and its officers and directors from
any claims that they might have arising from the Exchange Transaction
contemplated by the Settlement Agreements. The New Agreement also required the
Company to reimburse High View in the amount of $40,000 for legal expenses
incurred in connection with the settlement.
6. ISSUANCE OF SERIES E PREFERRED STOCK
On September 26, 1997, the Company entered into Stock Purchase Agreements
(the "Agreements") whereby the Company agreed to sell to two accredited
investors up to 1,700 shares of Series E Convertible Redeemable Preferred Stock,
$1,000 stated value per share (the "Series E Preferred Stock"), and warrants to
purchase 432,727 shares of Common Stock at a price of $1.25 per share (the
"Series E Warrants"). Pursuant to the Agreements, a total of 1,100 shares of
Series E Preferred Stock and 254,545 of the Series E Warrants were sold by the
Company on September 26, 1997 for gross proceeds of $1,100,000. The sale of the
Series E Preferred Stock and the Series E Warrants were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Regulation D promulgated thereunder. The Company received various
representations and warranties from the investors, including a representation
that the investors are "accredited investors" within the meaning of Regulation
D. Offering costs of $163,000, consisting primarily of cash finders' fees and
legal fees, were incurred by the Company. Dividends on the Series E Preferred
Stock are payable in cash or Common Stock, at the option of the Company, at a
rate of 8% per annum. The sale of the additional 600 shares of Series E
Preferred Stock and 178,182 Series E Warrants ($600,000 of gross offering
proceeds) is scheduled to occur within five days following the Company's
satisfaction of certain conditions which include, among others, a registration
statement covering the sale of the shares issuable upon conversion of the Series
E Preferred Stock and upon the exercise of the Series E Warrants is declared
effective; the market price of the Company's Common Stock for the ten trading
days preceding the additional closing date exceeds $1.00 per share; and the
Page 8 of 19
<PAGE>
CHATCOM, INC.
funding from a strategic investor of at least $1,000,000 from the sale of equity
securities of the Company. One-half of the Series E Preferred Stock is
convertible at the election of the holder into shares of the Company's Common
Stock commencing on the 51/st/ day after the closing date and all of the Series
E Preferred Stock is convertible commencing on the 91/st/ day after such closing
date. The conversion value to determine the number of shares of Common Stock
into which the Series E Preferred Stock is convertible is the lesser of $1.375
or 75% of the average of the closing bid prices of the Common Stock during the
five trading days immediately preceding the conversion date. The Series E
Warrants are exercisable for five years commencing January 1, 1998. The Company
has agreed to register the shares issuable upon the conversion of the Series E
Preferred Stock and upon the exercise of the Series E Warrants. The Registration
Rights Agreement provides that in the event the registration statement is not
declared effective on or before December 25, 1997, the Company shall pay the
investors, on January 24, 1998 and on each successive date which is 30 days
after the previous payment date (pro rated for partial periods) until such
registration statement is declared effective, payments in the amount of 3% of
the purchase price of outstanding Series E Preferred Stock ($1,100,000), in cash
or shares of the Company's Common Stock at the election of the investor. As of
February 20, 1998, such registration statement has not yet been filed, and the
Company owed such investors payments in the amount of $62,700.
No assurance can be given that the Company will be able to satisfactorily
meet the conditions required for the sale of the additional 600 shares of Series
E Preferred Stock.
7. SUBSEQUENT EVENT - CONVERSION OF UNSECURED DEBT
On January 29, 1998, the Company entered into a letter of intent with
Vermont Research Products, Inc. ("Vermont"), a major supplier of certain
products (which are resold by the Company), for the conversion of a portion of
the amount owed by the Company to Vermont (approximately $2.0 million at
December 31, 1997 and January 29, 1998) into 945 shares of the Company's Series
F Convertible Redeemable Preferred Stock, $1,000 stated value per share, valued
at $945,000 (the "Series F Preferred Stock") and 400 shares of the Company's
Series G Convertible Preferred Stock, $1,000 stated value per share, valued at
$400,000 (the "Series G Preferred Stock"). The letter of intent also provides
for payment terms with respect to the remaining balance owed to Vermont
(approximately $700,000 at December 31, 1997 and January 29, 1998 (the
"Remaining Balance")). As additional consideration, the Company has agreed to
issue to Vermont a five-year warrant to purchase 285,000 shares of Common Stock
at an exercise price of $.35 per share. Dividends on the Series F Preferred
Stock and Series G Preferred Stock are payable in cash or shares of Common
Stock, at the election of the Company, at the rate of 9.5% per annum. The Series
F Preferred Stock is convertible into shares of Common Stock at any time through
January 31, 2003 at a conversion price equal to the market price at the time of
conversion, but at a conversion price no greater than $.95 per share and no less
than $.35 per share. The Series G Preferred Stock is convertible into shares of
Common Stock at a conversion price of $.35 per share. The holders of the Series
F Preferred Stock and Series G Preferred Stock are entitled to equal preference
with holders of the Company's Series D and Series E Preferred Stock. The Company
has agreed to use its best efforts to register the shares issuable upon the
conversion of the Series F Preferred Stock and Series G Preferred Stock and
upon the exercise of the warrants, with such registration statement to be
declared effective no later than April 29, 1998 (extended to May 29, 1998 under
certain circumstances). As long as any amounts of Series F Preferred Stock or
Series G Preferred Stock remain outstanding, Vermont shall have the right to
approve any preferred stock offering by the Company which rank equal to or
senior to those of Vermont's, and approve any debt offering contemplated by the
Company, except for commercial bank lines of credit or loans secured by the
Company's U.S. accounts receivable or inventory. Of the remaining balance owed
to Vermont after the conversion of certain amounts into the Series F Preferred
Stock and the Series G Preferred Stock, $274,000 will represent equipment
warehoused by Vermont for the Company and is payable to Vermont at the time of
shipment to any customer of the Company. Of the remaining balance owed to
Vermont (approximately $420,000 together with interest at 9.5% effective
February 1, 1998), $5,000 will be paid upon execution of the definitive
settlement agreement, $5,000 is payable on March 1, 1998, $5,000 is payable on
April 1, 1998, and $35,000 per month is payable commencing May 1, 1998.
Additionally, the Company is required to remit 25% of its collections of foreign
accounts receivable commencing February 1, 1998 as well as 20% of the net
proceeds to the Company of any equity financings
Page 9 of 19
<PAGE>
CHATCOM, INC.
(other than commercial bank loan financing or asset based lending against United
States accounts receivable and finished or assembled good inventory) effected by
the Company subsequent to February 1, 1998 plus the sum of $50,000 upon
consummation of each of the first two such financings. The Company has also
agreed to pay Vermont's expenses in connection with this transaction. In the
event the Company is engaged in a bankruptcy proceeding or reorganization,
Vermont is allowed to be reinstated as an unsecured creditor. There can be no
assurance that the parties will enter into a definitive settlement agreement as
contemplated by the letter of intent.
During the quarter ended December 31, 1997 and in anticipation of entering into
the above agreement, the Company agreed to Vermont's invoicing the Company
$175,000 for interest charges related to its month-end balances owed to Vermont
throughout 1997. The effective rate of interest was approximately 17%.
8. LITIGATION
A. On January 15, 1998, the Company was sued by Strategic Growth
International, Inc. ("SGI"), an investor relations consulting firm. The lawsuit,
filed in U.S. Federal District Court, Central District of California, seeks
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 High View 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 seeks reimbursement for its legal fees in
connection with the lawsuit and obtained an attachment order against certain of
the Company's assets in connection with this lawsuit. At the present time, the
parties have agreed in principle to settle the lawsuit. The terms of the
proposed settlement include the Company's issuance to SGI of 800,000 shares of
Common Stock, the granting to SGI of options to purchase 200,000 shares of the
Company's Common Stock at an exercise price of $.50 per share (the closing bid
price on February 5, 1998), and the payment of $100,000 in cash to SGI, $25,000
of which was paid by the Company on February 9, 1998, with the balance ($75,000)
payable in equal consecutive monthly installments of $15,000, beginning April 9,
1998. The Company has agreed to grant a security interest in the Company's
finished goods inventory for the cash owed, and to register the foregoing shares
under the Securities Act of 1933, including shares issuable upon the exercise of
the stock options.
Although the parties have agreed in principle to settle the lawsuit, such
a settlement is subject to the completion and filing of documentation with the
Court and, as a result, there can be no assurance that the lawsuit will be
ultimately settled pursuant to the terms described above or at all.
B. As a result of the Company's continuing liquidity crisis during fiscal
1998, the Company has been sued for non-payment by four suppliers of products
and services, in addition to SGI, and numerous other vendors have forwarded
their accounts with the Company to collection. The Company has entered into a
Stipulation for Settlement with one supplier which will require the Company to
pay the balance owed ($22,000) in cash, $2,000 of which was paid on February 9,
1998, with the balance ($20,000) payable in equal consecutive monthly
installments of $4,000 beginning February 28, 1998. The Company has commenced
settlement discussions with the other three plaintiffs, however, no settlements
have yet been consummated with these plaintiffs and there can be no assurance
that any such settlements will be obtained by the Company.
9. RELATED PARTY TRANSACTIONS
A. The Assistant Secretary of the Company is also a shareholder of a law
firm that provides legal consultation to the Company. At December 31,1997 and
1996, the Company owed this law firm $16,000 and $4,000, respectively. During
the nine months ended December 31, 1997 and 1996, fees relating to services
provided by this law firm in the amounts of $34,000 and $53,000, respectively,
were included in general and administrative expenses in the accompanying
statements of operations.
Page 10 of 19
<PAGE>
CHATCOM, INC.
B. During the nine months ended December 31, 1997, the Company paid a
finder's fee of $110,000 to Maximum Partners, Ltd. ("Maximum"), an investment
banking firm, in connection with the Company's Series E Preferred Stock
financing. Mark D. Lubash, Managing Director of Maximum, is a shareholder of the
Company and son of A. Charles Lubash, a member of the Company's Board of
Directors and former Chief Executive Officer of the Company.
////
////
Page 11 of 19
<PAGE>
CHATCOM, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters
discussed in this quarterly report are forward-looking statements, which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's business
operations and financial condition and other factors as described in the
Company's various filings with the Securities and Exchange Commission, including
without limitation the Company's Form 10-KSB for the fiscal year ended March 31,
1997, as amended.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 1996
Gross sales during the three months ended December 31, 1997 (the "third
quarter of fiscal 1998") decreased $1.2 million or 40% compared to the third
quarter of fiscal 1997. This decline resulted primarily from a decrease in
shipments to domestic Value Added Resellers ("VAR's") which the Company believes
is attributable to the declining demand for remote control type remote access
solutions, decreased marketing and support for VAR's during fiscal 1998 due to
the Company's cash flow constraints and the redirection of the Company's sales
and marketing efforts toward the server consolidation and network emulation
markets which began during fiscal 1997.
