U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 0-20462
CHATCOM, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 TOPANGA CANYON BOULEVARD, CHATSWORTH, CALIFORNIA 91311
(Address of principal executive offices)
818/709-1778
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of November 11, 1996, there were 9,807,536 shares of the issuer's
common stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
Exhibit Index on Page 13
Page 1 of 14
CHATCOM, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BALANCE SHEETS (unaudited)
- --------------------------------------------------------------------------------
September 30, March 31,
ASSETS Notes 1996 1996
------- ------------- -----------
CURRENT ASSETS:
Cash $ 842,535 $ 1,067,397
Restricted cash 500,000
Accounts receivable, net of allowances of $167,917
(September 30, 1996) and $262,228 (March 31, 1996) 1,461,059 1,968,267
Inventories 2 3,174,368 3,481,195
Prepaid expenses and other current assets 223,317 201,431
----------- -----------
Total current assets 5,701,279 7,218,290
EQUIPMENT AND FIXTURES, Net 3 546,820 539,449
DEPOSITS 22,383 20,693
----------- -----------
TOTAL $ 6,270,482 $ 7,778,432
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,061,246 $ 1,842,942
Accrued expenses 693,602 907,668
Short term borrowings 4 938,461
Current portion of capital lease obligations 28,510 29,525
----------- -----------
Total current liabilities 1,783,358 3,718,596
CAPITAL LEASE OBLIGATIONS
-less current portion 21,876 18,583
SHAREHOLDERS' EQUITY 5
Preferred stock, no par value;
authorized 1,000,000 shares;
Series B Preferred Stock, $20,000 stated value per
share, authorized 1,000 shares, issued and
outstanding 0 and 75 shares at September 30,
and March 31, 1996, respectively 1,294,000
Series C Preferred Stock, $20,000 stated value per
share, authorized 1,000 shares, issued and
outstanding 45 and 0 shares at September 30,
and March 31, 1996, respectively 795,000
Common stock, no par value; authorized
25,000,000 shares; issued and outstanding
9,289,900 and 7,536,629 shares at September 30,
and March 31, 1996, respectively 8,567,946 5,859,660
Additional paid-in capital 1,435,711 1,435,711
Accumulated deficit (6,333,409) (4,548,118)
----------- -----------
Total shareholders' equity 4,465,248 4,041,253
----------- -----------
TOTAL $ 6,270,482 $ 7,778,432
=========== ===========
See accompanying notes to financial statements
Page 2 of 14
CHATCOM, INC.
STATEMENTS OF OPERATIONS (unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
SALES $ 2,208,896 $ 3,716,988 $ 4,893,212 $ 8,200,644
COST OF GOODS SOLD 1,519,808 2,553,154 3,334,258 5,280,337
----------- ----------- ----------- -----------
GROSS PROFIT 689,088 1,163,834 1,558,954 2,920,307
OPERATING EXPENSES
Selling 834,366 975,255 1,575,935 1,955,174
General and administrative 697,227 520,028 1,204,178 907,699
Research and development 255,876 234,396 453,028 464,224
Severance expense 61,484
----------- ----------- ----------- -----------
Total operating expenses 1,787,469 1,729,679 3,294,625 3,327,097
LOSS FROM OPERATIONS (1,098,381) (565,845) (1,735,671) (406,790)
INTEREST INCOME 12,082 27,954
INTEREST EXPENSE 1,839 38,684 10,502 71,829
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,088,138) (604,529) (1,718,219) (478,619)
PROVISION FOR INCOME
TAXES 2,000 4,000
----------- ---------- ----------- -----------
NET LOSS $(1,088,138) $ (606,529) $(1,718,219) $ (482,619)
=========== ========== =========== ===========
LOSS PER SHARE: (Note 6)
Primary and fully diluted loss
per share $ (0.13) $ (0.08) $ (0.21) $ (0.06)
=========== ========== =========== ===========
Weighted average number of
common shares and common
share equivalents (primary
and fully diluted) 8,553,457 7,536,629 8,139,945 7,536,345
=========== ========== =========== ===========
See accompanying notes to financial statements
Page 3 of 14
CHATCOM, INC.
