SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-QSB
___
| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
Commission file number 0-20462
CHATCOM, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 TOPANGA CANYON BOULEVARD, CHATSWORTH, CALIFORNIA 91311
(Address of principal executive offices)
818/709-1778
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
As of January 31, 1998, there were 9,981,692 shares of the Registrant's
Common Stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
---- ----
Page 1 of 19
EXHIBIT INDEX ON PAGE 19
CHATCOM, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BALANCE SHEETS (in thousands)
- -----------------------------------------------------------------------------------------------------------
(UNAUDITED)
DECEMBER 31, MARCH 31,
ASSETS NOTES 1997 1997
--------- ----------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 557 $ 1,169
Accounts receivable, net of allowances of $265,000
(December 31, 1997) and $109,000 (March 31, 1997) 2 853 1,334
Inventories 2,3 4,503 2,721
Prepaid expenses and other
current assets 102 108
-------- --------
Total current assets 6,015 5,332
EQUIPMENT AND FIXTURES, Net 4 593 651
DEPOSITS 24 24
-------- --------
TOTAL $ 6,632 $ 6,007
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 7 $ 4,865 $ 1,427
Accrued expenses 827 687
Notes payable 5 890
Current portion of capital lease
Obligations 23 23
-------- --------
Total current liabilities 6,605 2,137
-------- --------
CAPITAL LEASE OBLIGATIONS
-less current portion 22 12
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value,
authorized 1,000,000 shares: 7
Series D Convertible Preferred Stock, $1,000 stated value
per share, authorized 5,000 shares, issued and
outstanding 2,496 shares at December 31, 1997
and March 31, 1997 5 1,407 1,407
Series E Convertible Redeemable Preferred Stock,
$1,000 stated value per share, authorized 2,000 shares,
issued and outstanding 1,100 shares at December 31, 1997 6 937
Common Stock, no par value, authorized,
25,000,000 shares, issued and outstanding
9,981,692 shares at December 31, 1997 and
9,826,892 shares at March 31, 1997 5,8 10,325 10,090
Additional paid-in capital 2,404 2,404
Accumulated deficit (15,068) (10,043)
-------- --------
Total stockholders' equity 5 3,858
-------- --------
TOTAL $ 6,632 $ 6,007
======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 2 of 19
CHATCOM, INC.
STATEMENTS OF OPERATIONS (unaudited) (in thousands, except share and per share data)
- --------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
SALES:
Gross sales $ 1,781 $ 3,055 $ 8,955 $ 8,182
Returns (2,302) (305) (2,895) (538)
---------- ---------- ---------- ----------
Net sales (returns) (521) 2,750 6,060 7,644
---------- ---------- ---------- ----------
COST OF GOODS SOLD 328 1,723 4,485 5,057
---------- ---------- ---------- ----------
GROSS PROFIT (LOSS) (849) 1,027 1,575 2,587
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling 769 810 2,660 2,386
General and administrative 372 515 1,922 1,720
Research and development 449 310 1,616 763
Severance expense 61
---------- ---------- ---------- ----------
Total operating expenses 1,590 1,635 6,198 4,930
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (2,439) (608) (4,623) (2,343)
INTEREST INCOME 11 9 39
INTEREST EXPENSE (182) (1) (199) (12)
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (2,621) (598) (4,813) (2,316)
PROVISION FOR INCOME TAXES (1)
---------- ---------- ---------- ----------
NET LOSS $ (2,621) $ (598) $ (4,814) $ (2,316)
DIVIDENDS ON PREFERRED
STOCK (85) (14) (260) (838)
---------- ---------- ---------- ----------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (2,706) $ (612) $ (5,074) $ 3,154)
========== ========== ========== ==========
LOSS PER SHARE:
Primary and fully diluted
loss per share $ (0.27) $ (0.06) $ (0.51) $ (0.36)
========== ========== ========== ==========
Weighted average number of
common shares and common
share equivalents (primary and
fully diluted) 9,934,190 9,746,066 9,893,585 8,683,912
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 3 of 19
CHATCOM, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
- ------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
DECEMBER 31,
1997 1996
------- -------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(4,814) $(2,316)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 271 178
Provision for losses on accounts receivable 302 145
Provision for inventory obsolescence 306
Interest on subordinated debt 20
Interest on accounts payable (Note 7) 175
Changes in operating assets and liabilities:
Accounts receivable 179 6
Inventories (2,088) 461
Prepaid expenses and other current assets 6 8
Deposits (2)
Accounts payable 3,438 (629)
Accrued expenses (31) (233)
------- -------
Net cash used in operating activities (2,236) (2,382)
------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES-
Capital expenditures (183) (194)
------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments of notes payable (939)
Change in restricted cash 500
Principal payments on capital leases (20) (28)
Proceeds from sale of preferred stock 937 3,667
Proceeds from issuance of stock purchase warrants 5
Payment of dividends on preferred stock (10)
Proceeds from issuance of convertible subordinated debt 890
Exercise of stock options and warrants 850
------- -------
Net cash provided by financing activities 1,807 4,045
------- -------
NET (DECREASE) INCREASE IN CASH (612) 1,469
CASH, BEGINNING OF PERIOD 1,169 1,067
------- -------
CASH, END OF PERIOD $ 557 $ 2,536
======= =======
(CONTINUED)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
Page 4 of 19
STATEMENTS OF CASH FLOWS (unaudited) CONTINUED
CHATCOM, INC.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATON:
During the nine months ended December 31, 1997 and 1996, the Company paid
interest of $2,336 and $10,473, respectively, and taxes of $8,253 and $425,
respectively.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended December 31, 1997 and 1996, the Company acquired
office equipment under capital leases in the amount of $30,000 and $22,000,
respectively.
During the nine months ended December 31, 1997, the Company accrued dividends
related to the Series D Convertible Preferred Stock of $187,000 and paid
dividends of $235,000 through the issuance of 154,800 shares of common stock
which resulted in an increase in common stock of $235,000 and a decrease in
accrued expenses of $235,000.
During the nine months ended December 31, 1997, the Company accrued dividends
related to the Series E Convertible Redeemable Preferred Stock of $24,000.