Sales returns for the third quarter of fiscal 1998 ($2.3 million) were
the result of an agreement entered into during December 1997 between the Company
and its Singapore distributor, Macon Holdings(S) Pte. Ltd. ("Macon") whereby the
Company agreed to permit Macon to return a substantial portion of the equipment
(approximately $2.3 million during the third fiscal quarter) previously sold to
Macon in the quarterly periods ended June 30, 1997 ($2.8 million) and September
30, 1997 ($.5 million) due to Macon's inability to pay for this equipment. Macon
has attributed its inability to pay for the equipment primarily to the Asian
economic crisis during the later part of 1997 as well as less than anticipated
market acceptance of the equipment. Of the amount agreed upon to be returned,
approximately $505,000 was received by the Company as of December 31, 1997 and
$1.6 million was received between January 1, 1998 and February 20, 1998. The
Company anticipates receiving the remaining balance (approximately $495,000) by
no later than February 28, 1998. The balance of the equipment to be 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 equipment received from Macon (including that portion to be
received after February 20, 1998) has been added to the Company's inventory as
of December 31, 1997 and is a type that can be readily sold to other customers
in the event the Company is able to secure additional orders for these products.
The Company believes that sales may fluctuate on a quarterly basis as a
result of a number of factors, including the status of world economic
conditions, fluctuations in foreign currency exchange rates and the timing of
system shipments (the current U.S. list price of the Company's most powerful
system, for example, exceeds $300,000; thus the acceleration or delay of a small
number of shipments from one quarter to another can significantly affect the
results of operations for the quarters involved). Orders and shipments during
the first half of the March 31, 1998 fiscal quarter have been lower than
anticipated and the Company believes that sales during the March 31, 1998
quarter and subsequent quarters may be adversely affected by the Company's poor
financial condition, which will result in reduced sales and marketing activities
and may cause certain customers to delay purchases from the Company or order
from other suppliers until such time as the Company's financial condition
significantly improves.
Cost of goods sold decreased to $328,000 during the third quarter of fiscal
1998 from $1,723,000 or 63% of sales in the third quarter of fiscal 1997. Cost
of goods sold during the third quarter of fiscal 1998 was reduced by
approximately $1.5 million as a result of the product returns associated with
Macon. Without the returns from Macon, cost of sales would have been
approximately $1.8 million or 100% of
Page 12 of 19
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CHATCOM, INC.
gross sales for the quarter ended December 31, 1997. The decrease in product
gross margins during the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997 was primarily the result of an increase in inventory
reserves (approximately $400,000) due to increased inventory balances and lower
sales during fiscal 1998), price discounting on a large government order which
was shipped during the third quarter of fiscal 1998, and the continuation of
fixed manufacturing overhead which did not decrease proportinately with the
lower sales during the third quarter of fiscal 1998. Although the cost of
certain components (i.e., microprocessors and random access memory components)
during the third quarter of fiscal 1998 were somewhat lower than the comparable
prior year quarter, the Company has not been able to achieve further reductions
in component costs due to the lower quantities purchased during fiscal 1998 as a
result of the decrease in sales described above. The Company's gross margins are
affected by several factors, including, among others, sales mix and distribution
channels and, therefore, may vary in future periods from those experienced
during the third quarter of fiscal 1998.
Selling expenses decreased $41,000 or 5% in the third quarter of fiscal
1998 compared to the third quarter of fiscal 1997, primarily as a result of
decreased advertising expenses ($90,000) and decreased marketing salaries
($35,000) due to certain cost reductions implemented during the second quarter
of fiscal 1998. The decreases in fiscal 1998 were substantially offset by
increased personnel costs as a result of additional sales personnel and
increased expenses associated with international sales efforts.
General and administrative expenses during the third quarter of fiscal 1998
decreased by $143,000 or 28% compared to the third quarter of fiscal 1997. The
decrease was primarily the result of a reduction in bad debt expense ($300,000)
due to the Company's arrangement with Macon to receive back inventory (during
the second fiscal quarter ended September 30, 1997, the Company established a
bad debt reserve related to Macon as a result of Macon's payment delinquency)
and reductions in management consulting expenses ($73,000). These decreases were
partially offset by increases in legal fees ($132,000) and recruitment fees
($48,000) during the third quarter of fiscal 1998. As a result of the Company's
current liquidity problems, a number of vendors have either sued the Company or
have forwarded their accounts to collection. The Company anticipates incurring
substantial legal expenses in the March 31, 1998 fiscal quarter as well as
possible interruption in the receipt of goods and services due to its liquidity
problems.
Research and development expenses during the third quarter of fiscal 1998
increased $139,000 or 45% compared to the third quarter of fiscal 1997. The
increase in fiscal 1998 was primarily attributable to additional personnel
($31,000) and consultants ($49,000) as well as increased expenditures for
prototypes ($38,000) due to the Company's concerted effort to decrease product
development time and increase pre-production product testing.
In an effort to further reduce its operating expenses, the Company recently
effected a reduction in its workforce which reduced total employee headcount
from 60 to 45. During February 1998, Gary Dunham, the Company's Vice President
of Sales and Marketing, resigned. Additionally, during February 1998, Richard F.
Gordon, Chairman of the Company's Board of Directors, was appointed interim
President and Chief Executive Officer, replacing James B. Mariner, who resigned
as an officer of the Company. The Company and Mr. Mariner are currently
negotiating an arrangement whereby Mr. Mariner, in the capacity as an
independent contractor, would be responsible for directing the Company's sales
and marketing efforts. During February 1998, Gordon L. Almquist, the Company's
Chief Financial Officer, was appointed to the additional role of Chief Operating
Officer.
The Company did not earn interest income during the third quarter of fiscal
1998 compared to $11,000 earned during the third quarter of fiscal 1997 as a
result of lower investment balances due primarily to cash used for operating
activities during fiscal 1998.
Interest expense increased to $182,000 during the third quarter of fiscal
1998 from $1,000 in the third quarter of fiscal 1997 primarily as a result of
the Company's acceptance of a charge for interest ($175,000) by Vermont Research
Products, Inc. ("Vermont"), a major supplier of certain products which are
resold by the Company, in anticipation of the Company entering into an agreement
with Vermont whereby Vermont would convert a portion of the balance owed by the
Company to Preferred Stock as well as interest associated with a $350,000
convertible subordinated loan issued by the Company during May 1997.
Page 13 of 19
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CHATCOM, INC.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THE NINE MONTHS ENDED DECEMBER 31, 1996
Net sales during the nine months ended December 31, 1997 (the "first nine
months of fiscal 1998") were $6.1 million, a decrease of $1.6 million or 21%
compared to the $7.6 million recorded during the nine months ended December 31,
1996 (the "first nine months of fiscal 1997"). The decrease was due primarily
to a decrease in shipments to domestic VAR's which the Company believes is
attributable to the declining demand for remote control type remote access
solutions, decreased marketing and support for VAR's during fiscal 1998 due to
the Company's cash flow constraints, and the redirection of sales and marketing
efforts toward the server consolidation and network emulation markets which
began during fiscal 1997.
Cost of goods sold were $4.5 million or 74% of net sales in the first nine
months of fiscal 1998 compared to $5.1 million or 66% of sales in the first nine
months of fiscal 1997. The decrease in gross margins during the first nine
months of fiscal 1998 compared to the first nine months of fiscal 1997 (26% vs.
34%, respectively) was primarily the result of price discounting due to
competetion and increased manufacturing overhead during fiscal 1998 due to
increased indirect labor (primarily related to quality assurance) during fiscal
1998.
Selling expenses increased $274,000, or 11% in the first nine months of
fiscal 1998 compared to the first nine months of fiscal 1997, primarily as a
result of increased personnel costs as a result of additional sales personnel
($168,000); increased commissions and bonuses due to the increase in sales
personnel ($56,000); increased expenses associated with international sales
efforts ($183,000), and increased trade show expenses ($50,000). The increases
in the first nine months of fiscal 1998 were partially offset by decreased
advertising expenses ($170,000), decreased marketing salaries ($37,000) due to
certain cost reductions implemented during the second quarter of fiscal 1998,
and decreased consulting expenses ($47,000).
General and administrative expenses during the first nine months of fiscal
1998 increased by $202,000 or 12% compared to the first nine months of fiscal
1997. The increase was primarily the result of an increase in bad debt expense
($156,000) which is primarily related to Macon's remaining balance owed to the
Company as of December 31, 1997 ($150,000), as well as increased legal fees
during the first nine months of fiscal 1998 ($124,000). These increases were
partially offset by reductions in consulting expense ($172,000) during the first
nine months of fiscal 1998.
Research and development expenses during the first nine months of fiscal
1998 increased $853,000, or 112% compared to the first nine months of fiscal
1997. The increase was primarily attributable to additional personnel
($201,000) and consultants ($253,000) as well as increased expenditures for
prototypes ($253,000) due to the Company's concerted effort to decrease product
development time and increase pre-production product testing.
Interest income decreased to $9,000 during the first nine months of fiscal
1998 from $39,000 during the first nine months of 1997 as a result of lower
investment balances due primarily to cash used for operating activities during
fiscal 1998.
Interest expense increased to $199,000 during the first nine months of
fiscal 1998 from $12,000 in the first nine months of fiscal 1997 primarily as a
result of the Company's acceptance of a charge for interest ($175,000) by
Vermont, a major supplier of certain products which are resold by the Company,
in anticipation of the Company entering into an agreement with Vermont whereby
Vermont would convert a portion of the balance owed by the Company to Preferred
Stock as well as interest associated with a $350,000 convertible subordinated
loan issued by the Company during May 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company recorded a net loss of $2.6 million and $4.8 million during the
three and nine months ended December 31, 1997, respectively. During the nine
months ended December 31, 1997, cash
Page 14 of 19
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CHATCOM, INC.
decreased $612,000 primarily due to the negative cash flow from operations of
$2,236,000. The negative cash flow from operations during the first nine months
of fiscal 1998 was comprised primarily of the net loss ($4.8 million) and an
increase in inventory ($2.1 million), primarily as a result of the receipt of
equipment back from Macon. These decreases were partially offset by an increase
in accounts payable ($3.4 million), due primarily to the Company's delay in
paying suppliers as a result of the Company's financial condition, and by non
cash charges related to depreciation and amortization ($271,000), bad debt
expense ($302,000) and inventory obsolescence ($306,000).
Net cash used for investing activities during the first nine months of
fiscal 1998 ($183,000) was the result of expenditures related to computers and
manufacturing equipment.
Net cash provided by financing activities during the first nine months of
fiscal 1998 ($1.8 million) was primarily the result of the issuance of 1,100
shares of Series E Preferred Stock ($937,000) and the issuance of $890,000 in
convertible subordinated debt.
As of December 31, 1997, the Company had negative working capital of $.6
million, as compared to working capital of $3.2 million as of March 31, 1997.
The Company must immediately provide additional liquidity to meet its current
obligations and maintain its operations and is actively seeking additional
financing to meet its immediate needs. The purchasers of $1,100,000 of the
Series E Preferred Stock have agreed to purchase an additional $600,000 of such
shares but such purchase is subject to certain conditions which include, among
others, a registration statement covering the resale of the shares issuable upon
conversion of the Series E Preferred Stock and upon the exercise of the Series E
Warrants is declared effective; the market price of the Company's Common Stock
for the ten trading days preceding the additional closing date exceeds $1.00 per
share; and the receipt of at least $1,000,000 from the sale of equity securities
of the Company. No assurances, however, can be given that this or any other
financings will be consummated or that the proceeds from the sale of additional
shares of Series E Preferred Stock or any other financing will be sufficient to
permit the Company to continue its current operations. Furthermore, there can be
no assurance that the Company will be able to obtain additional commitments for
sufficient financing.
The Company has incurred operating losses in each of its last three fiscal
years, and has experienced operating losses for the past five consecutive fiscal
quarters and is continuing to incur operating losses subsequent to December 31,
1997. 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
continue its operations could be materially adversely affected.
