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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 000-22235
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Objective Communications, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 54-1707962
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 International Drive, Portsmouth, New Hampshire 03801
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (603) 334-6700
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
- -------------------------------------------- -------------------------------
Common Stock par value $0.01
Check whether the registrant (1) has 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. (not applicable)
The aggregate market value of the voting common equity held by non-affiliates as
of March 15, 1998, was $92,068,119.
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The number of shares of the issuer's Common Stock outstanding as of March 15,
1998, was 5,676,850 shares.
Transitional Small Business Disclosure Format (check one): Yes No x
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TABLE OF CONTENTS
PART I
ITEM
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters
6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
7. Financial Statements
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
10. Executive Compensation
11. Security Ownership of Certain Beneficial Owners and Management
12. Certain Relationships and Related Transactions
13. Exhibits and Reports on Form 8-K
Signatures
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PART I
This Form 10-KSB contains certain statements that constitute
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based on currently available
operating, financial and competitive information, and are subject to risks and
uncertainties. Actual future results could differ materially from the results
contemplated in the forward-looking statements as a result of a number of
factors, including but not limited to risks involving reliance on third-party
resellers, the development of the emerging market for video applications
technology, the uncertain protection of the Company's intellectual property,
the Company's limited marketing experience, the Company's planned rapid growth,
the impact of competition, the availability of financing and the volatility of
securities prices, and other risks detailed herein and in the Company's
Security and Exchange Commission filings.
ITEM 1. BUSINESS
INTRODUCTION
The Company, a Delaware corporation, was formed in 1993 to design,
develop and market the first high quality, cost-effective video network system
that supports video broadcast, retrieval of stored video and multi-party
conferencing to and from desktop personal computers and conference rooms over
the same wire used by the telephone. The VidPhone(R) system provides full-motion
video in support of video broadcast, retrieval of stored video information,
video conferencing, and concurrent data and file sharing directly to and from
the desktop or conference room. The Company believes that the VidPhone(R) system
offers greater functionality and compatibility with existing infrastructure and
higher quality than most video conferencing systems on the market today. The
Company also believes that it offers the only video network system that supports
the three major video applications in a single cost-effective solution. The
Company intends to become the leading provider of video networks.
The Company's strategy is to form long-term relationships with major
business telephone product and service providers and to resell the VidPhone(R)
system through such providers. The Company anticipates that these providers will
be interested in establishing relationships with the Company because of the ease
with which the VidPhone(R) system can be marketed and resold to existing
customers as an enhancement to telephone systems. In July 1997, the Company
entered into a one-year agreement with Sprint pursuant to which Sprint has
agreed to resell the Company's video network products worldwide. In August 1997,
the Company entered into an arrangement with Bell Atlantic to market and resell
the VidPhone(R) system to the Department of Defense and related agencies.
The Company is discussing joint marketing relationships and test
marketing arrangements for the VidPhone(R) system with leading private branch
exchange ("PBX") manufacturers and other resellers. As part of these test
marketing arrangements, the Company has installed, at no cost to the user, test
marketing VidPhone(R) equipment in the facilities of two of the three largest
PBX manufacturers, two of the five largest interexchange carriers ("IXCs"), one
of the four largest regional bell operating companies ("RBOCs") and at two
end-user customer locations. There can be no assurance that the Company will be
successful in its efforts to develop such relationships or that, if established,
such arrangements will be profitable.
INDUSTRY BACKGROUND
The demand for video communications, historically limited primarily
to video conferencing, is driven by the desire to achieve the most effective
means to communicate. Information that is exchanged or presented visually, such
as in-person meetings or video presentations, has a stronger impact on the
end-user than non-visual communications. Unfortunately, people cannot always
exchange or present information in person, and technology limitations and cost
constraints have restricted the use of video applications. Consequently,
non-visual forms of communication, such as telephony, voice mails, e-mails,
facsimiles and overnight mailings, are relied upon to
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communicate. Recent video application developments such as broadcasting and
conferencing achieve the effectiveness of face-to-face meetings, while retaining
the convenience of a telephone call. These applications have the potential to
become commonly used means of communication. The Aberdeen Group, in a study
commissioned by the Company, estimates that the video communications market will
grow from an estimated $3.7 billion in 1996 to $28.4 billion in 2003,
representing a compound annual growth rate of 34%.
The Company believes that a video network that fully supports video
broadcast, video retrieval and video conferencing applications addresses
the communications requirements of the business community. A video network can
improve worker productivity by facilitating the efficient exchange of
information between geographically dispersed parties while reducing travel
expenses. In addition, it enables the use of video material for training and
research at the convenience of the user rather than the presenter and permits
businesses to access business broadcasts such as CNN and CNBC at the desktop.
To date, however, transmission constraints, costs and other limitations have
precluded the development and deployment of acceptable video broadcast,
retrieval and conferencing applications to the desktop.
Until recently, video communications systems were boardroom video
conferencing systems. These systems typically used a proprietary protocol rather
than an international standard and, as a result, could not interface with
systems using other protocols. In addition, these systems were prohibitively
expensive for most businesses. Even today, most boardroom video conferencing
systems require substantial capital expenditures for new infrastructure, and
require trained personnel for set up and maintenance during the video conference
call. Most boardroom systems also do not provide video quality adequate for
video broadcast and retrieval and are limited by distracting latency --
transmission delays that result in unsynchronized audio and video.
Over the past decade, video conferencing systems have begun to evolve
from high cost, low quality, stand-alone boardroom systems to desktop systems.
However, desktop systems have not been widely adopted. The Company believes that
this is primarily because currently available systems produce inadequate video
quality for virtually all business purposes.
Most desktop video conferencing systems use either dedicated
telephone lines or the Local Area Network ("LAN") to transmit video data. Some
desktop video conferencing systems use dedicated Integrated Services Digital
Network ("ISDN") lines to achieve acceptable video quality for business
purposes. However, to achieve this quality, three dedicated lines with six
associated telephone numbers must be provided to each desktop. The installation
costs of these additional lines and line use charges render this approach
impractical on any significant scale. In addition, these systems require the
installation of either expensive and complex hardware coder-decoders ("CODECs")
in each PC or software CODECs that render the PC unavailable for other
applications during video conferences.
Some video conferencing systems attempt to use the LAN rather than
dedicated telephone lines. LAN-based systems also require the installation of
hardware or software CODECs. LANs were designed to be shared by individuals
using the transmission medium for short periods of time and do not have the
bandwidth to accommodate the volume of data inherent in full-motion video
applications. Consequently, even a single video conference would significantly
diminish the capacity of most LANs to support other users. Information
technology managers resist LAN-based video applications because of the
additional infrastructure and associated maintenance required to support them.
Although high speed Ethernet and gigabit routing switches may alleviate some of
the bandwidth problems resulting from the transmission of video on the LAN, the
Company believes that these new technologies do not go far enough to address
the latency problems plaguing such systems. The Company believes that in the
future synchronous fiber optic networks ("SONET") and Asynchronous Transfer
Mode ("ATM") switching will dominate in the Wide Area Network ("WAN"). However,
the Company does not believe that ATM will reach the desktop due to the high
cost and other limiting factors.
The Company believes that business users require a cost-effective
video network capable of providing high quality, non-latency-impaired video and
CD-quality stereo audio before they will adopt desktop video applications on a
significant scale. The Company believes that a video network must leverage an
organization's existing infrastructure, without sacrificing the functionality of
the desktop computers, in order to be an acceptable video network solution.
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PRODUCTS AND TECHNOLOGY
The Company's principal product is the VidPhone(R) system, which
provides full-motion video in support of video broadcast, retrieval of stored
video information and video conferencing within an enterprise over the same wire
used by the telephone. In addition, the VidPhone(R) system supports video
communications to any other location worldwide through the WAN.
The VidPhone(R) system is comprised of the following components:
VidPhone(R) Switch. VidPhone(R) Switch is the video, audio and data
switch that is the cornerstone of the VidPhone(R) system. It enables users to
access all VidPhone(R) system functions within an enterprise and to communicate
with remote locations through a WAN. The VidPhone(R) Switch, is a scaleable,
modular video network server that supports from five to 50 concurrent video
network users and also permits users to receive broadcast video and retrieve
stored video images. The VidPhone(R) Switch normally resides near the PBX or
CENTREX point of entry and is rack mountable in standard 19-inch racks.
VidModem(TM). The VidModem(TM) enables the connection between the
desktop and the VidPhone(R) Switch. The desktop and VidPhone(R) Switch versions
of VidModem(TM) incorporate a patented technology that permits distribution of
full-motion video, CD-quality stereo audio and high speed data over the single
twisted pair of copper wire that connects the desktop telephone to the PBX or
CENTREX. The connection is transparent to the telephone and PBX.
VidPhone(R) Terminal. The VidPhone(R) Terminal is a user's desktop
computer configured with a microphone, speakers, camera and proprietary
software. VidPhone(R) Terminals connect to the VidPhone(R) Switch via
VidModems(TM) and can receive broadcast video, retrieve stored video material
and participate in video conferences. VidPhone(R) Terminals may be located up to
1,250 feet from the VidPhone(R) Switch when using Category 3 wiring, or up to
2,500 feet when using Category 5 wiring. The Company believes that most modern
business telephone systems use at least Category 3 wire. VidPhone(R) Terminals
do not need a terminal-resident ISDN or ATM CODECs because they connect directly
to the VidPhone(R) Switch. VidPhone(R) Terminals may be easily and inexpensively
modified for deployment as conference room systems. In this configuration, all
video network applications are available in a large screen multi-party
conference room setting.
Software Applications. ObjectiveView(TM) is the primary software
platform supporting users of the VidPhone(R) system. It provides an easy-to-use
graphical user interface for all video applications offered by the VidPhone(R)
system. Two other software programs are currently provided with each VidPhone(R)
system, TeleDraw(R) and TeleShare(TM). TeleDraw(R) is a full-featured program
for collaborative drawing, annotation and editing of drawings and pictures.
TeleShare(TM) enables users to share applications such as word processing and
spreadsheet programs while simultaneously participating in a video conference.
VidPhone(R) Remote Terminal. VidPhone(R) Remote Terminals provide
VidPhone(R) system connectivity for users that are not directly connected to the
VidPhone(R) Switch via telephone wiring in the enterprise. Employees in branch
offices, individuals working out of their homes, and other parties outside an
enterprise are potential users of VidPhone(R) Remote Terminals. VidPhone(R)
Remote Terminal users have access to all video network functions of the
VidPhone(R) Switch to which they connect; however, the quality of the video and
audio presentation will be limited by the bandwidth of the external
communications connection. VidPhone(R) Remote Terminal connectivity may be over
a variety of communications circuits, such as ISDN (1 Basic Rate Interface
("BRI"), 2BRI, 3BRI, etc.), T1 or ATM.
SYSTEM FUNCTIONALITY
The Company believes that the VidPhone(R) system is the only video
network solution currently available that is capable of adequately supporting
the three basic business video requirements.
Broadcast Video. Sources of broadcast video material include, but are
not limited to, satellite broadcasts,
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cable television, and narrowcasts over an ATM network. These sources are
connected to the VidPhone(R) Switch through a specially designed circuit card.
The user selects the desired broadcast from a menu using standard
point-and-click techniques. The non-blocking architecture of the VidPhone(R)
Switch permits multiple users to access the same broadcast video source without
degrading system performance.
Retrieval of Stored Video Material. VidPhone(R) system users may
access stored video material residing on a variety of different types of
devices, such as a video server, a video jukebox or a video tape player. Users
access stored video using point-and-click techniques similar to those used to
access broadcast video. For example, the Company is developing video mail
applications which would allow users to create video mail with video, audio,
text and file attachments for later access by and delivery to VidPhone(R) system
users.
Video Conferencing. The VidPhone(R) system supports two-way and
multi-party video conferencing. VidPhone(R) system users may be delineated in
telephone directories and contacted using standard point-and-click techniques at
any time without prior coordination.
SALES AND MARKETING
The Company's sales and marketing strategy is to leverage its
position as the first provider of integrated video networks that support the
three major video applications. The Company seeks to obtain brand-name
recognition of the VidPhone(R) system by actively promoting the products.
Initiatives include press releases; targeting key media outlets; presentations
to industry analysts, and consultants; technology announcements; formal product
launches and participation in trade shows. In July and August 1997, the Company
held industry and press conferences in San Francisco, New York, Boston and the
metropolitan Washington D.C. area to introduce its VidPhone(R) Switch. The
Company maintains a Web page and has retained a public relations firm to help
ensure the effectiveness of the Company's marketing campaigns.
The Company intends to market the VidPhone(R) system as an upgrade to
existing telephone systems to capitalize on the drive by telephone product and
service companies to regain prominence in the corporate information systems
market. The attributes of the VidPhone(R) system enable telephone product and
service companies to offer a fully functional video network that competes
directly with computer and LAN vendors offering video applications. The Company
believes that the VidPhone(R) system is more attractive to information
technology administrators than LAN-based systems, because it does not use
LAN bandwidth, compromise LAN integrity, or affect LAN reliability. The
VidPhone(R) system architecture also enables IT administrators to centrally
manage system resources and feature upgrades.
The Company is marketing the VidPhone(R) system through telephone
product and service providers that will resell it as an enhancement to existing
telephone systems. These providers offer sales, service and support
organizations, have relationships with virtually every business telephone user
in the world, and enjoy a high level of customer loyalty. These distribution
channels have a mature customer base, which is generally receptive to system
upgrades. In July 1997, the Company entered into a one-year agreement with
Sprint under which Sprint has agreed to resell the Company's video network
products worldwide. The Company also has an arrangement with Bell Atlantic under
which it will market and resell the VidPhone(R) system to the Department of
Defense and related agencies. In October 1997, the Company hired a Vice
President, Marketing, who is responsible for developing the Company's marketing
and sales strategy.
The Company has been discussing joint marketing relationships and
test marketing arrangements for the VidPhone(R) system with leading PBX
manufacturers and other resellers. As part of these test marketing arrangements,
as of December 15, 1997, the Company had installed, at no cost to the user, test
marketing VidPhone(R) equipment in the facilities of one of the three largest
PBX manufacturers, two of the five largest IXCs, one of the four largest RBOCs
and at multiple end-user customer locations. In November 1997, the Company
shipped its first VidPhone(R) system to the Miramar Marine Corps Air Station in
California, fulfilling part of an outstanding purchase order from a reseller
and shipped an additional 40 VidPhone(R) systems to a variety of recipients,
including end-users and resellers, during the fourth quarter of 1997.
The Company has additional orders for and has continued delivery of the
VidPhone(R) system during the first quarter of 1998.
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PRODUCT RESEARCH AND DEVELOPMENT
Throughout 1997, the Company's research and development efforts
focused on completing the initial development and production of the VidPhone(R)
system. With the initial shipments of production VidPhone(R) systems in the
fourth quarter of 1997, research and development concentrated on further
refining and upgrading the Company's underlying VidModem(TM) technology, the
VidPhone(R) Switch and the accompanying user interface and applications software
products. In response to customer requirements, the Company has brought several
major research and development initiatives forward and has increased research
and development capabilities accordingly.