During the nine months ended December 31, 1996, the Company accrued dividends
on preferred stock of $81,000. Dividends of $10,000 were paid in cash,
dividends of $59,000 were paid through the issuance of 38,041 shares of the
Company's common stock and dividends of $12,000 were accrued but unpaid at
December 31, 1996.
(CONCLUDED)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 5 of 19
CHATCOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements of ChatCom, Inc. (the
"Company") have been prepared in accordance with instructions to Form 10-
QSB and, in the opinion of management, include all material adjustments
(consisting only of normal recurring accruals) which are necessary for the
fair presentation of results of operations for the interim periods. These
unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB, as amended, for the fiscal year ended March 31,
1997. The results of operations for the nine month period ended December
31, 1997 are not necessarily indicative of the results to be expected for
the full fiscal year ending March 31, 1998.
Certain prior year amounts have been reclassified to conform with current
year classifications.
2. ACCOUNTS RECEIVABLE AND INVENTORY
In January 1997, the Company executed a Memorandum of Understanding with
Macon Holdings (S) Pte. Ltd. ("Macon") whereby Macon, headquartered in
Singapore, was appointed a Master Distributor of the Company's products in
the Asia Pacific Region. On December 5, 1997, the Company and Macon
executed a Master Distribution Agreement (the "Distribution Agreement")
which detailed the terms of the relationship between the parties.
During the quarterly periods ended June 30, 1997 and September 30, 1997,
the Company shipped equipment to Macon totaling $2.8 million and $.5
million, respectively ($3.3 million in the aggregate). These sales were
made to Macon on an "open account" basis with payment terms generally 30
days from date of invoice. Payments made by Macon for the quarterly periods
ended June 30, 1997, September 30, 1997 and December 31, 1997 totaled
$250,000, $257,000, and $80,000, respectively. No payments have been
received from Macon subsequent to December 31, 1997. As a result of Macon's
inability to effect timely payments of its obligations to the Company,
which Macon has attributed primarily to the Asian economic crisis during
the later part of 1997 as well as less than anticipated market acceptance
of the equipment, the Company and Macon have agreed to permit Macon to
return to the Company all but $150,000 of unsold equipment (approximately
$2.6 million). Of the amount agreed upon to be returned, approximately
$505,000 was received by the Company as of December 31, 1997 and $1.6
million was received between January 1, 1998 and February 20, 1998. The
Company anticipates receiving the remaining balance (approximately
$495,000) by no later than February 28, 1998. The balance of the equipment
to be returned by Macon subsequent to December 31, 1997 ($2.1 million, $1.3
million at cost) has been accrued and reflected in the Company's financial
statements as of December 31, 1997.
Page 6 of 19
CHATCOM, INC.
3. INVENTORIES
The components of inventories are as follows:
December 31,
1997
------------
Raw materials $ 567,000
Work in process 971,000
Finished goods 3,914,000
----------
Inventory at cost 5,452,000
Less: reserve for obsolescence (949,000)
----------
$4,503,000
==========
4. EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following:
December 31,
1997
------------
Equipment $ 1,199,000
Software 138,000
Furniture and fixtures 185,000
Leasehold improvements 89,000
-----------
1,611,000
Less: accumulated depreciation and amortization (1,018,000)
-----------
Equipment and fixtures, net $ 593,000
===========
5. CONVERTIBLE SUBORDINATED DEBT AND SERIES D PREFERRED
STOCK AND SETTLEMENT
On September 11, 1997, the Company, together with a majority of its Board
of Directors, were sued by The High View Fund and The High View Fund, L.P.
(collectively, "High View"), holders of 2,496 shares of the Company's Series D
Convertible Preferred Stock (the "Series D Preferred Stock") and lenders of a
$350,000 convertible subordinated loan made to the Company in May 1997 (the
"$350,000 Loan"). The lawsuits, filed in U.S. Federal District Court, Southern
District of New York and in the State Court of New York, sought damages from the
defendants for alleged wrongful actions relating to securities fraud and not
informing High View regarding the extent of the Company's financial problems.
On September 25, 1997, the parties entered into settlement agreements
(comprised principally of a Stock Exchange Agreement, Registration Rights and
Lock-up Agreement and Warrant agreements; collectively, the "Settlement
Agreements") related to both cases whereby High View agreed to exchange their
2,496 shares of Series D Preferred Stock (representing the entire Series D
Preferred Stock issued by the Company) for a total of 2,000,000 shares of the
Company's Common Stock and to convert the $350,000 Loan, plus $15,173 of accrued
interest thereon, into 292,138 shares of the Company's Common Stock (the
"Exchange Transaction"). The Exchange Transaction also included the exchange of
High View's warrants to purchase 400,000 shares of Common Stock, exercisable at
$3.125 per share (the "Old Warrants"), issued to High View in connection with
the issuance of the Series D Preferred Stock in exchange for warrants to
purchase 1,000,000 shares of the Company's Common Stock at an exercise price of
$1.75 per share. The Settlement Agreements also required the Company to
reimburse High View in the amount of $15,000 for legal expenses incurred in
connection with the settlement.
Page 7 of 19
CHATCOM, INC.
During December 1997, High View alleged in a draft complaint (which was
not filed) that the Company and its directors had fraudulently induced High View
to enter into the Exchange Transaction. On December 31, 1997, the Company
terminated and cancelled the Exchange Transaction effective as of September 25,
1997 pursuant to an agreement with High View and certain of its affiliates (the
"High View Group") dated December 30, 1997 (the "New Agreement"). Pursuant to
the New Agreement, the Settlement Agreements entered into in connection with the
Exchange Transaction were terminated and cancelled and all transactions
purported to be effected pursuant to the Settlement Agreements were rescinded.
As a result of the cancellation, (i) High View continues to hold the Series D
Preferred Stock and the Old Warrants that were issued by the Company in December
1996; (ii) High View continues to be the payee of the $350,000 Loan; and (iii)
the Stock Purchase Agreement by and among the Company and High View dated
December 9, 1996 continues to be in full force and effect.
