<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to ____________
Commission file number 000-22235
------------------------------------
Objective Communications, Inc.
- ----------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 54-1707962
--------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
50 International Drive
Portsmouth, NH 03801
- ----------------------------------------------------------------------------
(Address of Principal Executive Offices)
(603) 334-6700
- ----------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- ----------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of November 12, 1998: 5,741,035
Transitional Small Business Disclosure Format (check one):
Yes No X
------ -------
1
<PAGE> 2
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1998 1997
--------------------------- ----------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,756,111 $18,199,434
Accounts receivable 110,226 -
Inventory 6,406,174 1,700,935
Other current assets 489,997 675,289
----------- -----------
Total current assets 8,762,508 20,575,658
Property and equipment, net 3,700,431 2,306,048
Trademarks and patents 175,129 108,475
Other assets 113,321 92,519
----------- -----------
$12,751,389 $23,082,700
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 126,806 $ -
Debentures 3,160,959 -
Accounts payable 5,639,199 3,077,723
Deferred revenue - 133,180
Accrued liabilities 853,197 752,018
Obligations under capital lease, current portion 337,236 190,454
----------- -----------
Total current liabilities 10,117,397 4,153,375
Obligations under capital lease, less current portion 101,121 57,196
----------- -----------
Total liabilities 10,218,518 4,210,571
Stockholders' equity:
Preferred Stock, Series A, par value $.01, 250,000 shares authorized; none
issued and outstanding at September 30, 1998 and -December 31, 1997 - -
Preferred Stock, Series B, at liquidation preference, par value $.01, 954,545
shares authorized; 209,091 and none issued and outstanding at September 30,1998
and December 31, 1997, respectively. 1,159,583 -
Common stock, par value $.01, 30,000,000 shares authorized;
5,741,035 and 5,676,850 issued and outstanding at September 30, 1998
and December 31, 1997, respectively 57,410 56,769
Additional paid-in capital 36,594,248 35,960,466
Deficit accumulated during development stage (35,278,370) (17,145,106)
---------- ----------
Total stockholders' equity 2,532,871 18,872,129
---------- ----------
$12,751,389 $23,082,700
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended For the period
September 30, September 30, October 5, 1993
(date of inception) to
1998 1997 1998 1997 September 30, 1998
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Revenues- net $ 255,283 $ - $ 365,788 $ - $ 861,448
Cost of sales 165,547 - 229,851 - 479,226
-------------- -------------- --------------- -------------- --------------
Gross margin 89,736 - 135,937 - 382,222
-------------- -------------- --------------- -------------- --------------
Operating expenses:
Research and development 2,638,333 1,257,537 9,871,383 2,588,177 18,594,773
Selling, general and administrative 2,515,734 1,224,914 6,954,957 2,699,312 13,543,582
Depreciation and amortization 649,099 121,787 1,619,149 444,466 2,671,385
Other - - - - 15,997
-------------- -------------- --------------- -------------- --------------
Total operating expenses 5,803,166 2,604,238 18,445,489 5,731,955 34,825,737
-------------- -------------- --------------- -------------- --------------
Loss from operations (5,713,430) (2,604,238) (18,309,552) (5,731,955) (34,443,515)
Interest (income) expense, net 22,410 (69,538) (176,288) 360,386 427,958
-------------- -------------- --------------- -------------- --------------
Net loss $ (5,735,840) $ (2,534,700) $ (18,133,264) $ (6,092,341) $(34,871,473)
-------------- -------------- --------------- -------------- ===============
Cumulative Series B Dividend (7,200) - (7,200) -
-------------- -------------- --------------- --------------
Net loss attributable to Common
$ (5,743,040) $ (2,534,700) $ (18,140,464) $ (6,092,341)
shareholders ============== ============ ============= ============
Net loss per common share - basic
and diluted $ (1.00) $ (0.55) $ (3.18) $ (1.67)
============= ============ ============= ============
Weighted average shares
outstanding - basic and
diluted 5,741,035 4,633,511 5,711,317 3,639,737
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the period
For the nine months ended October 5, 1993
September 30, (Date of inception)
1998 1997 to September 30, 1998
---- ---- ---------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($18,133,264) ($6,092,341) ($34,871,473)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,619,149 444,466 2,671,385
Interest expenses related to issuance of warrants - 385,000 706,789
Interest expense related to issuance of debentures 35,959 - 35,959
Non-cash compensation expense 422,766 340,166 762,932
Stock issued in exchange for services rendered - - 55,834
Other non-cash charges 62,256 - 62,256
Changes in operating assets and liabilities:
Accounts receivable (110,226) 49,131 (110,226)
Other current assets 415,355 (254,072) (259,934)
Inventory (4,737,464) (260,826) (6,438,399)
Trademarks and patents (74,691) (75,132) (194,386)
Other assets (20,802) - (108,654)
Accounts payable 2,561,476 46,971 5,639,199
Deferred revenue (133,180) - -
Accrued liabilities 101,179 67,042 853,197
----------- ------------ ------------
Net cash used in operating activities (17,991,487) (5,349,595) (31,195,521)
----------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (3,808,886) (971,381) (6,501,379)
Sale of other fixed assets 5,000 - 5,000
Sale of leasehold improvements 1,470,000 - 1,470,000
----------- ------------ ------------
Net cash used in investing activities (2,333,886) (971,381) (5,026,379)
----------- ------------ ------------
Cash flows from financing activities:
Net proceeds from the issuance of Series A Preferred Stock - 962,203 1,810,643
Net proceeds from the issuance of Series B Preferred Stock 1,150,000 - 1,150,000
Net proceeds from the issuance of common stock 221,240 9,530,251 32,565,923
Net proceeds from the issuance of debentures 3,125,000 3,125,000
Net proceeds from the issuance of notes payable - - 2,550,000
Repayments of notes payable (103,257) (2,300,000) (2,653,257)
Proceeds from the issuance of notes payable to related parties - (199,000) 716,223
Repayment of notes payable to related parties - (364,000)
Debt issue costs - - (258,131)
Principal payments on capital leases (510,933) (51,181) (664,390)
----------- ------------ ------------
Net cash provided by financing activities 3,882,050 7,942,273 37,978,011
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (16,443,323) 1,621,297 1,756,111
Cash and cash equivalents, at beginning of period 18,199,434 623,241 -
----------- ------------ ------------
Cash and cash equivalents, at end of period $ 1,756,111 $ 2,244,538 $ 1,756,111
=========== ============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Current asset financed by issuance of note payable $ 230,063
Capital lease obligations $ 701,640
Inventory transferred to fixed assets $ 32,225
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes To Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements as of
September 30, 1998 and for the three and nine months ended September
30, 1998 and 1997 have been prepared in accordance with generally
accepted accounting principles for interim financial information and
instructions to Form 10-QSB and Article 10 of Regulation S-X. These
financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be
necessary should Objective Communications, Inc. (the "Company") be
unable to continue as a going concern. The reader's attention is
directed to Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations for further disscussion
of going concern issues facing the Company. In the opinion
of management, such financial statements contain all adjustments,
consisting only of normal recurring entries, necessary to present
fairly the financial position of the Company as of September 30, 1998
and the results of operations for the three and nine months ended
September 30, 1998 and 1997. The interim financial statements should
be read in conjunction with the audited financial statements and notes
thereto for the year ended and as of December 31, 1997 included in the
Company's Annual Report on Form 10-KSB, dated March 31, 1998, as
filed with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. Certain prior year items have been
reclassified to conform to the current period's format. The results
of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for
the entire year.
