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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission file number 000-22235
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Objective Communications, Inc.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 54-1707962
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
50 International Drive
Portsmouth, NH 03801
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(Address of Principal Executive Offices)
(603) 334-6700
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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APPLICATION ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of August 12, 1998: 5,741,035
Transitional Small Business Disclosure Format (check one):
Yes No X
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Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
----------------------- -----------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,643,783 $ 18,199,434
Inventory 8,131,039 1,700,935
Other current assets 537,540 675,289
---------------- ---------------
Total current assets 11,312,362 20,575,658
Property and equipment, net 4,209,042 2,306,048
Trademarks and patents 167,690 108,475
Other assets 109,966 92,519
---------------- ---------------
$ 15,799,060 $ 23,082,700
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 167,348 $ -
Accounts payable 7,352,538 3,077,723
Deferred revenue 94,918 133,180
Accrued liabilities 614,457 752,018
Obligations under capital lease, current portion 462,030 190,454
---------------- ---------------
Total current liabilities 8,691,291 4,153,375
Obligations under capital lease, less current portion 129,980 57,196
---------------- ---------------
Total liabilities 8,821,271 4,210,571
Stockholders' equity:
Preferred Stock, par value $.01, 250,000 shares authorized; none
issued and outstanding at June 30, 1998 and December 31, 1997
Common stock, par value $.01, 10,000,000 shares authorized;
5,741,035 and 5,676,850 issued and outstanding at June 30, 1998
and December 31, 1997, respectively 57,410 56,769
Additional paid-in capital 36,462,909 35,960,466
Deficit accumulated during development stage (29,542,530) (17,145,106)
---------------- ---------------
Total stockholders' equity 6,977,789 18,872,129
---------------- ---------------
$ 15,799,060 $ 23,082,700
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Statements of Operations
(Unaudited)
-----------
<TABLE>
<CAPTION>
For the three months ended For the six months ended For the period
June 30, June 30, October 5, 1993
(Date of inception) to
1998 1997 1998 1997 June 30, 1998
---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ 110,505 $ - $ 606,165
Cost of sales - - 64,304 - 313,679
--------------- --------------- --------------- --------------- ----------------
Gross margin - - 46,201 - 292,486
--------------- --------------- --------------- --------------- ----------------
Operating expenses:
Research and development 4,616,462 870,706 7,233,050 1,330,640 15,956,440
Selling, general and administrative 2,697,879 814,020 4,439,223 1,475,885 11,027,848
Depreciation and amortization 572,043 212,821 970,050 322,679 2,022,286
Other - - - - 15,997
--------------- --------------- --------------- --------------- ----------------
Total operating expenses 7,886,384 1,897,547 12,642,323 3,129,204 29,022,571
--------------- -------------- --------------- -------------- --------------
Loss from operations (7,886,384) (1,897,547) (12,596,122) (3,129,204) (28,730,085)
Interest (income) expense, net (32,659) 218,050 (198,698) 428,437 405,548
--------------- --------------- --------------- --------------- --------------
Net loss $ (7,853,725) $ (2,115,597) $ (12,397,424) $ (3,557,641) $ (29,135,633)
============== ============== ============== ============== ===============
Net loss per common share - basic
and diluted $ (1.37) $ (0.49) $ (2.18) $ (1.11)
============== ============== ============== ==============
Weighted average shares
outstanding - basic and diluted 5,715,359 4,346,569 5,696,211 3,196,822
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the period
October 5, 1993
For the six months ended June 30, (Date of inception)
1998 1997 to June 30, 1998
---- ---- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($12,397,424) ($3,557,641) ($29,135,633)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 970,051 322,679 2,022,287
Interest expenses related to issuance of warrants - 385,000 706,789
Non-cash compensation expense 281,844 340,166 622,010
Stock issued in exchange for services rendered - - 55,834
Changes in operating assets and liabilities:
Accounts receivable - 49,131 -
Other current assets 367,812 (92,826) (307,477)
Inventory (6,430,104) (81,919) (8,131,039)
Trademarks and patents (64,071) (64,848) (183,766)
Other assets (17,447) - (105,299)