The Company may seek additional public or private financing to meet its
longer term capital needs if market conditions are favorable. If additional
funds are raised through the issuance of equity securities, it is likely that
the Company will be required to sell such securities at a substantial discount
to the current market price for the Common Stock, the percentage ownership of
the then current shareholders of the Company will be reduced, and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. No assurance can be given that
additional financing will be available or that, if available, it will be
available on terms favorable to the Company or its shareholders. Any increase
in the outstanding number of shares of the Common Stock or options and warrants
may have an adverse effect on the market price of the Common Stock and may
hinder efforts to arrange future financing.
The Company had no material commitments for capital expenditures as of
December 31, 1997.
Page 15 of 19
<PAGE>
CHATCOM, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
A. On September 11, 1997, the Company, together with a majority of its
Board of Directors, were sued by The High View Fund and The High View Fund, L.P.
(collectively, "High View"), holders of 2,496 shares of the Company's Series D
Preferred Stock and lenders of a $350,000 convertible subordinated loan made to
the Company in May 1997 (the "$350,000 Loan"). The lawsuits, filed in U.S.
Federal District Court, Southern District of New York and in the State Court of
New York, sought damages from the defendants for alleged wrongful actions
relating to securities fraud and not informing High View regarding the extent of
the Company's financial problems.
On September 25, 1997, the parties entered into settlement agreements
(comprised principally of a Stock Exchange Agreement, Registration Rights and
Lock-up Agreement and Warrant agreements; collectively, the "Settlement
Agreements") related to both cases whereby High View agreed to exchange their
2,496 shares of Series D Preferred Stock (representing the entire Series D
Preferred Stock issued by the Company) for a total of 2,000,000 shares of the
Company's Common Stock and to convert the $350,000 Loan, plus $15,173 of accrued
interest thereon, into 292,138 shares of the Company's Common Stock (the
"Exchange Transaction"). The Exchange Transaction also included the exchange of
High View's warrants to purchase 400,000 shares of Common Stock, exercisable at
$3.125 per share (the "Old Warrants"), issued to High View in connection with
the issuance of the Series D Preferred Stock in exchange for warrants to
purchase 1,000,000 shares of the Company's Common Stock at an exercise price of
$1.75 per share. The Settlement Agreements also required the Company to
reimburse High View in the amount of $15,000 for legal expenses incurred in
connection with the settlement.
During December 1997, High View alleged in a draft complaint (which was
not filed) that the Company and its directors had fraudulently induced High View
to enter into the Exchange Transaction. On December 31, 1997, the Company
terminated and cancelled the Exchange Transaction effective as of September 25,
1997 pursuant to an agreement with High View and certain of its affiliates (the
"High View Group") dated December 30, 1997 (the "New Agreement"). Pursuant to
the New Agreement, the Settlement Agreements entered into in connection with the
Exchange Transaction were terminated and cancelled and all transactions
purported to be effected pursuant to the Settlement Agreements were rescinded.
As a result of the cancellation, (i) High View continues to hold the Series D
Preferred Stock and the Old Warrants that were issued by the Company in December
1996; (ii) High View continues to be the payee of the $350,000 Loan; and (iii)
the Stock Purchase Agreement by and among the Company and High View dated
December 9, 1996 continues to be in full force and effect.
In addition, pursuant to the New Agreement, the High View Group made
additional loans to the Company in the amount of $540,000 (the "Additional
Loans") to help the Company meet its working capital shortfall. The Additional
Loans are evidenced by 9.5% convertible subordinated notes in the aggregate
principal amount of $540,000 (the "Additional Notes"). In connection with the
issuance of the Additional Notes, the Company also issued to the High View Group
warrants to purchase an aggregate of 150,000 shares of Common Stock (the
"Additional Warrants"). The Additional Notes mature on January 1, 1999 and bear
interest on the outstanding principal amount at the rate of 9.5% per annum,
payable semiannually in cash or shares of Common Stock at the election of the
Company. The Additional Notes are convertible into shares of Common Stock, at
the election of the holder, at a conversion price equal to the greater of (i)
$0.35 or (ii) 75% of the average market price of the Common Stock during the ten
trading days preceding the conversion date, subject to a maximum conversion
price of $0.95. Payment of the Additional Notes is subordinated to the prior
payment of indebtedness the Company may from time to time owe to any bank or
other financial institution (but excluding trade creditors). The Additional
Warrants expire on December 13, 2001 and have an exercise price of $0.375 per
share. Pursuant to the New Agreement, the $350,000 Loan was evidenced by
convertible subordinated notes having terms substantially the same as the terms
of the Additional Notes. The Company has agreed to register the shares of
Common Stock issuable upon conversion of the Additional Loans, the $350,000
Loan, and upon exercise of the Additional Warrants. Under the terms of the New
Agreement, High View released the Company and its officers and directors from
any claims that they might have arising from the Exchange Transaction
Page 16 of 19
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CHATCOM, INC.
contemplated by the Settlement Agreements. The New Agreement also required the
Company to reimburse High View in the amount of $40,000 for legal expenses
incurred in connection with the settlement.
B. On January 15, 1998, the Company was sued by Strategic Growth
International, Inc. ("SGI"), an investor relations consulting firm. The lawsuit,
filed in U.S. Federal District Court, Central District of California, seeks
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 High View 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 seeks reimbursement for its legal fees in
connection with the lawsuit and obtained an attachment against certain of the
Company's assets in connection with this lawsuit. As of February 5, 1998, the
parties agreed in principle to settle the lawsuit. The terms of the proposed
settlement include the Company's issuance to SGI of 800,000 shares of Common
Stock, the granting to SGI of options to purchase 200,000 shares of the
Company's Common Stock at an exercise price of $.50 per share (the closing bid
price on February 5, 1998), and the payment of $100,000 in cash to SGI, $25,000
of which was paid by the Company on February 9, 1998, with the balance ($75,000)
payable in equal consecutive monthly installments of $15,000, beginning April 9,
1998. The Company has agreed to grant a security interest in the Company's
finished goods inventory for the cash owed, and to register the foregoing shares
under the Securities Act of 1933, including shares issuable upon the exercise of
the stock options.
Although the parties have agreed in principle to settle the lawsuit, such
a settlement is subject to the completion and filing of documentation with the
Court and, as a result, there can be no assurance that the lawsuit will be
ultimately settled pursuant to the terms described above or at all.
C. As a result of the Company's continuing liquidity crisis during fiscal
1998, the Company has been sued for non-payment by four suppliers of products
and services, in addition to SGI, and numerous other vendors have forwarded
their accounts with the Company to collection. The Company has entered into a
Stipulation for Settlement with one supplier which will require the Company to
pay the balance owed ($22,000) in cash, $2,000 of which was paid on February 9,
1998, with the balance ($20,000) payable in equal consecutive monthly
installments of $4,000 beginning February 28, 1998. The Company has commenced
settlement discussions with the other three plaintiffs, however, no settlements
have yet been consummated with these plaintiffs and there can no assurance that
any such settlements will be obtained by the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On September 26, 1997, the Company entered into Stock Purchase Agreements
(the "Agreements") whereby the Company agreed to sell to two accredited
investors up to 1,700 shares of Series E Convertible Redeemable Preferred Stock,
$1,000 stated value per share (the "Series E Preferred Stock"), and warrants to
purchase 432,727 shares of Common Stock at a price of $1.25 per share (the
"Series E Warrants"). Pursuant to the Agreements, a total of 1,100 shares of
Series E Preferred Stock and 254,545 of the Series E Warrants were sold by the
Company on September 26, 1997 for gross proceeds of $1,100,000. The sale of the
Series E Preferred Stock and the Series E Warrants were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Regulation D promulgated thereunder. The Company received various
representations and warranties from the investors, including a representation
that the investors are "accredited investors" within the meaning of Regulation
D. Offering costs of $163,000, consisting primarily of cash finders' fees and
legal fees, were incurred by the Company. Dividends on the Series E Preferred
Stock are payable in cash or Common Stock, at the option of the Company, at a
rate of 8% per annum. The sale of the additional 600 shares of Series E
Preferred Stock and 178,182 Series E Warrants ($600,000 of gross offering
proceeds) is scheduled to occur within five days following the Company's
satisfaction of certain conditions which include, among others, a registration
statement covering the sale of the shares issuable upon conversion of the Series
E Preferred Stock and upon the exercise of the Series E Warrants is declared
effective; the market price of the Company's Common Stock for the ten trading
days preceding the additional closing date exceeds $1.00 per share; and the
funding from a strategic investor of at least $1,000,000 from the sale of equity
securities of the Company. One-half of
Page 17 of 19
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CHATCOM, INC.
the Series E Preferred Stock is convertible at the election of the holder into
shares of the Company's Common Stock commencing on the 51/st/ day after the
closing date and all of the Series E Preferred Stock is convertible commencing
on the 91/st/ day after such closing date. The conversion value to determine the
number of shares of Common Stock into which the Series E Preferred Stock is
convertible is the lesser of $1.375 or 75% of the average of the closing bid
prices of the Common Stock during the five trading days immediately preceding
the conversion date. The Series E Warrants are exercisable for five years
commencing January 1, 1998. The Company has agreed to register the shares
issuable upon the conversion of the Series E Preferred Stock and upon the
exercise of the Series E Warrants. The Registration Rights Agreement provides
that in the event the registration statement is not declared effective on or
before December 15, 1997, the Company shall has agreed to pay the investors, on
January 24, 1998 and on each successive date which is 30 days after the previous
payment date (pro rated for partial periods) until such registration statement
is declared effective, payments in the amount of 3% of the purchase price of
outstanding Series E Preferred Stock ($1,100,000), in cash or shares of the
Company's Common Stock at the election of the investor. As of February 20, 1998,
such registration statement has not been filed, and the Company owed such
investors payments in the amount of $62,700.
No assurance can be given that the Company will be able to satisfactorily
meet the conditions required for the sale of the additional 600 shares of Series
E Preferred Stock.
Page 18 of 19
<PAGE>
CHATCOM, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits. The following exhibits are filed with this Form 10-QSB:
10.1 Agreement between the Company and The High View Fund,
L.P. and The High View Fund dated December 30, 1997.
10.2 Form of Convertible Subordinated Note issued to The High
View Fund, The High View Fund, L.P. and their affiliates.
10.3 Form of Warrant to purchase Common Stock issued to The
High View Fund, The High View Fund, L.P. and their
affiliates.
27 Financial Data Schedule
b. Reports on Form 8-K.
Current Report on Form 8-K dated December 19, 1997 reporting on
Item 5, as filed on December 29, 1997.
No other information is required to be filed under Part II of this Form 10-QSB.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHATCOM, INC.,
a California corporation
Date: February 20, 1998 By: /s/ Richard F. Gordon
-------------------
Richard F. Gordon, Chairman of the
Board of Directors
By: /s/ Gordon L. Almquist
-------------------
Gordon L. Almquist, Vice
President, Finance and Chief
Financial Officer
Page 19 of 19
<PAGE>
EXHIBIT 10.1
AGREEMENT
THIS AGREEMENT (this "Agreement"), is executed on this 30th day of
December, 1997 by ChatCom Inc., a California corporation (the "Company"), on the
one hand and by The High View Fund and The High View Fund, L.P. (individually, a
"Shareholder" and collectively, the "Shareholders") on the other.