2. Net Loss Per Share
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," which modifies the calculation
of earnings (loss) per share. Net loss per common share is based on
the weighted average number of common shares and dilutive common share
equivalents outstanding during the periods presented. Basic earnings
(loss) per share are calculated by dividing net income (loss) by the
weighted average shares outstanding. Diluted earnings (loss) per
share reflect the dilutive effect of stock options and warrants and
are presented only if the effect is not anti-dilutive. Had options and
warrants been included in the computation, shares for the diluted
computation would have increased by approximately 1.6 million and 2.8
million as of September 30, 1997 and September 30, 1998, respectively.
3. Income taxes
The Company did not record a provision for income taxes for the three
and nine months ended September 30, 1998 and 1997 since the Company
has had net operating losses during each of those periods. The
Company recorded a full valuation allowance against the net deferred
tax asset generated primarily from its net operating loss
carryforwards.
4. Accounting Standards
In June 1997, the Financial Accounting Standard Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." SFAS No.
130 requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as
other financial statements. The Company adopted the new standard
effective for the three months ended March 31, 1998. There were no
items of comprehensive income for the first three quarters of the
fiscal year ended December 31, 1998. SFAS No. 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. The Company is in the process of
evaluating the impact of the new standard on the presentation of the
financial statements and the disclosures therein. The Statement will
become effective for fiscal years beginning after December 15, 1997.
The Company will adopt the new standard for the fiscal year ending
December 31, 1998.
5
<PAGE> 6
In June 1998, The Financial Accounting Standard Board issued SFAS No.
133, "Accounting of Derivative Instruments and Hedging Activities."
SFAS No. 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities.
The new standard requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position
and measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The Company
will adopt the new standard for the fiscal year ending December 31,
2000. Management is evaluating the impact SFAS No. 133 may have on
the Company's financial statements.
5. Inventory consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw Material $6,310,468 $901,548
Work in Progress - 24,272
Finished Goods 95,706 775,115
------ -------
$6,406,174 $1,700,935
========== ==========
</TABLE>
6. Sale of Leasehold Improvements
In the fourth quarter of 1997, the Company reached an agreement with
the Pease Development Authority (the "PDA") to enter into a lease
agreement for additional office space and, in exchange for a favorable
rental rate, the Company agreed to fund significant improvements to
the facility. Through June 1998 the Company had invested in excess of
$1.8 million in improvements to the new offices. In June 1998, the
Company and the PDA modified the previous agreement in that the PDA
agreed to purchase $1,470,000 of the leasehold improvements in
consideration of the Company's agreement to adjust the previously
agreed rental rate to a market rate. In June, 1998, the Company
received the proceeds from the sale, less accrued rent, of $83,870.
7. 5% Cumulative Convertible Debentures Due 2003
In July 1998, the Company completed a private placement of 5%
Cumulative Convertible Debentures due 2003 (the "5% Convertible
Debentures") with certain institutional, affiliated and other
investors, from which it received gross proceeds of approximately
$3.125 million. Interest thereon accrues daily and is payable
quarterly in arrears, payable in cash or, at the Company's option, by
increasing the principal amount of the 5% Convertible Debentures. For
the quarter ended September 30, 1998, the Company elected to pay the
interest due at that date by increasing the principal amount by
approximately $36,000. The 5% Convertible Debentures are senior in
right of payment to substantially all existing and future indebtedness
of the Company and the Company's equity securities. The Company sold
and issued such securities in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act of 1933,
Regulation D and Rule 506.
At the option of each holder, the Company shall redeem all or any
portion of such holder's 5% Convertible Debentures effective as of the
effective date of an "Extraordinary Transaction", as defined in such
debenture, and the holder shall be entitled to receive a redemption
price per $100 principal amount of 5% Convertible Debentures being
redeemed equal to 112.5% of the aggregate principal amount of the 5%
Convertible Debentures, plus accrued and unpaid interest thereon.
Also at the option of each holder, the Company also is obligated to
redeem all or any portion of such holder's outstanding 5% Convertible
Debentures effective as of the date of the occurrence of certain
"Triggering Events", as defined in such debenture, and the holder
shall be entitled to receive a redemption price per $100 principal
amount of 5% Convertible Debentures being redeemed equal to 130% of
the principal amount of the 5% Convertible Debentures, plus accrued
and unpaid interest. In addition, the 5% Convertible Debentures are
redeemable at the option of the Company in certain circumstances.
