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 December 31, 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 February 11, 1997, there were 9,826,892 shares of the issuer's common
stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
Exhibit Index on Page 15
CHATCOM, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BALANCE SHEETS (UNAUDITED)
===============================================================================
DECEMBER 31, MARCH 31,
ASSETS NOTES 1996 1996
--------- ------------ ------------
CURRENT ASSETS:
Cash $ 2,536,548 $ 1,067,397
Restricted cash 500,000
Accounts receivable, net of
allowances of $226,094
(December 31, 1996) and $262,228
(March 31, 1996) 1,817,422 1,968,267
Inventories 2 3,019,958 3,481,195
Prepaid expenses and other current
assets 193,095 201,431
----------- -----------
Total current assets 7,567,023 7,218,290
EQUIPMENT AND FIXTURES, Net 3 577,629 539,449
DEPOSITS 22,383 20,693
----------- ------------
TOTAL $ 8,167,035 $ 7,778,432
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,213,893 $ 1,842,942
Accrued expenses 686,627 907,668
Short term borrowings 4 938,461
Current portion of capital lease
obligations 16,850 29,525
----------- -----------
Total current liabilities 1,917,370 3,718,596
CAPITAL LEASE OBLIGATIONS
-less current portion 24,996 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 December 31, 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 0 and 0 shares at
December 31, and March 31, 1996,
respectively
Series D Preferred Stock, $1,000
stated value per
share, authorized 5,000
shares, issued and
outstanding 2,496 and 0
shares at December 31, and
March 31, 1996, respectively 2,341,623
Common stock, no par value; authorized
25,000,000 shares; issued and
outstanding 9,826,892 and 7,536,629
shares at December 31, and
March 31, 1996, respectively 9,387,718 5,859,660
Additional paid-in capital 1,440,711 1,435,711
Accumulated deficit (6,945,383) (4,548,118)
----------- -----------
Total shareholders' equity 6,224,669 4,041,253
----------- -----------
TOTAL $ 8,167,035 $ 7,778,432
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 2
CHATCOM, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
=============================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
---------- ---------- ----------- -----------
SALES $2,750,342 $4,206,683 $ 7,643,554 $12,407,327
COST OF GOODS SOLD 1,722,843 2,860,038 5,057,101 8,140,375
---------- ---------- ----------- -----------
GROSS PROFIT 1,027,499 1,346,645 2,586,453 4,266,952
OPERATING EXPENSES
Selling 810,132 705,689 2,386,067 2,660,863
General and administrative 514,975 525,219 1,719,153 1,432,918
Research and development 310,096 200,715 763,124 664,939
Severance expense 61,484
---------- ---------- ----------- -----------
Total operating expenses 1,635,203 1,431,623 4,929,828 4,758,720
LOSS FROM OPERATIONS (607,704) (84,978) (2,343,375) (491,768)
INTEREST INCOME 11,313 39,267
INTEREST EXPENSE 1,294 51,314 11,796 123,143
---------- ---------- ----------- -----------
LOSS BEFORE INCOME TAXES (597,685) (136,292) (2,315,904) (614,911)
PROVISION FOR INCOME
TAXES 4,000
---------- ---------- ----------- -----------
NET LOSS $ (597,685) $ (136,292) $(2,315,904) $ (618,911)
========== ========== =========== ===========
LOSS PER SHARE: (NOTE 6)
Primary and fully diluted loss
per share $ (0.06) $ (0.02) $ (0.27) $ (0.08)
========== ========== =========== ===========
Weighted average number of
common shares and common
share equivalents (primary and
fully diluted) 9,746,066 7,536,629 8,683,912 7,536,440
========== ========== =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 3
CHATCOM, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
=====================================================================
NINE MONTHS ENDED
DECEMBER 31,
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(2,315,904) (618,911)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 177,566 252,347
Provision for losses on accounts
receivable 145,411
Changes in operating assets and
liabilities:
Restricted cash 500,000 (500,000)
Accounts receivable 5,434 598,880