RECITALS
--------
WHEREAS, pursuant to that certain Purchase Agreement, dated as of December
9, 1996 (the "1996 Purchase Agreement"), entered into by the parties hereto,
each of the Shareholders purchased 1,248 shares of the Company's Series D
Convertible Preferred Stock (the "Preferred Shares") and warrants (the "1996
Warrants") to purchase 200,000 shares of the Company's common stock, no par
value per share (the "Common Stock"); and
WHEREAS, on September 25, 1997 the Shareholders and the Company entered
into that certain Stock Exchange Agreement (the "Stock Exchange Agreement")
pursuant to which the Shareholders intended to (i) exchange their Preferred
Shares for a total of 2,000,000 shares (the "Company Shares") of Common Stock,
(ii) return their 1996 Warrants to the Company for cancellation, (iii) convert a
$350,000 cash advance made by the Shareholders in May 1997 to the Company into a
total of 292,138 shares of Common Stock, and (iv) acquire new warrants to
purchase a total of 1,000,000 shares of Common Stock; and
WHEREAS, the consummation of the transactions contemplated by the Stock
Exchange Agreement was subject to certain conditions precedent, which conditions
the Shareholders believe were not satisfied; and
WHEREAS, the Shareholders are willing to provide the Company with
additional financing provided that the dispute between the parties hereto
regarding the satisfactions of the conditions precedent in the Stock Exchange
Agreement is resolved.
NOW, THEREFORE, in consideration of the promises and mutual covenants and
obligations hereinafter set forth, the Company and the Shareholders hereby agree
as follows:
ARTICLE 1
CANCELLATION OF STOCK EXCHANGE AGREEMENT TRANSACTIONS
-----------------------------------------------------
1.1 Cancellation of Stock Exchange Agreement and Related Agreements.
---------------------------------------------------------------
Subject to the satisfaction of all terms and conditions of this Agreement, the
parties hereto agree that
1
<PAGE>
the Stock Exchange Agreement shall be terminated and cancelled effective as of
September 25, 1997 and that all transactions purported to be effected pursuant
to the Stock Exchange Agreement shall be revoked, rescinded and declared void ab
initio. In addition, upon the closing of the transactions contemplated hereby,
that certain Registration Rights and Lock-Up Agreement, dated as of September
25, 1997 and entered into by the parties hereto, shall be terminated and
cancelled. Notwithstanding anything in this Agreement to the contrary, nothing
in this Agreement or in any other document delivered in connection herewith
shall affect the Stipulation of Settlement entered into by the United Stated
District Court, Southern District of New York, or the Stipulation of Settlement
entered into by the Supreme Court of the State of New York, County of New York.
1.2 Return of Securities. Subject to the satisfaction of all of the terms
--------------------
and conditions set forth in this Agreement, at the closing, each party hereto
agrees to return to the other party all stock certificates and warrants
delivered to it under the Stock Exchange Agreement, which deliveries shall
consist of the following:
(a) Each Shareholder shall deliver to the Company the Warrant to
Purchase Common Stock of ChatCom, Inc. (representing the right to purchase
500,000 shares of Common Stock at a price of $1.75 per share), dated September
25, 1997, issued in its name (the "1997 Warrants").
(b) Each Shareholder shall deliver to the Company the stock
certificate representing the 1,224,351 shares of Common Stock received by the
Shareholder on September 25, 1997, which certificates shall be duly endorsed for
cancellation (or accompanied by a duly executed assignment form separate from
certificate) by each such Shareholder.
(c) The Company shall deliver to the Shareholders the warrant
certificate No. D-1 and No. D-2, representing all of the 1996 Warrants.
(d) The Company shall deliver to the Shareholders stock certificate
No. 1 and No. 2, representing all of the Preferred Shares purchased by the
Shareholders on December 13, 1996 under the 1996 Purchase Agreement.
The parties hereto agree to cause each of the securities, documents or
other materials referred to in this Section 1.2 that is in their possession to
be delivered to Brock Fensterstock Silverstein McAuliffe & Wade LLC, One
Citicorp Center 56th Floor, New York, NY 10022 (the "Escrow Agent") by no later
than the first business day after the date of this Agreement.
2
<PAGE>
1.3 Issuance of Promissory Note. At the Closing, the Company agrees to
---------------------------
issue to the Shareholders one or more promissory notes, in the form attached
hereto as Exhibit 1.3 (collectively, the "Promissory Notes"), having an
aggregate principal balance of $350,000, which notes shall evidence the $350,000
of advances made in May 1997 by the Shareholders to the Company.
1.4 Reinstatement of Agreement. The parties hereto agree, that subject to
--------------------------
the satisfaction of the terms and conditions of this Agreement, the 1996
Purchase Agreement and all documents, certificates and other materials delivered
by the parties in connection with the 1996 Purchase Agreement shall continue in
full force and effect and, in the event that the 1996 Purchase Agreement or any
such other document or certificate is deemed to have been cancelled or
superseded by the Stock Exchange Agreement or any document delivered in
connection with the Stock Exchange Agreement, that the 1996 Purchase Agreement
and such other document or certificate is hereby reinstated effective as of the
date the 1996 Purchase Agreement or such other document or certificate was
dated.
ARTICLE 2
CONVERTIBLE NOTE/NEW WARRANTS
-----------------------------
2.1 Sale of Convertible Note/New Warrants. Subject to the terms and
-------------------------------------
conditions hereof, the Company agrees to sell to the Shareholders, and the
Shareholders hereby agree to purchase from the Company (i) one or more
convertible notes of the Company having an aggregate principal amount of
$540,000, which convertible notes shall be in the form attached hereto as
Exhibit 2.1 (the "Convertible Note"), and (ii) a warrant to purchase an
aggregate of 150,000 shares of Common Stock (the "New Warrants").
ARTICLE 3
CLOSING
-------
3.1 Closing. The closing of the transactions contemplated by this
-------
Agreement shall take place on the first business day following the date on which
all of the documents, securities and other materials referred to in Section 1.2
are in the possession of Escrow Agent, or at such other time as the parties
mutually agree; provided however, that the closing shall occur on or before
----------------
December 31, 1997. The date on which the transactions contemplated hereby are
effected is hereinafter referred to as the "Closing Date." At the closing, the
Escrow Agent shall confirm that $540,000 has been paid to the Company by wire
transfer by the Shareholders and shall thereafter (i) deliver to the
Shareholders the 1996 Warrants, the Convertible Notes, the Promissory Notes, the
New Warrants
3
<PAGE>
and Preferred Share certificates No. 1 and No. 2, and (ii) deliver to the
Company the stock certificates representing the 1,224,351 shares of Common Stock
held in the name of each of the Shareholders, and each of the 1997 Warrants.
If, on or before December 31, 1997 the closing has not occurred, then the
Escrow Agent, as soon as reasonably practicable thereafter, shall return to
each party hereto all securities, notes and other materials delivered to the
Escrow Agent by such party.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES BY THE COMPANY
---------------------------------------------
The Company represents and warrants to each Shareholder that as of the date
hereof and again as of the Closing Date:
4.1 Organization, Good Standing. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
California, and is duly qualified and authorized to do business and in good
standing in each other jurisdiction in which it is required to be qualified or
where it owns any material property or conducts any material operations. The
Company is not in violation of its Articles of Incorporation or By-Laws as in
effect on the date hereof. The Company has all requisite power, authority and
legal right to conduct its business as now being conducted.
4.2 Preferred Shares. The Certificate of Determination and Decrease of
----------------
ChatCom, Inc. filed with the Office of the Secretary of State of the State of
California on December 6, 1996 with respect to the Preferred Shares remains in
full force and effect and has not been amended since the date of such filing. As
of the date hereof, other than the 2,496 shares of the Preferred Shares
previously issued to the Shareholders, no other shares of the Preferred Shares
have been issued or are currently outstanding. In addition to the Preferred
Shares, there are a total of 1,100 shares of the Company's Series E Convertible
Redeemable Preferred Stock currently issued and outstanding.
4.3 Authority Relative to this Agreement. The execution, delivery and
------------------------------------
performance of, and compliance with, this Agreement have been duly authorized by
all necessary corporate action on the part of the Company, and this Agreement is
a valid and binding agreement of the Company enforceable in accordance with its
terms, except as such enforcement is subject to any applicable bankruptcy,
insolvency, reorganization or other law relating to or affecting creditors'
rights generally and general principles of equity.
4
<PAGE>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES BY THE SHAREHOLDERS
--------------------------------------------------
Each Shareholder hereby represents and warrants to the Company that as of
the date hereof and again as of the Closing Date:
5.1 Authority Relative to this Agreement. The execution, delivery and
------------------------------------
performance of, and compliance with, this Agreement have been duly authorized by
all necessary action on the part of such Shareholder, and this Agreement is a
valid and binding agreement of such Shareholder enforceable in accordance with
its terms, except as such enforcement is subject to any applicable bankruptcy,
insolvency, reorganization or other law relating to or affecting creditors'
rights generally and general principles of equity.
5.2 Investment Intent. The Convertible Notes, the Promissory Notes, the
-----------------
New Warrants and the shares of Common Stock issuable upon the conversion of the
Convertible Notes, the New Warrants or the Promissory Notes will be acquired by
such Shareholder hereunder for such Shareholder's own account and not with the
view to, or for resale in connection with, any distribution other than resales
made in compliance with the registration and prospectus delivery requirements of
the Securities Act of 1933, as amended (the "Securities Act"), or the rules
promulgated thereunder. Such Shareholder understands that neither the
Convertible Notes, the Promissory Notes, the New Warrants nor the Common Stock
issuable thereunder have been registered under the Securities Act by reason of
available exemptions from the registration and prospectus delivery requirements
of the Securities Act, that the securities must be held indefinitely unless
such securities are registered under the Securities Act or unless any transfer
is exempt from registration, and that the reliance of the Company upon these
exemptions is predicated in part upon these representations and warranties by
such Shareholder.
5.3 Qualification as an Investor.
----------------------------
(a) Such Shareholder has reviewed the Company's publicly disclosed
reports and filings, including the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission (the "Commission") on December 26,
1997, and has made such investigation of the Company as it deems necessary for
the purpose of its evaluation of its investment in the Company. Furthermore,
such Shareholder has had a full opportunity to discuss with the Company all
material aspects of an investment in the Convertible Notes, the New Warrants and
the Promissory Notes, including the opportunity to ask, and to receive answers
to his full satisfaction, regarding such questions as it has deemed
5
<PAGE>
necessary to evaluate this transaction, the Company and its operations and
prospects. The Shareholders are aware that the Company is attempting to convert
certain trade payables owed by it to Vermont Research Products, Inc. (a/k/a
Computer Storage) into the Company's securities. However, no assurance can be
given that the foregoing conversion of the trade payables will be consummated.
(b) Such Shareholder has had full opportunity to seek the advice of
independent counsel respecting this Agreement, the transactions contemplated
hereby and the tax risks and implications thereof.