The Institutional Investors may, in whole or in part, convert the 5%
Convertible Debentures into shares of Common Stock. The Debentures
issued to the Additional Investors are convertible, in whole or in
part, at the option of the holder any time after January 5, 1999. The
conversion rate of the 5% Convertible Debentures is determined by
dividing the principal amount of the 5% Convertible Debentures plus
any accrued and unpaid interest by a conversion price equal to the
lesser of (i) the fixed conversion price of $10.87, or (ii) a floating
conversion price equal to the average of the three lowest closing
prices of
6
<PAGE> 7
the Common Stock on its principal exchange during the 12 trading days
immediately preceding the date upon which the Company is notified of
such conversion. The number of shares of Common Stock issuable upon
conversion of the 5% Convertible Debentures is subject to adjustment
in certain events, including without limitation a reclassification,
reorganization or exchange of the Company's Common Stock.
On or after July 8, 2003, the Company will have the option to cause
the outstanding 5% Convertible Debentures to be automatically
converted to shares of Common Stock pursuant to the Conversion Rate,
as defined in such debenture, or to redeem all outstanding 5%
Convertible Debentures at a redemption price equal to the principal
amount of the 5% Convertible Debentures plus any accrued and unpaid
interest thereon.
8. 5% Cumulative Convertible Series B Preferred Stock
In August 1998, the Company issued to certain unaffiliated investors in
a private placement 209,091 shares of 5% Cumulative Convertible Series
B Preferred Stock, par value $.01 per share (the "Series B Preferred
Stock"), and warrants to purchase an aggregate of 52,237 shares of
Common Stock at an exercise price of $6.00 per share, which were
valued at $94,000 (the "Series B Warrants"). The shares of Series B
Preferred Stock and the Series B Warrants were issued at an exercise
price of $5.50 per share, resulting in gross proceeds to the Company of
$1.15 million. Dividends accrue at 5% annually, are cumulative, and are
payable in additional shares of Series B Preferred Stock. The Company
sold and issued such securities in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act of 1933,
Regulation D and Rule 506.
Shares of Series B Preferred Stock are convertible at any time after
the issuance date at the option of the holder into shares of Common
Stock at an initial conversion rate of $5.50 per share, subject to
adjustment in connection with certain events, including a
reclassification, reorganization or exchange of the Company's Common
Stock. The shares of Series B Preferred Stock are subject to
automatic conversion, without further action on the part of the holder
or the Company, if the closing price of the Company's common stock
equals or exceeds $11.00 per share for 15 consecutive trading days.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-QSB
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All such forward-looking
statements involve known and unknown risks, uncertainties or other factors
which may cause actual results, performance or achievement of the Company to
be materially different from any future results, performance or achievement
expressed or implied by such forward-looking statements. Factors that might
cause such a difference include risks and uncertainties related to product
development, competition and competitive products, the Company's dependence
on the emerging market for video broadcast, retrieval and conferencing,
development of additional products, protection of the Company's intellectual
property, the Company's limited marketing experience, customer acceptance of
the Company's products, limited number of customers, and the need for
additional personnel, as well as risks and uncertainties associated with the
Company's growth strategy, technological changes affecting the Company and
competitive factors affecting the Company.
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto appearing elsewhere in this Quarterly
Report on Form 10-QSB.
OVERVIEW
Objective Communications designs, develops and markets the first high
quality, cost-effective video network system that supports video broadcast,
retrieval of stored video and multi-party conferencing to and from a desktop
personal computer or conference room over the same wire used by the
telephone(s). The Company was incorporated in October 1993. The Company's
operations prior to 1998 related primarily to organizational activities,
including research and development, the development of its initial products,
recruiting management and technical personnel, and raising capital. During
1998, the Company has continued to focus
7
<PAGE> 8
on product development and enhancing its sales and marketing capabilities,
while continuing to recruit management and technical personnel, particularly
to support its sales and marketing efforts.
To date, the Company has not generated substantial revenues from the sale
of its products and services. The Company did not earn any revenues from the
sale of products or services during 1997, and recognized only $365,788 in
revenues from the sale of products during the first three quarters of 1998.
The Company expects to recognize additional operating revenues in the fourth
quarter of 1998. However, it is unable to predict when such revenues will be
recognized or the amount that will be recognized, which will depend on
customer acceptance of products shipped to date and certain other factors,
including new orders and the timing of customer payments, which are beyond
the control of the Company.
In addition, the Company expects to incur substantial operating expenses
in the future to support its product development efforts, enhance its sales
and marketing capabilities and organization and for other selling, general
and administrative expenses. Through September 30, 1998, the Company had
cumulative losses since inception of approximately $34.9 million. The
Company expects to incur additional operating losses for the foreseeable
future. The Company's results of operations may vary significantly from
quarter to quarter during this period of product introduction and initial
sales.
To promote product functionality and customer acceptance of the VidPhone(R)
system, the Company introduced Release 1.4 in August 1998, which added features
to the VidPhone(R) system, including ISDN and ATM wide area connectivity. In
addition, the Company debuted Release 1.5 in October 1998 at the annual Telecon
trade show. Release 1.5, which the Company intends to release in December 1998,
further enhances the functionality of the VidPhone(R) system through the
addition of the VidServer Gateway, the VidPhone(R) Gateway, and new laptop and
headset implementations. The VidServer Gateway enables video playback and video
on demand and the VidPhone(R) Gateway allows control of other vendor's CODECs.
The introduction of Release 1.5 completes the Company's solution for three video
services in one: videoconferencing, video on demand and broadcast distribution,
all with TV-quality images. In the third quarter, the Company sold two
VidPhone(R) systems. Both systems were sold through Unisys Corporation
("Unisys"), a strategic partner reseller of the Company, to the U.S. Second
Circuit Court of Appeals. The two systems, which will be deployed in Buffalo
and New York City, have been accepted and paid for by the customer.