The Company's engineering staff closely monitors technical
developments and works with the Company's marketing personnel to assess evolving
business video network requirements. The Company intends to monitor emerging
technologies that support new business applications and tailor its research and
development accordingly. In addition to the Company's internal research and
development resources, the Company engages contract engineering services when it
believes that the use of such services would be efficient. Contractors have
completed several component design initiatives in support of product
development. Research and development efforts target both hardware and software
enhancements to video network capabilities in support of all business video
applications.
INTELLECTUAL PROPERTY
The Company intends to continue to seek patents, trademarks and
copyrights on certain of its inventions and proprietary processes. Parts of the
Company's technology are protected by a patent or pending patents. The Company
has a patent (U.S. Patent No. 5,621,455) issued in April 1997 covering a method
and apparatus for transmitting video information over telephone wires.
Corresponding foreign patent applications on the VidPhone(R) technology are
pending in China, Canada, Mexico, Europe, Japan and Taiwan. Additionally, the
Company has filed a "continuation" U.S. patent application covering variations
of the basic VidPhone(R) technology. The Company has received notice from the
U.S. Patent and Trademark Office that it expects to issue the patent on the
continuation application in May 1998. The Company has also filed a patent
application covering the VidPhone(R) system's networking and switching
technology. The Company does not expect to receive any notice from the U.S.
Patent and Trademark Office concerning this second patent application until the
second half of 1998. The Company is in the process of preparing additional U.S.
patent applications directed to various improvements in the field of video
conferencing. The Company expects to file approximately six to nine new U.S.
patent applications in 1998 covering these improvements, but it does not expect
to receive any notice from the U.S. Patent and Trademark Office for at least one
year after filing. The success of the Company's products depends in part on its
continuing ability to obtain and protect patents, licenses and other
intellectual property rights covering its significant hardware and software
products.
The Company has registered the trademarks Objective
Communications(R), VidPhone(R), and TeleDraw(R), and the registration for the
trademark for VidModem(TM) is pending. The process of seeking patent and
trademark protection can be long and expensive, and there can be no assurance
that patents and trademarks will issue from currently pending or future
applications or that any patents or trademarks that are issued will be of
sufficient scope to provide meaningful protection or any commercial advantage
to the Company.
COMPETITION
The market for the Company's products is new, highly competitive and
rapidly evolving. The Company believes that the principal competitive factors in
the markets in which it intends to compete are product performance, price and
product support and services.
The principal competitors in the video conferencing market have been
PictureTel, VTEL and its wholly-owned subsidiary, CLI. According to a June 1995
article in U.S. News & World Report, PictureTel and CLI (prior to its
acquisition by VTEL) had approximately 71% market share in the video
conferencing systems market. Competitors in the video broadcast market include
cable television and direct satellite broadcast system providers. The Company is
not aware of any current competitors in the video retrieval market. The Company
expects to compete with PictureTel and VTEL and expects substantial additional
competition from new market entrants, such
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as Intel Corporation. To date, no new desktop system has captured any
significant portion of the market.
Virtually all of the companies with which the Company expects to
compete have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than the Company. The Company believes that it will be able to compete
effectively against larger companies with substantially greater resources on the
basis of its products' capabilities, distribution strategy, and price. There can
be no assurance, however, that the Company will be able to compete successfully.
MANUFACTURING
The Company entered into a manufacturing agreement in February 1998
with Sanmina Corporation to outsource the manufacture and assembly of components
used in its VidPhone(R) system. Several other manufacturers are producing
smaller sub-assemblies and components for the Company pursuant to arrangements
that the Company enters into on a per-project basis. All products produced by
third-party manufacturers are shipped to the Company for final assembly, systems
integration and quality assurance testing. The Company plans to retain test and
quality assurance functions until all subcontractors can be certified with
respect to quality. Any difficulties encountered with third-party manufacturers
could result in product defects, production delays, cost overruns or the
inability to fulfill orders on a timely basis which could have a material
adverse effect on the Company.
GOVERNMENT REGULATION
The Federal Communications Commission ("FCC") regulates the operation
of telecommunications equipment for use in the United States. The VidModem(TM)
and VidPhone(R) Switch components of the VidPhone(R) system are required to
comply with certain regulations promulgated by the FCC under Parts 2, 15 and 68
of the FCC's regulations, which relate to radio frequency devices and to
terminal equipment that is connected to the public, switched telephone network.
Pursuant to these FCC regulations, the Company has determined that the
VidModem(TM) is an unintentional radiator that constitutes a Class A digital
device that may be operated without an individual license. Under FCC
regulations, the Company will be required to follow a verification procedure
consisting of a self-certification by the Company that the radio frequency
device complies with applicable regulations. The Company has already had the
VidModem(TM) formally tested by a qualified, independent testing facility, and
it was found to comply. Under FCC regulations, the Company has the option of
ensuring compliance with the applicable technical specifications at the location
of a business end-user after installation. In addition, pursuant to Part 68 of
the FCC regulations, the Company will need to obtain equipment registration from
the FCC for a certain number of the VidPhone(R) system components (including the
VidPhone(R) Switch) that are connected to the public switched telephone network.
To date, the Company has not filed an application under Part 68 for equipment
registration. The Company has designed its initial line of products to conform
to all applicable guidelines and regulations and does not believe that FCC
approval requirements will materially delay the manufacture or marketing of the
VidPhone(R) system. However, there can be no assurance that the Company's
products will actually meet such requirements, or that the Company will be able
to obtain and maintain in effect all necessary FCC or other governmental
approvals required to permit the Company to market its products as currently
contemplated.
EMPLOYEES
As of December 31, 1997, the Company had 88 employees, all of whom
were full-time. The Company also uses the services of technical consultants and
subcontractors on an as-needed basis. Each employee and consultant has executed
both a confidentiality agreement and an agreement not to compete with the
Company for a period of 24 months after performing services for the Company. The
Company does not have any employment agreements with its employees, except for
Steven A. Rogers, the Company's President and Chief Executive Officer.
ITEM 2. PROPERTIES
The Company leases two facilities in Portsmouth, New Hampshire and
one facility in Northern Virginia. The
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Company is headquartered in New Hampshire in a facility that occupies
approximately 25,850 square feet and is the location of the Company's
administrative offices, sales and marketing offices, research and development
facilities and product demonstration facilities. The Company's equipment
assembly and test, customer support, and training facilities are located in a
13,000 square foot production facility in New Hampshire. The Company also
maintains a sales office of approximately 5,000 square feet in Chantilly,
Virginia, which includes offices for sales and customer support, and
demonstration facilities.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1997, the Company is not a party to, and the
property of the Company is not subject to, any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security
holders during the quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On April 3, 1997, the Company completed the initial public offering
of its common stock, par value $.01 (the "Common Stock") at an initial public
offering price of $5.50 per share. From April 3, 1997 to October 29, 1997, the
Common Stock traded on the Nasdaq SmallCap System. Effective October 30, 1997,
the Company's Common Stock began trading on the Nasdaq National Market
("Nasdaq") under the symbol OCOM. The following table sets forth, for the
periods indicated, the high and low closing bid prices per share of Common
Stock as reported on Nasdaq.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
April 3, 1997 to June 30, 1997 $14.25 $6.00
Third Quarter 1997 $38.25 $11.125
Fourth Quarter 1997 $36.75 $12.75
</TABLE>
The closing sales price of the Company's Common Stock on March 13,
1998 was $22.25 per share, and there were approximately 103 holders of record of
the Company's Common Stock as of that date.
The Company currently intends to retain future earnings to finance
its growth and development and therefore, does not anticipate paying any cash
dividends in the foreseeable future. Payment of any future dividends will depend
upon the future earnings and capital requirements of the Company and other
factors which the Board of Directors considers appropriate.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
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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
lines. The Company was incorporated in October 1993. The Company's operations
to date have related primarily to organizational activities, including
research and development, the development of its initial products, recruiting
management and technical personnel, and raising capital.
In November 1997, the Company shipped its first VidPhone(R) system,
fulfilling part of an outstanding purchase order from a reseller. The Company
has continued commercial production and installation of the initial VidPhone(R)
systems in the first quarter of 1998. These initial systems will support up to
50 simultaneous conferees, and are designed by the Company to be highly reliable
and easily maintained. There can be no assurance that the Company will continue
production or installation of such systems on its current time schedule.
In the next year, the Company intends to focus on sales and marketing
and continuing product development. Specifically, the Company intends to: (i)
continue engineering development on its commercially available VidPhone(R)
systems; (ii) hire additional personnel; (iii) negotiate reseller relationships
with providers of telephony equipment and services; (iv) continue research and
development to enhance current products and develop complementary products; (v)
establish direct sales relationships with reference accounts; and (vi) secure
further intellectual property protection, including additional patent, trademark
and copyright protections. However, there can be no assurance that the Company
will achieve these objectives. The Company plans to subcontract all major
manufacturing and production activities for the foreseeable future, but to
retain test and quality assurance functions until all subcontractors can be
certified with respect to quality.
To date, the Company has not generated substantial revenues from the
sale of its products and services. The Company did not earn any revenues during
the year ended December 31, 1997. The Company shipped 40 Vidphone video network
systems to customers and resellers late in the fourth quarter of 1997. These
initial shipments constitute first deployment of the new VidPhone(R) system
technology. Installation and acceptance of these systems is expected in the
first half of 1998. Accordingly, the Company has deferred revenue recognition
until initial customer acceptance can be documented. Historically, a
significant portion of the Company's revenues were derived from fees for
consulting services. During 1996 and 1995, consulting services accounted for
44.2% and 42.2% of the Company's revenues, respectively. The Company's business
strategy is to increase revenues through sales of its products, particularly
the VidPhone(R) system. Accordingly, the Company plans to continue to devote
substantially all of its efforts to production and sales and support of the
VidPhone(R) system. The Company has received and is currently working on a
limited number of customer orders and seeks to increase marketing of and
channels of distribution for the VidPhone(R) system. There can be no assurance
that the Company will be successful in its efforts to market and increase sales
of its products, particularly the VidPhone(R) system. The Company's inability
to do so, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company expects to incur substantial operating expenses in the
future to support its product development efforts, expand and enhance
significantly its sales and marketing capabilities and organization, expand its
technical and management personnel and for other selling, general and
administrative expenses.
From inception through December 31, 1997, the Company had incurred
substantial losses from operations, and had an accumulated deficit of
approximately $16.7 million. The Company expects to continue to incur operating
losses until the Company's products achieve commercial acceptance, which is
expected to occur by the end of 1998. This expectation is based on a number of
factors, certain of which are beyond the Company's control. Accordingly, there
can be no assurance that such expectation will be correct.
As a result of recurring losses, negative cash flows from operations
and the accumulated deficit, the report of Independent Accountants on the
Financial Statements of the Company contains an explanatory paragraph
related to the Company's ability to continue as a going concern. See Note 1 of
Notes to Financial Statements.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. The Company had no revenues in the year ended December 31,
1997 compared to revenues of
9
<PAGE> 12
$81,375 in the same period in 1996. The revenues recorded in 1996 were generated
from consulting arrangements, not from the Company's primary business. In 1997,
the Company devoted all of its resources to the development, production, and
sale and delivery of the VidPhone(R) system and related software products.
Gross Margin. The Company reported no revenues in 1997 and
correspondingly had no gross margin to report, as compared to a gross margin of
approximately 23.3% of total revenues for 1996.
Research and Development. Research and development expenses increased
by approximately $5,112,000, or 462%, for the year ended December 31, 1997, to
approximately $6,219,000 as compared to $1,107,000 for the year ended December
31, 1996. The increase was primarily due to hiring of technical staff and
increasing levels of spending in connection with final product design as well
as, to a lesser extent, costs incurred in connection with preparing the
Company's new production facilities. 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.
The Company intends to continue to expand research and development by
hiring additional technical staff and purchasing additional research and
development related material. As the Company continues developing, testing, and
demonstrating its product line, the Company expects research and development
expenses to increase.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $3,293,000, or 316%, in the
year ended December 31, 1997 to approximately $4,335,000 from approximately
$1,042,000 in the same period in 1996. Sales and marketing costs increased in
preparation for the introduction of the Company's products to the marketplace.
Significant expenses were incurred during 1997 in connection with a multi-city
product introduction tour and the addition of sales, marketing, and customer
support staff. Legal, accounting, personnel and insurance expenses have
increased as a result of the Company's growth, becoming a publicly-traded
company and the increased size and complexity of operations.
Depreciation and Amortization. Depreciation and amortization
increased approximately $670,000, or 421%, to $829,000 in the year ended
December 31, 1997 from $159,000 in the year ended December 31, 1996. During
1997, the Company charged to amortization expense $209,000 of capitalized debt
issuance costs upon the repayment of the debt from the proceeds of the Initial
Offering. The remainder of the increase was primarily due to approximately
$614,000 in depreciation of fixed assets and approximately $6,000 in
amortization of trademarks and patents.
Interest Expense. The Company incurred approximately $203,000 in net
interest expense for the year ended December 31, 1997 compared to approximately
$404,000 in net interest expense for the year ended December 31, 1996. Interest
income of approximately $272,000 was earned in 1997, principally derived from
the invested proceeds of the Company's initial public offering completed in
April 1997 (the "Initial Offering") and the follow-on offering completed in
November 1997 (the "Follow-on Offering"). Interest expense in 1997 included a
write-off of approximately $385,000 of unamortized debt discount representing
the fair value of warrants issued to holders of notes issued by the Company in
connection with a bridge financing completed in November 1996.
Net Loss. As a result of the foregoing factors, the net loss
increased by approximately $8.9 million, or 330%, to approximately $11.6 million
for the year ended December 31, 1997 from approximately $2.7 during the year
ended December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues for 1996 decreased by approximately $143,000, or
63.8%, to approximately $81,000, from approximately $225,000 for 1995. Of the
Company's revenues in 1996 and 1995, 55.8% and 57.8% respectively, were derived
from sales of VidPhone(R) Remote Terminals, which are the VidPhone(R) units with
ISDN capabilities. The remainder of the Company's revenues in both periods were
derived from consulting services provided by the Company. Revenues declined in
1996 as a result of the completion in 1995 of a single consulting contract
which accounted for 90% of total revenues in 1995.
Gross Margin. The Company's gross margin for 1996 was 23.3% of total
revenues, as compared with 38.8% of total revenues for 1995. The Company does
not believe that gross margins in the past periods, including
10
<PAGE> 13
1996 and 1995, are necessarily indicative of gross margin in future periods
because such margins do not relate to the revenues and costs of producing and
selling the VidPhone(R) system. In the future, the Company intends to focus on
sales of its products and, accordingly, may experience significant changes in
gross margin in future periods.
Research and Development. Research and development expenses for 1996
decreased by approximately $125,000, or 10.2%, to $1.1 million from $1.2 million
for 1995. The decrease in research and development expenses in 1996 was
primarily attributable to the redeployment by the Company of limited engineering
resources to support beta units, which is classified as a selling, general and
administrative expense rather than a research and development expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 increased by approximately $228,000, or 28.0%,
to approximately $1.0 million, from $814,000 for 1995. Selling, general and
administrative expenses consist of sales and marketing expenses, such as
advertising expenses associated with customer support, legal, accounting and
consulting fees, and an allocated portion of rent, telephone, mail, office
supplies and other costs incurred that are associated with the Company's
business. The increase in 1996 of selling, general and administrative expenses
was primarily due to significantly increased legal fees to support increasingly
complex financial operations at the Company, increased consulting fees,
including higher expenses related to accounting and technical consultants, and
the inclusion in 1996 of expenses related to the employment of key
administrative personnel by the Company for a full year compared with
partial-year employment in 1995.