5.4 Legend. Such Shareholder acknowledges and agrees that the Convertible
------
Notes, the Promissory Notes, the New Warrants and the certificates representing
the Common Stock to be issued thereunder shall bear the following (or
substantially equivalent) legend on the face or reverse side thereof:
THIS [NOTE/WARRANT] AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF
THIS [NOTE/WARRANT] HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY. THIS
[NOTE/WARRANT] AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF ALL OR
ANY PORTION HEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS (i) A REGISTRATION STATEMENT UNDER SAID ACT SHALL HAVE
BECOME EFFECTIVE WITH RESPECT THERETO OR (ii) IN THE OPINION OF COUNSEL IN FORM
AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, AN EXEMPTION UNDER
SAID ACT AND FROM ANY APPLICABLE STATE SECURITIES LAWS IS AVAILABLE.
Any stock certificate issued at any time in exchange or substitution for any
promissory note, warrant or certificate bearing such legend shall also bear such
(or substantially equivalent) legend unless, in the opinion of counsel for the
Company, the securities represented thereby need no longer be subject to
restrictions pursuant to the Securities Act or applicable state securities laws.
The Company shall not be required to transfer on its books any certificate for
securities in violation of the provisions of such legend.
ARTICLE 6
MUTUAL RELEASES; STATUS OF COMPLAINT
------------------------------------
6.1 Mutual Releases.
---------------
(a) Except with respect to breaches of representations contained in
this Agreement or obligations created by or arising out of this Agreement, which
shall survive the releases contained herein, the Company, on the one hand, does
hereby release, acquit and forever discharge the Shareholders
6
<PAGE>
and each of their officers, directors, shareholders, employees, agents,
attorneys, representatives, successors and assigns, and any affiliates of each
of the foregoing, and the Shareholders on the other hand, do hereby release,
acquit and forever discharge the Company, and each of its directors, officers,
employees agents, attorneys, heirs, representatives, successors and assigns, in
each case, of and from all debts, demands, actions, causes of action, suits,
accounts, covenants, contracts, promises, agreements (oral or written), damages,
and any and all claims (including without limitation claims for attorneys' fees
and costs), and liabilities whatsoever of every name and nature, which said
parties ever had, now may have, or hereafter can, shall or may have, by reason
of any matter relating to (i) the 1996 Purchase Agreement, or any of the
agreements executed or transactions consummated in connection with the 1996
Purchase Agreement, (ii) the Stock Exchange Agreement, or any of the agreements
executed or transactions consummated in connection with the Stock Exchange
Agreement, or (iii) the $350,000 of advances made by the Shareholders to the
Company in May 1997.
(b) This Agreement and the releases contained herein are not to be
construed as an admission on the part of any party of the validity of any
contention made or position taken by any of the parties of any unlawful or
wrongful conduct, or of any liability, or lack thereof, to any other party, all
of which is expressly denied. The parties intend that this Agreement shall be
effective as a full and final accord and satisfaction of each and every released
matter. In furtherance of this intention, they acknowledge they are familiar
with Section 1542 of the Civil Code of the State of California, which provides
as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release which if known by him must have materially
affected his settlement with the debtor."
The releasing parties respectively waive and relinquish to the fullest extent
possible every right or benefit which they have or may have under Section 1542
and under any similar or analogous law of any other applicable jurisdiction with
regard to the subject matter of this Agreement. The parties acknowledge they
are aware they may hereafter discover facts in addition to or different from
those which they now know or believe to be true with respect to the subject
matter of this Agreement.
6.2 Draft Complaint. The Shareholders have previously prepared a draft
---------------
Complaint, dated December 16, 1997 and identified as "DRAFT 12/17/97", that
makes certain
7
<PAGE>
allegations against the Company and its directors, which allegations are covered
by this Agreement. The Shareholders hereby agree that the draft Complaint will
not be filed and that the claims and allegations contained therein have been
settled and resolved by the execution of this Agreement and consummation of the
transactions contemplated hereby.
ARTICLE 7
REGISTRATION RIGHTS
-------------------
7.1 Required Registration. The Company hereby agrees to use its best
---------------------
efforts to prepare and file, on or before January 31, 1998, a Registration
Statement with the Commission in order to register the resale of all of the (i)
shares of Common Stock issuable upon the conversion of the Convertible Note or
the Promissory Notes, and (ii) the shares of Common Stock issuable upon the
exercise of the New Warrants (collectively, the "Shares"). The Company
furthermore agrees to use its best efforts to cause the foregoing Registration
Statement to be declared effective as soon as possible, but in no event later
than March 15, 1998. The Company may, at its option, give written notice to
other holders of the Company's securities that a registration is to be effected
and may, at its option, include in such registration any other shares of the
Company's unregistered capital stock. The Company may, however, only include
such additional shares of capital stock in such registration if, and to the
extent, that such inclusion of additional shares does not adversely affect the
preparation and filing of the Registration Statement.
7.2 Registration Procedures. In connection with the registration of the
-----------------------
Shares to be effected pursuant to this Agreement, the Company shall:
(a) As expeditiously as possible, furnish to the Shareholders, to
brokers or dealers effecting transactions in the Shares on behalf of the
Shareholders, if any, and to the underwriters, if any, of the securities being
registered such reasonable number of copies of the Registration Statement,
preliminary prospectus, final prospectus and such other documents as the
Shareholders, brokers or dealers and underwriters may reasonably request in
order to facilitate the public offering of such securities;
(b) As expeditiously as possible, use its reasonable best efforts to
register or qualify the Shares covered by such Registration Statement under such
state securities or blue sky laws of such jurisdiction as the Shareholders may
reasonably request and do any and all other things that may be necessary to
enable the Shareholders to consummate the public sale in such states of the
Shares, except that the Company shall not for any purpose be required to execute
a general
8
<PAGE>
consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(c) Promptly notify the Shareholders of the time when such
Registration Statement has become effective or when a supplement to any
prospectus included in such Registration Statement has been filed;
(d) Notify the Shareholders promptly of any request by the Commission
for the amending or supplementing of such Registration Statement or prospectus
or for additional information;
(e) Promptly advise the Shareholders of the issuance of any stop
order by the Commission suspending the effectiveness of such Registration
Statement or the initiation or threatening of any proceeding for that purpose
and promptly use its best efforts to prevent the issuance of any stop order or
obtain its withdrawal if such stop order should be issued;
(f) Make available for inspection by a representative of the
Shareholders, any underwriter participating in the registration or their
respective attorneys or accountants, all financial and other records of the
Company required to prepare such Registration Statement, and supply all other
information requested by such representative reasonably related to the
preparation and filing of such Registration Statement; and
(g) File all applications necessary to include all Shares registered
by such Registration Statement in The Nasdaq Stock Market or any national
securities exchange on which the shares of the Common Stock are then listed.
7.3 Expenses.
--------
(a) With respect to each inclusion of Shares in a Registration
Statement pursuant to this Agreement, any and all fees, costs and expenses of or
incidental to, or incurred in connection with such registration, inclusion and
public offering (as specified in Section 7.3(b) below) shall be borne by the
Company; provided, however, that the Shareholders shall bear their pro rata
share of any underwriting discounts and commissions and transfer taxes, and
shall bear all fees and expenses of counsel representing such Shareholders in
such a registration.
(b) The fees, costs and expenses of or incidental to each such
registration to be borne by the Company as provided in Section 7.3(a) above
shall include, without limitation, all registration, filing and NASD fees,
printing expenses, fees and disbursements of counsel and accountants
9
<PAGE>
for the Company, and all legal fees and disbursements and other expenses of
complying with state securities or blue sky laws of any jurisdictions in which
the securities to be offered are to be registered or qualified.
(c) Nothing shall obligate the Company to undergo an audit other than
as required under the rules of the Commission applicable to the Company or to
keep any Registration Statement filed hereunder current and effective.
7.4 Indemnification.
---------------
(a) The Company hereby agrees to indemnify, hold harmless and defend
the Shareholders and any underwriter (as defined in the Securities Act) and each
person, if any, who controls any Shareholder or such underwriter within the
meaning of the Securities Act, from and against, and will reimburse each
Shareholder and each such underwriter and controlling person with respect to,
any and all loss, damage, liability, cost and expense (as and when incurred),
including without limitation, the costs of investigation and defense of any
legal action, proceeding or investigation, to which any such Shareholders or any
such underwriter or controlling person may become subject under the Securities
Act, the Securities Exchange Act of 1934 (the "Exchange Act"), or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused by or
arise out of any untrue statement or alleged untrue statement of any material
fact contained in such Registration Statement, any prospectus contained therein,
or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, damage, liability, cost or expense arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in conformity with information furnished in writing by
the Shareholders, such underwriter or such controlling person in writing
specifically for use in the preparation thereof.
(b) Each Shareholder hereby agrees severally, but not jointly, to
indemnify and hold harmless the Company and any controlling person thereof from
and against, and will reimburse the Company and any controlling person with
respect to, any and all loss, damage, liability, cost or expense to which the
Company or any controlling person thereof may become subject under the
Securities Act, the Exchange Act or otherwise, only insofar as such losses,
damages, liabilities, costs or expenses are caused solely any entirely by any
untrue or alleged untrue statement of any material fact contained in such
Registration Statement, any prospectus contained therein or any amendment or
supplement thereto, or arise out of or are
10
<PAGE>
based upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was so
made in reliance upon and in strict conformity with written information
furnished by such Shareholder specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 7.4 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party shall, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said
paragraph (a) or (b), promptly notify the indemnifying party of the commencement
thereof; but the omission to so notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
hereunder. In case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party shall have the right to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party; provided, however, if the defendants in any action include both the
indemnifying party and the indemnified party and if there is a conflict of
interest which, in the reasonable opinion of counsel to the indemnified party,
would prevent counsel for the indemnifying party from also representing the
indemnified party, or any of the indemnified parties have available to them
defenses or counterclaims, in the reasonable opinion of counsel to the
indemnified party, not available to the indemnifying party even though this does
not result in a conflict of interest, the indemnified party or parties shall
have the right to select one separate counsel to participate in the defense of
such action on behalf of all such indemnified party or parties at the expense
of the indemnifying party. Except as otherwise provided in this paragraph (c),
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party pursuant to the provisions of said paragraph
(a) or (b) for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, unless (x) the indemnified party shall have employed
counsel in accordance with the proviso of the preceding sentence, (y) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after the notice of the commencement of the action, or (z) the indemnifying
party has authorized
11
<PAGE>
the employment of counsel for the indemnified party at the expense of the
indemnifying party.
ARTICLE 8
MISCELLANEOUS PROVISIONS
------------------------
8.1 Amendment and Modification. This Agreement may be amended, modified
--------------------------
or supplemented only by a written agreement executed by the Company and each
Shareholder.
8.2 Waiver of Compliance; Consents. Except as otherwise provided in this
------------------------------
Agreement, any failure of any of the parties to comply with any obligation,
covenant, agreement or condition herein may be waived by the party or parties
entitled to the benefits thereof only by a written instrument signed by the
party granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this Section
8.2.
8.3 Notices. All notices, requests, consents and other communications
-------
hereunder to any party shall be deemed to be sufficient if contained in a
written instrument delivered in person or by telecopy or sent by nationally-
recognized overnight courier or first class registered or certified mail, return
receipt requested, postage prepaid, addressed to such party at the address set
forth below or at such other address as may hereafter be designated in writing
by such party to the other parties:
(a) if to the Company, to:
ChatCom, Inc.
9600 Topanga Canyon Blvd.
Chatsworth, CA 91311
Attn: Chairman of the Board
Tel: (818) 709-1778
FAX: (818) 882-1424
with a copy to:
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, CA 90067
Attn: Sanford J. Hillsberg, Esq.