STATEMENTS OF CASH FLOWS (unaudited)
- ------------------------------------------------------------------------------
Six Months Ended
September 30,
1996 1995
------------ -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(1,718,219) $ (482,619)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 114,075 175,269
Provision for losses on accounts
receivable 142,879
Changes in operating assets and
liabilities:
Restricted cash 500,000
Accounts receivable 364,329 689,215
Inventories 306,827 (593,093)
Prepaid expenses and other
current assets (21,886) 92,524
Deposits (1,690) (500)
Accounts payable (781,696) (593,356)
Accrued expenses (236,857) (153,214)
----------- ----------
Net cash used in operating
activities (1,332,238) (865,774)
CASH FLOWS FROM INVESTING
ACTIVITIES-
Capital expenditures (99,858) (142,135)
----------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings under notes payable 921,688
Principal payments of notes payable (938,461) (1,075,000)
Principal payments on capital leases (19,310) (15,895)
Proceeds from sale of preferred stock 1,325,000
Payment of dividends on preferred
stock (10,495)
Collection of subscriptions receivable 40,000
Exercise of stock options and warrants 850,500 900
----------- ----------
Net cash provided (used) by
financing activities 1,207,234 (128,307)
----------- ----------
NET DECREASE IN CASH (224,862) (1,136,216)
CASH, BEGINNING OF PERIOD 1,067,397 1,457,260
----------- -----------
CASH, END OF PERIOD $ 842,535 $ 321,044
=========== ===========
(Continued)
Page 4 of 14
CHATCOM, INC.
STATEMENTS OF CASH FLOWS (unaudited) Continued
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended September 30, 1996, the Company accrued dividends
on preferred stock of $67,072. Dividends of $10,495 were paid in cash,
dividends of $33,786 were paid through the issuance of 24,194 shares of the
Company's common stock and dividends of $22,792 were accrued but unpaid at
September 30, 1996.
During the six months ended September 30, 1996 and 1995, the Company paid
interest of $10,473 and $85,693, respectively, and taxes of $425 and $250,
respectively.
During the six months ended September 30, 1996, the Company entered into a
capital lease agreement for equipment with costs of $21,588.
(Concluded)
See accompanying notes to financial statements.
Page 5 of 14
CHATCOM, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. ACCOUNTING POLICIES
The unaudited financial statements presented herein have been prepared
by ChatCom, Inc. (the "Company") in accordance with the accounting
policies described in its March 31, 1996 audited financial statements
and should be read in conjunction with the notes thereto. In the
opinion of management, all adjustments which are necessary to present
fairly the Company's financial position for the interim periods
presented (consisting only of normal recurring adjustments), have been
made. Certain prior year amounts have been reclassified to conform with
current year classifications.
The results of operations for the three month and six month periods
ended September 30, 1996, are not necessarily indicative of the results
that may be expected for the full fiscal year ending March 31, 1997.
2. INVENTORIES
The components of inventories are as follows:
September 30,
1996
-------------
Raw materials $ 1,021,031
Work in process 928,753
Finished goods 1,224,584
-------------
$ 3,174,368
=============
3. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
September 30,
1996
-------------
Equipment $ 767,838
Software 163,407
Furniture and fixtures 180,195
Leasehold improvements 43,306
-------------
1,154,746
Less: accumulated depreciation 607,926
-------------
Equipment and Fixtures, net $ 546,820
=============
Page 6 of 14
CHATCOM, INC.
4. NOTES PAYABLE
On May 26, 1995, the Company entered into a $3,500,000 working capital
line-of-credit agreement with a commercial finance corporation that bore
interest at the prime rate (8.25% at March 31, 1996) plus 1.75%. The
line-of-credit facility was collateralized by substantially all of the assets
of the Company. The proceeds from the funding of this facility were used to
repay the amounts owed to a bank under a line-of-credit agreement which had
expired. On May 2, 1996, the Company repaid all amounts then outstanding and
all accrued interest owed under the line-of-credit agreement and the agreement
was terminated.
5. STOCK OPTIONS AND WARRANTS
During the six month period ended September 30, 1996, the Company
granted options to purchase 350,000 shares of common stock to key employees
pursuant to the Company's 1994 Stock Option Plan. The options are exercisable
at the closing price of the common stock on the date of grant. 250,000 of the
options vest over a period of three years and 100,000 of the options were
vested on the date of grant.