Depreciation and Amortization. Depreciation and amortization for 1996
increased by approximately $98,000, or 163.2%, to approximately $159,000, from
approximately $60,000 for 1995. This increase was primarily due to the
depreciation associated with the acquisition of substantially new capital assets
in 1996, primarily computer equipment, and to a lesser extent, the accelerated
write-down of leasehold improvements as a result of the Company's move to new
office space.
Other Operating Expenses. Other operating expenses for 1996 decreased
by approximately $12,000, or 87.8% to approximately $1,700, from $14,000 for
1995. Operating expenses in 1995 primarily consisted of late fees and interest
costs on trade credit which were classified as an operating expense. The Company
did not incur comparable costs in 1996 because of the availability of additional
cash as a result of indebtedness incurred by the Company, interest on which is
classified as interest expense.
Interest Expense, Net. Interest expense, net, for 1996 increase by
approximately $391,000 to approximately $404,000 from approximately $13,000 in
1995. The increase in interest expense is primarily due to warrant issuance
costs associated with notes issued by the Company in connection with a bridge
financing completed in November 1996, approximately $322,000 of which is a
non-cash expense.
Net Loss. As a result of the foregoing factors, the Company's net
loss for 1996 increased by approximately $648,000, or 31.7%, to approximately
$2.7 million from approximately $2.0 million for 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred cumulative losses aggregating approximately
$17.1 million from inception through December 31, 1997. 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
year ended December 31, 1997, the Company satisfied its cash requirements
principally from the proceeds of the Initial Offering and the Follow-on Offering
in April and October, respectively, and, prior to the Initial Offering, from
private sales of equity and debt securities. The Company has primarily used cash
to fund research and development, sales, general and administrative expenses,
and to build production capacity and inventories in anticipation of additional
shipments of the Company's products during 1998.
At December 31, 1997, the Company had cash of approximately $18.2
million and a working capital surplus of approximately $16.4 million. In the
first quarter of 1997, the Company issued 250,000 shares of preferred
11
<PAGE> 14
stock (the "Preferred Stock") and received net proceeds of approximately $1.0
million. All of the shares of preferred stock were automatically converted to
Common Stock at the time of the Initial Offering in April 1997. In April 1997,
the Company received net proceeds of approximately $9.4 million from the
Initial Offering of 2,070,000 shares of Common Stock at $5.50 per share
(including proceeds received from the exercise in full of the over-allotment
option). Approximately $2.1 million of the gross proceeds were used to repay
the notes issued in the bridge financing completed in November 1996 and
approximately $600,000 were used to repay related expenses. In November 1997,
the Company received net proceeds of approximately $20.9 million for the
Follow-on Offering of 1,000,000 shares of Common Stock at $23.125 per share.
Approximately $400,000 of the gross proceeds were used for capital expenditures
and approximately $2.5 million of the gross proceeds were used for operating
activities. The Company utilized a portion of such proceeds for inventory for
units shipped as of year end and anticipated shipments in 1998, costs related
to research and development in response to customer requirements for
functionality and marketing capabilities to support major potential reseller
relationships. The Company plans to utilize the remaining proceeds from the
Follow-on Offering and cash flows from future sales to fund continued product
development, fund working capital and facilitate expansion of the Company's
business.
Net cash used in operating activities for the year ended December 31,
1997 totaled approximately $9.0 million. Net cash used in investing activities
year totaled approximately $2.0 million which consisted of spending on capital
equipment, primarily for computer and telecommunications related equipment and
software. Net cash provided by financing activities for the year totaled
approximately $28.6 million, and the Company repaid $2.5 million on notes
payable upon the completion of the Initial Offering in April 1997. During 1997,
the Company paid approximately $141,000 in principal payments on obligations
under capital leases.
During 1997, the Company incurred $2.0 million in capital expenses,
primarily for computer and telephone equipment. Additional spending was incurred
in connection with the establishment of its new headquarters and production
facilities in New Hampshire. The Company financed the capital spending in part
by assuming $348,000 in capital lease obligations.
The Company anticipates capital expenditures of approximately $4.0
million during 1998, primarily for leasehold improvements, capitalized test
equipment and office equipment. The Company does not currently have any other
material financial commitments.
As of December 31, 1997, the Company had cash and cash equivalents
of approximately $18.2 million, compared to approximately $623,000 at December
31, 1996. Based on the Company's anticipated level of expenditures and
commitments, management anticipates that its current financial resources,
together with cash generated by operations, will be sufficient to continue to
fund operations through June 1998. Cash flows from operations are not currently
expected to be sufficient to fund the Company's operations during 1998, and
management anticipates that it will continue to experience negative cash flow
from operations for the foreseeable future until its products achieve
commercial acceptance, which currently is estimated to occur in late 1998. As
reflected in the financial statements of the Company for the year ended
December 31, 1997, and the report of the Company's independent auditors
thereon, the Company has suffered recurring losses from operations and has a
working capital and an accumulated deficit that raise substantial doubt about
its ability to continue as a going concern. Accordingly, the Company is
currently pursuing additional sources of financing, and is considering both
debt and equity financing alternatives. The Company has required substantial
funding through debt and equity financings since its inception and,
historically, has been successful in obtaining debt and equity financing from
unaffiliated third parties. The Company has established relationships with
investment banking firms, and management anticipates that it will be able to
raise additional capital to meet its obligations and fund working capital
requirements after June 1998 as such obligations come due. However, the Company
does not currently have any commitments for debt or equity financing and
accordingly, there can be no assurance that it will be successful in its
efforts to secure additional financing on terms acceptable to the Company or at
all. See Note 1 of Notes to Financial Statements.
YEAR 2000
The Company has assessed its current systems and equipment to
address the year 2000 issue and believes that its systems and equipment will
not require substantial expenditures to update or correct any problems caused
by the year 2000 issue.
INFLATION
The impact of inflation on the Company's business has been
insignificant to date, and the Company believes that it will continue to be
insignificant for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board recently issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income." This
Statement requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. The Statement will become effective for fiscal years beginning
after December 15, 1997. The Company will adopt the new standard beginning in
the first quarter of the fiscal year ending December 31, 1998.
12
<PAGE> 15
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 14
Balance Sheets 15
Statements of Operations 16
Statements of Changes in Stockholders' Equity (Deficit) 17
Statements of Cash Flows 18
Notes to Financial Statements 19
</TABLE>
13
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Objective Communications, Inc.:
We have audited the accompanying balance sheets of Objective Communications,
Inc. (a development stage enterprise) as of December 31, 1996 and 1997, and the
related statements of operations, changes in stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1997
and for the period October 5, 1993 (date of inception) to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Objective Communications,
Inc. as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997 and for the period October 5, 1993 (date of inception) to December 31,
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations, has negative cash flows from operations and has an accumulated
deficit that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 20, 1998
14
<PAGE> 17
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, December 31,
1996 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 623,241 $ 18,199,434
Accounts receivable, less allowance for doubtful accounts
of $5,000 in 1996 84,855 -
Inventory 366,099 1,700,935
Other current assets 178,376 675,289
------------ ------------
Total current assets 1,252,571 20,575,658
Property and equipment, net 182,072 2,306,048
Debt issue costs, less accumulated amortization of
$44,065 and 258,131 in 1996 and 1997, respectively 214,066 -
Trademarks and patents, less accumulated amortization of
$5,624 and $11,220 in 1996 and 1997, respectively 32,869 108,475
Other assets - 92,519
------------ ------------
$ 1,681,578 $ 23,082,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY ( DEFICIT)
Current liabilities:
Notes payable, net of unamortized debt discounts of
$586,000 as of December 31, 1996 $ 1,714,000 $ -
Notes payable, related parties 199,000 -
Accounts payable 390,438 3,077,723
Deferred revenue - 133,180
Accrued liabilities 263,376 752,018
Obligations under capital lease, current portion 15,543 190,454
------------ ------------
Total current liabilities 2,582,357 4,153,375
Obligations under capital lease 25,610 57,196
COMMITMENTS (Note 5)
Redeemable Series A Convertible Preferred Stock, par value
$.01, 500,000 shares authorized; 250,000, and 0 shares
issued and outstanding at December 31, 1996 and 1997, respectively. 848,440 -
Stockholders' equity (deficit):
Preferred Stock, par value $.01, 2,500,000 shares authorized;
none issued and outstanding at December 31, 1996 and 1997
Common stock, par value $.01, 10,000,000 shares authorized;
1,896,577 and 5,676,850 issued and outstanding at December 31, 1996
and 1997, respectively 18,966 56,769
Additional paid-in capital 3,371,115 35,960,466
Deficit accumulated during development stage (5,164,910) (17,145,106)
------------ ------------
Total stockholders' equity (deficit) (1,774,829) 18,872,129
------------ ------------
$ 1,681,578 $ 23,082,700
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 18
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 5, 1993
FOR THE YEARS ENDED DECEMBER 31, (DATE OF INCEPTION) TO
1995 1996 1997 DECEMBER 31, 1997
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Operating revenues:
Merchandise revenue $ 129,861 $ 45,440 $ - $ 175,301
Service revenue 94,817 35,935 - 320,359
------------ ------------ ------------ ------------
Total revenues 224,678 81,375 - 495,660
------------ ------------ ------------ ------------
Operating expenses:
Cost of merchandise 124,730 44,579 - 169,309
Cost of services 12,684 17,774 - 80,066
Research and development 1,232,046 1,106,901 6,218,637 8,723,390
Selling, general and administrative 813,853 1,041,840 4,334,754 6,588,625
Depreciation and amortization 60,298 158,714 829,462 1,052,236
Other 14,031 1,713 - 15,997
------------ ------------ ------------ ------------
Total operating expenses 2,257,642 2,371,521 11,382,853 16,629,623
------------ ------------ ------------ ------------
Loss from operations (2,032,964) (2,290,146) (11,382,853) (16,133,963)
Interest (income) expense, net 13,152 404,290 203,441 604,246
------------ ------------ ------------ ------------
Net loss $ (2,046,116) $ (2,694,436) $(11,586,294) $(16,738,209)
------------ ------------ ------------ ------------
Net loss per common share, basic $ (0.59) $ (0.75) $ (2.84)
============ ============ ============
Shares outstanding -- basic 3,461,659 3,607,634 4,076,149
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 19
Objective Communications, Inc.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the period October 5, 1993 (date of inception) to December 31, 1997
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during
Common paid-in development
Shares Stock capital stage Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, October 5, 1993 500 $ 5 $ 995 $ - $ 1,000
Net loss - - - (4,521) (4,521)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1993 500 5 995 (4,521) (3,521)
Stock dividend 1,299,500 12,995 - (12,995) -
Issuance of common stock at $2/share 171,000 1,710 340,290 - 342,000
Issuance of common stock at $2/share
(Issued in exchange for services) 16,666 167 33,167 - 33,334
Issuance of common stock at $6/share 45,000 450 269,550 - 270,000
Expenses associated with issuance of
common stock - - (47,418) - (47,418)
Issuance of common stock at
$2.68/share (Issued in exchange for
services) 8,375 84 22,416 - 22,500
Net loss - - - (406,842) (406,842)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 1,541,041 15,411 619,000 (424,358) 210,053
Issuance of common stock at $6/share 111,666 1,117 668,883 670,000
Expenses associated with issuance of
common stock (81,389) (81,389)
Notes payable converted to common
stock at $6/share 58,704 587 351,636 352,223
Net loss (2,046,116) (2,046,116)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 1,711,411 17,115 1,558,130 (2,470,474) (895,229)
Exercise of common stock options
at $2/share 10,000 100 19,900 20,000
Issuance of common stock at $6/share 175,166 1,751 1,052,232 1,053,983
Expenses associated with issuance
of common stock (166,936) (166,936)
Interest expense incurred for issuance
of warrants 907,789 907,789
Net loss (2,694,436) (2,694,436)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 1,896,577 18,966 3,371,115 (5,164,910) (1,774,829)
Issuance of common stock pursuant -
to warrant exchange agreement 165,267 1,653 659,415 (320,902) 340,166
Reversal of interest expense upon
surrender of Bridge Warrants (201,000) (201,000)
Shares issued in connection with initial
public offering, net of expenses 2,070,000 20,700 9,331,379 - 9,352,079
Conversion of Redeemable Series A
Convertible Preferred Stock to
Common Stock 500,000 5,000 1,805,643 1,810,643
Exercise of warrants 45,006 450 29,550 30,000
Shares issued in connection with
secondary public offering,
net of expenses 1,000,000 10,000 20,891,364 20,901,364
Interest expense incurred for
issuance of warrants 73,000 (73,000) -
Net Loss (11,586,294) (11,586,294)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 5,676,850 $ 56,769 $ 35,960,466 $(17,145,106) $ 18,872,129
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
17
<PAGE> 20
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the period
October 5, 1993
For the Years ended December 31, (date of inception) to
December 31,
1995 1996 1997 1997
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,046,116) $ (2,694,436) $(11,586,294) $(16,738,209)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 60,298 109,025 614,467 787,552
Amortization - 49,689 214,995 264,684
Interest expense related to issuance of warrants - 321,789 385,000 706,789
Non-cash compensation expense - - 340,166 340,166
Stock issued in exchange for services rendered - - - 55,834
Changes in operating assets and liabilities:
Accounts receivable (11,397) (19,385) 84,855 -
Other current assets (746) (166,792) (496,913) (675,289)
Inventory (30,994) (335,105) (1,689,140) (1,700,935)
Other assets - - (87,852) (87,852)
Trademarks and patents (12,898) (19,595) (81,202) (119,695)
Accounts payable 520,681 (324,937) 2,687,285 3,077,723
Deferred revenues - - 133,180 133,180
Accrued liabilities 76,085 163,038 488,642 752,018
------------ ------------ ------------ ------------
Net cash used in operating activities (1,445,087) (2,916,709) (8,992,811) (13,204,034)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (166,296) (116,892) (2,036,190) (2,692,493)
------------ ------------ ------------ ------------
Net cash used in investing activities (166,296) (116,892) (2,036,190) (2,692,493)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from the issuance of Series A Preferred Stock - 848,440 962,203 1,810,643
Net proceeds from the issuance of common stock 588,611 907,047 30,283,443 32,344,683
Net proceeds from the issuance of notes payable 250,000 2,300,000 - 2,550,000
Repayments of notes payable - (250,000) (2,300,000) (2,550,000)
Proceeds from the issuance of notes payable to
related parties 546,223 170,000 - 716,223
Repayments of notes payable to related parties (30,000) (135,000) (199,000) (364,000)
Debt issue costs - (258,131) - (258,131)
Principal payments on capital leases - (12,005) (141,452) (153,457)
------------ ------------ ------------ ------------
Net cash provided by financing activities 1,354,834 3,570,351 28,605,194 34,095,961
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (256,549) 536,750 17,576,193 18,199,434
Cash and cash equivalents, at beginning of year 343,040 86,491 623,241 -
------------ ------------ ------------ ------------
Cash and cash equivalents, at end of year $ 86,491 $ 623,241 $ 18,199,434 $ 18,199,434
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 13,138 $ 57,628 $ 115,739 $ 186,505
Supplemental disclosure of non-cash investing and
financing activities:
Conversion of notes payable-related parties
and accrued interest into common stock $ 352,223 - - $ 352,223
Capital lease obligations - $ 53,158 $ 347,950 $ 401,108
Reclassification of inventory to fixed assets - - $ 354,304 $ 354,304
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 21
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
1. NATURE OF BUSINESS
Objective Communications, Inc. (the "Company") was formed and
incorporated in the State of Delaware on October 5, 1993 to design, develop
and market a proprietary video network system that provides high quality
video and stereo audio transmission capabilities for video conferencing, data
and file sharing, full-motion broadcasting and retrieval of stored data
directly to and from desktop personal computers and conference rooms.