Tel: (310) 553-4441
FAX: (310) 201-4746
12
<PAGE>
(b) if to a Shareholder, to:
The High View Fund
The High View Fund, L.P.
805 Third Avenue
New York, N.Y. 10022
Attn: Peter J. Powers
Tel: (212) 527-7274
FAX: (212) 527-7279
with a copy to:
Brock Fensterstock
Silverstein McAuliffe & Wade LLC
One Citicorp Center
56th Floor
New York, NY 10022-4611
Tel: (212) 371-2000
Fax: (212) 371-5500
Attn: Charles Brock, Esq.
All such notices, requests, consents and other communications shall be
deemed to have been delivered (a) in the case of personal delivery or delivery
by telecopy, on the date of such delivery, (b) in the case of dispatch by
nationally-recognized overnight courier, on the next business day following such
dispatch and (c) in the case of mailing, on the third business day after the
posting thereof.
8.4 Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, provided, however, that neither this Agreement
-------- -------
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties.
8.5 Governing Law. This Agreement shall be governed by the laws of the
-------------
State of New York.
8.6 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
8.7 Entire Agreement. This Agreement, together with the documents
----------------
referred to in Article 2 embody the entire agreement and understanding of the
parties hereto in respect of the transactions contemplated by this Agreement.
There are no restrictions, promises, representations, warranties, covenants or
undertakings, other than those expressly set forth or referred to herein or
therein. Except as provided herein,
13
<PAGE>
this Agreement supersedes all prior agreements and understandings between the
parties with respect to this transaction.
8.8 Jurisdiction and Forum. The Company and the Shareholders hereby
----------------------
consent to the exclusive jurisdiction of any court of the State of New York or
the United States located in the City of New York over all actions or
proceedings with respect to this Agreement, and agree that all such actions or
proceedings may be instituted and maintained only in such a forum. The Company
hereby agrees that CT Corporation System shall be its authorized agent upon
which process may be served on its behalf by any of the Shareholders in any
action, suit or proceeding arising out of or based upon this Agreement or any
document executed in connection herewith. The parties further agree that
service of legal process in the manner specified herein for the providing of
notice for purposes of this Agreement shall constitute valid service of process
for all purposes with respect to any such action or proceeding.
8.9 Termination. In the event that the Closing does not occur by December
-----------
31, 1997, other than the Escrow Agent's obligation to return all documents as
provided in Article 3, this Agreement shall terminate and the transactions
contemplated hereby shall be abandoned, without further action by any of the
parties hereto. If this Agreement is terminated as provided herein, no party
hereto shall have any liability or further obligation under this Agreement to
any other party hereto.
8.10 Fees and Expenses. All legal and other fees, costs and expenses
-----------------
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such fees, costs or expenses.
Notwithstanding the foregoing, in the event that the transactions contemplated
hereby are consummated, the Company hereby agrees to pay up to a total of
$40,000 of legal fees actually incurred by the Shareholders in the preparation
of this Agreement and the documents related hereto. Such legal fees shall be
promptly paid upon the presentation to the Company of an invoice issued by
Shareholders' counsel.
8.11 Third-Party Beneficiaries. Each party hereto intends that this
-------------------------
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto and their respective
successors and assigns as permitted under Section 8.4.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or have
caused this Agreement to be duly executed on their respective behalf by their
respective officers thereunto duly authorized, as of the day and year first
above written.
14
<PAGE>
CHATCOM, INC.
By: /s/ A. Charles Lubash
-------------------------------------
THE HIGH VIEW FUND
/s/
-----------------------------------------
Name:
Address:
THE HIGH VIEW FUND, L.P.
/s/
-----------------------------------------
Name:
Address:
The undersigned hereby agrees to act as Escrow Agent herein and agrees to
comply with the provisions of Article 3.
Brock Fensterstock Silverstein McAuliffe
& Wade LLC
_______________________________________
Name: Charles Brock
15
<PAGE>
EXHIBIT 10.2
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE
BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY. THIS NOTE AND THE SHARES OF COMMON
STOCK ISSUABLE UPON CONVERSION OF ALL OR ANY PORTION HEREOF MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS (i) A REGISTRATION
STATEMENT UNDER SAID ACT SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR
(ii) IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER
OF THESE SECURITIES, AN EXEMPTION UNDER SAID ACT AND FROM ANY APPLICABLE STATE
SECURITIES LAWS IS AVAILABLE.
9.5% CONVERTIBLE SUBORDINATED NOTE
----------------------------------
$_________ December 31, 1997
Chatsworth, California
Promise to Pay. FOR VALUE RECEIVED, the undersigned, CHATCOM, INC., a
--------------
California corporation ("Maker"), hereby promises to pay to the order of The
High View Fund ("High View"), at its principal office at 805 Third Avenue, 17th
Floor, New York, New York 10022 or to such other party or at such other place as
High View may from time to time designate in writing, the principal amount of
____________________ Dollars ($__________), together with interest thereon, in
lawful money of the United States, as hereinafter described. The entire
outstanding principal balance of this Note, together with interest thereon,
shall be due and payable on January 1, 1999.
Interest. Interest shall accrue from the date hereof on the principal
--------
amount outstanding under this Note at the rate of 9.5% per annum. Accrued
interest shall be payable in cash or shares of common stock, no par value, of
Maker ("Common Stock") at the election of Maker, such payment to be made
semiannually on June 1 and November 1 of each year commencing June 1, 1998. If
Maker elects to pay any accrued interest in shares of Common Stock, the number
of shares of Common Stock issuable shall be determined by dividing the amount of
such accrued interest due as of the interest payment date by the Market Price
(as defined below). In no event shall the interest rate payable on this Note
exceed the maximum rate of interest permitted to be charged under applicable
law.
Payment. This Note may be prepaid by Maker in whole or in part at any time
-------
without penalty. Each payment made pursuant to this Note shall be credited
first on interest then due and the remainder on principal; and interest shall
thereupon cease to accrue upon the principal so credited.
1
<PAGE>
Conversion. The holder of this Note shall have the right at any time to
----------
convert all or any portion of the outstanding principal amount under this Note,
together with all accrued and unpaid interest thereon, into fully paid and non-
assessable shares of Common Stock at the conversion price (the "Conversion
Price") equal to the greater of (i) $0.35 (the "Floor Price"), which Floor Price
shall be subject to further adjustment as set forth below or (ii) 75% of the
"Market Price" in effect on the Conversion Date (as defined below); provided
--------
however, that in no event will the Conversion Price exceed $0.95 per share (the
- -------
"Cap Price"). The "Market Price" on any date shall be the average of "Stock
Price" for the ten (10) consecutive trading days immediately preceding such
date. The "Stock Price" on any trading day is the last sale price of the Common
Stock (or if such information is not provided by such exchange or the National
Association of Securities Dealers, Inc. Automated Quotation System, the average
of the closing bid and asked prices of the Common Stock) as reported for such
day on the principal national securities exchange on which the Common Stock of
Maker is listed or admitted to trading, or if the Common Stock of Maker is not
listed or admitted to trading on any national securities exchange, as furnished
by the National Association of Securities Dealers, Inc. Automated Quotation
System, or comparable system, or in the absence of the foregoing, the fair
market value as reasonably determined by the Board of Directors of Maker.
The holder of this Note may exercise its rights to convert all or any
portion of the outstanding principal amount under this Note, together with all
accrued and unpaid interest thereon, into shares of Common Stock by surrendering
this Note to the Maker, at its principal office or at such other office or
agency maintained by Maker for that purpose, accompanied by a written notice of
election to convert the outstanding amount under this Note, or a specified
portion of such amount (as provided in the notice), executed by the holder
hereof, which notice shall specify a Conversion Date. The date specified in any
conversion notice delivered by the holder hereof, which date shall be no earlier
than the date of actual delivery of such notice, shall be defined as the
"Conversion Date."
As promptly as practicable after the surrender as herein provided of this
Note for conversion and the written notice, Maker shall deliver or cause to be
delivered certificates representing the number of fully paid and non-assessable
shares of Common Stock into which the outstanding principal amount under this
Note or such portion thereof, together with all accrued and unpaid interest
thereon, may be converted in accordance with the provisions herein. Such number
shall be determined by dividing the amount to be converted by the Conversion
Price on the applicable Conversion Date, calculated to the nearest share of
Common Stock (fractions of less than 1/2 being disregarded and fractions of 1/2
or greater being
2
<PAGE>
rounded up to the next full share). If only a portion of the outstanding
principal amount under this Note is used in such conversion, Maker shall execute
and deliver to or upon the order of the holder of this Note, a new note
evidencing the unused portion of the outstanding principal amount.
Any conversion of the outstanding principal amount under this Note or any
portion thereof shall be deemed to have been made at the close of business on
the Conversion Date specified in the applicable conversion notice, so that the
rights of the holder of this Note shall cease at such time and the person or
persons entitled to receive any of the shares of Common Stock upon conversion
shall be treated for all purposes as having become the record holder or holders
of such shares of Common Stock at such time.
The issuance of certificates for Common Stock upon the conversion of the
outstanding principal amount under this Note or any portion thereof shall be
made without charge to the holder hereof for any issue or stamp tax in respect
of the issuance of such certificates, and such certificates shall be issued in
the respective names of, or in such names as may be directed by, such holder.
In case Maker shall (i) pay a stock dividend or make a distribution in
shares of its capital stock (whether of shares of Common Stock or of capital
stock of any other class), (ii) subdivide its outstanding shares of Common
Stock, (iii) combine its outstanding shares of Common Stock into a smaller
number of such shares or (iv) issue by reclassification of its shares of Common
Stock, any shares of capital stock of Maker, the Floor Price and the Cap Price
shall be appropriately adjusted.
Subordination. The payment of the principal of and interest on this Note
-------------
is expressly subordinated and subject in right of payment to the prior payment
in full of the principal of and interest on other indebtedness of Maker then or
hereafter due and payable to any bank or other financial institution (but
excluding any trade creditors). If there shall have occurred a default in the
payment of principal or interest on any such other indebtedness to any bank or
other financial institution (but excluding any trade creditors), or if payment
on this Note would itself constitute an event of default with respect to any
such other indebtedness to any bank or other financial institution (but
excluding any trade creditors), then, unless or until such event of default
shall have been cured or waived or shall have ceased to exist, no payment shall
be made by Maker on account of principal of or interest on this Note.
Costs of Collection. If this Note is not paid in accordance with the terms
-------------------
hereof, Maker agrees to pay all
3
<PAGE>
costs and expenses of collection when incurred, including, without limitation,
reasonable attorneys' fees and expenses and court costs.
Notice. Any notice given pursuant to this Note shall be in writing and
------
shall be deemed to be sufficiently given (a) if delivered personally, upon
delivery, (b) if delivered postage prepaid, upon the earlier of actual delivery
or upon three days after being mailed, and (c) if delivered by telecopy, upon
confirmation of transmission by telecopy. Notices to Maker shall be sent to the
following address:
If to Maker: 9600 Topanga Canyon Blvd
Chatsworth, California 91311
Attention: President
Telecopy: (818) 882-1424
If to High View: 805 Third Avenue, 17th Floor
New York, New York 10022
Attention: President
Telecopy: (212) 527-7279
Governing Law. This Note is being delivered and is intended to be
-------------
performed in the State of New York, and shall be governed by and construed and
enforced in accordance with the laws of the State of York.
Severability. Every provision of this Note is intended to be severable.