The Company's Sales and Marketing departments are focused on promotional
materials and programs that develop distribution channels and that generate
revenue. The Marketing department has implemented a Sales Tools and
Training Program for resellers, and has completed training for six new VARs
in 1998. In addition, Marketing has initiated joint marketing programs with
resellers. For instance, the Company supported Unisys, a strategic partner,
at seven trade shows and with one radio and two joint print advertisements.
The Company's Sales department has made considerable progress since the
beginning of 1998 in securing new partner relationships and product
evaluation agreements with corporate prospects. Ten Value Added Resellers
(VARs) have signed reseller agreements. In September 1998, the Company
announced that it had signed a reseller agreement with TDS DATACOM of
Madison, Wisconsin to sell and service the Company's VidPhone(R) system
family of products. TDS DATACOM is a subsidiary of TDS TELECOM, which
provides businesses with a full line of voice, data, and video communication
products and services. In October 1998, the Company announced a strategic
alliance with Unisys, under which agreement, Unisys becomes the Company's
preferred reseller to the U.S. Government. Unisys will offer for resale
the VidPhone(R) system, which includes system software and hardware for
video on demand, broadcast distribution, videoconferencing, and wide area
communications. The companies have also agreed to collaborate on future
developments and co-marketing initiatives. This brings the total number of
resellers and strategic alliances to fourteen.
In July 1998, the Company implemented new cash management practices and
reduced its personnel in an effort to decrease corporate expenses. The
Company has continued its focus on cash management through the third and
fourth quarters. In addition, in July, 1998, James F. Bunker was elected the
new President and Chief Executive Officer of the Company. Mr. Bunker is an
experienced industry executive who has driven successful corporate turnarounds
at several technology companies including General Instrument and M/A-COM. Mr.
Steven A. Rogers, who is the founder of the Company and formerly acted as its
President and CEO, was elected as the Company's Chief Technology Officer and
Vice President, Engineering, as the Company continues to focus on product
development and meeting customer expectations regarding functionality.
To date, the Company has financed operations principally through public
and private sales of debt and equity. In July 1998, the Company announced
that it had raised $3.125 million in gross proceeds from a private placement
of 5% Convertible Deben-
8
<PAGE> 9
tures, $625,000 of which was purchased by certain directors, executive
officers and other affiliated investors of the Company. In August 1998, the
Company completed a private placement of 209,091 shares of Series B
Preferred Stock at a price of $5.50 per share, and Series B Warrants to
purchase 52,273 shares of Common Stock. The Company received $1.15 million
in gross proceeds from such offering. The proceeds of both financings are
being used for working capital and general corporate purposes. The Company
believes that its existing resources will be sufficient to fund operations
through late November 1998.
YEAR 2000
As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk for possible
miscalculations or systems failures causing disruptions in their business
operations. This is commonly known as the Year 2000 (or "Y2K") issue. The
Y2K issue can arise at any point in the Company's supply, manufacturing,
processing, distribution, and financial chains.
The Company has initiated the process of evaluating the impact of the Y2K
issue on the Company's operations. This consists of identifying the sources
of potential exposure to risk of systems malfunction or failure in internal
information technology ("IT") infrastructure, in the Company's products, and
in systems utilized by significant vendors and customers. The evaluation
process will also develop contingency plans in order to mitigate the
negative effects to the Company of any failure of these systems. The entire
review process and the remediation of any problems or development of
contingency plans is expected to be completed by September 1999. The
review process will be conducted using current staff and the Company believes
the cost of executing its review plan will not exceed $50,000. If, however,
in the course of the review equipment or software currently used or produced
by the Company prove to be susceptible to the Y2K issue, significant
additional costs may be incurred to modify, re-program or replace the
affected equipment or software.
The Company moved its primary operations to New Hampshire in 1997.
Accordingly, the majority of all computer, communications, and test
equipment, as well as all significant software, were acquired since moving
to the new location. The Company has confirmed with each vendor of this
equipment and software that their product is Y2K compliant. With respect to
internal IT infrastructure, including financial software, the Company
completed the review process and reached the conclusion that they are Y2K
compliant.
The next phase of the Y2K evaluation process involves verification of Y2K
compliance with respect to VidPhone(R) system embedded systems and software.
Initial assessments from the Company's engineers are that the VidPhone(R)
system and related equipment are not susceptible to the Y2K issue, though a
formal review of these systems and software will be initiated and completed
before March 31, 1999.
The Company will begin an evaluation of the compliance of our current and
future major supplier's systems in the fourth quarter of 1998. The risk of
failure of any of our significant supplier's systems could result in the
inability of the Company to supply products to our customers, with the
attendant detrimental impact on the Company's operating results and cash
flow. The Company's Y2K plan will include contingency plans to reduce the
risk of a disruption to normal access to required components and materials
or services. Although the Company believes that the cost of assessing Y2K
compliance by third parties will not exceed $50,000 because the Company intends
to use current staff, at this time it cannot estimate the costs of any steps
taken to resolve any problems or secure alternative relationships with Y2K
compliant third parties.
The Company's expectations about the impact of Y2K on the Company's
operations are based on its current assessment of Y2K compliance, and that
assessment process is not complete. Accordingly, there can be no assurance
that there will not be interruptions or other limitations of financial and
operation systems functionality or that the Company will not incur greater
costs than projected to avoid such interruptions. The Company's expectations
about future costs associated with the Y2K issue are subject to certain
uncertainties that could cause actual results to have a greater financial
impact than currently anticipated. Factors that could influence the amount and
timing of future costs include the success of the Company in identifying Y2K
issues, the costs of remediation or avoidance, the costs of assessing
third-party compliance and its impact on the Company's operations, and other
factors. The forward-looking statements discussed in this section regarding
Y2K compliance involve a number of risks and uncertainties, including those
described above, and general economic conditions, the competitive environment
in which the Company operates, and other risks and uncertainties identified
elsewhere in this quarterly report.