Inventories 461,237 (207,858)
Prepaid expenses and other
current assets 8,336 91,943
Deposits (1,690) (500)
Accounts payable (629,049) (408,592)
Accrued expenses (233,350) (267,917)
----------- -----------
Net cash used in operating
activities (1,882,009) (1,060,608)
CASH FLOWS FROM INVESTING
ACTIVITIES-
Capital expenditures (194,158) (164,700)
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings under notes payable 912,459
Principal payments of notes payable (938,461) (1,075,000)
Principal payments on capital leases (27,850) (24,109)
Proceeds from sale of preferred stock 3,666,623
Proceeds from sale of stock purchase
warrants 5,000
Payment of dividends on preferred
stock (10,494)
Collection of subscriptions
receivable 40,000
Exercise of stock options and
warrants 850,500 900
----------- -----------
Net cash provided (used) by
financing activities 3,545,318 (145,750)
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,469,151 (1,371,058)
CASH, BEGINNING OF PERIOD 1,067,397 1,457,260
----------- -----------
CASH, END OF PERIOD $ 2,536,548 $ 86,202
=========== ===========
(CONTINUED)
Page 4
CHATCOM, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended December 31, 1996, the Company accrued dividends on
preferred stock of $81,361. Dividends of $10,494 were paid in cash, dividends
of $58,558 were paid through the issuance of 38,041 shares of the Company's
common stock and dividends of $12,309 were accrued but unpaid at December 31,
1996.
During the nine months ended December 31, 1996 and 1995, the Company paid
interest of $11,798 and $121,131, respectively, and income taxes of $425 and
$4,257, respectively.
During the nine months ended December 31, 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
CHATCOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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 nine month periods ended
December 31, 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:
December 31,
1996
------------
Raw materials $ 952,719
Work in process 872,317
Finished goods 1,194,922
----------
$3,019,958
==========
3. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
December 31,
1996
------------
Equipment $ 837,983
Software 186,700
Furniture and fixtures 180,701
Leasehold improvements 43,306
----------
1,248,690
Less: accumulated depreciation 671,061
----------
Equipment and fixtures, net $ 577,629
==========
Page 6
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 nine month period ended December 31, 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. 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.
The private placements of Series B Preferred Stock and Series C Preferred
Stock caused the antidilution provisions of certain stock purchase warrants to
take effect. Outstanding warrants to purchase 2,459,000 shares of common stock
at an average exercise price of $2.69 per share were affected by the
antidilution provisions, increasing the number of shares issuable upon the
exercise of such warrants to 2,631,284 and decreasing the average exercise price
to $2.51 per share. Additionally, the antidilution provisions caused the
Company to issue 19,356 additional shares of common stock relating to exercises
of warrants that occurred between the dates of the private placements and the
determination of the effect of antidilution provisions by the Company.
In November 1996, the Company granted options to purchase 3,000 shares of
common stock to each of the Company's five non-employee directors as a result of
their re-election to the Board of Directors. 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 May 1997
In December 1996, in connection with the sale of 2,496 shares of Series D
Preferred Stock, warrants to purchase 400,000 shares of common stock at an
exercise price of $3.125 per share were sold to the purchasers of the Series D
Preferred Stock. Also in December 1996, warrants to purchase 100,000 shares of
common stock at an exercise price of $3.125 per share were granted to Strategic
Growth International, Inc. for services in connection with the private placement
of Series D Preferred Stock.
Page 7
CHATCOM, INC.