The Company has suffered recurring losses from operations, has
recurring negative cash flow from operations and an accumulated deficit that
raise substantial doubt about its ability to continue as a going concern. The
Financial Statements do not include any adjustments that might result from the
outcome of this uncertainty. The Company has required substantial funding
through debt and equity financings since its inception to complete its
development plans and commence full scale operations. The Company successfully
completed a Follow-on Offering resulting in net proceeds of approximately $20.9
million in November 1997. Since that time, the Company has utilized, as
planned, a significant portion of such proceeds for capital expenditures,
inventory for units shipped as of year end and anticipated shipments in 1998,
costs related to research and development in response to customer requirements
for functionality and marketing capabilities to support major potential
reseller relationships. The Company plans to utilize the remaining proceeds
from the Follow-on Offering and cash flows from future sales to fund continued
product development, fund working capital and facilitate expansion of the
Company's business. Based on the Company's anticipated level of expenditures
and commitments, management anticipates that its current financial resources,
together with cash generated by operations, will be sufficient to continue to
fund operations through June 1998. Cash flows from operations are not currently
expected to be sufficient to fund the Company's operations during 1998, and
management anticipates that it will continue to experience negative cash flow
from operations for the foreseeable future until its products achieve
commercial acceptance, which currently is expected to occur in late 1998. The
Company has established relationships with investment banking firms, and
management anticipates that it will be able to raise additional capital to meet
its obligations and fund working capital requirements after June 1998 as such
obligations come due. However, the Company does not currently have any
commitments for debt or equity financing, and accordingly, there can be no
assurance that it will be successful in its efforts to secure additional
financing on terms acceptable to the Company or at all.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company's principal activities to date have been planning and
organization, initiating research and development projects, conducting market
research and securing adequate financing for the development of its products.
Accordingly, the Company's financial statements are presented as those of a
development stage enterprise, as prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises."
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and investments with original
maturities of three months or less.
REVENUE RECOGNITION
The Company's merchandise revenue, consisting principally of sales of
the Company's video conferencing products, is recognized upon delivery and
acceptance by customers. Service revenue, consisting principally of consulting
services, is recognized over the time period to which it relates.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Software development costs are included in research and development and
are expensed as incurred. SFAS No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased or Otherwise Marketed" requires the capitalization
of certain software development costs once technological feasibility is
established. Capitalization ceases when the products are available for general
release to customers, at which time amortization of the capitalized costs
begins on a straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues, whichever is
greater. To date, the period between achieving
19
<PAGE> 22
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
technological feasibility and the general availability of such software has
been short, and software development costs qualifying for capitalization have
been insignificant. Accordingly, the Company has not capitalized any software
development costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income. The Company uses accelerated methods of depreciation for
book and for tax purposes. The annual provisions for depreciation have been
computed principally in accordance with the following ranges of asset lives:
computer and lab equipment, 3 to 5 years; capitalized software, 3 years;
furniture and fixtures, 5 years; and leasehold improvements over the lesser of
7 years or the term of the lease relating to the improved asset. Assets held
under the construction in progress caption are not depreciated until the asset
is completed and placed in service.
INVENTORY
Inventory, consisting principally of hardware for the Company's video
conferencing products, is valued at the lower of cost or market, with cost
being determined using the FIFO ("first-in, first-out") method of accounting.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and cash
equivalents and accounts receivable. The Company's cash and cash equivalents
are held with a U.S. commercial bank. The Company has not experienced any
losses related to its cash and cash equivalents. The Company generally grants
uncollateralized credit terms to its customers and has not experienced any
credit related losses.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the current tax provision for the period plus the change
during the period in deferred tax assets and liabilities.
NET LOSS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable
and notes payable approximate fair value because of the relatively short
maturity of these instruments.
20
<PAGE> 23
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is effective
beginning with the year ending December 31, 1996. SFAS No. 123 permits
companies to account for stock based compensation based on the provisions
prescribed in SFAS No. 123 or based on the authoritative guidance in Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." The Company has elected to continue to account for its stock based
compensation in accordance with APB 25; however, as required by SFAS No. 123,
the Company has disclosed the pro forma impact on the financial statements
assuming the measurement provisions of SFAS No. 123 had been adopted (see Note
8).
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
3. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Raw materials $ 366,099 $ 901,548
Work in process - 24,272
Finished goods - 775,115
----------- -----------
$ 366,099 $ 1,700,935
=========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
--------- ----------
<S> <C> <C>
Computer and laboratory equipment $309,716 $2,070,415
Computer software 6,699 220,711
Leasehold improvements 11,925 174,697
Furniture and fixtures 26,817 348,025
Construction in Progress - 279,754
--------- ----------
355,157 3,093,602
Accumulated depreciation (173,085) (787,554)
--------- ----------
$182,072 $2,306,048
========= ==========
</TABLE>
21
<PAGE> 24
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
5. COMMITMENTS
The Company leases office space and manufacturing space and
miscellaneous office and testing equipment under various operating and
capital leases. Commitments for minimum rentals under non-cancelable leases at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1998 $ 207,294 $ 75,919
1999 62,351 75,139
2000 1,810 75,139
2001 - 36,477
2002 - 4,833
Thereafter - -
- -
--------- --------
Total minimum lease payments 271,455 $267,507
========
Less amount representing interest 23,805
------
Present value of net minimum lease payments $ 247,650
=========
</TABLE>
Property, plant, and equipment at year-end include the following amounts for
capitalized leases:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Computer and laboratory equipment $ 53,158 $ 275,608
Furniture and fixtures - 273,320
--------- ---------
53,158 548,928
Less allowances for depreciation (13,289) (78,752)
--------- ---------
$39,869 $ 470,176
========= =========
</TABLE>
Rent payments made in 1995, 1996, and 1997 were $351,000, $228,000, and
$293,000.
6. INCOME TAXES
At December 31, 1997, the Company has available net operating loss
carryforwards for federal and state tax purposes of approximately $ 16,448,000
and $ 5,633,000, respectively. The federal and state net operating losses begin
to expire in 2009 and 1999, respectively. The remaining deferred tax assets
relate principally to accrued expenses, reserves and depreciation and amount to
approximately $ 847,000. As of December 31, 1997, a valuation allowance of
$ 6,145,000 has been recorded against total deferred tax assets, due to the
uncertainty surrounding their realization.
The components of the Company's net deferred tax position and the tax
effects of temporary differences giving rise to the Company's deferred tax
assets (liabilities) as of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Net operating loss carryforwards $1,769,000 $5,817,000
Accrued liabilities 28,000 116,000
Reserves 0 68,000
Depreciation and amortization (24,000) 144,000
Valuation allowance (1,773,000) (6,145,000)
---------- ----------
Total deferred tax asset 0 0
========== ==========
</TABLE>
Ownership changes, as defined in Internal Revenue Code Section 382,
may have limited the amount of net operating loss carryforwards that can be
utilized annually to offset future taxable income. Subsequent ownership changes
could further affect the limitation in future years.
22
<PAGE> 25
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
7. NOTES PAYABLE
During 1995 and 1996, the Company borrowed $224,000 and $170,000,
respectively, from various stockholders of the Company. The loans accrue
interest at 7% per annum and are payable, along with all accrued interest, upon
demand. In connection with the loans made in 1995, the Company issued warrants
to purchase common stock equal to the principal balance of the loans divided by
$6.00 per share, for an aggregate of 37,333 warrants. The exercise price of
these warrants is $8.00 per share. In June 1995, one of the lenders converted a
$30,000 loan plus accrued interest into 5,009 shares of common stock.
Additionally, during 1995, the Company borrowed an aggregate of
$320,000 from a financial advisory firm hired to assist the Company in raising
equity. This amount as well as $2,166 in accrued interest were converted to
common stock during 1995 (see Note 8).
In November 1995, the Company received a letter of intent from a
potential investor pursuant to which the potential investor agreed to pay
$250,000 to the Company as an initial installment of a larger investment which
would be finalized in early 1996. The letter of intent provided that in the
event that a final agreement was not reached within a specified period of time,
the letter of intent could be canceled by the Company or the potential investor
and the $250,000 investment would be converted to a note payable, with interest
accruing at 6% per annum, payable 90 days from the date of such cancellation.
The letter of intent was canceled by the investor in June 1996, and the Company
repaid the $250,000 note, together with $5,548 in accrued interest at 6%.
In August 1996, the Company borrowed $300,000 from an investment
company. The loan bears interest at the NationsBank prime rate plus 1.5% per
annum, adjusted quarterly beginning September 30, 1996. Interest is payable
semi-annually in arrears on the last day of January and August of each year,
commencing January 31, 1997. The full balance of this note is due and payable
on the earlier of: (1) August 14, 1997, or (2) the closing date of an initial
public offering of securities of the Company. In consideration for this loan,
the Company issued to the lender warrants to purchase 33,750 shares of the
Company's common stock at an initial exercise price of $8.90 per share. Each
time the Company declares a stock split or dividend, sells previously unissued
shares, or issued additional options, warrants or rights to purchase shares of
the Company's common stock, the Company applies a formula, pursuant to the
terms of the warrant, to determine if the number of warrants and the
23
<PAGE> 26
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
exercise price thereof must be adjusted. As of December 31, 1996, the number of
shares subject to the warrant pursuant to the loan agreement are 42,755 at an
exercise price of $7.03.
In November 1996, the underwriter of the Company's proposed IPO
placed $2,000,000 in bridge notes of the Company to provide the Company with
operating capital until the time of the expected closing of the IPO. The bridge
notes are collateralized by substantially all of the assets of the Company. The
bridge notes are due and payable upon the earliest of the closing of the IPO,
twelve months from the date of issuance, or the closing of a series of sales of
securities of the Company with aggregate gross proceeds of at lease $2,000,000,
and the notes bear interest at the rate of 10% per annum, due and payable
quarterly, beginning January 1, 1997. The notes were issued to a total of 38
investors, in three tranches: (1) $1,025,000 as of October 18, 1996, (2)
$400,000 as of November 8, 1996, and (3) $575,000 as of November 22, 1996. The
individual note holders were also issued warrants to purchase an aggregate of
500,000 shares of the Company's common stock at an exercise price of $3.30 per
share. As a fee for this transaction, the underwriter received $200,000 and
warrants to purchase 50,000 shares common stock at an exercise price of $3.30
per share. These fee warrants will be forfeited upon the completion of the
Company's initial public offering. Based on an analysis utilizing the
Black-Scholes option-pricing model giving consideration to the features of the
warrants and the external economic environment provided by an independent
valuation firm, the Company estimated that the fair value of the warrants
issued in connection with these debt financings was approximately $782,000.
This aggregate amount has been recorded as a discount against the related notes
payable and an increase to additional paid-in-capital. The discount against the
related notes payable is being amortized to interest expense over the terms of
the related notes. As of December 31, 1996, approximately $196,000 had been
amortized to interest expense. The effective interest rate of the bridge notes
is 43.3% per annum based on the 10% stated interest rate pursuant to the bridge
notes and the fair value of the 500,000 warrants that were originally issued in
connection with the notes.
All notes payable were repaid in full concurrent with the receipt of
the proceeds of the Company's Initial Offering in April 1997. Of the $586,000
unamortized discount recorded as at December 31, 1996, $385,000 was charged to
interest expense. The remaining $201,000 of the unamortized discount was
charged against equity as the warrant holder to whom the Bridge Warrants had
been granted returned a portion thereof.
24
<PAGE> 27
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
8. CAPITAL STOCK TRANSACTIONS
COMMON STOCK
The Company was initially capitalized in the amount of $1,000 by the
issuance of 500 shares of common stock, par value $.01. On June 28, 1994, the
Company filed a Certificate of Amendment of Certificate of Incorporation
increasing the authorized shares to 10,000,000.
On June 28, 1994, the Company issued a stock dividend of 1,299,500
shares to the Company's sole stockholder and President and Chief Executive
Officer, Mr. Steven A. Rogers.
On August 3, 1994, the Company sold 187,666 shares of common stock
for $2.00 per share. Of the shares issued, 171,000 shares were sold for
cash and 16,666 were issued in exchange for services rendered. On December 31,
1994, the Company sold an additional 45,000 shares of common stock for $6.00
per share.
25
<PAGE> 28
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
On December 31, 1994, the Company issued 8,375 shares in fulfillment
of an obligation of $22,500 for services rendered in connection with the
previous stock offerings.
In December 1994, the Company entered into an agreement with a
financial advisory firm to assist in raising a minimum of $600,000 in equity
for the Company. In return, the Company was required to issue warrants to the
financial advisor to purchase shares of the Company's common stock equal to 10%
of the number of shares of common stock sold by the financial advisor to
investors and 10% of the number of warrants issued to investors. The exercise
price for these warrants is 110% of the common stock issue price or warrant
exercise price.
Pursuant to this agreement, the Company sold 111,667 shares of common
stock for $6.00 per share during June 1995. Each share of common stock sold
entitled the investor to a warrant to purchase an additional share of the
Company's common stock, at an exercise price of $8.00 per share. Further, the
Company converted $30,057 in notes payable and accrued interest into 5,009
shares of common stock. Additionally, the Company converted $202,166 in
outstanding notes payable and accrued interest to the financial advisory firm
into 33,694 shares of common stock. Each share of common stock issued in the
conversion was accompanied by a warrant to purchase one share of common stock,
at an exercise price of $8.00 per share. The Company also converted an
additional $120,000 loan from the financial advisory firm into 20,000 shares of
common stock, subject to the warrant provision described above. In connection
with this transaction, holders of the converted notes were also issued an
aggregate of warrants to purchase 85,666 shares of common stock at an exercise
price of $8.00 per share.
Pursuant to its 1995 agreement with the financial advisory firm,
during June 1996, the Company sold 175,166 shares of common stock for $6.00
per share. Each share of common stock sold entitled the investor to a warrant
to purchase an additional share of the Company's common stock at an exercise
price of $8.00 per share. In connection with the provisions of the agreement,
the president of the financial advisory firm received 34,553 warrants at an
exercise price of $6.60 per share and 34,553 warrants at an exercise price of
$8.80 per share in consideration of the services performed to assist the
Company in obtaining equity financing. Additionally, the Company issued to
certain lenders as an inducement to make loans to the Company, warrants to
purchase 16,666 shares of common stock at $8.00 per share.