In September 1996, the Company granted options to purchase 25,000
shares of common stock to each of the five directors serving as chairmen of
committees of the Board of Directors subject to shareholder approval of
amendments to the Company's 1994 Stock Option Plan. The options are
exercisable at the closing price of the common stock on the date of grant and
were fully vested on the date of grant, but are not exercisable until March
1997.
In May 1996, in connection with the sale of 75 shares of Series C
Preferred Stock, warrants to purchase 30,000 shares of common stock at an
exercise price of $3.00 per share were granted to Maximum Partners, Ltd.
6. (LOSS) EARNINGS PER SHARE
The computation of (loss) earnings per share is detailed as follows:
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 1996 1995
----------- ---------- ----------- -----------
LOSS USED TO COMPUTE PRIMARY AND
FULLY DILUTED LOSS PER SHARE:
Net loss $(1,088,138) $ (606,529) $(1,718,219) $ (482,619)
=========== ========== =========== ===========
NUMBER OF SHARES USED TO COMPUTE
PRIMARY AND FULLY DILUTED LOSS PER SHARE:
Weighted average number of
common shares outstanding 8,553,457 7,536,629 8,139,945 7,536,345
=========== ========== =========== ===========
7. RELATED PARTIES
One of the officers of the Company is also a shareholder of a law firm
that provides legal consultation to the Company. At September 30, 1996 and
1995, the Company owed this law firm $8,525 and $3,651, respectively. During
the six months ended September 30, 1996 and 1995, fees relating to services
provided by this law firm in the amounts of $30,788 and $70,796, respectively,
were included in operating expenses.
Page 7 of 14
CHATCOM, INC.
In May 1996, the Company paid $150,000 and granted warrants to purchase
30,000 shares of common stock to Maximum Partners, Ltd. in connection with the
placement of 75 shares of Series C Preferred Stock. A principal of Maximum
Partners, Ltd. is the son of a director and former officer of the Company.
8. SUBSEQUENT EVENT
During October 1996, the 45 shares of Series C Preferred Stock that were
outstanding at September 30, 1996 and accrued dividends thereon were converted
into 517,636 shares of common stock.
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Page 8 of 14
CHATCOM, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995
The Company's sales revenue decreased $1,508,000, or 41%, from
$3,717,000 to $2,209,000 primarily due to a decrease in unit sales. The Company
believes that the decrease in revenues is attributable, at least in part, to
decreased sales and marketing efforts during the quarters ended December 31,
1995 and March 31, 1996. The sales and marketing efforts were limited during
those periods due to liquidity constraints that have subsequently been
alleviated. The Company also believes that the remote control niche of the
remote access market, which has historically provided a significant portion of
the Company's revenues, is not experiencing the growth rates that it has enjoyed
in the past, and may possibly be declining. In response, the Company has
increased and redirected its marketing and sales efforts to penetrate the server
consolidation market and the network emulation market. The Company believes that
its products are well suited to these markets and that these markets offer the
growth potential that no longer appears to be present in the remote control
market. The Company's ability to 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
in which it has not previously been a significant participant and the strength
of the Company's competition.
The cost of goods sold decreased $1,033,000, or 40%, from $2,553,000 to
$1,520,000. The decrease was primarily due to the reduction in material costs
related to the decrease in revenues and a $92,000, or 29%, decrease in
manufacturing labor and overhead related to a restructuring of the manufacturing
department. The restructuring of the Company's manufacturing department included
an increase in the purchase of the electronic subassemblies required for the
manufacture of a significant portion its products on a "turn-key" basis from
electronics parts distributors. The "turn-key" purchase allows the Company to
purchase the completed subassembly, as opposed to purchasing the individual
components required for the manufacture of the subassembly and subcontracting
the assembly of the subassembly. The "turn-key" manufacturing is intended to
allow the Company to take advantage of the purchasing power of the electronics
parts distributor to decrease materials costs, reduce the personnel of the
manufacturing department and lessen the Company's requirement for component
inventories to ensure against interruptions in production. These decreases were
partially mitigated by an increase of additions to the reserve for obsolete
inventory of approximately $90,000, which was at least partially related to the
redirection of marketing efforts to other markets.