6. LOSS PER SHARE
The computation of loss per share is detailed as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
---------- ---------- ----------- ----------
LOSS USED TO COMPUTE PRIMARY AND
FULLY DILUTED LOSS PER SHARE:
Net loss $ (597,685) $ (136,292) $(2,315,904) $ (618,911)
========== ========== =========== ==========
NUMBER OF SHARES USED TO COMPUTE
PRIMARY AND FULLY DILUTED LOSS PER
SHARE:
Weighted average number of
common shares outstanding 9,746,066 7,536,629 8,683,912 7,536,440
========== ========== =========== ==========
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 December 31, 1996 and 1995, the
Company owed this law firm $3,563 and $6,715, respectively. During the nine
months ended December 31, 1996 and 1995, fees relating to services provided by
this law firm in the amounts of $52,890 and $86,214, respectively, were included
in operating expenses.
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.
Page 8
CHATCOM, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 1995
The Company's sales revenue decreased $1,457,000, or 35%, from $4,207,000
for the quarter ended December 31, 1995 to $2,750,000 for the quarter ended
December 31, 1996 primarily due to a 39% decrease in unit sales, which was
partially mitigated by a 24% increase in average selling prices. The Company
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, which has adversely affected unit sales of the Company's products.
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 $1,137,000, or 40%, from $2,860,000 to
$1,723,000. The decrease was due to a 43% reduction in material costs related
to the decrease in unit sales and a $42,000, or 13%, decrease in manufacturing
labor and overhead related to a restructuring of the manufacturing department.
The percentage decrease in materials cost was greater than the percentage
decrease in unit sales due to increased average selling prices and an increase
in "turn-key" manufacturing, both of which allow the Company to realize higher
margins. 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 of 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.
Selling expenses increased $104,000, or 15%, from $706,000 to $810,000.
The increase was primarily the result of a constant marketing program throughout
the quarter, whereas marketing efforts had been curtailed to a significant
extent during the prior year due to liquidity constraints and the departure of
the Company's director of marketing. Selling expense for the quarter ended
December 31 ,1996 was at approximately the same level as for the quarter ended
September 30, 1996. The Company anticipates some increases in selling expenses
in future quarters due to planned increases in the outside sales force and a
planned increase of marketing efforts directed toward new target markets.
General and administrative expense decreased $10,000, or 2%, from $525,000
to $515,000. The decrease was primarily the result of a decrease in legal fees.
During the quarter ended December 31, 1995, the Company changed its outside
corporate counsel, which resulted in additional attorney fees from the
transition. The decrease was partially offset by increases in salaries related
to the transfer of the Senior Vice President of Technology from the research and
development department to the general and administrative department and the
addition of a Senior Vice President of Business Development.
Research and development expense increased $109,000, or 54%, from $201,000
to $310,000. The increase primarily consisted of $48,000 related to personnel
costs and $48,000 in consulting expenses. These increases are associated with
the Company's efforts to decrease development time for products and increase
product testing during the development cycle. The personnel cost increases
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CHATCOM, INC.
included the addition of a Director of Engineering and two engineers. The
increases were partially offset by the transfer of a Senior Vice President to
the General and Administrative Department. The Company expects product
development related expenses in the immediate future to approximate those
experienced in the quarter ended December 31, 1996. Competitive pressure and an
increased rate of development of personal computer related technology, however,
could cause the Company to increase these expense levels, as it will be required
to ensure that its products include, and are compatible with, the technological
advances.
Interest income increased $11,000 due to larger cash balances during the
quarter, due to proceeds from private placements of preferred stock in March
1996, May 1996 and December 1996 and the exercise of options and warrants in
June 1996.
Interest expense decreased $50,000, or 97%, from $51,000 to $1,000. 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 NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO
THE NINE MONTHS ENDED DECEMBER 31, 1995
The Company's sales revenue decreased $4,763,000, or 38%, from $12,407,000
to $7,644,000 primarily due to a 45% decrease in unit sales, which was partially
mitigated by a 12% increase in average selling prices. The Company 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, which has adversely affected unit sales of the Company's products.
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 $3,083,000, or 38%, from $8,140,000 to
$5,057,000. The decrease was due to a 42% reduction in material costs related
to the decrease in unit sales and a $296,000, or 29%, decrease in manufacturing
labor and overhead related to a restructuring of the manufacturing department.