Accounts payable 4,274,815 (427,852) 7,352,538
Deferred revenue (38,262) - 94,918
Accrued liabilities (137,561) (44,175) 614,457
------------- ------------- -------------
Net cash used in operating activities (13,190,347) (3,172,285) (26,394,381)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (3,636,549) (396,380) (6,329,042)
Sale of leasehold improvements 1,470,000 - 1,470,000
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Net cash used in investing activities (2,166,549) (396,380) (4,859,042)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from the issuance of Series A Preferred Stock - 962,203 1,810,643
Net proceeds from the issuance of common stock 221,240 9,510,576 32,565,923
Net proceeds from the issuance of notes payable - - 2,550,000
Repayments of notes payable (62,715) (2,300,000) (2,612,715)
Proceeds from the issuance of notes payable to related parties - (199,000) 716,223
Repayment of notes payable to related parties - - (364,000)
Debt issue costs - - (258,131)
Principal payments on capital leases (357,280) (9,294) (510,737)
------------- ------------- -------------
Net cash provided by (used in) financing activities (198,755) 7,964,485 33,897,206
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (15,555,651) 4,395,820 2,643,783
Cash and cash equivalents, at beginning of period 18,199,434 623,241 -
------------- ------------- -------------
Cash and cash equivalents, at end of period $ 2,643,783 $ 5,019,061 $ 2,643,783
============= ============= =============
Supplemental disclosure of non-cash investing and
financing activities:
Current asset financed by issuance of note payable $ 230,063
Capital lease obligations $ 701,640
</TABLE>
The accompanying notes are an integral part of these financial statements.
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OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes To Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements as of June
30, 1998 and for the three and six months ended June 30, 1998 and 1997 have
been prepared in accordance with generally accepted accounting principles
for interim financial information and instructions to Form 10-QSB and
Article 10 of Regulation S-X. In the opinion of management, such financial
statements contain all adjustments, consisting only of normal recurring
entries, necessary to present fairly the financial position of Objective
Communications, Inc. (the "Company") as of June 30, 1998 and the results of
operations for the three and six months ended June 30, 1998 and 1997. The
interim financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended and as of
December 31, 1997 included in the Company's Annual Report on Form 10-KSB,
dated March 31, 1998, as filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended. Certain prior year
items have been reclassified to conform to the current period's format. The
results of operations for the three and six months ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the
entire year.
2. Net Loss Per Share
The Company adopted Statement of Financial Accounting Standard
("SFAS") No. 128, "Earnings per Share," which modifies the calculation of
earnings (loss) per share. Net loss per common share is based on the
weighted average number of common shares and dilutive common share
equivalents outstanding during the periods presented. Basic earnings (loss)
per share are calculated by dividing net income (loss) by the weighted
average shares outstanding. Diluted earnings (loss) per share reflect the
dilutive effect of stock options and warrants and are presented only if the
effect is not anti-dilutive.
3. Income Taxes
The Company did not record a provision for income taxes for the three
and six months ended June 30, 1998 and 1997 since the Company has had net
operating losses during each of those periods. The Company recorded a full
valuation allowance against the net deferred tax asset generated primarily
from its net operating loss carryforwards.
4. Accounting Standards
In June 1997, the Financial Accounting Standard Board issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 130 requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted the new standard effective for
the three months ended March 31, 1998. There were no items of comprehensive
income for the first two quarters of the fiscal year ended December 31,
1998. SFAS No. 131 specifies new guidelines for determining a company's
operating segments and related requirements for disclosure. The Company is
in the process of evaluating the impact of the new standard on the
presentation of the financial statements and the disclosures therein. The
Statement will become effective for fiscal years beginning after December
15, 1997. The Company will adopt the new standard for the fiscal year
ending December 31, 1998.