In addition, pursuant to the New Agreement, the High View Group made
additional loans to the Company in the amount of $540,000 (the "Additional
Loans") to help the Company meet its working capital shortfall. The Additional
Loans are evidenced by 9.5% convertible subordinated notes in the aggregate
principal amount of $540,000 (the "Additional Notes"). In connection with the
issuance of the Additional Notes, the Company also issued to the High View Group
warrants to purchase an aggregate of 150,000 shares of Common Stock (the
"Additional Warrants"). The Additional Notes mature on January 1, 1999 and bear
interest on the outstanding principal amount at the rate of 9.5% per annum,
payable semiannually in cash or shares of Common Stock at the election of the
Company. The Additional Notes are convertible into shares of Common Stock, at
the election of the holder, at a conversion price equal to the greater of (i)
$0.35 or (ii) 75% of the average market price of the Common Stock during the ten
trading days preceding the conversion date, subject to a maximum conversion
price of $0.95. Payment of the Additional Notes is subordinated to the prior
payment of indebtedness the Company may from time to time owe to any bank or
other financial institution (but excluding trade creditors). The Additional
Warrants expire on December 13, 2001 and have an exercise price of $0.375 per
share. Pursuant to the New Agreement, the $350,000 Loan was evidenced by
convertible subordinated notes having terms substantially the same as the terms
of the Additional Notes. The Company has agreed to register the shares of
Common Stock issuable upon conversion of the Additional Loans, the $350,000
Loan, and upon exercise of the Additional Warrants. Under the terms of the New
Agreement, High View released the Company and its officers and directors from
any claims that they might have arising from the Exchange Transaction
contemplated by the Settlement Agreements. The New Agreement also required the
Company to reimburse High View in the amount of $40,000 for legal expenses
incurred in connection with the settlement.
6. ISSUANCE OF SERIES E PREFERRED STOCK
On September 26, 1997, the Company entered into Stock Purchase Agreements
(the "Agreements") whereby the Company agreed to sell to two accredited
investors up to 1,700 shares of Series E Convertible Redeemable Preferred Stock,
$1,000 stated value per share (the "Series E Preferred Stock"), and warrants to
purchase 432,727 shares of Common Stock at a price of $1.25 per share (the
"Series E Warrants"). Pursuant to the Agreements, a total of 1,100 shares of
Series E Preferred Stock and 254,545 of the Series E Warrants were sold by the
Company on September 26, 1997 for gross proceeds of $1,100,000. The sale of the
Series E Preferred Stock and the Series E Warrants were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Regulation D promulgated thereunder. The Company received various
representations and warranties from the investors, including a representation
that the investors are "accredited investors" within the meaning of Regulation
D. Offering costs of $163,000, consisting primarily of cash finders' fees and
legal fees, were incurred by the Company. Dividends on the Series E Preferred
Stock are payable in cash or Common Stock, at the option of the Company, at a
rate of 8% per annum. The sale of the additional 600 shares of Series E
Preferred Stock and 178,182 Series E Warrants ($600,000 of gross offering
proceeds) is scheduled to occur within five days following the Company's
satisfaction of certain conditions which include, among others, a registration
statement covering the sale of the shares issuable upon conversion of the Series
E Preferred Stock and upon the exercise of the Series E Warrants is declared
effective; the market price of the Company's Common Stock for the ten trading
days preceding the additional closing date exceeds $1.00 per share; and the
Page 8 of 19
CHATCOM, INC.
funding from a strategic investor of at least $1,000,000 from the sale of equity
securities of the Company. One-half of the Series E Preferred Stock is
convertible at the election of the holder into shares of the Company's Common
Stock commencing on the 51/st/ day after the closing date and all of the Series
E Preferred Stock is convertible commencing on the 91/st/ day after such closing
date. The conversion value to determine the number of shares of Common Stock
into which the Series E Preferred Stock is convertible is the lesser of $1.375
or 75% of the average of the closing bid prices of the Common Stock during the
five trading days immediately preceding the conversion date. The Series E
Warrants are exercisable for five years commencing January 1, 1998. The Company
has agreed to register the shares issuable upon the conversion of the Series E
Preferred Stock and upon the exercise of the Series E Warrants. The Registration
Rights Agreement provides that in the event the registration statement is not
declared effective on or before December 25, 1997, the Company shall pay the
investors, on January 24, 1998 and on each successive date which is 30 days
after the previous payment date (pro rated for partial periods) until such
registration statement is declared effective, payments in the amount of 3% of
the purchase price of outstanding Series E Preferred Stock ($1,100,000), in cash
or shares of the Company's Common Stock at the election of the investor. As of
February 20, 1998, such registration statement has not yet been filed, and the
Company owed such investors payments in the amount of $62,700.
No assurance can be given that the Company will be able to satisfactorily
meet the conditions required for the sale of the additional 600 shares of Series
E Preferred Stock.