These decreases were partially offset by a $174,000 increase in additions to
inventory reserves related to product changes in response to progressing
technology and market redirection. The percentage decrease in materials cost
was greater than the percentage decrease in unit sales due to increased average
selling prices and an increase in "turn-key" manufacturing, both of which allow
the Company to realize higher margins. 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 of 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.
Selling expenses decreased $275,000, or 10%, from $2,661,000 to $2,386,000.
The decrease was primarily the result of a $227,000 decrease in advertising
costs, which was primarily due to a marketing hiatus that occurred from
approximately February 1996 through June 1996 and was related to liquidity
constraints of the Company and a vacancy in the Director of Marketing position.
Additionally, advertising subsequent to the hiatus has focused upon target
market directed advertising, which has
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CHATCOM, INC.
reduced the number of publications in which the Company advertises. The Company
anticipates some increases in selling expenses in future quarters due to planned
increases in the outside sales force and a planned increase in marketing efforts
directed toward new target markets.
General and administrative expense increased $286,000, or 20%, from
$1,433,000 to $1,719,000. 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 $240,000 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 a
decrease in legal fees of $63,000 and by the elimination of the Executive Vice
President position, which resulted in a savings of approximately $100,000.
Research and development expense increased $98,000, or 15%, from $665,000
to $763,000. The increase primarily consisted of $30,000 related to personnel
costs and $67,000 in consulting expenses. These increases are associated with
the Company's efforts to decrease development time for products and increase
product testing during the development cycle. The personnel cost increases
included the addition of a Director of Engineering and two engineers. The
increases were partially offset by the transfer of a Senior Vice President to
the General and Administrative Department. The Company expects product
development related expenses in the immediate future to approximate those
experienced in the quarter ended December 31, 1996. Competitive pressure and an
increased rate of development of personal computer related technology, however,
could cause the Company to increase these expense levels, as it will be required
to ensure that its products include, and are compatible with, the technological
advances.
Interest income increased $39,000 due to larger cash balances during the
nine months, due to proceeds from private placements of preferred stock in March
1996, May 1996 and December 1996 and the exercise of options and warrants in
June 1996.
Interest expense decreased $111,000, or 90%, from $123,000 to $12,000. 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 NINE MONTHS
ENDED DECEMBER 31, 1996
The Company recorded a net loss of $2,316,000 for the nine months ended
December 31, 1996. Cash increased $1,469,000 during the nine months ended
December 31, 1996 and is the result of the receipt of net proceeds of $2,343,000
from the sale of 2,496 shares of Series D Preferred Stock and stock purchase
warrants, net proceeds of $1,325,000 from the sale of 75 shares of Series C
Preferred Preferred Stock and $850,000 in proceeds from the exercise of options
and warrants. The impact of the proceeds from financing activities on cash flow
was mostly offset by a loss from operations of $2,316,000, and the repayment of
short term borrowings of $938,000. Working capital increased approximately
$2,150,000, or 61%, from $3,500,000 to $5,650,000 primarily due to the proceeds
from the sale of preferred stock and the exercise of stock options and warrants.
Accounts receivable decreased $151,000, or 8%, from $1,968,000 to
$1,817,000. The decrease was primarily attributable to revenues during the two
months (which approximates one receivables cycle) prior to December 31, 1996
being approximately 4% lower than those for the two months prior to March 31,
1996 and the addition of accounts receivable reserves.
Inventories decreased $462,000, or 13%, from $3,481,000 to $3,019,000. The
decrease was primarily the result of a decrease in unit sales and "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
Page 11
CHATCOM, INC.
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 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 decreased $8,000, or 4%, from $201,000 to $193,000. The
decrease was primarily a result of the timing of downpayments for insurance
policies and amortization of prepaid expense items.
Equipment and fixtures increased $38,000, or 7%, due to the acquisition of
equipment with cost of $143,000, which was mostly offset by depreciation of
$176,000. The purchased equipment primarily consisted of office equipment and
workstations.