In June 1998, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives
and hedging activities. The new standard requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The
Company will adopt the new standard for the fiscal year ending December 31,
2000. Management is evaluating the impact SFAS No. 133 may have on the
Company's financial statements.
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5. Inventory consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw Material $5,507,718 $901,548
Work in Progress 58,361 24,272
Finished Goods 2,564,960 775,115
--------- -------
$8,131,039 $1,700,935
========== ==========
</TABLE>
6. Sale of Leasehold Improvements
In the fourth quarter of 1997, the Company reached an agreement with the
Pease Development Authority to enter into a lease agreement for additional
office space and, in exchange for a favorable rental rate, the Company agreed
to fund significant improvements to the facility. Through June 1998 the Company
had invested in excess of $1.8 million in improvements to the new offices. In
June 1998 the Company and the Pease Development Authority modified the previous
agreement in that the Pease Development Authority agreed to purchase $1,470,000
of the leasehold improvements in consideration of the Company's agreement to
adjust the previously agreed rental rate to a market rate. In June 1998 the
Company received the proceeds from that sale, less accrued rent of $83,870.
7. Subsequent Events
The Company has experienced delays in completing product development. The
Company shipped the first VidPhone(R) systems in the fourth quarter of 1997 and
shipments continued during the first quarter of 1998. However, the products
shipped did not achieve complete customer functionality, and the Company has
continued to work on product functionality and enhancements. During late July
and early August 1998, at the request of the Company, 27 VidPhone(R) systems
were returned to the Company by a reseller for upgrade. The Company intends to
upgrade the VidPhone(R) systems at its headquarters and return the switches to
inventory, canceling a significant portion of the reseller's order. The cost of
the return and upgrade, which will be paid for by the Company, is expected to be
in the range of $1,700 per system, all of which will be incurred during the
third quarter of 1998. On August 12, 1998, the Company announced the
introduction of Release 1.4, which the Company believes includes broadcast and
video conferencing functionality that will meet current customers' requirements.
Following the introduction of Release 1.4 and the related upgrade of existing
VidPhone(R) systems, the Company believes that the VidPhone(R) system will
achieve acceptable customer functionality.
On July 1, 1998, the Company reduced its personnel to approximately 90 from
approximately 130. No severance was accrued due to the immateriality of the
amount. The Company also closed its Northern Virginia sales office and accrued
$120,000 to cover the costs of cancellation of plans to lease new sales offices
in the Washington, D.C. metropolitan area. On July 6, 1998, the Company
announced that James F. Bunker has been elected President and Chief Executive
Officer of the Company. Mr. Bunker is an experienced industry executive who has
driven successful corporate turnarounds at several technology companies
including General Instrument and M/A-COM. Mr. Steven A. Rogers, who is the
founder of the Company and its former President and CEO, was elected as the
Company's Chief Technical Officer and Vice President Engineering, as the Company
continues to focus on product development and meeting customer expectations
regarding functionality.
On July 13, 1998, the Company announced that it had raised $3.125 million
in gross proceeds from a private placement of 5% Convertible Debentures due 2003
(the "5% Convertible Debentures"), $625,000 of which was purchased by certain
directors, executive officers and affiliated investors of the Company. The
proceeds of the financing will be used for working capital and general corporate
purposes. The Company believes that its existing resources will be sufficient to
fund operations through October 1998. The Company currently is seeking
additional sources of debt or equity financing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-QSB
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All such forward-looking statements
involve known and unknown risks, uncertainties or other factors which may cause
actual results, performance or achievement of the Company to be materially
different from any future results, performance or achievement expressed or
implied by such forward-looking statements. Factors that might cause such a
difference include risks and uncertainties related to product development,
competition and competitive products, the Company's dependence on the emerging
market for video broadcast, retrieval and conferencing, development of
additional products, protection of the Company's intellectual property, the
Company's limited marketing experience, limited number of customers, and need
for additional personnel, as well as risks and uncertainties associated with
the Company's growth strategy, technological changes affecting the Company
and competitive factors affecting the Company.
