EXHIBIT 99
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
ChatCom, Inc. (the "Company") desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 and
is filing this Form 8-K to do so. Many of the following important factors have
been discussed in the Company's prior filings with the Securities and Exchange
Commission (the "SEC").
The Company wishes to caution readers that the following important factors,
among others, have affected, or in the future could affect, the Company's actual
results and could cause the Company's actual results for future periods to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
IMPORTANT FACTORS
LIQUIDITY AND ABILITY TO CONTINUE AS A GOING CONCERN
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The Company has incurred operating losses in each of its last three fiscal
years and in the three months ended June 30, 1996. Should the Company continue
to experience operating losses in the future which results in a significant
utilization of liquid resources, the Company's liquidity and its ability to
sustain operations at current levels or to continue as a going concern could be
materially, adversely affected.
The Company previously relied upon a line-of-credit financing arrangement
for working capital to support its operations. In May 1996, the Company repaid
all amounts owing under the line-of-credit and terminated the agreement. The
Company intends to meet its short-term working capital needs with the remaining
proceeds from a private placement of equity securities that it completed in May,
1996 and the proceeds from the exercise of warrants and options in June 1996.
In July 1996, the Company reduced its workforce in connection with a
restructuring to allow for greater conservation of liquid resources and the
outsourcing of a greater portion of the manufacturing activities. The Company
believes that the increased outsourcing of manufacturing will allow the Company
to respond more rapidly to changes in sales volume, reduce the amount of
inventory on hand and realize cost savings by utilizing the purchasing power of
the Company's subcontractors for component purchases. The Company believes that
after giving effect to the recent reduction in the Company's workforce, the
capital resources that it currently possesses should be sufficient to sustain
operations at current levels through the end of the fiscal year even without a
significant increase in revenue during the balance of the fiscal year.
Additional capital resources might be obtained through the calling or voluntary
exercise of warrants that were issued in connection with the Company's 1995
private placement. The exercise of these warrants could yield proceeds of up to
$4,819,500. The Company may call these warrants for redemption at $3.00 per
warrant if the market value of the Company's common stock ("Common Stock") has
been greater than $3.60 per share for ten consecutive trading days. As of the
date of this report, the conditions necessary for the Company to call the
warrants have not been satisfied.
Should the Company experience significant growth in revenues that requires
the utilization of significant liquid resources for the financing of increased
accounts receivable and inventory balances, the Company may seek a new line-of-
credit financing agreement to assist in meeting such cash requirements. There
can be no assurance that the Company will be able to secure such an agreement
when desired, and failure to obtain such an agreement would be likely to have a
materially adverse effect upon the Company's liquidity. The Company does not
currently have a committment from any third party to provide short-term
financing.
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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 then 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 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. If adequate funds are not available to
satisfy capital requirements, the Company may be required to curtail its
operations significantly or to obtain funds through arrangements with strategic
partners or others that may require the Company to relinquish material rights to
certain of its technologies or potential markets.
FLUCTUATIONS IN OPERATING RESULTS
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The Company's reported results of operations are subject to considerable
fluctuations due to changes in demand for the Company's products and other
factors, and there can be no assurance that the Company will be profitable in
any particular period. Demand for the Company's products in each of the markets
it serves can vary significantly from quarter to quarter due to revisions in
budgets or schedules for customer projects requiring the Company's products,
changes in demand for systems that incorporate the Company's products, general
business and economic factors and other factors beyond the control of the
Company.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT
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The markets served by the Company are characterized by rapid technological
advances, downward price pressure in the marketplace as technologies mature,
changes in customer requirements, frequent new product introductions and
enhancements and price erosion. The Company's business requires substantial
ongoing research and development efforts and expenditures, and its future
success will depend on its ability to enhance its current products, reduce
product costs and develop and introduce new products that both keep pace with
technological developments in response to evolving customer requirements and
that also achieve market acceptance.