------------
In the event any term or provision is declared illegal, invalid or unenforceable
for any reason whatsoever by a court of competent jurisdiction, such illegality,
invalidity or unenforceability shall not affect the balance of the terms and
provisions of this Note, which shall remain binding and enforceable.
Waivers. Maker and all other persons or corporations now or at any time
-------
liable, whether primarily or secondarily, for the payment of the indebtedness
hereby evidenced, for themselves, their heirs, legal representatives,
successors and assigns, respectively, expressly waive presentment for payment,
notice of dishonor, protest, notice of protest, and diligence in collection.
CHATCOM, INC.
By:_______________________________
4
<PAGE>
EXHIBIT 10.3
WARRANT TO PURCHASE COMMON STOCK
OF
CHATCOM, INC.
THIS IS TO CERTIFY THAT, for value received, The High View Fund or
permitted transferees or assigns (in each case, "Holder"), upon due exercise of
this Warrant, is entitled to purchase, subject to the terms and conditions
hereinafter set forth, from ChatCom, INC., a California corporation
("Corporation"), on or before the Expiration Date (as that term is hereinafter
defined), __________ fully paid and non-assessable shares of Corporation's
authorized common stock ("Common Stock"), at a purchase price of $0.375 per
share. The number of shares of Common Stock to be received upon the exercise of
this Warrant and the price to be paid therefor may be adjusted from time to time
as hereinafter set forth.
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT
OR UNLESS SOLD PURSUANT TO RULE 144 PROMULGATED UNDER SAID ACT, OR UNLESS, IN
THE OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE ISSUER
OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION PROVISIONS OF SAID ACT.
1. Definitions. As used in this Warrant, the following terms shall mean:
-----------
"Aggregate Exercise Price" - The Exercise Price times the number of
shares to be issued, from time to time, upon exercise of this Warrant.
"Capital Stock" - The Common Stock and all other outstanding shares of
capital stock of the Corporation, including all classes of the Corporation's
preferred stock.
"Common Stock" - The common stock, no par value, of Corporation.
"Convertible Securities" - Any rights or options for the purchase of,
or stock or other securities convertible into, Common Stock (whether initially
or through a series of exercises and/or conversions).
"Effective Price" - The Effective Price for an issuance of Common
Stock shall mean the quotient determined by dividing (x) the total number of
shares of Common Stock which were issued or sold, or deemed to have been issued
or sold assuming full exercise or conversion of Convertible
1
<PAGE>
Securities, by Corporation under Section 4.4 hereof into (y) the aggregate
consideration (including the minimum considera tion payable to fully exercise or
convert all Convertible Securities) received or to be received by Corporation
for such issued, or deemed issued, Common Stock under Section 4.4 hereof.
"Exercise Price" - The price to be paid per share of Common Stock upon
the exercise of this Warrant. The initial Exercise Price, shall be $0.375 per
share, subject to changes that may hereafter be effected from time to time
pursuant to Section 4.
"Expiration Date" - December 13, 2001; if the Expiration Date shall
be, in the State of California, a holiday or a day on which banks are authorized
to close, then the Expiration Date shall be the next following date which, in
the State of California, is not a holiday or a day on which banks are authorized
to close.
"Shares" - The shares of Common Stock of Corporation for which this
Warrant may be exercised.
2. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time, or from time to time, up to 5:00 p.m. New York time on the
Expiration Date, by presentation and surrender hereof at the principal office of
Corporation, or at such other office as shall have theretofore been designated
by Corporation by notice pursuant hereto, or at the office of Corporation's
stock transfer agent, if any, with the Purchase Form attached hereto duly
executed and accompanied by payment of the Aggregate Exercise Price. Payment of
the Aggregate Exercise Price may be made by a check payable to the order of the
Corporation.
Promptly after the receipt of the Aggregate Exercise Price, the Corporation
shall cause to be issued and delivered to the Holder a certificate or
certificates, registered in the name of the Holder and dated as of the date of
exercise, representing the aggregate number of full shares of Common Stock for
which this Warrant is being exercised. Such shares, when issued, shall be
validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale
(except as specified in this Warrant) and free and clear of all preemptive
rights. If this Warrant should be exercised in part only, Corporation shall,
upon surrender of this Warrant for cancellation, execute and deliver to the
Holder a new Warrant (in the same form and content as this Warrant) evidencing
the rights of the holder thereof to purchase the balance of the shares of Common
Stock purchasable hereunder.
2
<PAGE>
Corporation shall not issue fractional shares of Common Stock or scrip
representing fractional shares of Common Stock upon any exercise of this
Warrant. For any fractional share of Common Stock which the Holder hereof would
otherwise be entitled to purchase from Corporation upon such exercise,
Corporation shall purchase from the Holder such fractional share at a price
equal to an amount calculated by multiplying the fractional share (calculated to
the nearest .001 of a share) by the Exercise Price calculated as of the date of
the Purchase Form. Payment of such amount shall be made in cash or by check
payable to the order of the Holder at the time of delivery of any certificate or
certificates issuable upon such exercise.
3. Reservation of Shares; Maintenance of Registration Books. Corporation
--------------------------------------------------------
hereby agrees that, at all times, there shall be reserved and duly authorized
for issuance and delivery a sufficient number of shares of its Common Stock as
shall from time to time be issuable upon the exercise of this Warrant and the
exercise of all other warrants which have been or will have been issued by
Corporation. Corporation shall keep at its principal office a register in
which, subject to such reasonable regulations as it may prescribe, Corporation
shall provide for the registration, transfer and exchange of this Warrant.
4. Protection Against Dilution.
---------------------------
4.1 Adjustment for Stock Splits and Combinations. If Corporation at
--------------------------------------------
any time or from time to time after the date of this Warrant files an amendment
to its Articles of Incorporation effecting a subdivision or combination of the
outstanding Common Stock, the Exercise Price then in effect immediately before
such subdivision or combination shall be multiplied by a fraction: (a) the
numerator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the subdivision or combination, and (b) the
denominator of which shall be the total number of shares of Common Stock issued
and outstanding immediately after the subdivision or combination. Any
adjustment under this Section 4.1 shall become effective as of the date and time
that the Corporation files an amendment to its Articles of Incorporation
effecting the subdivision or combination.
4.2 Adjustment for Certain Dividends and Distributions. In the
---------------------------------------------------
event Corporation at any time or from time to time after the date of this
Warrant makes, or fixes a record date for the determination of holders of
Capital Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock or Convertible Securities, then and in each
such event the Exercise Price then in effect shall be decreased as of the time
of such issuance or, in the event such a record date is fixed, as of the close
of
3
<PAGE>
business on such record date, by multiplying the Exercise Price then in effect
by a fraction: (a) the numerator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date; and (b) the denominator
of which shall be the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock
(including Common Stock issuable upon the exercise of any Convertible Securities
so distributed) issuable in payment of such dividend or distribution; provided,
however, that if such record date is fixed and such dividend is not fully paid,
or if such distribution is not fully made on the date fixed therefor, the
Exercise Price shall be recomputed to reflect that such dividend was not fully
paid or that such distribution was not fully made as of the close of business
on such record date and thereafter the Exercise Price shall be adjusted pursuant
to this Section 4.2 as of the time of actual payment of such dividends or
distributions. Notwithstanding the foregoing, the provisions of this Section
4.2 shall not apply to shares of Common Stock or Convertible Securities issued
by Corporation to holders of its preferred stock or its Convertible Securities
in lieu of cash otherwise payable as periodic dividends/interest under any
series of its preferred stock or Convertible Securities.
4.3 Adjustments for Other Dividends and Distributions. In the event
--------------------------------------------------
Corporation at any time or from time to time after the date of this Warrant
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
Corporation other than shares of Common Stock or Convertible Securities, or
payable in property or other assets of the Corporation (including stock of any
subsidiary), then and in each such event provision shall be made so that the
Holder shall receive upon exercise of this Warrant, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities,
property, or other assets of Corporation which the Holder would have received
had this Warrant been fully exercised for Common Stock on the date of such event
and had it thereafter, during the period from the date of such event to and
including the date of exercise, retained such securities, property, or other
assets receivable by it as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 4 with respect to
the rights of the Holder.
4
<PAGE>
4.4 Adjustments for Issuances or Sales of Common Stock at Less than
---------------------------------------------------------------
Exercise Price.
- --------------
(a) In the event that the Corporation at any time or from time to time
after the date of this Warrant issues Common Stock or Convertible Securities,
other than (i) as a dividend or other distribution as provided in Section 4.2
above, (ii) upon a subdivision or combination of shares of Common Stock as
provided in Section 4.1 above, (iii) upon the exercise or conversion of a
Convertible Security for which an appropriate adjustment has already been made,
or (iv) a Permitted Security (as defined below), for an Effective Price less
than the Exercise Price, then and in each such case the then existing Exercise
Price shall be reduced as of the opening of business on the date of such issue
or sale (or such deemed issue or sale) to a price equal to the then existing
Exercise Price multiplied by a fraction, the numerator of which shall be (i) the
number of shares of Common Stock outstanding or deemed outstanding immediately
before that issue or sale, plus (ii) the number of shares of Common Stock which
the aggregate consideration, if any, received (or by the express provisions
hereof, deemed to have been received) by Corporation on that issue or sale would
purchase at the then current Exercise Price, and the denominator of which shall
be the number of shares of Corporation's Common Stock outstanding or deemed
outstanding immediately after the issue or sale. For the purposes of this
Section 4.4, a "Permitted Security" shall mean the Series E Convertible
Redeemable Preferred Stock of the Company and the Common Stock issued upon the
conversion of such preferred stock.
(b) For the purpose of making any adjustment required under this
Section 4.4, the consideration received by Corporation for any issue or sale of
securities shall: (i) to the extent it consists of cash, be computed at the
aggregate sales price paid in cash; (ii) to the extent it consists of property
other than cash, be computed at the fair value of that property as determined in
good faith by Corporation's board of directors; and (iii) if Common Stock,
Convertible Securities or other rights or options to purchase either Common
Stock, Convertible Securities or other rights or options are issued or sold
together with other stock or securities or other assets of Corporation for a
consideration which covers both, be computed as the portion of the consideration
so received that may be reasonably determined in good faith by Corporation's
board of directors to be allocable to such Common Stock, Convertible Securities
or other rights or options.
(c) For the purpose of the adjustments required under this Section
4.4, if Corporation issues or sells any Convertible Securities, then in each
such case if the Effective Price of the Common Stock underlying such
5
<PAGE>
Convertible Securities is less than the prevailing Exercise Price, Corporation
shall be deemed to have issued at the time of the issuance of such Convertible
Securities the maximum number of shares of Common Stock (determined without
regard to adjustment provisions similar to those contained in this Section 4)
issuable upon exercise or conversion of the total amount of Convertible
Securities and to have received as consideration for the issuance of such shares
of Common Stock an amount equal to the amount of consideration, if any, received
by Corporation for the issuance of such Convertible Securities, plus the minimum
amount of consideration, if any, payable to Corporation (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon exercise or conversion of the Convertible Securities.
4.5 Adjustment for Reclassification, Exchange and Substitution. If
----------------------------------------------------------
the Common Stock issuable upon the exercise of this Warrant is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets, provided for elsewhere in this Section 4), then
and in such event each Holder shall have the right thereafter, upon exercise of
this Warrant to receive the kind and amount of stock and other securities and
property receivable upon such reorganization or other change in an amount equal
to the amount that the Holder would have been entitled to have had it
immediately prior to such reorganization, reclassification or change exercised
this Warrant, but only to the extent this Warrant is actually exercised, all
subject to further adjustment as provided herein.