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The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto appearing elsewhere in this Quarterly
Report on Form 10-QSB.
OVERVIEW
Objective Communications designs, develops and markets the first high
quality, cost-effective video network system that supports video broadcast,
retrieval of stored video and multi-party conferencing to and from a desktop
personal computer or conference room over the same wire used by the
telephone(s). The Company was incorporated in October 1993. The Company's
operations prior to 1998 related primarily to organizational activities,
including research and development, the development of its initial products,
recruiting management and technical personnel, and raising capital. During 1998,
the Company has continued to focus on product development and enhancing its
sales and marketing capabilities, while continuing to recruit management and
technical personnel, particularly to support its sales and marketing efforts.
To date, the Company has not generated substantial revenues from the sale
of its products and services. The Company did not earn any revenues from the
sale of products or services during 1997, and recognized only $110,505 in
revenues from the sale of products during the first half of 1998. The Company
currently expects that it will recognize some operating revenues in the second
half of 1998. However, it is unable to predict when such revenues will be
recognized or the amount that will be recognized, which will depend on customer
acceptance of products shipped to date and certain other factors, including new
orders and the timing of customer payments, which are beyond the control of the
Company.
In addition, the Company expects to incur substantial operating expenses in
the future to support its product development efforts, enhance its sales and
marketing capabilities and organization and for other selling, general and
administrative expenses. Through June 30, 1998, the Company had cumulative
losses since inception of approximately $29.1 million. The Company expects to
incur additional operating losses for the foreseeable future, and does not
expect that its products will achieve initial customer acceptance until the
second half of 1998. The Company's results of operations may vary significantly
from quarter to quarter during this period of product introduction and initial
sales.
The Company has experienced delays in completing product development. The
Company shipped the first VidPhone(R) systems in the fourth quarter of 1997 and
shipments continued during the first quarter of 1998. However, the products
shipped did not achieve complete customer functionality, and the Company has
continued to work on product functionality and enhancements. During late July
and early August 1998, at the request of the Company, 27 VidPhone(R) systems
were returned to the Company by a reseller for upgrade. The Company intends to
upgrade the VidPhone(R) systems at its headquarters and return the switches to
inventory, canceling a significant portion of the reseller's order. The cost of
the return and upgrade, which will be paid for by the Company, is expected to be
in the range of $1,700 per system, all of which will be incurred during the
third quarter of 1998. On August 12, 1998, the Company announced the
introduction of Release 1.4, which the Company believes includes broadcast and
video conferencing functionality that will meet current customers' requirements.
Following the introduction of Release 1.4 and the related upgrade of existing
VidPhone(R) systems, the Company believes that the VidPhone(R) system will
achieve acceptable customer functionality.
The Company's sales and marketing efforts are focused on promotional
materials and programs that develop distribution channels and that generate
revenue. The Company has implemented a Sales Tools and Training Program for
resellers, and has completed training for six new Value Added Resellers ("VARs")
in 1998. In addition, the Company has initiated joint marketing programs with
resellers. For instance, the Company provided support to Unisys, a strategic
partner, at six trade shows and with joint radio and print advertisements.
The Company has made considerable progress since the beginning of 1998 in
securing new relationships and product evaluation agreements with prospective
corporate customers. Nine VARs have signed reseller agreements, bringing the
total number of resellers and strategic alliances to thirteen.