The remote access product market in particular is characterized by the
continuing advancement of technology, including technologies relating to the
increased efficiency of remote data transmission and the speed and efficiency of
microprocessors. The Company's strategy is to update its products to
accommodate new technologies; however, there can be no assurance that the new
technologies will not render the Company's products obsolete. Management
believes the Company must continue to respond quickly to the needs of its
customers for broad product functionality and to advances in hardware, emerging
technologies such as ISDN (Integrated Services Digital Network), Frame Relay and
ATM (Asynchronous Transfer Mode), operating system software and application
software. There can be no assurance that the Company will be able to respond
effectively to technological changes or product announcements by its
competitors. If the Company is unable, for technological or other reasons, to
develop and introduce products and applications in a timely manner in response
to changing market conditions or customer requirements, the Company's operating
results and financial condition could be materially, adversely affected.
Additionally, the marketability of the Company's products is influenced to
a significant degree by the management capabilities and efficiency of
proprietary software that is an integral component of the remote access
solutions that are offered by the Company. The Company's strategy is to
continually update its proprietary remote access management software to increase
its capabilities and efficiency as well as to maintain its compatibility with
application and operating software and network protocols that proliferate in the
marketplace. There can be no assurance that the Company's competitors will not
introduce
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proprietary management software that could render the Company's products
obsolete or that the Company will be able to revise its management software so
that it is compatible with applications software, operating software and network
protocols that may be introduced in the future. If the Company is unable to
develop or revise its management software in response to changes in its
operating environment or customer requirements, the Company's operating results
and financial condition could be materially, adversely affected.
NEED TO MANAGE PRODUCT TRANSITIONS
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The introduction of new and enhanced products requires the Company to
manage the transition from older products in order to minimize disruption in
customer ordering patterns, avoid excessive levels of older product inventories
and ensure that adequate supplies of new products can be delivered to meet
customer demand. There can be no assurance that the Company will successfully
manage the transition to selling new products as such products are developed and
introduced, and the failure to do so could have a materially adverse effect on
the Company's operating results and financial condition.
HIGHLY COMPETITIVE ENVIRONMENT
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The market for remote access products is highly competitive. The Company
competes with traditional vendors of terminal servers, personal computers,
modems, remote control software, terminal emulation software and application
specific remote access solutions. The Company also competes with suppliers of
routers, hubs and other data communication products. In the future, the Company
expects competition from companies offering remote access solutions based on
emerging technologies such as switched digital telephone services. In addition,
the Company may encounter increased competition from operating systems ("OS")
and network operating system ("NOS") vendors to the extent such vendors include
full remote access capabilities in their products. The Company may also
encounter future competition from telephony service providers (such as AT&T or
the regional Bell operating companies) that may offer remote access services
through their telephone networks.
The basic method of remote access for a business using the Company's
products involves a remote user establishing a connection directly to a remote
access server on their company's network. This method of remote access could
migrate to one in which the remote user establishes a connection to a public
network, such as the Internet, to which the company network is also connected.
The development of remote access service offerings from public networks could
have a materially adverse effect on the Company's business.
Due in part to liquidity constraints, the Company decreased its sales and
marketing expenditures during the quarters ended December 31, 1995 and March 31,
1996. Although such liquidity constraints have since been alleviated and the
Company has subsequently increased its sales and marketing efforts, the prior
marketing hiatus may continue to have some adverse impact on the Company's
revenues for subsequent periods due to the protracted sales cycle of the
Company's products. The Company's ability to thereafter increase revenues will
be dependent upon a number of factors, including but not limited to the market's
acceptance of the Company's future products, the ability of the Company to
penetrate new markets and the strength of the Company's competition. There can
be no assurance that the Company's previous decrease in sales and marketing
efforts will not have a materially adverse effect on the Company's competitive
position in future periods.
Increased competition could result in price reductions and loss of market
share, which would adversely affect the Company's results of operations. Many
of the Company's current and potential competitors have greater financial,
marketing, technical and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully with its
existing competitors or any new competitors.
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RELIANCE ON CERTAIN MARKETS; EARLY STAGE OF MARKET
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The Company currently devotes a majority of its product development,
manufacturing, marketing and sales resources to the remote access market.