26
<PAGE> 29
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
A summary of the number of shares of common stock subject to purchase
under all warrant agreements and the related exercise prices as of December 31,
1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
<S> <C>
429,207 $ 4.00
350,000 3.30
15,000 8.00
-------
794,207
=======
</TABLE>
During January 1997, the Company executed a warrant exchange
agreement (the "Exchange Agreement") with investors who purchased shares
of common stock and received warrants through the financial advisory firm
during 1995 and 1996. The purpose of the warrant exchange was to induce such
investors to enter into lock-up arrangements with the Underwriter and into
agreements consolidating such investors' registration rights with those granted
by the Company to other investors, and to provide those investors with the
opportunity to invest in the Company upon terms and conditions that more
closely reflect the terms and conditions upon which the other investors
invested in the Company during a comparable time period. Under the Exchange
Agreement, each such investor was given the opportunity to exchange existing
warrants to purchase 5,000 shares of common stock at an exercise price of $8.00
per share for new warrants to purchase 2,500 shares of common stock an exercise
price of $4.00 per share and an additional 2,500 newly issued shares of common
stock. In addition, in the original offering, certain investors purchased
shares of common stock from Mr. Steven A. Rogers at a purchase price of $2.00
per share at a time during which other investors were purchasing shares of
common stock from the Company at $6.00 per share. As part of the warrant
exchange, such investors also were required to pay Mr. Rogers $2.00 per share
of common stock purchased from him in the original offering, so as to cause
such transactions to be consummated upon terms and conditions more closely
reflecting market conditions. Mr. Rogers received an aggregate of $340,166 in
the warrant exchange transaction. As a result of the Exchange Agreement, the
Company issued an aggregate of 165,267 shares of common stock. Of the fair
market value of such shares, the Company will reflect a non-cash compensation
expense of $340,166, and the remaining $320,902 will be a direct charge to
equity as a cost of equity financing. Additionally, an aggregate of 345,536
warrants with an exercise price of $8.00 per share were exchanged for 165,269
warrants with an exercise price of $4.00 per share and 15,000 warrants with an
exercise price of $8.00 per share. Further, in connection with the Warrant
Agreement, the Company also exchanged warrants held by the president of the
financial advisory firm to purchase 34,553 warrants to purchase shares of
common stock at an exercise price of $6.60 per share, and 34,553 warrants to
purchase shares of common stock at an exercise price of $8.80 per share, for an
aggregate of 69,106 warrants to purchase shares of common stock at an exercise
price of $4.00 per share. Additionally, the Company exchanged warrants
originally issued to other investors as an inducement to loan funds to the
Company, representing the right to purchase an aggregate of 102,332 shares at
an exercise price of $8.00 per share for warrants to purchase 102,332 shares of
common stock at an exercise price of $4.00 per share (see Note 5). The Company
did not receive any additional cash proceeds as a result of the Exchange
Agreement.
During April 1997, the Company issued 2,070,000 shares of common
stock, par value $.01 for approximately $9.5 million in proceeds, net of
underwriting discounts and commissions and certain other expenses of the
offering of $1.9 million. The issuance of these shares was pursuant to an
initial public offering at a price of $5.50 per share. The net proceeds of the
initial public offering were used primarily to repay certain outstanding notes
payable and to fund the continued research and development and the working
capital deficiencies of the Company. In connection with the initial public
offering, all of the issued and outstanding shares of Redeemable Series A
Convertible Preferred Stock were converted into common stock on a one-for-one
basis.
In April 1997, in connection with the initial public offering,
certain holders of Bridge Warrants surrendered such warrants to acquire an
aggregate of 150,000 shares of common stock with a fair value of $1.34 per
warrant, resulting in a decrease due to reversal of interest expense upon
surrender of Bridge Warrants of $201,000 in stockholders' equity. The surrender
and cancellation of such warrants did not have any other effect on the Bridge
Financing, nor did the Company pay any consideration in connection with such
surrender.
On November 5, 1997, the Company completed the offering and sale of
1,000,000 shares of the Company's common stock at a public offering price of
$23.125 per share, resulting in net proceeds to the Company of approximately
$20.9 million (net of underwriting discounts and commissions and other expenses
of the offering).
STOCK OPTIONS
On August 3, 1994, the Company granted certain outside directors of
the Company options to purchase 200,000 shares of common stock. These
options vest on the anniversary of the option grant date in accordance with a
five year vesting schedule, 20% each year. The exercise price is $2.00 per
share, which was in excess of the fair value of the stock on the date of the
grant, as determined by the Board of Directors. As of December 31, 1997,
10,000 of these options had been exercised and 110,000 of these options were
exercisable. The right to exercise these options terminates ten years from the
grant date.
In October 1994, the Board of Directors adopted the 1994 Stock Option
Plan (the "1994 Plan") pursuant to which 343,000 shares of common stock are
reserved for issuance. These options vest on the anniversary of the option
grant date in accordance with a vesting schedule ranging from two to five
years. The options granted under this plan are granted at an exercise price per
share equal to the fair value per share of the Company's common stock on the
date of grant. As of December 31, 1997, 108,600 of these options had been
exercised and none of these options were exercisable. The right to exercise
these options terminates ten years from the grant date.
In January 1997, the Board of Directors adopted the 1996 Stock Option
Plan (the "1996 Plan") pursuant to which 450,000 shares of common stock are
reserved for issuance. These options vest on the anniversary of the option
grant date in accordance with a vesting schedule ranging from three to five
years. The options granted under this plan are granted at an exercise price
per share equal to the fair value per share of the Company's common stock on
the date of grant. As of December 31, 1997, none of these options had been
exercised and none of these options were exercisable. The right to exercise
these options ranges from five to ten years from the grant date.
In December 1997, the Company granted to an investment banking firm
options to purchase 125,000 shares of common stock at an exercise price of
$13.81 per share, which was the fair value of the stock on the date of the
grant. Since this grant is for future services to be provided, the related
compensation expense, in accordance with SFAS No. 123, will be recorded over
two years, the expected term of services. In 1997, the compensation expense
was $20,355 with $563,688 in 1998 and $543,332 in 1999.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Number of Price
Shares Range
------ -----
<S> <C> <C>
1995
Granted 232,500 $4.00
Forfeited -- --
Exercised -- --
Outstanding at December 31, 1995 432,500 $2.00-$4.00
Exercisable at December 31, 1995 40,000 $2.00
Available for grant at December 31, 1995 110,500
1996
Granted 138,000 $4.00
Forfeited (27,500) $4.00
Exercised 10,000 $2.00
Outstanding at December 31, 1996 533,000 $2.00-$4.00
Exercisable at December 31, 1996 111,000 $2.00-$4.00
Available for grant at December 31, 1996 0
1997
Granted 487,550 $6.125-$23.00
Forfeited (4,000) $6.625-$17.75
Exercised -- --
Outstanding at December 31, 1997 1,011,550 $2.00-$23.00
Exercisable at December 31, 1997 218,600 $2.00-$4.00
Available for grant at December 31, 1997 91,450
</TABLE>
<TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
Weighted-Avg.
Number Remaining Number
Range of Outstanding Contractual Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices As of 12/31/97 Life (years) Exercise Price As of 12/31/97 Exercise Price
- --------------- -------------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$2.00 190,000 6.6 $2.00 110,000 $2.00
$4.00 338,000 7.9 $4.00 108,600 $4.00
$6.125-$12.125 271,600 4.3 $6.89 - -
$13.813-$23.00 211,950 4.9 $17.50 - -
---------- ----------
1,011,550 218,600
========== ==========
</TABLE>
27
<PAGE> 30
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
All stock options granted by the Company from its inception through
December 31, 1997 were granted with an exercise price per share equal to the
fair value per share of the Company's common stock on the date of grant. In
December of 1996, the Company repriced the exercise price of all options
previously granted to $4.00 per share, to reflect an exercise price consistent
with the price per share paid by outside investors of the Series A Preferred
Stock issued in December of 1996 and January of 1997 (see Note 9). The Company
accounts for the fair value of its options granted to employees and directors
in accordance with APB 25. Accordingly, no compensation expense has been
recognized for the options granted, since the exercise price of the options has
been in excess of the fair value of the options on the date of grant, as
determined by the Board of Directors. Had compensation expense been determined
based on the fair value of the options at the grant dates consistent with the
method of accounting under SFAS 123, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<S> <C> <C>
Net loss: 1996 1997
---- ----
As Reported $ (2,694,436) $ (11,586,294)
Pro forma $ (2,895,916) $ (11,915,198)
Net loss per common share: 1996 1997
---- ----
As Reported, basic $ (0.75) $ (2.84)
Pro forma, basic $ (0.80) $ (2.92)
</TABLE>
The fair value of each option granted in 1996 and 1997 was estimated
on the date of grant using a type of Black-Scholes option-pricing model. The
model used the following weighted-average assumptions used for grants during
the year ended December 31, 1996 and 1997: expected volatility of 43% and 75%,
respectively, risk-free interest rate of 5.9% and 6.4%, respectively. Dividend
yield of 0% and expected term of 5 years was assumed in both years.
28
<PAGE> 31
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
9. PREFERRED STOCK
On December 9, 1996, the Board of Directors and a majority of the
holders of the outstanding common stock authorized the establishment of
2,500,000 shares of preferred stock, with a par value of $.01 per share. In
December 1996, the Company authorized the issuance and sale of 500,000 shares
of Series A Convertible Preferred Stock ("Series A") and warrants to purchase
100,000 shares of common stock for aggregate consideration of $2,000,000. The
Series A shares have liquidation preferences over the common stock and any
series of preferred stock authorized in the future. The holders of Series A
shares are entitled to non-cumulative dividends when dividends are declared on
the common stock as though the Series A shares had been converted to common
stock. At any time after five years following the issuance of the Series A
shares, or upon a merger in which the Company is not the surviving entity, or
upon a sale of all or substantially all of the assets of the Company, at the
request of at least 50% of the holders of Series A shares and given sixty days
notice, the Company is required to redeem all or a portion of the outstanding
Series A shares at a redemption price equal to the amount such holders would be
entitled to receive had they converted the Series A shares into common stock or
the liquidation value of $4.00 per share, whichever is greater. The Series A
shares are convertible to common stock as determined by multiplying the Series
A stated value plus all declared but unpaid dividends by $4.00 and dividing
that result by the conversion price, which as defined by the agreement will not
exceed $4.00 per share. The Series A shares will automatically convert to
shares of common stock upon the consummation of the Company's IPO. The holders
of Series A shares are entitled to vote, with each holder entitled to the
number of votes per share as equal to the number of shares of common stock into
which each share of Series A is then convertible.
The warrants issued in conjunction with the Series A shares have an
exercise price of $4.00 per share. As a fee for the placement of the Series A
shares and related warrants, the underwriting firm received a $140,000
underwriter's discount and commission in consideration of its services on this
transaction.
As of December 31, 1996, the Company had issued 250,000 Series A
shares and 50,000 warrants for the purchase of common stock and had received $1
million of consideration for the sale of the Series A shares. The remaining $1
million was received in January 1997. The Series A shares have been recorded
net of the underwriters discount and commission and approximately $82,000 in
other issuance costs. The 500,000 shares of Series A shares outstanding at
the time of the Initial Offering in April were exchanged for 500,000 shares of
common stock upon the closing of the Initial offering.
10. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board recently issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income." This
Statement requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. The Statement will become effective for fiscal years beginning
after December 15, 1997. The Company will adopt the new standard beginning in
the first quarter of the fiscal year ending December 31, 1998.
29
<PAGE> 32
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are set forth
below. Biographical information concerning each of the directors and executive
officers is presented on the following pages. Information is presented as of
March 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mr. Steven A. Rogers.................................. 46 President, Chief Executive Officer
and Director
Mr. Clifford M. Kendall............................... 66 Chairman of the Board
Mr. Anthony M. Agnello................................ 48 Director
Mr. Robert L. Barnett................................. 57 Director
Mr. Donald W. Barrett................................. 51 Director
Mr. Eugene R. Cacciamani.............................. 61 Director
Mr. Marc S. Cooper.................................... 36 Director
Lt. Gen. Lincoln D. Faurer, USAF (Ret.)............... 70 Director
Mr. Richard T. Liebhaber.............................. 62 Director
Mr. Roy C. Nash....................................... 56 Director
Mr. John B. Torkelsen................................. 52 Director
Mr. Roger A. Booker................................... 43 Vice President, Operations
Mr. Robert H. Emery................................... 53 Vice President, Administration and
Finance and Secretary
Mr. Frank H. Gore..................................... 58 Vice President, Sales
Ms. Mary Murphy....................................... 40 Vice President, Marketing
</TABLE>
Steven A. Rogers founded the Company in 1993 and has served as President
and Chief Executive Officer since the Company's inception. Mr. Rogers has
participated in other successful start-up companies as an executive officer or
founder. From July 1990 to July 1992, he served as a Senior Vice President of
General Kinetics, Inc. where he managed the Cryptek division. In January 1986,
he had founded Cryptek, Inc., an encrypted facsimile machine manufacturer and,
from January 1986 to July 1990, served as its President and Chief Operating
Officer until it was acquired by General Kinetics, Inc. Mr. Rogers holds four
patents and was a nominee for KPMG Peat Marwick's "1990 Entrepreneur of the
Year" award. He has a B.S.E.E. from Virginia Polytechnic Institute.
Clifford M. Kendall has been Chairman of the Board of Directors since
August 1994 and currently is Chairman of the Executive Committee. Mr. Kendall is
one of the founders, and until December 1997, served as Chairman of the Board of
Computer Data Systems, Inc. ("CDSI"), a professional services company which
provides consulting and data processing services to federal, state and local
governments, not-for-profit institutions and commercial clients, and had served
in such capacity since July 1991. From 1971 to July 1991, Mr. Kendall served as
Chairman and Chief Executive Officer of CDSI. In December 1997, CDSI was
acquired by Affiliated Computer Services, Inc. ("ACS"), a computer services
provider. Mr. Kendall currently serves as a director of ACS and is Chairman of
the Advisory Board of CDSI. Mr. Kendall also serves as a member of the Advisory
Boards of Atlantic Holdings, Inc. and Ferris, Baker, Watts Incorporated.
30
<PAGE> 33
Anthony M. Agnello has served as a director of the Company since January
1997. Mr. Agnello co-founded Ariel Corporation, a DSP (Digital Signal
Processing) equipment provider, in 1982 and currently serves as Chief Executive
Officer and Chairman of the Board of Ariel Corporation. Mr. Agnello received his
M.S.E.E. from City College of New York and owns several patents in digital
signal processing.
Robert L. Barnett has served as a director of the Company since August 1994
and currently is Chairman of the Compensation Committee. Mr. Barnett has served
as Executive Vice President of Motorola, Inc. since 1995, where he is
responsible for the development of two-way wireless communications products.
From 1992 to 1995, he was the President of Nexteps, Inc., an international
communications consulting firm. He served in various capacities at the Ameritech
Corporation from 1987 to 1993, including President of Ameritech Bell Group and
Vice Chairman of Ameritech Corporation. Mr. Barnett serves on the boards of
Johnson Controls, Inc., USG, the parent company of United States Gypsum and
Central Vermont Public Service, a utility company.