Accounts payable decreased $629,000, or 34%, from $1,843,000 to $1,214,000,
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 nine months
ended December 31, 1996.
Accrued expenses decreased $221,000, or 24%, from $908,000 to $687,000.
The decrease was primarily due to the payment of a lawsuit settlement and
payment of a portion of the accrued severance pay to two former officers.
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 decreased $6,000, or 13%, from $48,000 to
$42,000. The decrease was the result principal payments of $28,000, which were
mostly offset by the addition of an office equipment lease in the amount of
$22,000.
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 D Preferred Stock increased $2,342,000 due to the sale of 2,496
shares of Series D Preferred Stock, $1,000 per share stated value, during
December 1996.
Additional paid in capital increased $5,000 as a result of warrants issued
in connection with the placement of the Series D Preferred Stock in December
1996.
Common stock increased $3,528,000 due to the conversions of Series B
Preferred Stock, the issuance and subsequent conversion of 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 $2,397,000 due to the net loss of
$2,316,000 recorded for the nine months ended December 31, 1996 and the payment
or accrual of $81,000 of dividends on preferred stock.
Liquidity
- ---------
As of December 31, 1996, the Company had working capital of $5,649,000.
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
Page 12
CHATCOM, INC.
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 the capital resources that it currently possesses
would be sufficient to sustain operations at current revenue levels for only
approximately the next twelve months. However, the Company's plan of operations
anticipates increasing revenues through penetration of the server consolidation
market, a focused marketing program and product improvements, which should
decrease the rate of utilization of capital resources. There can be no
assurance, however, that the Company will be successful in its efforts to
increase revenues or that any increase in revenues will enable the Company to
sustain its operations for more than the next twelve months without additional
capital resources. 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 $2.80 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. To the extent required, 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
December 31, 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 on Form 10-QSB 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.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On December 13, 1996, the Company completed a private placement pursuant to
which it sold 2,496 shares of the Company's Series D 10% convertible redeemable
voting preferred stock, $1,000 stated value per share ("Series D Preferred
Stock"), and warrants to purchase 400,000 shares of the Company's common stock
(the "Warrants") to two institutional investors. The Series D Preferred Stock
and the Warrants were exempt from registration requirements of the Securities
Act of 1933 (the "Securities Act") pursuant to Regulation D promulgated under
the Securities Act. The Company received various representations and warranties
from the purchasers including a representation that the purchasers are
"accredited investors" within the meaning of Regulation D. The Warrants are
exercisable commencing on May 1, 1997 through December 31, 2001 at $3,125 per
share. Gross proceeds from this private placement were $2,500,000 and total
offering fees and costs incurred by the Company consisted of approximately
$153,000 in cash and warrants to purchase 100,000 shares of the Company's common
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CHATCOM, INC.
stock exercisable at $3.125 per share, of which $125,000 in cash and warrants to
purchase 100,000 shares of the Company's common stock were paid to Strategic
Growth International, Inc. There were no underwriters or placement agents
involved in connection with the private placement.
The proceeds from the placement will be utilized to provide working capital
for operations.
The Company can require the holders of the Series D Preferred Stock to
convert these shares into shares of the Company's common stock at any time prior
to December 14, 1997 by acquiring the shares of Series D Preferred Stock from
the holders in exchange for shares of the Company's common stock. The Series D
Preferred Stock is also convertible at the election of the holders into shares
of the Company's common stock during the one-year period commencing on December
14, 1997. The actual number of shares of common stock into which the Series D
Preferred Stock and any dividends that are payable in shares of common stock are
convertible is variable, with the conversion value of the shares of common stock
being equal to the market price of the common stock (determined based on the
closing sale price of the common stock for the ten trading days preceding the
date of conversion). The conversion value of the common stock will have a cap
of $4.50 per share, and commencing on December 14, 1997, will have a floor of
$1.50 per share. The Company has agreed to register the shares issuable upon
conversion of the Series D Preferred Stock or upon exercise of the Warrants.