Although the Company believes that its concentrated focus provides it with
certain competitive advantages in the remote access market, this focus may also
leave the Company more vulnerable to a decline in the remote access market than
companies with more diverse product offerings. In addition, the Company's
future financial performance will depend in large part on continued growth of
the remote access market, which in turn will depend in part on the number of
organizations utilizing remote access products and the number of applications
developed for use with those products. There can be no assurance that these
markets will continue to grow or that the Company will be able to respond
effectively to the evolving requirements of these markets. Any significant
decline in, or significant decrease in the growth rate of, the remote access
market could have a materially adverse effect on the Company's results of
operations and financial condition. Additionally, many of the Company's
customers do not yet have a standard remote access solution, and there can be no
assurance that the Company's products will be the standard adopted by its
customers.
The Company has recently begun to devote a significant portion of its
product development, sales and marketing resources to serving the server
consolidation market. The server consolidation market is a substantially larger
market than the remote access market and is serviced by competitors with far
greater resources than those of the Company. The Company believes that its
current products and its products under development have unique features and
attributes that will be attractive to certain segments of the server
consolidation market. The Company's future success and growth is in large part
dependent upon its ability to forge significant inroads in the server
consolidation market. However, there can be no assurance that the Company's
products will be accepted in the server consolidation market, or that any
significant inroads in such market will be made.
POTENTIAL ADVERSE IMPACT OF PRODUCT RETURNS AND PRICE REDUCTIONS
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The Company provides one of its resellers with product return rights for
stock balancing and price protection rights and any distributors that the
Company may utilize in the future will likely be afforded similar rights. Stock
balancing rights permit the reseller to return products to the Company for
credit, within specified limits and subject to purchasing an equal amount of
other Company products. Price protection rights require that the Company grant
retroactive price adjustments for inventories of the Company's products held by
that reseller if the Company lowers its price for such products. There can be
no assurance that the Company will not experience significant returns or price
protection adjustments in the future that could have a materially adverse effect
on the Company's operating results and financial condition.
PRODUCT DEFECTS
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New products, when first released by the Company, may contain undetected
design faults and software errors, or "bugs" that, despite testing by the
Company, are discovered only after a product has been installed and used by
customers. There can be no assurance that faults or errors in the Company's
existing products or in new products introduced by the Company will not be
discovered in the future, causing delays in product introductions and shipments
or requiring design modifications that could adversely affect the Company's
competitive position and results of operations. In addition, there can be no
assurance that new products or product enhancements developed by the Company
will achieve market acceptance or, if successful, will not adversely impact the
sales of the Company's existing products. On several occasions, the Company has
discovered minor design defects in its products that have caused delays in the
introduction of products. To date, however, the Company has not experienced any
significant problems in this regard and has not recalled products as a result of
a product defect.
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DEPENDENCE ON KEY PERSONNEL
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The Company's future success depends in large part on the continued service
of its key marketing, sales and management personnel. The Company is dependent
upon its ability to identify, hire, train, retain and motivate high quality
personnel, especially highly skilled engineers involved in the ongoing hardware
and software development required to refine the existing products, to introduce
enhancements for future applications and to develop new products. The Company
is particularly dependent on the skills and contributions of certain of its
management personnel, although the Company does not have any long-term
employment agreements with any of these individuals. Competition for personnel
in the Company's industry, as well as in the computer hardware and software
industry, is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. There can be no assurance that the Company's
current employees will continue to work for the Company or that the Company will
be able to obtain the services of additional personnel necessary for the
Company's growth, if any.
DEPENDENCE ON TIMELY RECEIPT OF ACCEPTABLE COMPONENTS
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The Company depends on the timely receipt of non-defective components to
meet its manufacturing schedule. The Company's operating results or financial
condition could be adversely affected by the receipt of a significant number of
defective components or a delay in component delivery, an increase in component
prices or the inability of the Company to obtain lower component prices in
response to competitive pressures on the pricing of the Company's products.
RELIANCE ON CERTAIN SUPPLIERS
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The Company purchases from various independent suppliers numerous parts,
supplies and other components, which the Company assembles into products.
Although there are at least dual suppliers for many of such parts, supplies and
components, the Company currently relies on single sources of supply for certain
parts and components, and the Company is vulnerable to product changes by and
variances in product quality from these suppliers. Although management believes
that such changes and quality fluctuations could be accommodated by the Company,
they may necessitate changes in the Company's product design or manufacturing
methods, and the Company could experience temporary delays or interruptions in
supply while such changes are incorporated or a new source of supply is
procured. Any future disruptions in supply of suitable parts and components
from the Company's principal suppliers could have a materially adverse effect on
the Company's operating results and financial condition.