4.6 Reorganization, Mergers, Consolidations or Sales of Assets. If
----------------------------------------------------------
at any time or from time to time there is a capital reorganization of the Common
Stock (other than a recapitalization, subdivision, combination, reclassification
or exchange of the Common Stock provided for elsewhere in this Section 4) or
merger or consolidation of Corporation with or into another corporation, or the
sale of all or substantially all of Corporation's properties and assets to any
other person, then, as a part of such reorganization, merger, consolidation or
sale, provision shall be made so that the Holder shall thereafter be entitled to
receive upon exercise of this Warrant (and only to the extent this Warrant is
exercised), the number of shares of stock or other securities or property of
Corporation, or of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of Common Stock, or other securities,
deliverable upon the exercise of this Warrant would otherwise have been entitled
on such capital reorganization, merger, consolidation or sale. In any such
case, appropriate adjustments shall be
6
<PAGE>
made in the application of the provisions of this Section 4 (including
adjustment of the Exercise Price then in effect and number of Shares purchasable
upon exercise of this Warrant) which shall be applicable after such events;
provided, however, that any such adjustments shall be made so as to ensure that
the provisions of this Section 4 applicable after such events shall, to the
extent practicable, be equivalent to the provisions of this Section 4 applicable
before such events.
4.7 Reversal of Adjustment. Upon the expiration of any rights,
----------------------
options, warrants or conversion or exchange privileges, if any thereof shall not
have been exercised, the Exercise Price and the number of Shares purchasable
upon the exercise of this Warrant shall, upon such expiration, be readjusted and
shall thereafter be such as it would have been had it been originally adjusted
(or had the original adjustment not been required, as the case may be) as if
the only shares of Common Stock so issued were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such rights, options, warrants
or conversion or exchange rights; provided, however, that no such readjustment
shall have the effect of increasing the Exercise Price by an amount in excess of
the amount of the adjustment initially made in respect to the issuance, sale or
grant of such rights, options, warrants or conversion or exchange rights.
4.8 Certificate of Adjustment. In any case of an adjustment or
-------------------------
readjustment of the Exercise Price or the number of shares of Common Stock, or
other securities issuable upon exercise of this Warrant, Corporation's chief
financial officer (or other officer designated by Corporation's board of
directors) shall compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and shall mail such certificate, by first class mail, postage
prepaid, to the Holder at the Holder's address as shown in Corporation's books.
The certificate shall set forth such adjustment or readjustment, showing in
detail the facts upon which such adjustment or readjustment is based.
4.9 Adjustment in Number of Shares. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Article 4, the number of
Shares issuable upon the exercise of this Warrant shall be adjusted, to the
nearest full Share, by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Shares issuable
upon exercise of this Warrant immediately prior to such adjustment and dividing
the product so obtained by the adjusted Exercise Price.
5. Restriction on Transfer. This Warrant and the Common Stock to be
-----------------------
received upon exercise has been or will be,
7
<PAGE>
as the case may be, acquired for investment and not with a view to distribution.
The holder of the underlying Common Stock agrees that he will not sell or
transfer the underlying Common Stock unless (i) the underlying Common Stock and
the sale thereof are the subject of a Registration Statement filed under the
Securities Act of 1933, as amended ("Act"), with the Securities and Exchange
Commission ("Commission"), which shall have become effective, or (ii) the holder
shall have furnished the Corporation with an opinion of counsel, which opinion
and counsel are reasonably satisfactory to counsel for the Corporation, to the
effect that the proposed transfer, without registration as aforesaid, may be
effected without a violation of Section 5 of the Act or any applicable state
securities law. The underlying Common Stock certificates shall bear the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE PLEDGED OR HYPOTHECATED, AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER
THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL OF THE CORPORATION THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR ANY APPLICABLE STATE
SECURITIES LAW."
In the event that the underlying Common Stock is so registered pursuant to
the Act, or such a satisfactory opinion of counsel is obtained with respect to a
public distribution, then, the holder of the underlying Common Stock shall be
entitled to exchange its Common Stock certificates for certificates without the
foregoing legend.
6. Additional Rights of Warrant Holder. This Warrant, prior to its
-----------------------------------
exercise, shall not entitle its holder to any rights of a shareholder of the
Corporation, including without limitation, the right to vote, to receive
dividends or other distributions, to exercise any preemptive rights, and to
receive any notice of any proceedings of the Corporation, except as provided for
in this Warrant. If, at any time, or from time to time, while this Warrant
remains outstanding, Corporation shall (i) dissolve, liquidate or wind up;
reorganize, reclassify or effect some other change of the Common Stock; effect a
consolidation or merger where the Corporation is not the surviving entity; sell,
lease, transfer or convey substantially all of the Corporation's assets
(collectively, the "Corporate Changes"); or (ii) declare any dividend, authorize
any distribution, or offer any rights, either in securities, property, assets,
or cash, upon its Common Stock, then Corporation shall cause notice thereof to
be mailed to the holder of this Warrant, at least twenty (20) calendar days
prior to (i) the date of the Corporate Change or (ii) the date as of which
holders of Common Stock who shall
8
<PAGE>
participate in such dividend, distribution, or offer of rights are to be
determined, as the case may be. Such notice shall also specify the date as of
which holders of Common Stock who shall participate in such dividend,
distribution, or offer of rights are to be determined.
7. Loss, Theft, Destruction or Mutilation. Upon receipt by Corporation
--------------------------------------
of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant and, in case of loss, theft or destruction, of
indemnity reasonably satisfactory to it and, in case of mutilation, upon
surrender and cancellation hereof, Corporation will execute and deliver, in lieu
thereof, a new Warrant of like tenor, in lieu of this Warrant.
8. Taxes, Costs and Expenses. Corporation will pay all taxes, costs and
-------------------------
expenses incident to the performance of its obligations under this Warrant,
including all taxes, costs and expenses incident to the issuance of this Warrant
and the shares of Common Stock issuable upon the exercise hereof.
9. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be delivered by personal service or
telegram, telecopy or registered or certified mail, postage prepaid and, if to
the Holder of this Warrant, addressed to him at the address furnished to
Corporation in writing by such Holder and, if to Corporation, addressed to it at
9600 Topanga Canyon Boulevard, Chatsworth, California 91311, or to such other
address as may have been furnished to the Holder of this Warrant in writing by
Corporation. Any notice sent by registered or certified mail will be deemed to
have been given three (3) days after the date on which it is mailed. All other
notices will be deemed given when received.
10. Binding Obligation. All terms and conditions contained in this
------------------
Warrant shall bind and inure to the benefit of the respective heirs,
transferees, assignees, and successors of the Holder of this Warrant and
Corporation.
11. Law Governing. This Warrant shall be construed and enforced in
-------------
accordance with the laws of the State of New York. The Company hereby consents
to the exclusive jurisdiction of any court of the State of New York or the
United States located in the City of New York over all actions or proceedings
with respect to this Warrant, and agrees that all such actions or proceedings
may be instituted and maintained only in such a forum.
12. Titles. The titles of the sections contained in this Warrant are for
------
convenience of reference only, and are not to be considered in construing this
Warrant. When the context so requires in this Warrant, the masculine gender
9
<PAGE>
includes the feminine or neuter, and the singular number includes the plural.
13. Severability. If, in any action before any court or agency legally
------------
empowered to enforce any provision contained herein, any provision hereof is
found to be unenforceable, then such provision shall be deemed modified to the
extent necessary to make it enforceable by such court or agency. If any such
provision is not enforceable as set forth in the preceding sentence, the
unenforceability of such provision shall not affect the other provisions of this
Warrant, but this Warrant shall be construed as if such unenforceable provision
had never been contained herein.
14. Amendment. This Warrant may not be modified or amended except by
---------
written agreement of Corporation and the holder hereof.
15. Attorneys' Fees. The Company and the Holder, by accepting this
---------------
Warrant, agree that if any action is brought to enforce this Warrant, then the
prevailing party shall be entitled, in addition to all other relief, to recover
its reasonable attorneys' fees and other costs and disbursements incurred by it
in connection therewith.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be duly
executed by its duly authorized representative.
Dated: December 31, 1997 CHATCOM, INC.
By:__________________________
10
<PAGE>
PURCHASE FORM
(To be executed only upon
exercise of the Warrant)
The undersigned registered holder of the Warrant to which this Purchase
Form is attached irrevocably exercises such Warrant for the purchase of _____
shares of Common Stock of ChatCom, Inc. purchasable on the date hereof, and
herewith makes payment therefor in the amount of $______ all at the price and
on the terms and conditions specified in such Warrant.
The undersigned hereby requests that a certificate (or _______
certificates in denominations of _______ shares) for the shares of Common Stock
of ChatCom, Inc. hereby purchased be issued in the name of and delivered to
(choose one) (a) the undersigned or (b) ________________ , whose address is
___________________________________________________
__________________.
Dated: ________________, 19__.
By:_____________________________
(Signature of Registered
Holder)
NOTICE: The signature to this Purchase Form must correspond with the name as
written upon the face if the Warrant to which this Purchase Form is
attached in every particular, without alteration or enlargement or any
change whatever.
11
<PAGE>
ASSIGNMENT FORM
(To be executed only upon
the assignment of the Warrant)
FOR VALUE RECEIVED, the undersigned registered Holder of the Warrant to
which this Assignment Form is attached hereby sells, assigns and transfers unto
________________________________________________, whose address is
_________________________________________________% of the rights of the
undersigned under such Warrant, with respect to shares of Common Stock of
ChatCom, Inc., and does hereby irrevocable constitute and appoint
_________________________ its Attorney to register such transfer on the books of
ChatCom, Inc., maintained for the purpose, with full power of substitution.
Dated: ______________, 19__.
By:__________________________
(Signature of Registered
Holder)
NOTICE: The signature to this Assignment Form must correspond with the name as
written upon the face of the Warrant to which this Assignment Form is
attached in every particular, without alteration or enlargement or any
change whatever.
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-START> OCT-01-1997 APR-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 557 557
<SECURITIES> 0 0
<RECEIVABLES> 1,118 1,118
<ALLOWANCES> (265) (265)
<INVENTORY> 4,503 4,503
<CURRENT-ASSETS> 6,015 6,015
<PP&E> 1,611 1,611
<DEPRECIATION> (1,018) (1,018)
<TOTAL-ASSETS> 6,632 6,632
<CURRENT-LIABILITIES> 6,605 6,605
<BONDS> 0 0
0 0
2,344 2,344
<COMMON> 10,325 10,325
<OTHER-SE> (12,664) (12,664)
<TOTAL-LIABILITY-AND-EQUITY> 6,632 6,632
<SALES> (521) 6,060
<TOTAL-REVENUES> (521) 6,060
<CGS> 328 4,485
<TOTAL-COSTS> 328 4,485
<OTHER-EXPENSES> 1,590 6,198
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 182 190
<INCOME-PRETAX> (2,621) (4,813)
<INCOME-TAX> 0 1
<INCOME-CONTINUING> (2,621) (4,814)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,621) (4,814)
<EPS-PRIMARY> (0.27) (0.51)
<EPS-DILUTED> (0.27) (0.51)
</TABLE>