9
<PAGE> 10
Results of Operations
Comparison of the Three Months Ended September 30, 1998 and September 30, 1997
Revenues. The Company recognized approximately $255,300 in revenues in
the three months ended September 30, 1998 compared to no recognized
revenues for the comparable period in 1997. The revenues recognized related
primarily to VidPhone(R) systems and related peripheral equipment shipped in
the quarter ended September 30, 1998 and, to a lesser extent, to equipment
and system components shipped earlier in the year and accepted in the
quarter ended September 30, 1998. The Company did not ship any systems or
products in the three months ended September 30, 1997.
Cost of Sales. The Company incurred approximately $165,500 of cost
of sales in the three months ended September 30, 1998 compared to no cost of
sales recognized for the comparable period in 1997. Cost of sales includes
all direct material costs as well as allocated indirect costs of production,
such as labor, indirect materials, and allocated manufacturing overhead
associated with the manufacture of equipment.
Gross margin on sales as a percentage of total revenues was approximately
$89,700, or approximately 35%, during the three months ended September 30,
1998. There was no gross margin recorded in the three months ended
September 30, 1997.
Research and Development. Research and development expenses increased by
approximately $1.4 million, or 110%, for the three months ended September
30, 1998, to approximately $2.6 million as compared to $1.3 million for the
three months ended September 30, 1997. Approximately $660,000 of the
increase was due to hiring of staff offset by approximately a $90,000
reduction in the use of contract labor. Approximately $690,000 of the
increase was due primarily to increased materials and inventory related
costs, including approximately $196,000 related to an increase in the
reserve for excess and obsolete inventory. Research and development expenses
include the costs associated with all personnel, materials and contract
personnel engaged in research and development for the Company, as well as an
allocated portion of overhead expenses, such as rent, telephone, and office
supplies.
In July 1998, as part of the implementation of a new cash management
program and to reduce expenses, the Company reduced full-time personnel to
approximately 90 persons from approximately 130. The reduction in force
included approximately 13 technical personnel, which will reduce personnel
related research and development costs by approximately $110,000 annually.
Although technical personnel costs may decrease, the Company will continue
developing, testing, and demonstrating its product line, and, accordingly,
research and development costs will continue to be incurred.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $1.3 million, or 105%, in
the three months ended September 30, 1998 to approximately $2.5 million from
approximately $1.2 million during the same period in 1997. Customer support
costs increased from approximately $73,000 to approximately $196,000, or
approximately $123,000, due primarily to increased customer support staffing
levels and related travel expenses to support installations at customer
sites and at demonstration and evaluation sites. Sales and marketing costs
increased from approximately $560,000 to approximately $1.6 million, or
approximately $1.0 million. The increase consisted of approximately $520,000
in higher personnel costs and approximately $560,000 in sales and
promotional materials expenses. General and administrative costs increased
approximately $148,000, or 25%, in the three months ended September 30, 1998
compared to the same period in 1997. Approximately $40,000 of the increase
is related to increased staffing levels, approximately $98,000 is
attributable to increased professional fees and investor relations costs and
an additional non-cash charge of approximately $141,000 for investment
consulting in the three months ending September 30, 1998. Additional costs
associated with expanded office space accounted for approximately $80,000 of
the overall increase in general and administrative costs for the three
months ended September 30, 1998. These increased costs were partially
offset by $218,000 in decreases in relocation, recruiting, and travel costs.
Depreciation and Amortization. Depreciation and amortization increased
approximately $527,000 to $649,000 in the third quarter of 1998 from
approximately $122,000 in the third quarter of 1997. The increase is due
primarily to increased levels of fixed assets and capitalized leases and, to
a lesser extent, increased levels of intellectual property held by the
Company.
Net Interest Income. The Company recorded approximately $22,000 of net
interest expense during the three months ended September 30, 1998 compared
to incurring approximately $70,000 of net interest income in the three
months ended September 30, 1997. The approximately $41,000 in interest
income recorded in the three months ended September 30, 1998, earned on
invested cash balances, was partially offset by approximately $63,000 of
interest expense, incurred primarily in connection with capital lease
obligations, the 5% Convertible Debentures, and the note payable. For the
three months ended September 30, 1997, interest
10
<PAGE> 11
income of approximately $74,000, earned on the invested proceeds of the
initial public offering of the Company's Common Stock concluded in April
1997 (the "Initial Public Offering"), was offset by approximately $4,000 of
interest expense incurred primarily on capital lease obligations.
Net Loss. As a result of the foregoing factors, the net loss increased by
approximately $3.2 million, or 126%, to approximately $5.7 million for the
three months ended September 30, 1998 from approximately $2.5 million during
the three months ended September 30, 1997.
Comparison of the Nine Months Ended September 30, 1998 and September 30, 1997
Revenues. The Company recognized approximately $365,800 in revenues in
the nine months ended September 30, 1998 compared to no revenues recognized
for the comparable period in 1997. The revenues recognized related
primarily to VidPhone(R) systems and related peripheral equipment shipped in
the quarter ended September 30, 1998. The Company did not ship any systems
or products in the nine months ended September 30, 1997.
Cost of Sales. The Company incurred approximately $229,900 of cost
of sales in the nine months ended September 30, 1998. The Company did not
incur any cost of sales in the comparable period in 1997. Cost of sales
includes all direct material costs as well as allocated indirect costs of
production, such as labor, indirect materials, allocated manufacturing
overhead associated with the manufacture of equipment.
Gross margin on sales as a percentage of total revenues was approximately
$135,900, or approximately 37%, during the nine months ended September 30,
1998. There was no gross margin recorded in the nine months ended September
30, 1997.
Research and Development. Research and development expenses increased by
approximately $7.3 million, or 281%, for the nine months ended September 30,
1998, to approximately $9.9 million as compared to $2.6 million for the nine
months ended September 30, 1997. Approximately $2.6 million of the increase
was due to hiring of technical staff, though this was partially offset by a
reduction of approximately $430,000 in the cost of utilizing contract labor.