Donald W. Barrett has served as a director of the Company since August
1994. Mr. Barrett has been Chairman of the Board and Chief Executive Officer of
Telepad, Corp., a telecommunications and information systems equipment
manufacturer, since April 1996. From July 1991 to March 1996, Mr. Barrett was
President and Chief Executive Officer of Ideas, Inc., a systems integrator for
the intelligence community. From July 1987 to June 1991, he served as President
of the Government Systems Group of Contel Federal Systems where he was
responsible for the design, development and integration of information systems
supporting the United States government. Mr. Barrett has a B.S. from California
State Polytechnic University and an M.B.A. from California State University,
Fullerton.
Eugene R. Cacciamani has served as a director of the Company since August
1994. Dr. Cacciamani has been a Senior Vice President of Hughes Network Systems,
Inc. a company furnishing private communications networks to business,
government and common carriers since 1987, where he is responsible for
developing new technologies, systems and businesses, including lead efforts in
the Hughes DBS DirecTV system and the systems design in the ICO global satellite
personal communications systems. Dr. Cacciamani is on the Engineering Advisory
Boards at Union College and The Catholic University of America and serves as an
advisor to Aloha Networks, Inc. and Quest Communications.
Marc S. Cooper has served as a director of the Company since April 1997.
Mr. Cooper is Vice Chairman of Barington Capital Group, L.P. ("Barington")
responsible for the Syndicate, Investment Banking and Research Departments. From
March 1992 until January 1998, Mr. Cooper served as Executive Vice President,
Director of Investment Banking and Research at Barington. He also serves as a
director of Thinking Tools, Inc., a software developer.
Lincoln D. Faurer has served as a director of the Company since August
1994. Lt. Gen. Faurer USAF (Ret.) has served as President of LDF, Inc., a
company providing consulting services on intelligence and security matters,
since 1991. From 1986 to 1991, he also served as President of the Corporation
for Open Systems, Inc., a corporation engaged in research and development of a
worldwide "open systems" environment. Lt. Gen. Faurer retired from the United
States Air Force in 1985, serving the last four years as Director of the
National Security Agency.
Richard T. Liebhaber has served as a director of the Company since August
1994. Mr. Liebhaber has been a Managing Director of Veronis, Suhler &
Associates, Inc., New York, a media merchant banking firm, since 1995. From 1985
to 1995, Mr. Liebhaber was Chief Strategy and Technology Officer of MCI
Communications Corporation. He serves on the board of directors of QWEST
Communications, Inc., Alcatel Network Systems, Inc., a subsidiary of Alcatel
Alsthom Compagnie Generale d'Electricite, Geotek Communications, Inc., and
Scholz Master Builders, Inc. He is also a member of the Steering Committee for
the National Information Infrastructure for the Computer Science and
Telecommunications Board of the National Research Council and is a member of the
Federal Networking Commission Advisory Council.
31
<PAGE> 34
Roy C. Nash has served as a director of the Company since August 1994 and
is Chairman of its Audit Committee. Mr. Nash has been Vice President of Finance
for MCI Communications Corporation since December 1996. From January 1995 to
November 1996, Mr. Nash was Vice President of Audit for MCI Communications
Corporation. From 1993 to 1995, Mr. Nash served as Chief Financial Officer for
Concert Communications Company, a joint venture between MCI and British Telecom
plc. From 1987 to 1993, Mr. Nash served as Vice President and Controller,
responsible for all internal and external financial reporting of MCI
Communications Corporation. Mr. Nash received a B.A. in Economics from Cornell
University and an M.B.A. from Columbia University.
John B. Torkelsen has served as a director of the Company since March 1996.
Mr. Torkelsen has served as President of Princeton Venture Research, Inc.
("PVR") since 1984 and President of its affiliate PVR Securities, Inc. ("PVR
Securities") since 1987. Mr. Torkelsen also is a director serving on the
Audit and Compensation Committees of Voice Control Systems, Inc. and a director
serving on the Compensation Committee of Mikros Systems Corporation. He has a
B.S. in engineering from Princeton University and an M.B.A. from Harvard
University.
Roger A. Booker has served as Vice President, Operations since February
1996. From June 1994 to February 1996, Mr. Booker served as the Vice President,
International Development and Operations at Global Partnership, Inc., where he
directed international development and operations. From February 1990 to June
1994, Mr. Booker also served as the Vice President, Manufacturing Operations at
Cryptek, Inc., an encrypted facsimile machine manufacturer, and served in the
same position at General Kinetics, Inc. when it acquired Cryptek, Inc., where he
was responsible for overseeing operations, including several acquisitions and
divestitures. From August 1986 to February 1990, Mr. Booker was Director of
Operations for Magnavox Government and Industrial Electronics Company, where he
managed the development of a new 200,000 square foot manufacturing facility. He
received a B.S. and an M.A. in manufacturing engineering technology and
management from East Tennessee State University.
Robert H. Emery has served as Vice President, Administration and Finance
and Secretary since December 1996, and previously served as Vice President,
Administration from May 1995 to December 1996. From May 1986 to May 1995, he
served as Vice President of Aries Systems International, Inc., an information
services company. From August 1983 to July 1986, Mr. Emery served as the ADP
Security Officer for the military's largest secure computer network. He has a
B.S. from the U.S. Naval Academy, an M.S. in information systems from the Naval
Postgraduate School and an M.S. in accounting from George Mason University. He
is a CPA and a certified financial planner.
Frank M. Gore has served as Vice President, Sales since July 1994. From
January 1990 to June 1994, he served as Director of Marketing for International
Financial Communications, Inc., a distributor of video conferencing equipment.
From March 1988 to January 1990, Mr. Gore served as Director of Marketing for
International Data Services, Inc., a communications company, where he was
responsible for establishing and managing a $35 million contract. From October
1987 to March 1988, Mr. Gore served as National Sales Manager for British
Telecom, plc, U.S. division, managing 120 sales people and 12 regional sales
managers. From February 1980 to October 1987, Mr. Gore served as Marketing
Program Manager for Boeing Computer Services, Inc., a division of The Boeing
Company, where he managed the development and distribution of hardware and
software products related to computer communications.
Mary C. Murphy joined the Company as Vice President, Marketing in October
1997. From March 1996 to October 1997, Ms. Murphy served as the General Manager
of Telco and ISP Solutions Division of Lotus Development Corporation ("Lotus"),
a subsidiary of International Business Machines Corporation ("IBM"). At Lotus,
Ms. Murphy was responsible for partner recruitment, solutions development and
technical, sales and marketing enablement for over 23 global telecommunications
and Internet service provider firms. Previously, from July 1994 to March 1996,
Ms. Murphy managed the Industry Marketing, Enterprise Marketing and Business
Partner Marketing organizations of Lotus in Europe. From November 1992 to July
1994, Ms. Murphy was a Senior Product Marketing Manager at Lotus. Prior to
joining Lotus, Ms. Murphy was a Senior Marketing Manager at Digital Equipment
Corporation. Ms. Murphy received a B.A. in Communication Arts and Sciences from
Bridgewater State College.
32
<PAGE> 35
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities to file with the Securities and Exchange
Commission and Nasdaq initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. In
addition, under Section 16(a), trusts for which a reporting person is a trustee
and a beneficiary (or for which a member of his immediate family is a
beneficiary) may have a separate reporting obligation with regard to ownership
of the Common Stock and other equity securities of the Company. Such reporting
persons are required by rules of the Securities and Exchange Commission to
furnish the Company with copies of all Section 16(a) reports they file. In
1997, the Company received Section 16(a) reports and written representations
that certain reports were not required. Based upon a review of that
information, the Company believes that all members of the Board of Directors,
executive officers and each beneficial owner of more than 10% of the Company's
Common Stock timely filed all reports require by Section 16(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), except that
Ms. Murphy filed late her Initial Report of Beneficial Ownership on Form 3,
and Mr. Torkelsen reported late transactions on an Annual Statement of Changes
In Beneficial Ownership on Form 5 that should have been reported on a Statement
of Changes in Beneficial Ownership on Form 4.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table lists the cash remuneration paid or accrued during 1997
to the President and Chief Executive Officer of the Company, and to each of the
other most highly compensated executive officers for fiscal year 1997. The
Company did not have any pension or long-term incentive plan and did not issue
any restricted stock awards or stock awards to any of the executive officers
named in this table during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------------ SECURITIES
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS UNDERLYING OPTIONS
- --------------------------- ------- -------- ------- ------------------
<S> <C> <C> <C> <C>
Steven A. Rogers
President and Chief Executive Officer.......... 1997 $120,000 $60,000 50,000
Roger A. Booker
Vice President, Operations..................... 1997 85,000 45,000 35,000
Robert H. Emery
Vice President, Administration and Finance..... 1997 90,000 45,000 35,000
Frank M. Gore
Vice President, Sales.......................... 1997 96,000 50,000 20,000
</TABLE>
- ---------------
(1) Information with respect to fiscal years 1996 and 1995 is not shown because
the Company was not a reporting company under the Exchange Act during those
years.
33
<PAGE> 36
STOCK OPTION GRANTS IN FISCAL YEAR 1997
The following table sets forth certain information about the stock options
granted pursuant to the 1996 Stock Incentive Plan (the "1996 Plan") during
fiscal year 1997 to the executive officers named in the Summary Compensation
Table. As of the date of this report on Form 10-KSB, the Company has not
granted any stock appreciation rights.
STOCK OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENTAGE OF TOTAL
UNDERLYING OPTIONS OPTIONS GRANTED TO
NAME GRANTED(1) EMPLOYEES IN 1997 EXERCISE PRICE ($/SH) EXPIRATION DATE
- ---- -------------------- ------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
Steven A. Rogers.......... 50,000 16.73% $6.625 April 10, 2002
Roger A. Booker........... 35,000 11.71 6.625 April 10, 2002
Robert H. Emery........... 35,000 11.71 6.625 April 10, 2002
Frank M. Gore............. 20,000 6.69 6.625 April 10, 2002
</TABLE>
- ---------------
(1) The options granted are non-qualified stock options that vest ratably over a
three-year period on the anniversary of the grant date. The options expire
on the fifth anniversary of the date of grant.
STOCK OPTION EXERCISES IN FISCAL YEAR 1997
The following table sets forth information concerning the number and value
of unexercised stock options at December 31, 1997. The executive officers named
in the Summary Compensation Table did not exercise any options in 1997.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1997 AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED VALUE DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
NAME ON EXERCISE REALIZED EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
- ---- ----------- -------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Steven A. Rogers............ -- -- 5,000 / 70,000 $ 51,250 / $586,250
Roger A. Booker............. -- -- 7,300 / 64,200 $ 74,825 / $566,175
Robert H. Emery............. -- -- 19,800 / 74,200 $202,950 / $668,675
Frank M. Gore............... -- -- 21,800 / 62,200 $223,450 / $482,550
</TABLE>
- ---------------
(1) Value based on the last reported sale price per share Common Stock of $14.25
on December 31, 1997, as reported on Nasdaq, minus the exercise price.
EXECUTIVE EMPLOYMENT CONTRACTS
The Company has entered into an employment agreement with Mr. Rogers. The
agreement was effective on March 13, 1997 and is for an initial term of one year
with automatic one-year renewals, unless terminated as provided in the
agreement. The agreement provides that the 1997 base salary for Mr. Rogers will
be $120,000. The agreement also includes a non-competition commitment during and
after the term of the agreement, confidentiality commitments, non-solicitation
of employee provisions and assignment of work product agreements. The Company
also maintains a key man life insurance policy on Mr. Rogers in the amount of
$1.0 million. The Company has no other employment agreements with, nor does it
maintain key man life insurance on, any of its other employees.
34
<PAGE> 37
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth below regarding beneficial ownership of the
Common Stock is presented in accordance with rules of the Securities and
Exchange Commission and is not necessarily indicative of beneficial ownership
for any other purpose. Under such rules, beneficial ownership of Common Stock
includes any shares as to which a person has the sole or shared voting power or
investment power and also any shares which a person has the right to acquire
within 60 days of the date of this report on Form 10-KSB through the exercise
of any stock option, warrant or other right.
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of March 31, 1998 by (i) all persons
known by the Company to beneficially own 5% or more of the outstanding shares of
Common Stock, (ii) each current director of the Company, and (iii) all current
directors and executive officers of the Company, as a group. Unless otherwise
noted, each stockholder named has sole voting and investment power with respect
to such shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNERSHIP CLASS (1)
-------------------- ----------
<S> <C> <C>
Steven A. Rogers(2)......................................... 968,249 16.9%
Anthony M. Agnello(3)....................................... 2,067 *
Robert L. Barnett(4)........................................ 22,133 *
Donald W. Barrett(5)........................................ 22,000 *
Eugene R. Cacciamani(6)..................................... 27,200 *
Marc S. Cooper(7)........................................... 182,200 3.1
Lincoln D. Faurer(8)........................................ 17,000 *
Clifford M. Kendall(9)...................................... 55,100 *
Richard T. Liebhaber(10).................................... 42,133 *
Roy C. Nash(11)............................................. 18,133 *
John B. Torkelsen(12)....................................... 762,728 13.0
Applewood Associates, L.P.(13).............................. 425,000 7.0
All directors and executive officers as a group (15
persons)(14).............................................. 2,228,177 35.0%
</TABLE>
- ---------------
* Less than one percent
(1) Applicable percentage of ownership is based on 5,676,850 shares of Common
Stock outstanding as of March 31, 1998. Beneficial ownership is determined
in accordance with rules of the Securities and Exchange Commission. For
each beneficial owner, shares of Common Stock subject to options or
conversion rights exercisable within 60 days of the date of this proxy are
deemed outstanding.
(2) The address of Mr. Rogers is c/o Objective Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Includes 10,000
shares of Common Stock held by Mr. Rogers' son, as to which Mr. Rogers
disclaims beneficial ownership; 30,000 shares of Common Stock held by Mark
Rogers, Steven Rogers' brother, as custodian for Steven Rogers' three minor
children, as to which Mr. Rogers disclaims beneficial ownership; 16,666
shares of Common Stock issuable upon exercise of warrants; and 21,667
shares of Common Stock issuable upon exercise of options.
(3) The address of Mr. Agnello is 2540 Route 130, Cranbury, New Jersey 08512.
Mr. Agnello was elected as a member of the Board of Directors pursuant to a
voting agreement among the Company, Mr. Rogers, Applewood Associates, L.P.
("Applewood") and Acorn Technology Partners, L.P. ("Acorn"). Consists of
2,067 shares of Common Stock issuable upon exercise of options.
(4) The address of Mr. Barnett is 1445 South Ridge Road, Lake Forest, Illinois
60045. Includes 14,633 shares of Common Stock issuable upon exercise of
options.
(5) The address of Mr. Barrett is 3105 Bennett Point Road, Queenstown, Maryland
21658. Includes 17,000 shares of Common Stock issuable upon exercise of
options.
(6) The address of Dr. Cacciamani is 10100 New London Drive, Potomac, Maryland
20854. Includes 17,200 shares of Common Stock issuable upon exercise of
options.
35
<PAGE> 38
(7) The address of Mr. Cooper is 888 Seventh Avenue, 17th Floor, New York, New
York 10019. Consists of 180,000 shares of Common Stock that may be acquired
upon exercise of the Barington option (the "Barington Option") and 2,200
shares of Common Stock issuable upon the exercise of other options. The
Barington Option is held by Barington Capital Group, L.P. ("Barington") and
was granted by the Company in connection with the initial public offering
of the Company's Common Stock in April, 1997. Mr. Cooper also is a
stockholder in LNA Capital Corp., the corporate general partner of
Barington. Includes options to acquire 27,000 shares of Common Stock which
Cross Connect, L.L.C. has the right to acquire under certain conditions.