The Company also has implemented new cash management practices throughout
the Company to reduce corporate expenses. On July 1, 1998, the Company reduced
its personnel to approximately 90 from approximately 130, and closed its
Northern Virginia sales office. To date, the Company has financed operations
principally through public and private sales of debt and equity. On July 13,
1998, the Company announced that it had raised $3.125 million in gross proceeds
from a private placement of 5% Convertible Debentures due 2003 (the "5%
Convertible Debentures"), $625,000 of which was purchased by certain directors,
executive officers and affiliated investors of the Company. The proceeds of the
financing will be used for working capital and gen-
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<PAGE> 8
eral corporate purposes. The Company believes that its existing resources
will be sufficient to fund operations through October 1998. The Company
currently is seeking additional sources of debt or equity financing.
The Company also recently announced that James F. Bunker has been
elected President and Chief Executive Officer of the Company. Mr. Bunker is
an experienced industry executive who has driven successful corporate
turnarounds at several technology companies including General Instrument
and M/A-COM. Mr. Steven A. Rogers, who is the founder of the Company and
its former President and CEO, was elected as the Company's Chief Technical
Officer and Vice President Engineering, as the Company continues to focus
on product development and meeting customer expectations regarding
functionality.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Revenues. The Company did not recognize any revenues in the three
months ended June 30, 1998 or in the three months ended June 30, 1997. In
each period, the Company devoted all of its resources to the development
and production of the VidPhone(R) system and related software products. The
Company did not sell any products during the three months ended June 30,
1998 or 1997.
The Company did not incur any cost of sales in the three months ended
June 30, 1998 or 1997, as the Company did not have any sales in either
period.
Research and Development. Research and development expenses increased
by approximately $3.7 million, or 430%, for the three months ended June 30,
1998, to approximately $4.6 million as compared to $871,000 for the three
months ended June 30, 1997. Of the approximately $3.7 million increase,
approximately $1.2 million was due to hiring of technical staff,
approximately $1.4 million was due to increased use of materials and
equipment, approximately $600,000 represented write-off of first quarter
1998 capitalized production department costs, $300,000 was related to an
increase in the reserve for inventory obsolescence, and approximately
$150,000 of the increase was due to increased levels of spending in
connection with final product design. Research and development expenses
include the costs associated with all personnel, materials and contract
personnel engaged in research and development for the Company, as well as
an allocated portion of overhead expenses, such as rent, telephone, and
office supplies.
In July 1998, as part of the implementation of a new cash management
program and to reduce expenses, the Company reduced full-time personnel to
approximately 90 persons from approximately 130. The reduction in force
included approximately 13 technical personnel, which will reduce personnel-
related research and development costs by approximately $110,000 annually
beginning in August 1998. Although technical personnel costs may decrease,
the Company will continue developing, testing, and demonstrating its
product line, and, accordingly, research and development costs will
continue to be incurred.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $1.9 million, or 231%,
in the three months ended June 30, 1998 to approximately $2.7 million from
approximately $814,000 during the same period in 1997. Customer support
costs increased from approximately $11,000 to approximately $308,000, or
approximately $297,000, due primarily to increased customer support
staffing levels and related travel expenses to support installations at
customer sites and at demonstration and evaluation sites. Sales and
marketing costs increased from approximately $344,000 to approximately $1.5
million, or approximately $1.2 million. The increase consisted of
approximately $360,000 in higher personnel costs, approximately $245,000 in
higher costs associated with tradeshow attendance, approximately $73,000 in
increased travel and entertainment costs, and approximately $199,000 in
sales and promotional materials expenses. Also included in the three month
period were approximately $133,000 of expenses associated with the
cancellation of plans to open a new sales office in the metropolitan
Washington, D.C. area. General and administrative costs increased
approximately $386,000, or 84%, in the three months ended June 30, 1998
compared to the same period in 1997. Approximately $110,000 of the increase
is related to increased staffing levels, approximately $192,000 is
attributable to increased professional fees and investor relations costs
and an additional non-cash charge of approximately $141,000 is related to
investment consulting in the period ending June 30, 1998. These increased
costs were partially offset by decreases in relocation, recruiting, and
travel costs.