Costs associated with relocation and recruitment were approximately $126,000
higher in the nine months ended September 30, 1998 than the comparable nine
month period of 1997. Materials and inventory related costs increased
approximately $2.8 million, including an increase of approximately $596,000
in the reserve for excess and obsolete inventory. The costs associated with
increased use of uncapitalized equipment and equipment rentals increased
approximately $560,000 in the nine months ended September 30, 1998 compared
with the nine months ended September 30, 1997. The costs associated with
professional fees incurred in connection with product design increased
approximately $310,000 in the 1998 period compared to 1997. The remainder of
the increase was due to increased costs incurred in supporting a
significantly expanded research and development staff in the 1998 period
than had existed in 1997, consistent with the Company's objective of
bringing the product to full functionality for introduction to the market.
Research and development expenses include the costs associated with all
personnel, materials and contract personnel engaged in research and
development for the Company, as well as an allocated portion of overhead
expenses, such as rent, telephone, and office supplies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $4.3 million, or 158%, in
the nine months ended September 30, 1998 to approximately $7.0 million from
approximately $2.7 million during the same period in 1997. Customer support
costs increased from approximately $99,000 to approximately $779,000, or
approximately $680,000, due primarily to increased customer support staffing
levels and related travel expenses to support installations at customer sites
and at demonstration and evaluation sites. Sales and marketing costs
increased from approximately $991,000 to $3.9 million, or approximately $2.9
million. The increase consisted of approximately $1,183,000 in increased
personnel costs, approximately $140,000 in higher recruitment expenses,
approximately $273,000 in higher costs associated with tradeshow attendance,
approximately $121,000 in increased travel and entertainment costs, and
approximately $702,000 in increased sales and promotional expenses. Also
included in the nine month period were approximately $133,000 of expenses
associated with the cancellation of plans to open a new sales office in the
metropolitan Washington, D.C. area. General and administrative costs
increased approximately $639,000, or 40%, in the nine months ended September
30, 1998 compared to the same period in 1997. Approximately $426,000 of the
increase is related to increased legal, accounting, and investor relations
costs, approximately $423,000 is attributable to a non-cash charge related to
investment consulting services, and approximately $172,000 is attributable to
higher salaries expense, before consideration is given to the $340,000
non-cash compensation charge recorded in 1997. Offsetting these increased
costs were reductions totaling approximately $286,000 due to reduced travel,
relocation, and recruitment costs in 1998.
Depreciation and Amortization. Depreciation and amortization increased
approximately $1.2 million to approximately $1.6 million in the first nine
months of 1998 from approximately $444,000 in the comparable period of 1997.
The increase is due primarily to increased levels of fixed assets and
capitalized leases and, to a lesser extent, increased levels of intellectual
property held by the Company. Approximately $209,000 related to the
amortization of debt issuance costs was included in the total for the first
nine months of 1997.
11
<PAGE> 12
Net Interest Income. The Company recorded approximately $176,000 of net
interest income during the nine months ended September 30, 1998 compared to
incurring approximately $360,000 of net interest expense in the nine months
ended June 30, 1997. The approximately $285,000 in interest income
recorded in the nine months ended September 30, 1998, earned on invested
cash balances, was partially offset by approximately $109,000 of interest
expense, incurred primarily in connection with capital lease obligations,
the 5% Convertible Debentures, a note payable, and finance charges on trade
payables. The approximately $606,000 of interest expense recorded in the
nine months ended September 30, 1997 was incurred primarily in connection
with warrant issuance costs associated with notes issued by the Company in
connection with a bridge financing completed in November 1996, $385,000, and
interest incurred on borrowed funds prior to the Initial Public Offering.
Interest expense during that period was offset by approximately $246,000 of
interest income earned primarily on invested proceeds of the Initial Public
Offering.
Net Loss. As a result of the foregoing factors, the Company's net loss
increased by approximately $12.0 million, or 198%, to approximately $18.1
million for the nine months ended September 30, 1998 from approximately $6.1
million during the nine months ended September 30, 1997.
Liquidity and Capital Resources
The Company has incurred cumulative losses aggregating approximately $34.9
million from inception through September 30, 1998. The Company expects to
incur additional operating losses for the foreseeable future, principally as
a result of expenses associated with the Company's product development
efforts and anticipated sales, marketing and general and administrative
expenses. During the first nine months of 1998, the Company satisfied its
cash requirements principally from the proceeds of a follow-on public
offering of Common Stock completed during November 1997 (the "Follow-on
Offering"), augmented by approximately $3.1 million of proceeds from the
issuance of the 5% Convertible Debentures and approximately $1.1 million of
proceeds from the issuance of the Series B Preferred Stock. In June 1998,
the Company sold for approximately $1.4 million certain leasehold
improvements it had made to its principal office building to the PDA in
consideration for higher rental costs in the future. The primary uses of
cash have been to fund research and development, sales, general and
administrative expenses, and to build inventory levels to support sales of
the Company's products in 1998.
The Company's cash and cash equivalents decreased by approximately $16.4
million to $1.8 million at September 30, 1998, compared to $18.2 million at
December 31, 1997. The Company utilized a portion of such cash for units
shipped in the first quarter of 1998, to build inventory for future
anticipated shipment developments, for costs related to research and
development in response to market demands for additional functionality, and
to increase marketing capabilities to support anticipated and established
significant reseller relationships.
Net cash used in operating activities in the nine months ended September
30, 1998 was approximately $18.0 million. The net loss in the first nine
month period, reduced by depreciation and amortization and the non-cash
compensation and other non-cash charges, was approximately $16.1 million.
Inventories increased by $4.7 million, funded in part by an increase of $2.6
million in accounts payable over the nine month period. Inventory at
September 30, 1998 was approximately $6.4 million, compared to approximately
$1.7 million at December 31, 1997. Inventory at September 30, 1998 included
approximately $95,000 of finished goods representing the cost of equipment
shipped in the third quarter of 1998 which had not been recorded as sales in
the quarter.