Selling expenses decreased $141,000, or 14%, from $975,000 to $834,000.
This reduction included a $34,000 decrease in sales salaries related to the
elimination of an executive sales position and the consolidation of sales
territories, a $12,000 decrease in sales commission expense due to lower sales
volumes and a $92,000 decrease in advertising costs. During the prior fiscal
year, the Company expended significant amounts on advertising during the first
two quarters and was compelled to significantly reduce the expenses in the
latter quarters due to liquidity constraints. It is the Company's intention to
maintain advertising expenses at a level that it believes can be steadily
sustained in order to maintain a constant presence in the desired areas of the
market, and anticipates maintaining these expenditures at levels comparable to
those for the quarter ended September 30, 1996.
General and administrative expense increased $177,000, or 34%, from
$520,000 to $697,000. Approximately $100,000 of the increase related to
additions to the allowance for doubtful accounts relating to the Company's
assessment of the collectibility of a receivable from a certain reseller that is
experiencing some financial difficulties. Approximately $60,000 of the increase
related to the restructuring of the management of the Company, which included
the transfer of two vice presidents from operational cost centers to the
administrative cost center and the creation of a Senior Vice President of
Business Development position. The increases were partially mitigated by a
savings of approximately $32,000 related to the elimination of the Executive
Vice President position.
Page 9 of 14
CHATCOM, INC.
Research and development expense increased $22,000, or 9%, from
$234,000 to $256,000. The increase included increased salaries related to the
addition of a director of engineering, a hardware engineer and a software
engineer. This increase was partially mitigated by the transfer of the Senior
Vice President of Technology to the administrative cost center. The net
increase in the engineering staff was implemented to allow the Company to
develop products more rapidly for the markets that it is entering and to
intensify its pre-production testing program to ensure the quality of the new
products.
Interest income increased $12,000 due to larger cash balances during
the quarter, due to proceeds from private placements of preferred stock in
March 1996 and May 1996 and the exercise of options and warrants in June 1996.
Interest expense decreased $37,000, or 95%, from $39,000 to $2,000.
The decrease was caused by a retirement of the line-of-credit financing
agreement during the quarter ended June 30, 1996.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO
THE SIX MONTHS ENDED SEPTEMBER 30, 1995
The Company's sales revenue decreased $3,308,000, or 40%, from
$8,201,000 to $4,893,000 primarily due to a decrease in unit sales. The Company
believes that the decrease in revenues is attributable, at least in part, to
decreased sales and marketing efforts during the quarters ended December 31,
1995 and March 31, 1996. The sales and marketing efforts were limited during
those periods due to liquidity constraints that have subsequently been
alleviated. The Company also believes that the remote control niche of the
remote access market, which has historically provided a significant portion of
the Company's revenues, is not experiencing the growth rates that it has enjoyed
in the past, and may possibly be declining. In response, the Company has
increased and redirected its marketing and sales efforts to penetrate the server
consolidation market and the network emulation market. The Company believes that
its products are well suited to these markets and that these markets offer the
growth potential that no longer appears to be present in the remote control
market. The Company's ability to 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
in which it has not previously been a significant participant and the strength
of the Company's competition.
The cost of goods sold decreased $1,946,000, or 37%, from $5,280,000 to
$3,334,000. The decrease was primarily due to the reduction in material costs
related to the decrease in revenues and a $125,000, or 20%, decrease in
manufacturing labor and overhead related to a restructuring of the
manufacturing department, which was implemented in June 1996. These decreases
were partially mitigated by an increase of additions to the reserve for
obsolete inventory of approximately $100,000, which was at least partially
related to the redirection of marketing efforts to other markets.
Selling expenses decreased $379,000, or 19%, from $1,955,000 to
$1,576,000. The decrease resulted from a decrease in sales department salaries
of $52,000 due to the elimination of an executive sales position and the
consolidation of sales territories, a $41,000 decrease in sales commissions
due to decreased revenues and a decrease of $255,000 in advertising costs.