7. SUBSEQUENT EVENT - CONVERSION OF UNSECURED DEBT
On January 29, 1998, the Company entered into a letter of intent with
Vermont Research Products, Inc. ("Vermont"), a major supplier of certain
products (which are resold by the Company), for the conversion of a portion of
the amount owed by the Company to Vermont (approximately $2.0 million at
December 31, 1997 and January 29, 1998) into 945 shares of the Company's Series
F Convertible Redeemable Preferred Stock, $1,000 stated value per share, valued
at $945,000 (the "Series F Preferred Stock") and 400 shares of the Company's
Series G Convertible Preferred Stock, $1,000 stated value per share, valued at
$400,000 (the "Series G Preferred Stock"). The letter of intent also provides
for payment terms with respect to the remaining balance owed to Vermont
(approximately $700,000 at December 31, 1997 and January 29, 1998 (the
"Remaining Balance")). As additional consideration, the Company has agreed to
issue to Vermont a five-year warrant to purchase 285,000 shares of Common Stock
at an exercise price of $.35 per share. Dividends on the Series F Preferred
Stock and Series G Preferred Stock are payable in cash or shares of Common
Stock, at the election of the Company, at the rate of 9.5% per annum. The Series
F Preferred Stock is convertible into shares of Common Stock at any time through
January 31, 2003 at a conversion price equal to the market price at the time of
conversion, but at a conversion price no greater than $.95 per share and no less
than $.35 per share. The Series G Preferred Stock is convertible into shares of
Common Stock at a conversion price of $.35 per share. The holders of the Series
F Preferred Stock and Series G Preferred Stock are entitled to equal preference
with holders of the Company's Series D and Series E Preferred Stock. The Company
has agreed to use its best efforts to register the shares issuable upon the
conversion of the Series F Preferred Stock and Series G Preferred Stock and
upon the exercise of the warrants, with such registration statement to be
declared effective no later than April 29, 1998 (extended to May 29, 1998 under
certain circumstances). As long as any amounts of Series F Preferred Stock or
Series G Preferred Stock remain outstanding, Vermont shall have the right to
approve any preferred stock offering by the Company which rank equal to or
senior to those of Vermont's, and approve any debt offering contemplated by the
Company, except for commercial bank lines of credit or loans secured by the
Company's U.S. accounts receivable or inventory. Of the remaining balance owed
to Vermont after the conversion of certain amounts into the Series F Preferred
Stock and the Series G Preferred Stock, $274,000 will represent equipment
warehoused by Vermont for the Company and is payable to Vermont at the time of
shipment to any customer of the Company. Of the remaining balance owed to
Vermont (approximately $420,000 together with interest at 9.5% effective
February 1, 1998), $5,000 will be paid upon execution of the definitive
settlement agreement, $5,000 is payable on March 1, 1998, $5,000 is payable on
April 1, 1998, and $35,000 per month is payable commencing May 1, 1998.
Additionally, the Company is required to remit 25% of its collections of foreign
accounts receivable commencing February 1, 1998 as well as 20% of the net
proceeds to the Company of any equity financings
Page 9 of 19
CHATCOM, INC.
(other than commercial bank loan financing or asset based lending against United
States accounts receivable and finished or assembled good inventory) effected by
the Company subsequent to February 1, 1998 plus the sum of $50,000 upon
consummation of each of the first two such financings. The Company has also
agreed to pay Vermont's expenses in connection with this transaction. In the
event the Company is engaged in a bankruptcy proceeding or reorganization,
Vermont is allowed to be reinstated as an unsecured creditor. There can be no
assurance that the parties will enter into a definitive settlement agreement as
contemplated by the letter of intent.
During the quarter ended December 31, 1997 and in anticipation of entering into
the above agreement, the Company agreed to Vermont's invoicing the Company
$175,000 for interest charges related to its month-end balances owed to Vermont
throughout 1997. The effective rate of interest was approximately 17%.
8. LITIGATION
A. On January 15, 1998, the Company was sued by Strategic Growth
International, Inc. ("SGI"), an investor relations consulting firm. The lawsuit,
filed in U.S. Federal District Court, Central District of California, seeks
damages from the Company for the balance of certain finder's fees ($191,500)
alleged by SGI to be owed by the Company to SGI in connection with the Company's
financings from High View and for amounts alleged by SGI to be owed to SGI for
consulting services ($75,841) and the economic value of stock options for 66,666
shares of the Company's Common Stock that SGI was to receive in connection with
SGI's consulting services. SGI also seeks reimbursement for its legal fees in
connection with the lawsuit and obtained an attachment order against certain of
the Company's assets in connection with this lawsuit. At the present time, the
parties have agreed in principle to settle the lawsuit. The terms of the
proposed settlement include the Company's issuance to SGI of 800,000 shares of
Common Stock, the granting to SGI of options to purchase 200,000 shares of the
Company's Common Stock at an exercise price of $.50 per share (the closing bid
price on February 5, 1998), and the payment of $100,000 in cash to SGI, $25,000
of which was paid by the Company on February 9, 1998, with the balance ($75,000)
payable in equal consecutive monthly installments of $15,000, beginning April 9,
1998. The Company has agreed to grant a security interest in the Company's
finished goods inventory for the cash owed, and to register the foregoing shares
under the Securities Act of 1933, including shares issuable upon the exercise of
the stock options.
Although the parties have agreed in principle to settle the lawsuit, such
a settlement is subject to the completion and filing of documentation with the
Court and, as a result, there can be no assurance that the lawsuit will be
ultimately settled pursuant to the terms described above or at all.
B. As a result of the Company's continuing liquidity crisis during fiscal
1998, the Company has been sued for non-payment by four suppliers of products
and services, in addition to SGI, and numerous other vendors have forwarded
their accounts with the Company to collection. The Company has entered into a
Stipulation for Settlement with one supplier which will require the Company to
pay the balance owed ($22,000) in cash, $2,000 of which was paid on February 9,
1998, with the balance ($20,000) payable in equal consecutive monthly
installments of $4,000 beginning February 28, 1998. The Company has commenced
settlement discussions with the other three plaintiffs, however, no settlements
have yet been consummated with these plaintiffs and there can be no assurance
that any such settlements will be obtained by the Company.
9. RELATED PARTY TRANSACTIONS
A. The Assistant Secretary of the Company is also a shareholder of a law
firm that provides legal consultation to the Company. At December 31,1997 and
1996, the Company owed this law firm $16,000 and $4,000, respectively. During
the nine months ended December 31, 1997 and 1996, fees relating to services
provided by this law firm in the amounts of $34,000 and $53,000, respectively,
were included in general and administrative expenses in the accompanying
statements of operations.
Page 10 of 19
CHATCOM, INC.
B. During the nine months ended December 31, 1997, the Company paid a
finder's fee of $110,000 to Maximum Partners, Ltd. ("Maximum"), an investment
banking firm, in connection with the Company's Series E Preferred Stock
financing. Mark D. Lubash, Managing Director of Maximum, is a shareholder of the
Company and son of A. Charles Lubash, a member of the Company's Board of
Directors and former Chief Executive Officer of the Company.