Net cash used in investing activities in the nine months ended September
30, 1998 was approximately $2.3 million. The approximately $3.8 million in
cash used for capital items was partially offset by the approximately $1.4
million sale to the PDA of leasehold improvements made to the Company's
leased headquarters. Of the total of approximately $4.5 million in
additions to property and equipment in the nine month period, approximately
$702,000 were financed by additions to capital lease obligations. Total
additions to property and equipment in the nine months ended June 30, 1998
consisted of additions to offices, furniture and fixtures, and related items
and to computer and telecommunications equipment and software.
Net cash provided by financing activities was approximately $3.9 million
in the nine months ended September 30, 1998. In July, the Company raised
approximately $3.125 million from the issuance of 5% Convertible Debentures,
$625,000 of which was purchased by certain directors, executive officers and
certain other affiliated investors. In August, the Company raised
approximately $1.15 million from the issuance of Series B Preferred Stock.
A further approximately $221,000 of proceeds was received from the exercise
of warrants by certain warrant holders after contractual restrictions lapsed
of a portion of their warrants in the
12
<PAGE> 13
second quarter of 1998. These proceeds from financing activities were
partially offset by approximately $511,000 of principal payments on capital
lease obligations and approximately $103,000 of principal payments on a note
payable.
The Company believes, based upon its current plan of operations, that its
existing resources will only be sufficient to fund operations through late
November 1998. Thus, the Company will require significant additional
financing in the near term to continue operations beyond that date. The
Company is currently exploring several potential sources of financing,
including several alternative sources of equity financing. The Company
recently retained a brokerage services firm to act as a non-exclusive
placement agent for a private offering of the Company's equity securities,
on a best efforts basis. In addition, the Company is in discussions with a
second brokerage firm regarding a possible private placement of convertible
securities for which the firm would act as the placement agent, again on a
best efforts basis.
Although the Company believes that it will be successful in its efforts to
raise additional capital, there can be no assurance that it will be able to
do so, particularly given the Company's current cash position. The Company
has been diligently pursuing financing alternatives for a number of months
and, to date, its efforts to obtain additional debt or equity financing have
resulted in financings with gross proceeds to the Company of approximately
$4.275 million in July and August. The Company's ability to attract capital
has been hampered by a number of adverse conditions, certain of which are
beyond the Company's control, including uncertainty regarding economic
conditions generally, the decline in the market for technology stocks, and
concern about the stock market in general. In addition, adverse conditions
in the Company's operations have impeded financing efforts, including the
Company's inability to secure substantial additional orders for its
products, concern about product reliability and customer acceptance, and
concern about the market for video conferencing products generally.
Accordingly, there can be no assurance the Company will be successful in its
efforts to secure additional debt or equity financing through a strategic
alliance, private placement, or otherwise, on terms acceptable to the
Company, or at all.
With respect to the Company's plan of operations, the Company intends to
continue to focus on seeking to operate efficiently and preserve cash by
closely monitoring expenditures and payments to vendors on outstanding
payables, reviewing appropriate staffing levels without sacrificing product
performance, and continuing to increase product functionality and promote
customer acceptance of the VidPhone(R) system, the Company's principal
product. If the Company is not successful in securing additional financing,
the Company will be forced to consider alternative methods of maximizing
shareholder value, which could include sales of the Company's assets, a sale
of the Company, or workout alternatives.
13
<PAGE> 14
Part II
Item 2. Changes in Securities
The information required by this Item is disclosed in Notes 7 and 8 to
the Financial Statements included in this Quarterly Report on Form 10-QSB, and
that information is incorporated in this Item 2 by this reference.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
(a) Exhibits.
3.1 Second Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit No. 3.1 forming a part of
the Company's Quarterly Report on Form 10-QSB, as amended by Amendment No. 1 to the Form 10-QSB on Form 10-QSB/A, for the
quarter ended June 30, 1998).
3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 forming a part of Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (File No. 333-20625) filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
4.1 Form of Warrant for the Purchase of Shares of Common Stock, issued in connection with the private placement of 2,000,000
aggregate principal amount of Bridge Notes (Incorporated by reference to Exhibit 3.4 forming a part of the Company's
Registration statement on Form SB-2 (File No. 333-20625) filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
4.2 Form of Warrant to Purchase Common Stock of the Company, issued in connection with the private placement of units in June
1995 and August 1996 (Incorporated by reference to Exhibit 3.5 forming a part of the Company's Registration Statement on
Form SB-2 (File No. 333-20625) filed with the Securities and Exchange Commission under the Securities Act of 1933, as
amended).
4.3 Form of Warrants for the Purchase of 100,000 Shares of Common Stock, $.01 par value per share, issued in connection with
the private placement of Series A Convertible Preferred Stock and warrants in December 1996 and January 1997 (Incorporated
by reference to Exhibit 3.7 forming a part of the Company's Registration Statement on Form SB-2 (File No. 333-20625) filed
with the Securities and Exchange Commission under the Securities Act of 1933, as amended).
4.4 Form of Option for the Purchase of 180,000 shares of Common Stock issued to Barington Capital Group, L.P. (Incorporated by
reference to Exhibit 3.8 forming a part of the Company's Registration Statement on Form SB-2 (File No. 333-20625) filed
with the Securities and Exchange Commission under the Securities Act of 1933, as amended).
4.5 Form of Stock Option Agreement, dated December 18, 1997, by and between the Company and Barington Capital Group, L.P.
(Incorporated by reference to Exhibit 10.8 forming a part of the Company's Annual Report on Form 10-KSB, as amended by
Amendment No. 1 to Form 10-KSB on Form 10-KSB/A, for the year ended December 31, 1997.
4.6 Specimen certificate evidencing shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.2 forming a
part of Amendment No. 2 to the Company's Registration Statement on Form SB-2 (File No. 333-20625) filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended).