General and administrative expense increased $296,000, or 33%, from
$908,000 to $1,204,000. Approximately $100,000 of the increase related to
additions to the allowance for doubtful accounts relating to the Company's
assessment of the collectibility of a receivable from a certain reseller that
is experiencing some financial difficulties. Approximately $180,000 of the
increase related to the restructuring of the management of the Company, which
included the transfer of two vice presidents from operational cost centers to
the administrative cost center and the addition of a Senior Vice President of
Business Development position. The increases were partially mitigated by the
elimination of the Executive Vice President position, which resulted in a
savings of approximately $65,000.
Page 10 of 14
CHATCOM, INC.
Research and development expense decreased $11,000, or 2%, from
$464,000 to $453,000. A decrease of approximately $72,000 is attributable to
the transfer of the Senior Vice President of Technology to the Office of the
President, which is included in the general and administrative cost center.
This decrease was largely offset by the addition of a director of engineering,
a hardware engineer and a software engineer position during the six months
ended September 30, 1996. The net increase in the engineering staff was
implemented to allow the Company to develop products more rapidly for the
markets that it is entering and to intensify its pre-production testing
program to ensure the quality of the new products.
In June 1996, the Company recorded severance expense of $61,000
related to the implementation of a plan that was completed in July 1996 to
reduce the workforce by approximately 20% in connection with a restructuring
of the manufacturing operation to allow for an increase in outsourced
manufacturing and an overall streamlining of the management structure. The
workforce reduction was part of the Company's continuing efforts to reduce
operating expenses and involved eliminating 13 positions and terminating the
employees who were then occupying those positions. The annual cost to the
Company related to those employees was estimated at $480,000. The Company
believes that the staffing level subsequent to the planned workforce reduction
should result in a measurable decrease in overall personnel costs and should
support any potential increase in revenues of up to approximately 25% from
those generated in fiscal year 1996. Although the Company may, from time to
time, determine that the elimination of a certain position or positions is in
the Company's best interests, the Company does not anticipate that a workforce
reduction of a similar magnitude to the one that was recently effected will be
warranted in the foreseeable future.
Interest income increased $28,000 due to larger cash balances during
the quarter, due to proceeds from private placements of preferred stock in
March 1996 and May 1996 and the exercise of options and warrants in June 1996.
Interest expense decreased $61,000, or 85%, from $72,000 to $11,000.
The decrease was caused by a retirement of the line-of-credit financing
agreement during the quarter ended June 30, 1996.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION DURING THE SIX MONTHS
ENDED SEPTEMBER 30, 1996
The Company recorded a net loss of approximately $1,718,000 for the six
months ended September 30, 1996. Cash decreased $225,000 during the six months
ended September 30, 1996 and is a result of the loss from operations. The impact
of the loss on cash flow was mostly offset by net cash inflows from financing
activities, which included proceeds from the sale of preferred stock and the
exercise of options and warrants of $1,325,000 and $850,500, respectively, and
the repayment of short term borrowings of $938,000. Working capital increased
approximately $418,000, or 12%, from $3,500,000 to $3,918,000 primarily due to
the proceeds from the sale of preferred stock and the exercise of stock options
and warrants.
Accounts receivable decreased $507,000, or 26%, from $1,968,000 to
$1,461,000. The decrease was primarily attributable to revenues during the two
months prior to September 30, 1996 being approximately 24% lower than those for
the two months prior to March 31, 1996 and the addition of accounts receivable
reserves.
Inventories decreased $307,000, or 9%, from $3,481,000 to $3,174,000.
The decrease was primarily the result of "turn-key" purchasing of subassemblies,
which has been implemented by the Company on certain of its products. The
Company has traditionally purchased the individual components required to
manufacture an electronic assembly, sent the components to a subcontractor to be
soldered onto the circuit board, and performed final assembly and test upon its
return from the subcontractor. The Company has begun to institute "turn-key"
purchasing for some of its products, whereby the subassembly is purchased
already soldered and ready for final assembly and testing. The Company intends
to
Page 11 of 14
CHATCOM, INC.
implement "turn-key" purchasing for all assemblies that meet volume thresholds
required by the vendor in order to significantly reduce the requirement to stock
individual components.
