I WONDER IF ANYONE DOES ANY DD HERE GEZZZZ.... :)MULLA771
LIKE THEY SAY THERE'S ONE BORN EVERY MINUTE
CREDITORS MORATORIUM
In September 1998, a meeting of the Company's creditors was held at Credit
Managers Association of California ("CMAC"). As an inducement for creditors
to enter into a moratorium and to discourage present and future creditors
from attempting to execute on The Company's assets, the Company pledged
substantially all of its assets to CMAC in its capacity as agent for the
creditors of The Company. An unofficial committee of creditors has been
formed to monitor the Company's operations and review its business plan, as
described under Liquidity and Capital Resources. Creditors are being
requested to forbear from seeking payment on all past due obligations
through February 1999, while efforts are undertaken to explore alternative
measures by which the Company can seek to realized moneys or other
consideration for its creditors and stockholders. No binding moratorium
agreement is currently in place, and it is possible that one or more
creditors will not honor this forbearance request. Absent creditor
cooperation, there is a significant possibility that the Company will be
forced to seek relief in the bankruptcy court.
Page 10 of 18
CHATCOM INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
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,
1998, as amended.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Net sales during the three months ended September 30, 1998 (the "second
quarter of fiscal 1999") decreased approximately $1.1 million or 54% compared to
approximately $2.1 million for the three months ended September 30, 1997 (the
"second quarter of fiscal 1998"). The decline in net sales during the second
quarter of fiscal 1999 compared to the second quarter of fiscal 1998 resulted
primarily from decreased shipments to domestic Value Added Resellers ("VAR's")
($793,000) which the Company believes is attributable to the declining demand
for remote control type remote access solutions, and a continued decrease in
selling, advertising and marketing expenditures including marketing support for
VAR's during fiscal 1999 due to the Company's cash flow constraints, and a
decrease in net shipments to the Company's Singapore distributor ($272,000) as a
result of the Asian economic crisis in the later half of 1997.
In December 1997, the Company and its Singapore distributor, Macon
Holdings(S) Pte. Ltd. ("Macon") entered into an agreement whereby the Company
agreed to permit Macon to return a majority of the equipment (approximately $2.7
million at sales price, approximately $1.8 million at cost) 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 such 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 returned by Macon,
approximately $505,000 (approximately $328,000 at cost) was received by the
Company during the quarter ended December 31, 1997 (of which $285,000 at sales
price, approximately $185,000 at cost was accrued for as of September 30, 1997)
and approximately $2.2 million (approximately $1.4 million at cost) was received
during the quarter ended March 31, 1998 (of which approximately $2.1 million at
sales price and, approximately $1.3 million at cost was accrued for during the
quarter ended December 31, 1997). The equipment received from Macon 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. Through September 30, 1998,
approximately $1.2 million (approximately $761,000 at cost) of the equipment
returned from Macon had been resold by the Company to other customers.
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 December 31, 1998 fiscal quarter continue to be adversely
impacted as a result of reduced expenditures for advertising and marketing
programs and the postponement of hiring or replacement of certain sales
personnel due to the Company's continuing and deepening cash flow constraints,
and the Company's poor financial condition to the extent that it has caused
certain customers to delay purchases from the Company or order from other
suppliers. Additionally, as a result of the Company's poor financial condition,
the Company may not be able to effect the timely procurement of manufacturing
components and thus may need to extend the time
Page 11 of 18
CHATCOM INC.
normally required to ship finished goods and may not be able to meet delivery
requirements of certain customers.
Cost of goods sold were approximately $743,000 or 76% of net sales during
the second quarter of fiscal 1999 compared to $1.3 million or 61% of net sales
in the second quarter of fiscal 1998. The decrease in gross margin in fiscal
1999 (24% vs. 39%, respectively) was primarily the result of continued price
discounting due to competition and continued fixed manufacturing overhead costs
which did not decrease proportionately with the lower sales during the second
quarter of fiscal 1999. Although the cost of certain components (i.e.,
microprocessors and random access memory components) during the second quarter
of fiscal 1999 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 1999 as a result of the
decrease in sales described above. Furthermore, as a result of the Company's
cash flow constraints, the Company has incurred and may continue to incur
additional costs from vendors in order to expedite the procurement of components
in order to satisfy delivery requirements of certain customers. 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 second quarter of fiscal 1999.
Selling expenses decreased $587,000 or 71% in the second quarter of fiscal
1999 compared to the second quarter of fiscal 1998, primarily as a result of
decreased salaries and related costs ($268,000) in all departments (selling,
marketing and technical support) as a result of resignations (and the subsequent
postponement of hiring replacement personnel due to cash flow constraints) and
reductions-in-force effected by the Company since November 1997, as well as
decreased advertising expenses ($84,000) and trade show expenses ($47,000) due
to certain cost reductions implemented during the second quarter of fiscal 1998;
decreased commissions ($40,000) as a result of significantly lower sales during
second quarter of fiscal 1999 compared to the second quarter of fiscal 1998; and
reduced travel costs associated with selling and equipment installation due to
the lower sales and fewer personnel, as described above.
General and administrative expenses decreased by $685,000, or 63%, to
$402,000 during the second quarter of fiscal 1999 from $1,087,000 during the
second quarter of fiscal 1998. The decrease in general and administrative
expenses consisted primarily of lower bad debt expense ($512,000) as the result
of the establishment of a reserve of $500,000 during the second quarter of
fiscal 1998 related to the payment delinquency of Macon; the elimination of
certain consulting expenses ($45,000) due to the termination during February
1998 of an employment contract with a former executive officer of the Company;
decreased salaries, bonuses and related costs ($60,000) as a result of
resignations (and the subsequent postponement of hiring replacement personnel
due to cash flow constraints) and reductions-in-force effected by the Company
since November 1997; lower investor relations expenses ($33,000); and lower
accounting fees ($34,000). These decreases were partially offset by increased
legal fees ($58,000). As a result of the Company's continuing liquidity
problems, a number of vendors have either sued the Company or have forwarded
their accounts to collection. The Company anticipates that it will continue to
incur substantial legal expenses in the December 31, 1998 quarter as well as
possible interruption in the receipt of goods and services due to its liquidity
problems.
Research and development expenses during the second quarter of fiscal 1999
decreased $320,000 or 56% compared to the second quarter of fiscal 1998. The
decrease in the second quarter of fiscal 1999 was primarily attributable to
lower payroll and related expenses ($104,000), decreased use of consultants
($96,000); and decreased expenditures for prototypes ($102,000); all of which
were due to cost reductions implemented by the Company as a result of its poor
financial condition and cash flow constraints.
The Company did not earn interest income during the second quarter of
fiscal 1999 compared to $2,000 earned during the second quarter of fiscal 1998
as a result of lower investment balances due primarily to cash used for
operating activities.
Page 12 of 18
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