Depreciation and Amortization. Depreciation and amortization increased
approximately $359,000 to $572,000 in the second quarter of 1998 from
approximately $213,000 in the second quarter of 1997. The increase is due
primarily to increased levels of fixed assets and capitalized leases and,
to a lesser extent, increased levels of intellectual property held by the
Company. Approximately $209,000 related to the amortization of debt
issuance costs was included in the total for the second quarter 1997.
Net Interest Income. The Company recorded approximately $33,000 of net
interest income during the three months ended June 30, 1998 compared to
incurring approximately $218,000 of interest expense in the three months
ended June 30, 1997. The approximately $65,000 in interest income recorded
in the three months ended June 30, 1998, earned on invested cash balances,
was partially offset by approximately $32,000 of interest expense, incurred
primarily in connection with capital lease obligations and the note
payable. Interest expense for the three months ended June 30, 1997 included
a write-off of approximately $190,000 of unamortized debt discount
representing the fair value of warrants issued to holders of bridge notes
issued in connection with an earlier financing. Interest income during that
period was earned on the proceeds of the Initial Public Offering concluded
in April,
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<PAGE> 9
1997.
Net Loss. As a result of the foregoing factors, the net loss increased
by approximately $5.7 million, or 271%, to approximately $7.9 million for
the three months ended June 30, 1998 from approximately $2.1 million during
the three months ended June 30, 1997.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Revenues. The Company recognized revenues of approximately $111,000 in
the six months ended June 30, 1998. The Company did not recognize any
revenues during the six months ended June 30, 1997. The revenues were
recognized in the first quarter of 1998 and related to equipment shipments
made in the fourth quarter of 1997 that were accepted by the customer and
for which the Company received full payment. No additional revenues were
recognized in the second quarter of 1998. During the first six months of
1997, the Company devoted all of its resources to the development and
production of the VidPhone(R) system and related software products and did
not sell any products during such period.
Cost of sales in the six months ended June 30, 1998 were approximately
$64,000. The Company did not incur any cost of sales in the six months
ended June 30, 1997 as there were no sales in the period. Cost of sales
includes costs of materials, labor, and allocated manufacturing overhead
associated with the manufacture of equipment.
Gross margin on sales as a percentage of total revenues was
approximately $46,000, or 41.8%, in the six months ended June 30, 1998.
Research and Development. Research and development expenses increased
by approximately $5.9 million, or 443%, for the six months ended June 30,
1998, to approximately $7.2 million as compared to $1.3 million for the six
months ended June 30, 1997. Approximately $2.2 million of the increase was
due to hiring of technical staff, approximately $2.6 million was due to
increased use of materials and equipment, $400,000 was related to an
increase in the reserve for inventory obsolescence, and approximately
$420,000 of the increase was due to increased levels of spending in
connection with final product design. Research and development expenses
include the costs associated with all personnel, materials and contract
personnel engaged in research and development for the Company, as well as
an allocated portion of overhead expenses, such as rent, telephone, and
office supplies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $3.0 million, or 201%,
in the six months ended June 30, 1998 to approximately $4.4 million from
approximately $1.5 million during the same period in 1997. Customer support
costs increased from approximately $26,000 to approximately $584,000, or
approximately $558,000, due primarily to increased customer support
staffing levels and related travel expenses to support installations at
customer sites and at demonstration and evaluation sites. Sales and
marketing costs increased from approximately $434,000 to $2.3 million, or
approximately $1.9 million. The increase consisted of approximately
$647,000 in increased personnel costs, approximately $304,000 in higher
costs associated with tradeshow attendance, approximately $88,000 in
increased travel and entertainment costs, and approximately $223,000 in
increased sales and promotional expenses. Also included in the six month
period were approximately $133,000 of expenses associated with the
cancellation of plans to open a new sales office in the metropolitan
Washington, D.C. area. General and administrative costs increased
approximately $490,000, or 48%, in the six months ended June 30, 1998
compared to the same period in 1997. Approximately $259,000 of the increase
is related to increased staffing levels, approximately $346,000 is
attributable to increased professional fees and investor relations costs
and an additional non-cash charge of $282,000 is related to investment
consulting services. Offsetting these increases was a decrease in
relocation and travel expenses. Also, a non-cash compensation charge of
$340,000 recorded in the six months ended June 30, 1997 was not incurred in
1998.