////
////
Page 11 of 19
CHATCOM, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters
discussed in this quarterly report are forward-looking statements, which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's business
operations and financial condition and other factors as described in the
Company's various filings with the Securities and Exchange Commission, including
without limitation the Company's Form 10-KSB for the fiscal year ended March 31,
1997, as amended.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 1996
Gross sales during the three months ended December 31, 1997 (the "third
quarter of fiscal 1998") decreased $1.2 million or 40% compared to the third
quarter of fiscal 1997. This decline resulted primarily from a decrease in
shipments to domestic Value Added Resellers ("VAR's") which the Company believes
is attributable to the declining demand for remote control type remote access
solutions, decreased marketing and support for VAR's during fiscal 1998 due to
the Company's cash flow constraints and the redirection of the Company's sales
and marketing efforts toward the server consolidation and network emulation
markets which began during fiscal 1997.
Sales returns for the third quarter of fiscal 1998 ($2.3 million) were
the result of an agreement entered into during December 1997 between the Company
and its Singapore distributor, Macon Holdings(S) Pte. Ltd. ("Macon") whereby the
Company agreed to permit Macon to return a substantial portion of the equipment
(approximately $2.3 million during the third fiscal quarter) previously sold to
Macon in the quarterly periods ended June 30, 1997 ($2.8 million) and September
30, 1997 ($.5 million) due to Macon's inability to pay for this equipment. Macon
has attributed its inability to pay for the equipment primarily to the Asian
economic crisis during the later part of 1997 as well as less than anticipated
market acceptance of the equipment. Of the amount agreed upon to be returned,
approximately $505,000 was received by the Company as of December 31, 1997 and
$1.6 million was received between January 1, 1998 and February 20, 1998. The
Company anticipates receiving the remaining balance (approximately $495,000) by
no later than February 28, 1998. The balance of the equipment to be returned by
Macon subsequent to December 31, 1997 ($2.1 million, $1.3 million at cost) has
been accrued and reflected in the Company's financial statements as of December
31, 1997. The equipment received from Macon (including that portion to be
received after February 20, 1998) has been added to the Company's inventory as
of December 31, 1997 and is a type that can be readily sold to other customers
in the event the Company is able to secure additional orders for these products.
The Company believes that sales may fluctuate on a quarterly basis as a
result of a number of factors, including the status of world economic
conditions, fluctuations in foreign currency exchange rates and the timing of
system shipments (the current U.S. list price of the Company's most powerful
system, for example, exceeds $300,000; thus the acceleration or delay of a small
number of shipments from one quarter to another can significantly affect the
results of operations for the quarters involved). Orders and shipments during
the first half of the March 31, 1998 fiscal quarter have been lower than
anticipated and the Company believes that sales during the March 31, 1998
quarter and subsequent quarters may be adversely affected by the Company's poor
financial condition, which will result in reduced sales and marketing activities
and may cause certain customers to delay purchases from the Company or order
from other suppliers until such time as the Company's financial condition
significantly improves.
Cost of goods sold decreased to $328,000 during the third quarter of fiscal
1998 from $1,723,000 or 63% of sales in the third quarter of fiscal 1997. Cost
of goods sold during the third quarter of fiscal 1998 was reduced by
approximately $1.5 million as a result of the product returns associated with
Macon. Without the returns from Macon, cost of sales would have been
approximately $1.8 million or 100% of
Page 12 of 19
CHATCOM, INC.
gross sales for the quarter ended December 31, 1997. The decrease in product
gross margins during the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997 was primarily the result of an increase in inventory
reserves (approximately $400,000) due to increased inventory balances and lower
sales during fiscal 1998), price discounting on a large government order which
was shipped during the third quarter of fiscal 1998, and the continuation of
fixed manufacturing overhead which did not decrease proportinately with the
lower sales during the third quarter of fiscal 1998. Although the cost of
certain components (i.e., microprocessors and random access memory components)
during the third quarter of fiscal 1998 were somewhat lower than the comparable
prior year quarter, the Company has not been able to achieve further reductions
in component costs due to the lower quantities purchased during fiscal 1998 as a
result of the decrease in sales described above. The Company's gross margins are
affected by several factors, including, among others, sales mix and distribution
channels and, therefore, may vary in future periods from those experienced
during the third quarter of fiscal 1998.
Selling expenses decreased $41,000 or 5% in the third quarter of fiscal
1998 compared to the third quarter of fiscal 1997, primarily as a result of
decreased advertising expenses ($90,000) and decreased marketing salaries
($35,000) due to certain cost reductions implemented during the second quarter
of fiscal 1998. The decreases in fiscal 1998 were substantially offset by
increased personnel costs as a result of additional sales personnel and
increased expenses associated with international sales efforts.
General and administrative expenses during the third quarter of fiscal 1998
decreased by $143,000 or 28% compared to the third quarter of fiscal 1997. The
decrease was primarily the result of a reduction in bad debt expense ($300,000)
due to the Company's arrangement with Macon to receive back inventory (during
the second fiscal quarter ended September 30, 1997, the Company established a
bad debt reserve related to Macon as a result of Macon's payment delinquency)
and reductions in management consulting expenses ($73,000). These decreases were
partially offset by increases in legal fees ($132,000) and recruitment fees
($48,000) during the third quarter of fiscal 1998. As a result of the Company's
current liquidity problems, a number of vendors have either sued the Company or
have forwarded their accounts to collection. The Company anticipates incurring
substantial legal expenses in the March 31, 1998 fiscal quarter as well as
possible interruption in the receipt of goods and services due to its liquidity
problems.
Research and development expenses during the third quarter of fiscal 1998
increased $139,000 or 45% compared to the third quarter of fiscal 1997. The
increase in fiscal 1998 was primarily attributable to additional personnel
($31,000) and consultants ($49,000) as well as increased expenditures for
prototypes ($38,000) due to the Company's concerted effort to decrease product
development time and increase pre-production product testing.
In an effort to further reduce its operating expenses, the Company recently
effected a reduction in its workforce which reduced total employee headcount
from 60 to 45. During February 1998, Gary Dunham, the Company's Vice President
of Sales and Marketing, resigned. Additionally, during February 1998, Richard F.
Gordon, Chairman of the Company's Board of Directors, was appointed interim
President and Chief Executive Officer, replacing James B. Mariner, who resigned
as an officer of the Company. The Company and Mr. Mariner are currently
negotiating an arrangement whereby Mr. Mariner, in the capacity as an
independent contractor, would be responsible for directing the Company's sales
and marketing efforts. During February 1998, Gordon L. Almquist, the Company's
Chief Financial Officer, was appointed to the additional role of Chief Operating
Officer.