Prepaid expenses increased $22,000, or 11%, from $201,000 to $223,000.
The increase was primarily due to the downpayment for Officers' and Directors'
liability insurance premiums, which was paid in July 1996.
Equipment and fixtures increased $7,000, or 1%, due to the acquisition
of equipment with cost of $121,000, which was mostly offset by depreciation of
$114,000. The purchased equipment primarily consisted of office equipment and
workstations.
Accounts payable decreased $781,000, or 42%, from $1,843,000 to
$1,062,000, due to decreased purchasing of inventory and a shortening of the
payables cycle that the Company was able to effectuate with the proceeds from
the sale of preferred stock and the exercise of options and warrants during the
fiscal quarters ended March 31, 1996 and June 30, 1996.
Accrued expenses decreased $215,000, or 24%, from $908,000 to $693,000.
The decrease was primarily due to the payment of a lawsuit settlement, payment
of a portion of the accrued severance pay to two former officers and a decrease
in payroll related liabilities due to a decreased workforce and the timing of
paydates with relation to the end of the accounting period.
Short term borrowings decreased by $938,000 due to the repayment and
termination of the line-of-credit financing agreement with Deutsche Financial
Services.
Capital lease obligations increased $2,000, or 4%, from $48,000 to
$50,000. The increase was the result of the addition of an office equipment
lease in the amount of $22,000, which was mitigated by approximately $20,000 of
principal payments on capital leases in accordance with the terms of the lease
agreements.
Series B Preferred Stock decreased $1,294,000 due to the conversion of
all outstanding shares of Series B Preferred Stock into 1,024,768 shares of
common stock.
Series C Preferred Stock increased $795,000 due to the sale of 75 shares
of Series C Preferred Stock in May 1996 for net proceeds of $1,325,000 and the
subsequent conversion of 30 shares into 403,309 shares of common stock.
Common stock increased $2,708,000 due to the conversions of Series B and
Series C Preferred Stock, the exercise of options and warrants and the payment
of dividends on preferred stock through the issuance of common stock.
The accumulated deficit increased by $1,785,000 due to the net loss of
$1,718,000 recorded for the six months ended September 30, 1996 and the payment
or accrual of $67,000 of dividends on preferred stock.
Liquidity
- ---------
As of September 30, 1996, the Company had working capital of $3,918,000.
The Company currently relies on liquid assets to fund operations. 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
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.
Page 12 of 14
CHATCOM, INC.
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 revenues during the
balance of the fiscal year. Additional capital resources might be obtained
through the calling or the voluntary exercise of warrants that were issued in
conjunction with the Company's 1995 private placement. The exercise of these
warrants could yield proceeds of up to $4,820,000. The Company may call these
warrants for redemption at $3.00 per warrant if the market value of the
Company's 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. The Company may also seek
additional public or private financing to meet its capital needs if market
conditions permit.
The Company has incurred operating losses in each of its last three
fiscal years. Should the Company continue to experience operating losses in the
future which result in a significant utilization of liquid resources, the
Company's liquidity and its ability to sustain operations at current levels
could be materially, adversely affected. 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. The Company does not
currently have a commitment from any third party to provide short-term
financing.
The Company had no material commitments for capital expenditures as of
September 30, 1996.
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 operations,
markets, products and prices, and other factors discussed in the Company's
various filings with the Securities and Exchange Commission, including without
limitation the Current Report on Form 8-K, dated August 29, 1996, and the
Registration Statement on Form S-3 (Registration No. 333-3792), which was
declared effective by the Securities and Exchange Commission on June 7, 1996.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits. The following exhibits are filed with this Form
10-QSB or are incorporated by reference to the document
described:
27. Financial Data Schedule
b. Reports on Form 8-K.
A current report on Form 8-K was filed on August 29, 1996, under
Items 5 and 7 to disclose the cautionary statement for purposes
of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
No other information is required to be filed under Part II of this Form 10-QSB.
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CHATCOM, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CHATCOM, INC.,
a California corporation
Date: November 11, 1996 By: /s/ James B. Mariner
--------------------
James B. Mariner, President
and Chief Executive Officer
By: /s/ John R. Grady
-----------------
John R. Grady,
Chief Financial Officer
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