The purchasers of the Series D Preferred Stock will have voting rights for
each share of the Series D Preferred Stock then outstanding equivalent to that
of 380 shares of common stock for each share of such preferred stock. Holders
of the Series D Preferred Stock also will have the right to elect a majority of
the Company's directors in the event of a default by the Company in the payment
of dividends on the Series D Preferred Stock or upon certain other defined
events of default.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the third quarter of fiscal year 1997, the Company submitted the
following matters to a vote of security holders at the annual meeting of
shareholders, which was held on November 21, 1996.
(1) Amendment to the Company's Bylaws - The Company proposed an amendment
---------------------------------
to the Company's Bylaws to amend the authorized number of directors of
the Company. The amendment proposed that the authorized number of
directors that the Company shall have shall not be less than five nor
greater than nine, with the exact number being fixed by the Board of
Directors. Prior to the amendment the Bylaws stated that the
authorized number of directors that the Company shall have shall not
be less than four nor greater than seven with the exact number being
fixed by the Board of Directors. The proposal passed with 7,734,991
votes for, 145,641 votes against and 21,690 votes withheld.
(2) Slate of Directors - The Company proposed the following slate of
------------------
directors for service until the next annual meeting of shareholders:
Richard F. Gordon, Jr., A. Charles Lubash, George L. Lazik, Ph.D.,
Gerald R. Sayer, Ph.D., James D. Edwards, Philip B. Smith, Sanford C.
Sigoloff and James B. Mariner. The entire slate of directors proposed
by management were elected by the following votes:
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CHATCOM, INC.
Votes Votes
For Withheld
--------- --------
Mr. Gordon 8,017,757 2,250
Mr. Lubash 8,023,376 36,750
Mr. Lazik 7,988,876 7,769
Mr. Sayer 8,023,726 1,900
Mr. Edwards 8,024,126 1,500
Mr. Smith 8,023,976 1,650
Mr. Sigoloff 8,019,238 6,388
Mr. Mariner 8,020,926 4,700
(3) Amendments to the 1994 Stock Option Plan - The Company proposed
----------------------------------------
amendments to the 1994 Stock Option Plan (the "1994 Plan") to (i)
eliminate the formula option grant system for non-employee directors
and (ii) provide the Board of Directors with greater flexibility in
amending the 1994 Plan in the future. The proposal passed with
7,385,667 votes for, 182,786 votes against and 43,186 votes
abstaining.
(4) Ratification of the Company's Auditors - The Company proposed the
--------------------------------------
ratification of Deloitte & Touche, LLP as the independent auditors for
the Company for the fiscal year ending March 31, 1997. The proposal
passed with 8,009,061 votes for, 26,785 votes against and 14,082 votes
abstaining.
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:
3.1 Bylaws of ChatCom, Inc., as amended at the annual meeting of
shareholders held on November 21, 1996.
10.1 Purchase Agreement, dated as of December 9, 1996, regarding the
sale of Series D Preferred Stock and Warrants to Purchase Common
Stock of ChatCom, Inc.
10.2 Form of Warrant Agreement, between ChatCom, Inc. and Strategic
Growth International, Inc. relating to warrants to purchase
100,000 shares of common stock of ChatCom, Inc.
10.3 1994 Stock Option Plan of ChatCom, Inc., as amended at the
annual meeting of shareholders held on November 21, 1996.
27. Financial Data Schedule
b. Reports on Form 8-K.
A current report on Form 8-K was filed on December 23, 1996, under
Item 5 to disclose the completion of a private placement of Series D
Preferred Stock and warrants to purchase common stock.
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: February 11, 1997 By: /s/ James B. Mariner
-------------------------------------
James B. Mariner, President
and Chief Executive Officer
By: /s/ John R. Grady
-------------------------------------
John R. Grady,
Chief Financial Officer
Page 16