The Company did not earn interest income during the third quarter of fiscal
1998 compared to $11,000 earned during the third quarter of fiscal 1997 as a
result of lower investment balances due primarily to cash used for operating
activities during fiscal 1998.
Interest expense increased to $182,000 during the third quarter of fiscal
1998 from $1,000 in the third quarter of fiscal 1997 primarily as a result of
the Company's acceptance of a charge for interest ($175,000) by Vermont Research
Products, Inc. ("Vermont"), a major supplier of certain products which are
resold by the Company, in anticipation of the Company entering into an agreement
with Vermont whereby Vermont would convert a portion of the balance owed by the
Company to Preferred Stock as well as interest associated with a $350,000
convertible subordinated loan issued by the Company during May 1997.
Page 13 of 19
CHATCOM, INC.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THE NINE MONTHS ENDED DECEMBER 31, 1996
Net sales during the nine months ended December 31, 1997 (the "first nine
months of fiscal 1998") were $6.1 million, a decrease of $1.6 million or 21%
compared to the $7.6 million recorded during the nine months ended December 31,
1996 (the "first nine months of fiscal 1997"). The decrease was due primarily
to a decrease in shipments to domestic VAR's which the Company believes is
attributable to the declining demand for remote control type remote access
solutions, decreased marketing and support for VAR's during fiscal 1998 due to
the Company's cash flow constraints, and the redirection of sales and marketing
efforts toward the server consolidation and network emulation markets which
began during fiscal 1997.
Cost of goods sold were $4.5 million or 74% of net sales in the first nine
months of fiscal 1998 compared to $5.1 million or 66% of sales in the first nine
months of fiscal 1997. The decrease in gross margins during the first nine
months of fiscal 1998 compared to the first nine months of fiscal 1997 (26% vs.
34%, respectively) was primarily the result of price discounting due to
competetion and increased manufacturing overhead during fiscal 1998 due to
increased indirect labor (primarily related to quality assurance) during fiscal
1998.
Selling expenses increased $274,000, or 11% in the first nine months of
fiscal 1998 compared to the first nine months of fiscal 1997, primarily as a
result of increased personnel costs as a result of additional sales personnel
($168,000); increased commissions and bonuses due to the increase in sales
personnel ($56,000); increased expenses associated with international sales
efforts ($183,000), and increased trade show expenses ($50,000). The increases
in the first nine months of fiscal 1998 were partially offset by decreased
advertising expenses ($170,000), decreased marketing salaries ($37,000) due to
certain cost reductions implemented during the second quarter of fiscal 1998,
and decreased consulting expenses ($47,000).
General and administrative expenses during the first nine months of fiscal
1998 increased by $202,000 or 12% compared to the first nine months of fiscal
1997. The increase was primarily the result of an increase in bad debt expense
($156,000) which is primarily related to Macon's remaining balance owed to the
Company as of December 31, 1997 ($150,000), as well as increased legal fees
during the first nine months of fiscal 1998 ($124,000). These increases were
partially offset by reductions in consulting expense ($172,000) during the first
nine months of fiscal 1998.
Research and development expenses during the first nine months of fiscal
1998 increased $853,000, or 112% compared to the first nine months of fiscal
1997. The increase was primarily attributable to additional personnel
($201,000) and consultants ($253,000) as well as increased expenditures for
prototypes ($253,000) due to the Company's concerted effort to decrease product
development time and increase pre-production product testing.
Interest income decreased to $9,000 during the first nine months of fiscal
1998 from $39,000 during the first nine months of 1997 as a result of lower
investment balances due primarily to cash used for operating activities during
fiscal 1998.
Interest expense increased to $199,000 during the first nine months of
fiscal 1998 from $12,000 in the first nine months of fiscal 1997 primarily as a
result of the Company's acceptance of a charge for interest ($175,000) by
Vermont, a major supplier of certain products which are resold by the Company,
in anticipation of the Company entering into an agreement with Vermont whereby
Vermont would convert a portion of the balance owed by the Company to Preferred
Stock as well as interest associated with a $350,000 convertible subordinated
loan issued by the Company during May 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company recorded a net loss of $2.6 million and $4.8 million during the
three and nine months ended December 31, 1997, respectively. During the nine
months ended December 31, 1997, cash
Page 14 of 19
CHATCOM, INC.
decreased $612,000 primarily due to the negative cash flow from operations of
$2,236,000. The negative cash flow from operations during the first nine months
of fiscal 1998 was comprised primarily of the net loss ($4.8 million) and an
increase in inventory ($2.1 million), primarily as a result of the receipt of
equipment back from Macon. These decreases were partially offset by an increase
in accounts payable ($3.4 million), due primarily to the Company's delay in
paying suppliers as a result of the Company's financial condition, and by non
cash charges related to depreciation and amortization ($271,000), bad debt
expense ($302,000) and inventory obsolescence ($306,000).
Net cash used for investing activities during the first nine months of
fiscal 1998 ($183,000) was the result of expenditures related to computers and
manufacturing equipment.
Net cash provided by financing activities during the first nine months of
fiscal 1998 ($1.8 million) was primarily the result of the issuance of 1,100
shares of Series E Preferred Stock ($937,000) and the issuance of $890,000 in
convertible subordinated debt.
As of December 31, 1997, the Company had negative working capital of $.6
million, as compared to working capital of $3.2 million as of March 31, 1997.
The Company must immediately provide additional liquidity to meet its current
obligations and maintain its operations and is actively seeking additional
financing to meet its immediate needs. The purchasers of $1,100,000 of the
Series E Preferred Stock have agreed to purchase an additional $600,000 of such
shares but such purchase is subject to certain conditions which include, among
others, a registration statement covering the resale of the shares issuable upon
conversion of the Series E Preferred Stock and upon the exercise of the Series E
Warrants is declared effective; the market price of the Company's Common Stock
for the ten trading days preceding the additional closing date exceeds $1.00 per
share; and the receipt of at least $1,000,000 from the sale of equity securities
of the Company. No assurances, however, can be given that this or any other
financings will be consummated or that the proceeds from the sale of additional
shares of Series E Preferred Stock or any other financing will be sufficient to
permit the Company to continue its current operations. Furthermore, there can be
no assurance that the Company will be able to obtain additional commitments for
sufficient financing.