Additionally, in an effort to reduce the inventory of individual
components, the Company has recently instituted, and intends to implement for
subassemblies that meet vendor volume requirements, "turn key" purchasing for
some of its products, whereby instead of purchasing individual components and
sending them to contractors for soldering, the final subassemblies themselves
are purchased from the suppliers. There can be no assurance that such increased
reliance on "turn key" purchasing will not increase the risk of possible
disruptions in supply, or that such subassemblies will consistently meet the
requirements of the Company.
MANAGEMENT OF INVENTORY; RISK OF INVENTORY OBSOLESCENCE
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The marketplace dictates that many of the Company's products be shipped
very quickly after an order is received. Since purchased component and
manufacturing lead times are typically much longer than the short order
fulfillment times allowed by the marketplace, the Company is required to
maintain adequate inventories of both components and finished goods, and must
accurately forecast demand for finished products. Historically, the Company has
been unable to accurately forecast specific future demand, requiring it to
maintain relatively large inventory levels, which has had an adverse effect on
its financial condition. The relatively high levels of inventories have also
contributed to the Company
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experiencing costs relating to obsolescence of inventories, which has had an
adverse effect on the Company's results of operations and financial condition.
Engineering refinements to the Company's new hardware and software products
are relatively common. These changes can result in the disruption of the
manufacturing operation and delays in delivery dates. These changes also can
cause the finished goods inventory to enjoy a relatively short shelf life or may
require the Company to incur additional costs to rework the finished goods or
work-in-process inventories that were produced prior to the engineering change.
These and other circumstances, including inaccurate forecasts of customer
demand, poor availability of purchased components, supplier quality problems,
allocation limitations of key components by their manufacturer, carrier strikes
or damage to products during manufacture could result in a buildup of excess
components of finished goods on the one hand or an inability to deliver product
on a timely basis on the other hand, either of which could have a materially
adverse effect on the Company's operating results and financial condition.
The Company has incurred inventory writedowns in the past. While the
Company maintains valuation allowances for excess and obsolete inventories,
which it believes to be adequate, significant changes in the technology
prevailing in the industry could require the Company to record additional
valuation reserves. Should future writedowns become necessary, such writedowns
could have a materially adverse effect on the Company's operating results and
financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
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The Company's future success and competitive position is dependent partly
upon its proprietary technology, and the Company relies in part on trademark and
copyright law and, to a lesser extent, patent law to protect its intellectual
property. There can be no assurance that any patent owned by the Company will
not be invalidated, circumvented or challenged, that the rights granted
thereunder will provide competitive advantages to the Company or that any of the
Company's pending or future patent applications will be issued within the scope
of the claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology, duplicate the Company's technology or design around
the patents owned by the Company. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
POTENTIAL EROSION OF PROFIT MARGINS
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As a result of competitive pressures and technological changes, the sales
price of the Company's current products may decrease over time. As markets
develop for the Company's products, the Company expects that the average selling
price will decrease, which will adversely affect gross profit margins to the
extent that such decreases are not offset by new higher-margin products or
product cost reductions. In addition, certain of the Company's competitors have
significantly greater resources than the Company, and the market for the
Company's products is relatively new and undeveloped. There can be no assurance
that a competitor will not enter the remote access communications market and
devote substantial resources to the introduction of competing products at lower
prices, which could require the Company to reduce the price of its products.
Such a price reduction could have an adverse effect on the Company's profit
margins, and accordingly, on its operating results and financial condition.
POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND PREFERRED STOCK
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The Company previously has issued or granted shares of convertible
preferred stock, warrants and stock options that currently are convertible into
or exercisable for a substantial number of shares of the Company's Common Stock.
Because the Company anticipates that the trading price of Common Stock at the
time of exercise of any such options or warrants or conversion of such preferred
stock will exceed the exercise or conversion price, such exercise or conversion
will have a dilutive effect on the Company's shareholders.
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