4.7 Form of 5% Convertible Debentures due 2003 of the Company (Incorporated by reference to Exhibits 4.3 and 4.4 forming a part
of the Company's Current Report on Form 8-K dated July 1, 1998 and filed July 16, 1998 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended).
</TABLE>
14
<PAGE> 15
<TABLE>
<S> <C>
4.8 Form of Warrants to be issued upon redemption of the 5% Cumulative Convertible Debentures due 2003 of the Company
(Incorporated by reference to Exhibit 4.5 forming a part of the Company's Current Report on Form 8-K dated July 1,1998 and
filed July 16, 1998 with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended).
4.9 Specimen certificate evidencing shares of the Series B 5% Cumulative Convertible Preferred Stock of the Company
(Incorporated by reference to Exhibit 4.9 forming a part of Amendment No. 1 to the Company's Registration Statement on Form
S-3 (File No. 333-62971) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended).
4.10 Certificate of Designations of the Series B 5% Cumulative Convertible Preferred Stock of the Company (Incorporated by
reference to Exhibit 4.10 forming a part of Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No.
333-62971) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended).
4.11 Form of Warrant issued in connection with the Series B 5% Cumulative Convertible Preferred Stock of the Company
(Incorporated by reference to Exhibit 4.11 forming a part of Amendment No. 1 to the Company's Registration Statement on
Form S-3 (File No. 333-62971) filed with the Securities and Exchange Commission under the Securities Act of 1933, as
amended).
10.1 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.1 forming a part of the Company's Registration Statement on
Form SB-2 (File No. 333-20625) filed with the Securities and Exchange Commission under the Securities Act of 1933, as
amended).
10.2 1996 Stock Incentive Plan (Incorporated by reference to Exhibit No. 10.2 forming a part of the Company's Registration
Statement on Form SB-2 (File No. 333-20625) filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended).
10.3 Employment Agreement between the Company and Steven A. Rogers (Incorporated by reference to Exhibit No. 10.3 forming part
of Amendment No. 2 to the Company's Registration Statement on Form SB-2 (File No. 333-20625) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended).
10.4 Form of Consulting Agreement by and between the Company and Barington Capital Group, L.P. (Incorporated by reference to
Exhibit No. 10.4 forming a part of the Company's Registration Statement on Form SB-2 (File No. 333-20625) filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended).
10.5 Letter Agreement, dated October 7, 1996, between Barington Capital Group and the Company (Incorporated by reference to
Exhibit No. 10.5 forming a part of Amendment No. 2 to the Company's Registration Statement on Form SB-2 (File No. 33-20625)
filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended).
10.6 Letter Agreement, dated December 5, 1995, by and among PVR Securities, Inc., the Company, Steven A. Rogers and John B.
Torkelsen (Incorporated by reference to Exhibit No. 10.6 forming a part of Amendment No. 2 to the Company's Registration
Statement on Form SB-2 (File No. 333-20625) filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended).
10.7 Form of Stock Option Agreement, dated December 18, 1997, by and between the Company and Barington Capital Group, L.P.
(Incorporated by reference to Exhibit 10.8 forming a part of the Company's Annual Report on Form 10-KSB, as amended by
Amendment No. 1 to the Form 10-KSB on Form 10-KSB/A, for the year ended December 31, 1997).
10.8 Subscription Agreement, dated as of July 1, 1998, by and among the Company and the Institutional Investors (Incorporated by
reference to Exhibit 4.1 forming a part of the Company's Current Report on Form 8-K dated July 1, 1998 and filed July 16,
1998 with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended).
10.9 Subscription Agreement, dated as of July 8, 1998, by and among the Company and the Additional Investors (Incorporated by
reference to Exhibit 4.2 forming a part of the Company's Current Report on Form 8-K dated July 1, 1998 and filed July 16,
1998 with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended).
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
10.10 Strategic Alliance and Marketing Agreement between the Company and Unisys Corporation (Incorporated by reference to
Exhibit 10.10 forming a part of Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 333-62971)
filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended).
11 Statement re: computation of per share earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K during the quarter ended March 31, 1998.
(1) The Company's Current Report on Form 8-K dated April 10, 1998 and filed April 15, 1998 for the purpose of filing as an
exhibit a press release relating to shipments made by the Company during the first quarter of 1998 and revenue recognition
for the period.
(2) The Company's Current Report on Form 8-K filed July 16, 1998 reporting certain events including the $3,125,000
financing.
</TABLE>
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Objective Communications, Inc.
By: /s/ James F. Bunker
--------------------
James F. Bunker
President and Chief Executive Officer
(duly authorized executive officer)
/s/ Robert H. Emery
-------------------
Robert H. Emery
Vice President, Administration and Finance
(principal financial officer)
November 16, 1998
17
<PAGE> 1
Objective Communication
Weighted average
<TABLE>
<CAPTION>
Exhibit 11
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares 5,741,035 4,633,511 5,711,317 3,639,737
outstanding
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,756,111
<SECURITIES> 0
<RECEIVABLES> 110,226
<ALLOWANCES> 0
<INVENTORY> 6,406,174
<CURRENT-ASSETS> 8,762,508
<PP&E> 6,092,911
<DEPRECIATION> 2,392,480
<TOTAL-ASSETS> 12,751,389
<CURRENT-LIABILITIES> 10,117,397
<BONDS> 0
0
1,159,583
<COMMON> 57,410
<OTHER-SE> 2,475,461
<TOTAL-LIABILITY-AND-EQUITY> 12,751,389
<SALES> 365,788
<TOTAL-REVENUES> 365,788
<CGS> 229,851
<TOTAL-COSTS> 229,851
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (176,288)
<INCOME-PRETAX> (18,133,264)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,133,264)
<EPS-PRIMARY> (3.18)
<EPS-DILUTED> (3.18)
</TABLE>