Cross Connect, L.L.C. is not affiliated with Barington or Mr. Cooper, and
Mr. Cooper disclaims beneficial ownership of the 27,000 shares of Common
Stock that may be acquired upon exercise of such options.
(8) The address of Lt. Gen. Faurer is 1438 Brookhaven Drive, McLean, Virginia
22102. Consists of 17,000 shares of Common Stock issuable upon the exercise
of options.
(9) The address of Mr. Kendall is 2 Tobin Court, Potomac, Maryland 20854.
Includes 30,100 shares of Common Stock issuable upon the exercise of
options.
(10) The address of Mr. Liebhaber is 1100 Chain Bridge Road, P.O. Box 8210,
McLean, Virginia 22106. Includes 14,633 shares of Common Stock issuable
upon the exercise of options and 2,500 shares of Common Stock that may be
acquired upon the exercise of warrants.
(11) The address of Mr. Nash is 4251 Gulf Shore Boulevard North, Naples, Florida
34103. Includes 14,633 shares of Common Stock issuable upon the exercise of
options.
(12) The address of Mr. Torkelsen is 240 Library Place, Princeton, New Jersey
08540. Includes (i) 2,067 shares of Common Stock issuable upon the exercise
of options; (ii) 528,041 shares of Common Stock beneficially owned by
Princeton Venture Research, Inc. ("PVR"), of which Mr. Torkelsen is the
President and 207,620 shares of Common Stock that may be acquired upon the
exercise of warrants beneficially owned by PVR; (iii) 20,000 shares of
Common Stock beneficially owned by Pamela Torkelsen, Mr. Torkelsen's wife
and 5,000 shares of Common Stock that may be acquired upon the exercise of
warrants beneficially owned by Pamela Torkelsen. Mr. Torkelsen disclaims
beneficial ownership of all shares of Common Stock and warrants owned by
Mrs. Torkelsen.
(13) The address of Applewood, a New York limited partnership, is c/o Barry
Rubenstein, 68 Wheatley Road, Brookville, New York 11545. Includes 175,000
shares of Common Stock that may be acquired by Applewood upon the exercise
of warrants. Applewood is beneficially owned by its three general partners,
Barry Rubenstein, Barry Fingerhut and Irwin Lieber, and by a number of
limited partners. Applewood is not an affiliate of Barington, Acorn or the
Company.
(14) Includes 669,220 shares of Common Stock issuable to executive officers and
directors upon exercise of warrants and options.
36
<PAGE> 39
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The following is a description of certain transactions between the Company
and each of its directors, executive officers, entities beneficially owned by
its executive officers or directors and security holders known to the Company to
beneficially own more than 5% of the Company's outstanding Common Stock.
FOUNDER'S TRANSACTIONS
In October 1993, the Company issued 500 shares of Common Stock to Mr.
Steven A. Rogers, President and Chief Executive Officer of the Company, in
exchange for services rendered in connection with the formation of the Company
and an initial capital contribution of $1,000. In June 1994, the Company issued
a stock dividend of 1,299,500 shares of Common Stock to Mr. Rogers, who was then
the Company's sole stockholder. In December 1996, the Company granted to Mr.
Rogers under the Company's 1994 Stock Option Plan non-qualified options to
purchase 25,000 shares of Common Stock at an exercise price of $4.00 per share
and, in April 1997, granted options to purchase 50,000 shares of Common Stock
at an exercise price of $6.625 per share under the 1996 Plan.
RELATED PARTY LOANS
During the three-year period ending December 31, 1997, certain officers,
stockholders and members of management extended loans to the Company totaling
$714,000 in aggregate principal amount. The following is a discussion of loans
made to the Company by directors, executive officers, and 5% stockholders of the
Company, or members of the immediate family of any of the foregoing persons,
during the three-year period ending December 31, 1997 in which the amount
involved exceeds $60,000.
In April 1996, Mr. Clifford M. Kendall, the Chairman of the Board of
Directors of the Company, loaned the Company $100,000 in aggregate principal
amount. Interest accrues quarterly on the loan at a fixed rate of 7% per annum,
payable at maturity. The principal amount of and accrued interest on the loan
were repaid shortly following the Initial Offering. Additionally, in July 1997,
Mr. Kendall elected to exercise an option for 50,000 shares of Common Stock from
Mr. Steven A. Rogers at an exercise price of $2.00 per share.
PVR, a corporation of which Mr. John B. Torkelsen, a director of the
Company, serves as the President, loaned the Company an aggregate of $320,000
during 1995. The loan accrued interest at a fixed rate of 7% per annum. As an
inducement to PVR to extend the loan to the Company, the Company issued to Mr.
Torkelsen warrants to purchase 53,333 shares of Common Stock at an original
exercise price of $8.00 per share. In June 1995, PVR converted the outstanding
principal amount of and the accrued interest on the loan to Common Stock and
warrants. In connection with the loan conversion, Mr. Torkelsen invested an
additional $160,000 in the Company. In the loan conversion transaction, the
Company issued to Mr. Torkelsen 60,361 shares of Common Stock and warrants to
purchase 60,361 shares of Common Stock, to Mrs. Pamela R. Torkelsen 10,000
shares of Common Stock and warrants to purchase 10,000 shares of Common Stock,
and to PVR 10,000 shares of Common Stock and warrants to purchase 10,000 shares
of Common Stock. All Common Stock was issued at $6.00 per share, and all
warrants to purchase Common Stock were issued with an original exercise price of
$8.00 per share.
In July 1995, Mr. Robert H. Emery, Vice President, Administration and
Finance, loaned $35,000 to the Company. The loan accrued interest at a fixed
rate of 7% per annum. The loan was repaid in full in 1996. As an inducement to
extend the loan to the Company, the Company also issued to Mr. Emery in June
1995, warrants to acquire 5,833 shares of Common Stock. The warrants were issued
at an original exercise price of $8.00 per share and are exercisable for a
period of five years from the date of issuance.
Mr. Rogers, the founder, President and Chief Executive Officer and a
director of the Company, loaned the Company an aggregate of $30,000 during 1995
and an additional $70,000 during 1996. The loans accrued interest at a fixed
rate of 7% per annum. The principal amount of and accrued interest on the loans
were repaid in full in April 1997. As an inducement to extend the loans to the
Company, the Company also issued to Mr. Rogers warrants to acquire an aggregate
of 16,666 shares of Common Stock. The warrants were issued at an original
exercise price of $8.00 per share and are exercisable for a period of five years
from the date of issuance. The Company repaid the loans outstanding to Mr.
Rogers in full in April 1997 upon completion of the Initial Offering.
37
<PAGE> 40
EQUITY ISSUANCES
Private Placement Services Provided by Barington Capital Group,
L.P. Barington, an investment banking firm, of which Mr. Marc S. Cooper, a
director of the Company, serves as Vice Chairman, acted as the placement agent
for the Company in connection with the private placement of $2.0 million
aggregate principal amount of Bridge Notes and Bridge Warrants to purchase
500,000 shares of Common Stock at an exercise price of $3.30 per share (the
"Bridge Financing"). The Bridge Financing was completed in November 1996. As
partial compensation for services provided in that offering, Barington received
warrants to purchase up to 50,000 shares of Common Stock at an exercise price of
$3.30 per share, which warrants were forfeited upon consummation of the Initial
Offering. In addition, Barington also received a fee of $200,000 for placement
services provided in connection with the Bridge Financing, which fee represented
10% of the gross proceeds raised in the Bridge Financing, and was reimbursed for
certain other expenses.
Barington also acted as the placement agent of the Company in connection
with the private placement of 250,000 shares of Series A Convertible Preferred
Stock, par value $.01 per share (the "Series A Preferred Stock") and warrants to
purchase up to an additional 50,000 shares of Common Stock (the "Series A
Warrants") in December 1996 and 250,000 shares of Series A Preferred Stock and
Series A Warrants to purchase 50,000 shares of Common Stock in January 1997 for
aggregate gross proceeds to the Company of $2.0 million. As compensation for
services provided in that private placement, the Company paid Barington a fee of
$140,000, which fee represented 7% of the gross proceeds raised in the private
placement.
Financial Advisory Services. The Company has retained Barington to provide
financial advisory services to the Company, including consulting services in
connection with possible mergers and acquisitions. As partial consideration for
such services, in December 1997, the Company granted to Barington options to
purchase 125,000 shares of Common Stock at an exercise price of $13.813 per
share, which was the fair market value of the Common Stock on the date of grant.
The options vest ratably over the two-year period over which such services are
to be provided.
Public Offerings. Barington acted as an underwriter of the Follow-on
Offering and was the underwriter of the Initial Offering, for which it received
underwriting discounts and commissions totaling approximately $1.6 million. In
addition, as compensation for the Initial Offering, Barington received a
non-accountable expense allowance of $341,550, and was issued the Barington
Option to acquire 180,000 shares of Common Stock of the Company at the Initial
Offering. This Barington option is exercisable for a period of five years
beginning on April 8, 1997 at an exercise price of $9.08 per share of Common
Stock.
Private Placement Services Provided by PVR Securities, Inc. PVR
Securities, a corporation of which Mr. Torkelsen is the President, acted as the
placement agent of the Company in connection with the private placements in June
1995 and August 1996, of 50 units and 19.11 units, respectively, to accredited
investors (the "PVR Investors"). Each unit sold consisted of 5,000 shares of
Common Stock and warrants to purchase an additional 5,000 shares of Common Stock
at $8.00 per share. In the private placement conducted by PVR Securities, the
Company issued 345,536 shares of Common Stock and warrants to acquire 345,536
shares of Common Stock at an exercise price of $8.00 per share. Aggregate gross
proceeds to the Company from the offering were $2,073,222.
As partial compensation for services provided in the private placement, the
Company issued to Mr. Torkelsen, President of PVR Securities, warrants to
purchase an aggregate of 69,106 shares of Common Stock. Of such warrants, the
exercise price for warrants to acquire 34,553 shares of Common Stock was
originally $6.60 per share, and the exercise price for warrants to acquire
34,553 shares of Common Stock was originally $8.80 per share (the "PVR
Warrants"). In addition, as compensation for financial advisory and other
services rendered in connection with the private placement, the Company paid PVR
Securities a fee of approximately $150,000.
Each PVR Investor was also given the opportunity to purchase from Mr.
Rogers, the Chief Executive Officer and President of the Company, 2,500 shares
of Common Stock for each unit purchased in the private placement, at a price of
$2.00 per share. In connection with such transaction, PVR Investors in the
private placement purchased an aggregate of 172,583 shares of Common Stock from
Mr. Rogers for aggregate consideration of $345,166.
38
<PAGE> 41
As part of the private placement of securities managed by PVR Securities,
between May 1995 and May 1996, the Company also issued to certain investors (the
"Debt Inducement Investors"), in a private placement, warrants to purchase an
aggregate of 102,332 shares of Common Stock at an exercise price of $8.00 per
share, in order to induce such investors to extend loans to the Company. These
debt transactions were considered by the Company to be part of its overall
financing activities during this time period, and were necessary because the
equity financing being raised in the PVR Offering was not obtained as quickly as
originally contemplated by the Company.
Private Placement of Series A Preferred Stock. In December 1996, the
Company issued and sold to Applewood 250,000 shares of Series A Preferred Stock,
which converted to Common Stock on a one-to-one basis upon the Initial Offering,
and Series A Warrants to purchase 50,000 shares of Common Stock at an exercise
price of $4.00 per share for aggregate gross proceeds of $1,000,000.
In January 1997, the Company issued and sold to Acorn 250,000 shares of
Series A Preferred Stock, which converted to Common Stock on a one-to-one basis
upon the Initial Offering, and Series A Warrants to purchase 50,000 shares of
Common Stock at an exercise price of $4.00 per share, for aggregate gross
proceeds of $1,000,000. Mr. Torkelsen was the President and Manager of the
general partner of Acorn. In September 1997, Acorn distributed its holdings of
the Company's securities to PVR. PVR served as the investment advisor to Acorn.
Warrant Exchange. In January 1997, the Company offered to certain
investors the opportunity to exchange existing warrants to purchase shares of
Common Stock in the Company for new warrants to purchase shares of Common Stock.
The purpose of the warrant exchange was to induce such investors to enter into
lock-up arrangements with Barington, the underwriter of the Initial Offering,
and into agreements consolidating such investors' registration rights with those
granted by the Company to other investors, and so that the investment by such
investors in the Company would be on terms and conditions that more closely
reflect the terms and conditions upon which other investors invested in the
Company during a comparable time period.
For the investors who participated in the warrant exchange transaction, the
effect of the warrant exchange was to cause investors who previously had
purchased shares of Common Stock in the Company to purchase such shares at an
effective purchase price of $4.00 per share, and to cause investors who
previously had received warrants to purchase shares of Common Stock in the
Company, to exchange such warrants for warrants with an exercise price of $4.00
per share.
As a result of the warrant exchange transaction, the Company issued an
aggregate of 165,267 shares of Common Stock and new warrants to purchase an
aggregate of 336,707 shares of Common Stock at an exercise price of $4.00 per
share. As described in detail below, the new warrants to purchase 336,707 shares
of Common Stock consist of (i) warrants to purchase 165,269 shares of Common
Stock issued to PVR Investors, (ii) warrants to purchase 69,106 shares of Common
Stock issued to Mr. Torkelsen, a director of the Company and President of PVR
Securities, and (iii) warrants to purchase 102,332 shares of Common Stock issued
to the Debt Inducement Investors. The Company did not receive any additional
cash proceeds or consideration other than the securities exchanged by the
investors in the warrant exchange.
In January 1997, the Company offered to each of the PVR Investors the
opportunity to exchange their existing warrants, representing the right to
purchase an aggregate of 345,536 shares of Common Stock at an exercise price of
$8.00 per share, for new warrants representing the right to purchase
approximately one-half of the number of shares of Common Stock at an exercise
price of $4.00 per share. In exchange for warrants to purchase an aggregate of
330,536 shares of Common Stock at an exercise price of $8.00 per share, the
Company issued warrants to purchase an aggregate of 165,269 shares of Common
Stock at an exercise price of $4.00 per share. One PVR Investor holding warrants
to purchase 15,000 shares of Common Stock chose not to participate in the
warrant exchange transaction and to retain such warrants with an exercise price
of $8.00 per share. As part of the warrant exchange, each PVR Investor who
accepted the Company's offer also was issued by the Company an additional 2,500
shares of Common Stock for each unit purchased in the PVR Offering, for no
additional consideration. The Company issued an aggregate of 165,267 additional
shares of Common Stock to the PVR Investors in the warrant exchange. Each PVR
Investor also agreed to sign an agreement with the Company relating to
registration rights and a lock-up agreement with Barington, the underwriter of
the Initial Offering. In connection with the Follow-On Offering, Barington
conveyed to NationsBanc Montgomery Securities all rights and responsibilities
under this agreement.
39
<PAGE> 42
As part of the warrant exchange, in order to restructure the transaction in
which the PVR Investors originally purchased shares of Common Stock from Mr.