The Company has incurred operating losses in each of its last three fiscal
years, and has experienced operating losses for the past five consecutive fiscal
quarters and is continuing to incur operating losses subsequent to December 31,
1997. Even if the Company successfully completes the debt and equity financings
it is currently attempting to consummate, if the Company continues to experience
operating losses in the future that result in a significant utilization of its
liquid resources, the Company's liquidity and its ability over the long-term to
continue its operations could be materially adversely affected.
The Company may seek additional public or private financing to meet its
longer term capital needs if market conditions are favorable. If additional
funds are raised through the issuance of equity securities, it is likely that
the Company will be required to sell such securities at a substantial discount
to the current market price for the Common Stock, the percentage ownership of
the then current shareholders of the Company will be reduced, and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. No assurance can be given that
additional financing will be available or that, if available, it will be
available on terms favorable to the Company or its shareholders. Any increase
in the outstanding number of shares of the Common Stock or options and warrants
may have an adverse effect on the market price of the Common Stock and may
hinder efforts to arrange future financing.
The Company had no material commitments for capital expenditures as of
December 31, 1997.
Page 15 of 19
CHATCOM, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
A. On September 11, 1997, the Company, together with a majority of its
Board of Directors, were sued by The High View Fund and The High View Fund, L.P.
(collectively, "High View"), holders of 2,496 shares of the Company's Series D
Preferred Stock and lenders of a $350,000 convertible subordinated loan made to
the Company in May 1997 (the "$350,000 Loan"). The lawsuits, filed in U.S.
Federal District Court, Southern District of New York and in the State Court of
New York, sought damages from the defendants for alleged wrongful actions
relating to securities fraud and not informing High View regarding the extent of
the Company's financial problems.
On September 25, 1997, the parties entered into settlement agreements
(comprised principally of a Stock Exchange Agreement, Registration Rights and
Lock-up Agreement and Warrant agreements; collectively, the "Settlement
Agreements") related to both cases whereby High View agreed to exchange their
2,496 shares of Series D Preferred Stock (representing the entire Series D
Preferred Stock issued by the Company) for a total of 2,000,000 shares of the
Company's Common Stock and to convert the $350,000 Loan, plus $15,173 of accrued
interest thereon, into 292,138 shares of the Company's Common Stock (the
"Exchange Transaction"). The Exchange Transaction also included the exchange of
High View's warrants to purchase 400,000 shares of Common Stock, exercisable at
$3.125 per share (the "Old Warrants"), issued to High View in connection with
the issuance of the Series D Preferred Stock in exchange for warrants to
purchase 1,000,000 shares of the Company's Common Stock at an exercise price of
$1.75 per share. The Settlement Agreements also required the Company to
reimburse High View in the amount of $15,000 for legal expenses incurred in
connection with the settlement.
During December 1997, High View alleged in a draft complaint (which was
not filed) that the Company and its directors had fraudulently induced High View
to enter into the Exchange Transaction. On December 31, 1997, the Company
terminated and cancelled the Exchange Transaction effective as of September 25,
1997 pursuant to an agreement with High View and certain of its affiliates (the
"High View Group") dated December 30, 1997 (the "New Agreement"). Pursuant to
the New Agreement, the Settlement Agreements entered into in connection with the
Exchange Transaction were terminated and cancelled and all transactions
purported to be effected pursuant to the Settlement Agreements were rescinded.
As a result of the cancellation, (i) High View continues to hold the Series D
Preferred Stock and the Old Warrants that were issued by the Company in December
1996; (ii) High View continues to be the payee of the $350,000 Loan; and (iii)
the Stock Purchase Agreement by and among the Company and High View dated
December 9, 1996 continues to be in full force and effect.
In addition, pursuant to the New Agreement, the High View Group made
additional loans to the Company in the amount of $540,000 (the "Additional
Loans") to help the Company meet its working capital shortfall. The Additional
Loans are evidenced by 9.5% convertible subordinated notes in the aggregate
principal amount of $540,000 (the "Additional Notes"). In connection with the
issuance of the Additional Notes, the Company also issued to the High View Group
warrants to purchase an aggregate of 150,000 shares of Common Stock (the
"Additional Warrants"). The Additional Notes mature on January 1, 1999 and bear
interest on the outstanding principal amount at the rate of 9.5% per annum,
payable semiannually in cash or shares of Common Stock at the election of the
Company. The Additional Notes are convertible into shares of Common Stock, at
the election of the holder, at a conversion price equal to the greater of (i)
$0.35 or (ii) 75% of the average market price of the Common Stock during the ten
trading days preceding the conversion date, subject to a maximum conversion
price of $0.95. Payment of the Additional Notes is subordinated to the prior
payment of indebtedness the Company may from time to time owe to any bank or
other financial institution (but excluding trade creditors). The Additional
Warrants expire on December 13, 2001 and have an exercise price of $0.375 per
share. Pursuant to the New Agreement, the $350,000 Loan was evidenced by
convertible subordinated notes having terms substantially the same as the terms
of the Additional Notes. The Company has agreed to register the shares of
Common Stock issuable upon conversion of the Additional Loans, the $350,000
Loan, and upon exercise of the Additional Warrants. Under the terms of the New
Agreement, High View released the Company and its officers and directors from
any claims that they might have arising from the Exchange Transaction
Page 16 of 19
CHATCOM, INC.
contemplated by the Settlement Agreements. The New Agreement also required the
Company to reimburse High View in the amount of $40,000 for legal expenses
incurred in connection with the settlement.
B. On January 15, 1998, the Company was sued by Strategic Growth
International, Inc. ("SGI"), an investor relations consulting firm. The lawsuit,
filed in U.S. Federal District Court, Central District of California, seeks
damages from the Company for the balance of certain finder's fees ($191,500)
alleged by SGI to be owed by the Company to SGI in connection with the Company's
financings from High View and for amounts alleged by SGI to be owed to SGI for
consulting services ($75,841) and the economic value of stock options for 66,666
shares of the Company's Common Stock that SGI was to receive in connection with
SGI's consulting services. SGI also seeks reimbursement for its legal fees in
connection with the lawsuit and obtained an attachment against certain of the
Company's assets in connection with this lawsuit. As of February 5, 1998, the
parties agreed in principle to settle the lawsuit. The terms of the proposed
settlement include the Company's issuance to SGI of 800,000 shares of Common
Stock, the granting to SGI of options to purchase 200,000 shares of the
Company's Common Stock at an exercise price of $.50 per share (the closing bid
price on February 5, 1998), and the payment of $100,000 in cash to SGI, $25,000
of which was paid by the Company on February 9, 1998, with the balance ($75,000)
payable in equal consecutive monthly installments of $15,000, beginning April 9,
1998. The Company has agreed to grant a security interest in the Company's
finished goods inventory for the cash owed, and to register the foregoing shares
under the Securities Act of 1933, including shares issuable upon the exercise of
the stock options.
Although the parties have agreed in principle to settle the lawsuit, such
a settlement is subject to the completion and filing of documentation with the
Court and, as a result, there can be no assurance that the lawsuit will be
ultimately settled pursuant to the terms described above or at all.
C. As a result of the Company's continuing liquidity crisis during fiscal
1998, the Company has been sued for non-payment by four suppliers of products
and services, in addition to SGI, and numerous other vendors have forwarded
their accounts with the Company to collection. The Company has entered into a
Stipulation for Settlement with one supplier which will require the Company to
pay the balance owed ($22,000) in cash, $2,000 of which was paid on February 9,
1998, with the balance ($20,000) payable in equal consecutive monthly
installments of $4,000 beginning February 28, 1998. The Company has commenced
settlement discussions with the other three plaintiffs, however, no settlements
have yet been consummated with these plaintiffs and there can no assurance that
any such settlements will be obtained by the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On September 26, 1997, the Company entered into Stock Purchase Agreements
(the "Agreements") whereby the Company agreed to sell to two accredited
investors up to 1,700 shares of Series E Convertible Redeemable Preferred Stock,
$1,000 stated value per share (the "Series E Preferred Stock"), and warrants to
purchase 432,727 shares of Common Stock at a price of $1.25 per share (the
"Series E Warrants"). Pursuant to the Agreements, a total of 1,100 shares of
Series E Preferred Stock and 254,545 of the Series E Warrants were sold by the
Company on September 26, 1997 for gross proceeds of $1,100,000. The sale of the
Series E Preferred Stock and the Series E Warrants were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Regulation D promulgated thereunder. The Company received various
representations and warranties from the investors, including a representation
that the investors are "accredited investors" within the meaning of Regulation
D. Offering costs of $163,000, consisting primarily of cash finders' fees and
legal fees, were incurred by the Company. Dividends on the Series E Preferred
Stock are payable in cash or Common Stock, at the option of the Company, at a
rate of 8% per annum. The sale of the additional 600 shares of Series E
Preferred Stock and 178,182 Series E Warrants ($600,000 of gross offering
proceeds) is scheduled to occur within five days following the Company's
satisfaction of certain conditions which include, among others, a registration
statement covering the sale of the shares issuable upon conversion of the Series
E Preferred Stock and upon the exercise of the Series E Warrants is declared
effective; the market price of the Company's Common Stock for the ten trading
days preceding the additional closing date exceeds $1.00 per share; and the
funding from a strategic investor of at least $1,000,000 from the sale of equity
securities of the Company. One-half of
Page 17 of 19
CHATCOM, INC.
the Series E Preferred Stock is convertible at the election of the holder into
shares of the Company's Common Stock commencing on the 51/st/ day after the
closing date and all of the Series E Preferred Stock is convertible commencing
on the 91/st/ day after such closing date. The conversion value to determine the
number of shares of Common Stock into which the Series E Preferred Stock is
convertible is the lesser of $1.375 or 75% of the average of the closing bid
prices of the Common Stock during the five trading days immediately preceding
the conversion date. The Series E Warrants are exercisable for five years
commencing January 1, 1998. The Company has agreed to register the shares
issuable upon the conversion of the Series E Preferred Stock and upon the
exercise of the Series E Warrants. The Registration Rights Agreement provides
that in the event the registration statement is not declared effective on or
before December 15, 1997, the Company shall has agreed to pay the investors, on
January 24, 1998 and on each successive date which is 30 days after the previous
payment date (pro rated for partial periods) until such registration statement
is declared effective, payments in the amount of 3% of the purchase price of
outstanding Series E Preferred Stock ($1,100,000), in cash or shares of the
Company's Common Stock at the election of the investor. As of February 20, 1998,
such registration statement has not been filed, and the Company owed such
investors payments in the amount of $62,700.
No assurance can be given that the Company will be able to satisfactorily
meet the conditions required for the sale of the additional 600 shares of Series
E Preferred Stock.
Page 18 of 19
CHATCOM, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits. The following exhibits are filed with this Form 10-QSB:
10.1 Agreement between the Company and The High View Fund,
L.P. and The High View Fund dated December 30, 1997.
10.2 Form of Convertible Subordinated Note issued to The High
View Fund, The High View Fund, L.P. and their affiliates.
10.3 Form of Warrant to purchase Common Stock issued to The
High View Fund, The High View Fund, L.P. and their
affiliates.
27 Financial Data Schedule
b. Reports on Form 8-K.
Current Report on Form 8-K dated December 19, 1997 reporting on
Item 5, as filed on December 29, 1997.
No other information is required to be filed under Part II of this Form 10-QSB.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHATCOM, INC.,
a California corporation
Date: February 20, 1998 By: /s/ Richard F. Gordon
-------------------
Richard F. Gordon, Chairman of the
Board of Directors
By: /s/ Gordon L. Almquist
-------------------
Gordon L. Almquist, Vice
President, Finance and Chief
Financial Officer
Page 19 of 19