Rogers at a below-market price per share to terms and conditions more closely
reflecting market terms and conditions, each PVR Investor who had originally
purchased shares of Common Stock from Mr. Rogers at a purchase price of $2.00
per share, also was required to pay Mr. Rogers an additional $2.00 for each
share originally purchased from him. Mr. Rogers received an aggregate of
$340,166 from PVR Investors in connection with the warrant exchange.
Also as part of the warrant exchange, the Company issued to Mr. Torkelsen,
a director of the Company and President of PVR Securities, new warrants to
purchase an aggregate of 69,106 shares of Common Stock at $4.00 per share, in
exchange for the warrants to purchase 34,553 shares of Common Stock at an
exercise price of $6.60 per share, and the warrants to purchase 34,553 shares of
Common Stock at an exercise price of $8.80 per share, previously issued to Mr.
Torkelsen as compensation for services in the private placement managed by PVR
Securities.
As part of the warrant exchange, the Company also exchanged warrants to
purchase an aggregate of 102,332 shares of Common Stock held by the Debt
Inducement Investors at an exercise price of $8.00 per share, for warrants to
purchase 102,332 shares at an exercise price of $4.00 per share.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors and principal stockholders and their affiliates will be
approved by at least a majority of the Board of Directors, including a majority
of the independent and disinterested members of the Board of Directors, and will
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith or are incorporated herein
by reference, as indicated.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (Incorporated by reference to Exhibit 3.1 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)
3.2 Amended and Restated Bylaws of the Registrant (Incorporated by
reference to Exhibit 3.2 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)
3.3 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)
3.4 Form of Warrant to Purchase Common Stock of the Registrant,
issued in connection with the private placement 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)
40
<PAGE> 43
3.5 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)
3.6 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)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6
4.2 Specimen certificate evidencing shares of Common Stock of the
Registrant (Incorporated by reference to Exhibit 4.2 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)
10.1 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 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 Registrant and Steven A.
Rogers (Incorporated by reference to Exhibit 10.3 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)
10.4 Form of Consulting Agreement by and between the Registrant and
Barington Capital Group, L.P. (Incorporated by reference to Exhibit
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 Registrant (Incorporated by reference to
Exhibit 10.5 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)
10.6 Letter Agreement, dated December 5, 1995, by and among PVR
Securities, Inc., the Registrant, Steven A. Rogers and John B.
Torkelsen (Incorporated by reference to Exhibit 10.6 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)
10.7 Voting Agreement, dated December 19, 1996, by and among the
Registrant, Steven A. Rogers, Applewood Associates, L.P. and Acorn
Technology Partners, L.P. (Incorporated by reference to Exhibit 10.7
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)
10.8 Form of Stock Option Agreement, dated December 18, 1997, by
and between the Company and Barington Capital Group, L.P.
11 Statement regarding calculation of net income per share
41
<PAGE> 44
21 Subsidiaries of the Company (Incorporated by reference to
Exhibit 21 forming a part of the Company's Registration Statement on
Form SB-2 (File No. 333-35913) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended)
27 Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended December 31, 1997.
42
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunder duly authorized.
OBJECTIVE COMMUNICATIONS, INC.
(Registrant)
By: /s/ Steven A. Rogers
--------------------------------------
Steven A. Rogers
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Steven A. Rogers President and Chief Executive March 31, 1998
- ---------------------------------------- Officer, and Director
Steven A. Rogers (Principal Executive Officer)
/s/ Robert H. Emery Vice President of March 31, 1998
- ---------------------------------------- Administration and Finance and
Robert H. Emery Secretary (Principal Financial
and Accounting Officer)
/s/ Clifford M. Kendall Chairman of the Board of March 31, 1998
- ---------------------------------------- Directors
Clifford M. Kendall
/s/ Anthony M. Agnello Director March 31, 1998
- ----------------------------------------
Anthony M. Agnello
/s/ Robert L. Barnett Director March 31, 1998
- ----------------------------------------
Robert L. Barnett
/s/ Donald W. Barrett Director March 31, 1998
- ----------------------------------------
Donald W. Barrett
/s/ Eugene R. Cacciamani Director March 31, 1998
- ----------------------------------------
Eugene R. Cacciamani
/s/ Marc S. Cooper Director March 31, 1998
- ----------------------------------------
Marc S. Cooper
/s/ Lincoln D. Faurer Director March 31, 1998
- ----------------------------------------
Lincoln D. Faurer
</TABLE>
43
<PAGE> 46
<TABLE>
<S> <C> <C>
/s/ Richard T. Liebhaber Director March 31, 1998
- ----------------------------------------
Richard T. Liebhaber
/s/ Roy C. Nash Director March 31, 1998
- ----------------------------------------
Roy C. Nash
/s/ John B. Torkelsen Director March 31, 1998
- ----------------------------------------
John B. Torkelsen
</TABLE>
571804 v3
44
<PAGE> 1
EXHIBIT 10.8
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement"), dated as of this 18th
day of December, 1997, is made by and between Objective Communications, Inc., a
Delaware corporation (the "Company"), and Barington Capital Group, L.P.
("Barington" or the "Holder").
RECITALS
WHEREAS, the Company has engaged the Holder to provide consulting and
related investment banking services to the Company in connection with its
evaluation of potential merger and acquisition candidates from time to time
during the term of this Agreement;
WHEREAS, in consideration of the services to be provided to the
Company during the term of this Agreement, the Company has agreed to grant to
the Holder an option to purchase shares of the common stock of the Company, par
value $0.01 per share (the "Common Stock"), on the terms set forth below.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements and covenants contained herein, and for other good and valuable
consideration the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Consulting Services to be Provided by the Holder. For a
period of two (2) years from the date of this Agreement, Barington agrees to
provide, from time to time and at the request of the Company, consulting and
related investment banking services to the Company in connection with its
evaluation of potential merger and acquisition candidates.
2. Grant of Stock Option. For and in consideration of the
services to be provided to the Company, effective as of December 18, 1997 (the
"Effective Date"), the Company grants Barington an option (the "Option") to
purchase One Hundred Twenty Five Thousand (125,000) shares of Common Stock.
Such shares, together with any additional shares of Common Stock issued in
respect thereof as a result of any stock split or stock dividend, are referred
to below as the "Option Shares."
3. Exercise Price. The exercise price of the Common Stock
covered by the Option shall be $13.813 per share.
4. Vesting. The Option shall vest in two equal installments over
a two-year period on the first and second anniversaries of the Effective Date.
5. Manner of Exercise of Option.
The Option shall be exercisable in whole or in part. The Holder shall
exercise the Option by delivering to the Secretary of the Company a written
notice signed by the Holder which states the Holder's election to exercise the
Option and the number of shares of Common Stock the
<PAGE> 2
Holder elects to purchase. The Holder's notice shall be accompanied by payment
of the exercise price. The Holder may pay the exercise price of the Option
(i) in cash or by good check, (ii) by exchange of Common Stock having an
aggregate Fair Market Value (as defined in Section 9) equal to the cash
exercise price, or (iii) partly in cash (or by good check) and partly by
exchange of Common Stock. As soon as practicable following the payment to the
Company of the exercise price, the Company will deliver to the Holder a
certificate representing the Option Shares purchased and (unless the Option
Shares shall have been registered under the Securities Act of 1933, as amended)
bearing a legend to the effect that the shares represented thereby have not
been registered under the Securities Act of 1933 or state securities laws and
that the sale or other transfer of such shares may be made only in compliance
with the requirements of such Act and applicable state securities laws.
If the Holder desires to acquire Option Shares through a series of
exercises of the Option in which the Holder pays the exercise price by exchange
of Option Shares acquired from the previous exercise of the Option (referred to
below as "pyramiding"), the Holder shall give only one notice of election to
exercise the Option which states (i) the Holder's desire to exercise the Option
through pyramiding, (ii) the number of Option Shares to be acquired by cash
payment upon the initial exercise of the Option and (iii) the total number of
Option Shares the Holder desires to hold after the pyramiding is completed.
The Holder shall make a single payment to the Company in cash or by good check
of the exercise price for the initial exercise of the Option. The Company
shall issue the Holder a single certificate representing the total number of
Option Shares the Holder is entitled to receive following the pyramiding.
6. Term of Option. The Option shall continue in effect until it
terminates pursuant to Section 8.
7. Available Stock and Adjustment Provisions. The Company at all
times shall keep reserved as authorized but unissued shares the number of
shares of Common Stock required to satisfy the option rights of the Holder
under this Agreement.
Subject to any required action by the stockholders of the Company, the
number of shares of Common Stock covered by the Option and the exercise price
per share shall be proportionately adjusted to account for any increase or
decrease in the number of issued shares of Common Stock of the Company
resulting from a stock split (whether by subdivision or consolidation of
shares) or any payment of a stock dividend (but only on the Common Stock).
In the event of a change in the Common Stock of the Company as
presently constituted, which is limited to a change of all of its authorized
shares with par value into the same number of shares with a different par value
or without par value, the shares resulting from any such change shall be deemed
to be Common Stock within the meaning of this Agreement.
The foregoing adjustments shall be made by the Board of Directors of
the Company (the "Board"), whose determination in that respect shall be final,
binding and conclusive.
2
<PAGE> 3
Except as expressly provided in this Agreement, the Holder shall have
no rights by reason of any subdivision or consolidation of shares of stock of
any class or the payment of any stock dividend or any other increase or
decrease in the number of shares of stock of any class; the dissolution or
liquidation of the Company; the merger or consolidation of the Company with or
into any other corporation; the sale or other transfer of assets or stock of
the Company; or any issue by the Company of shares of stock of any class or
securities convertible into shares of stock of any class.
The grant of the Option pursuant to this Agreement shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, or to merge or consolidate, or to dissolve or liquidate, or to sell
or transfer all or any part of its business or assets.
8. Termination of Option.
The Option shall immediately and automatically terminate upon the
fifth (5th) anniversary of the Effective Date.
9. Valuation of Common Stock.
The fair market value of each share of Common Stock (the "Fair Market
Value") will be equal to the closing sale price of the Common Stock on the date
as of which the Fair Market Value is to be determined as reported on the
principal national exchange or quotation system on which the Common Stock is
then listed or, if the Common Stock is not then listed on any such exchange or
quotation system, as determined in good faith by the Board as of the end of
each fiscal year of the Company and, in the Board's discretion, at any other
time during any fiscal year. In its discretion, the Board may retain an
independent appraiser to assist it in the determination of the Fair Market
Value of the Common Stock. In the event that Fair Market Value is determined
by the Board of Directors of the Company, the Board's determination of the Fair
Market Value of the Common Stock shall be final, binding and conclusive.
10. Transfer Restrictions. Neither this Agreement nor the Option
is assignable or transferable by the Holder. Upon any attempt to transfer the
Option or any interest therein contrary to the provisions of this Agreement, or
to subject the Option or any interest therein to execution, attachment or
similar process, the Option shall immediately terminate and become null and
void.
11. Representations and Covenants of Holder. The Holder
represents and warrants to the Company that (i) it is an "accredited investor"
within the meaning of Rule 501 under the Securities Act of 1933, as amended;
(ii) that it is sophisticated and experienced in matters of equity investing in
general and in financial and business matters related to the business of the
Company in particular, capable of evaluating the merits and risks of an
investment in the Option and the Option Shares; (iii) that it is acquiring the
Option and will acquire the Option Shares for investment for its own account
and not with a view to any distribution thereof in violation of Federal or
applicable state securities laws. The Holder agrees that the sale or any other
disposition of the Option Shares will be made in compliance with Federal and
applicable state securities laws.
3
<PAGE> 4
12. Governing Law. This Agreement shall be governed by the laws
of the State of Delaware without reference to its principles of conflicts of
laws.
13. Successors and Assigns.
Subject to Section 10, this Agreement shall be binding on, and shall
inure to the benefit of, the parties and their respective heirs, legal
representatives, successors and assigns.
14. Severability. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, void or unenforceable, this
decision shall not affect the remainder of this Agreement. It is the intention
of the parties that the provision held invalid, void or unenforceable shall be
limited by the court to the extent necessary to make it valid and enforceable.
15. Notices.
Any notice or other communication under this Agreement shall be given
in writing and shall be deemed to have been given (i) on the delivery date, if
delivered personally to the party to whom it is directed, (ii) on the date
received, if sent by facsimile or express courier, or (iii) five (5) business
days after the mailing date, whether or not actually received, if sent by
registered or certified mail, return receipt requested, postage and charges
prepaid, addressed as follows:
If to the Company: Objective Communications, Inc.
50 International Drive
Portsmouth, New Hampshire 03801
Attn: Vice President, Finance and Administration
With a copy to: Ellen Canan Grady, Esq.
Shaw, Pittman, Potts & Trowbridge
1501 Farm Credit Drive
McLean, Virginia 22102
If to the Holder: Barington Capital Group, L.P.
888 Seventh Avenue
New York, New York 10019
Attn: Mr. Marc Cooper
Either party may change the address specified above by giving the
other party notice of the change in accordance with this Section.
16. Entire Agreement.
This Agreement contains the entire understanding between the parties
concerning the subject matter of this Agreement. There are no representations,
agreements, arrangements or undertakings, oral or written, between the parties
relating to the subject matter of this Agreement which are not fully expressed
herein, and all prior agreements, to the extent they pertain to the
4
<PAGE> 5
subject matter herein, are canceled and of no further force or effect. This
Agreement may not be amended or modified except in a writing signed by the
parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY:
OBJECTIVE COMMUNICATIONS, INC., a
Delaware corporation
By:
----------------------------------
Steven A. Rogers, President and Chief
Executive Officer
THE HOLDER:
BARINGTON CAPITAL GROUP, L.P. a
limited partnership
By:
----------------------------------
Marc Cooper, General Partner
5
<PAGE> 1
Objective Communications, Inc.
Weighted average shares Exhibit 11
<TABLE>
<CAPTION>
Years ended December 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding 1,565,438 1,711,413 1,896,577
Shares issued within one year of filing of initial
public offering 350,431 350,431
Options issued within one year of filing of initial
public offering 138,000 138,000
Warrants issued within one year of filing of initial
public offering 907,790 907,790
Convertible securities issued within one year of
filing of initial public offering 500,000 500,000
Weighted average of warrants outstanding 167,079
Weighted average shares issued for initial
public offering 1,316,712
Weighted average of conversion of preferred
stock to common stock 365,753
Weighted average shares issued for overallotment
of initial public offering 182,712
Weighted average shares issued for secondary
offering 145,206
Weighted average of options exercised 2,110
---------- ---------- ----------
3,461,659 3,607,634 4,076,149
========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,199,434
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,700,935
<CURRENT-ASSETS> 20,575,658
<PP&E> 3,093,602
<DEPRECIATION> 787,554
<TOTAL-ASSETS> 23,082,700
<CURRENT-LIABILITIES> 4,153,375
<BONDS> 0
0
0
<COMMON> 56,769
<OTHER-SE> 18,815,360
<TOTAL-LIABILITY-AND-EQUITY> 23,082,700
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,586,294
<LOSS-PROVISION> 36,423
<INTEREST-EXPENSE> 475,866
<INCOME-PRETAX> (11,586,294)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,586,294)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,586,294)
<EPS-PRIMARY> (2.84)
<EPS-DILUTED> 0
</TABLE>