Depreciation and Amortization. Depreciation and amortization increased
approximately $647,000 to approximately $970,000 in the six months ended
June 30, 1998 from approximately $323,000 in the six months ended June 30,
1997. The increase is due primarily to increased levels of fixed assets and
capitalized leases and, to a lesser extent, increased levels of
intellectual property held by the Company. Approximately $209,000 related
to the amortization of debt issuance costs was included in the total for
the first six months of 1997.
Net Interest Income. The Company recorded approximately $199,000 of
net interest income during the six months ended June 30, 1998 compared to
incurring approximately $428,000 of net interest expense in the six months
ended June 30, 1997. The approximately $245,000 in interest income recorded
in the six months ended June 30, 1998, earned on invested cash balances,
was partially offset by approximately $46,000 of interest expense, incurred
primarily in connection with capital lease obligations and a note payable.
The approximately $385,000 of interest expense recorded in the six months
ended June 30, 1997 was incurred primarily in connection with warrant
issuance costs associated with notes issued by the Company in connection
with a bridge financ-
9
<PAGE> 10
ing completed in November 1996. Interest expense during that period was
offset by approximately $27,000 of interest income earned primarily on
invested proceeds of the Initial Public Offering completed in the second
quarter of 1997.
Net Loss. As a result of the foregoing factors, the Company's net loss
increased by approximately $8.8 million, or 248%, to approximately $12.4
million for the six months ended June 30, 1998 from approximately $3.6
million during the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred cumulative losses aggregating approximately
$29.1 million from inception through June 30, 1998. The Company expects to
incur additional operating losses for the foreseeable future, principally
as a result of expenses associated with the Company's product development
efforts and anticipated sales, marketing and general and administrative
expenses. During the first six months of 1998, the Company satisfied its
cash requirements principally from the proceeds of a follow-on public
offering of Common Stock completed during November of 1997 (the "Follow-on
Offering"). In June 1998, the Company sold for approximately $1.4 million
certain leasehold improvements it had made to its principal office building
to the Pease Development Authority in consideration for higher rental costs
in the future. The primary uses of cash have been to fund research and
development, sales, general and administrative expenses, and to build
inventory levels to support sales of the Company's products in 1998.
The Company's cash and cash equivalents decreased by approximately
$15.6 million to $2.6 million at June 30, 1998, compared to $18.2 million
at December 31, 1997. The Company utilized a portion of such cash for units
shipped in the first quarter of 1998, to build inventory for future
anticipated shipment developments, for costs related to research and
development in response to market demands for additional functionality, and
to increase marketing capabilities to support anticipated significant
reseller relationships.
Net cash used in operating activities in the six months ended June 30,
1998 was approximately $13.2 million. The net loss in the first six month
period, reduced by depreciation and amortization and the non-cash
compensation charge, was approximately $11.1 million. Inventories increased
by $6.4 million, funded in part by an increase of $4.3 million in accounts
payable over the six month period. Inventory at June 30, 1998 was
approximately $8.1 million, compared to approximately $1.7 million at
December 31, 1997. Inventory at June 30, 1998 included approximately $2.6
million of finished goods representing the value of equipment shipped in
the fourth quarter of 1997 and the first quarter of 1998. In July 1998, a
significant portion of this equipment was returned to the Company for
upgrade. The Company intends to upgrade the equipment and return it to
inventory, canceling a significant portion of the reseller's order. See
Note 6 of the Notes to Condensed Unaudited Financial Statements.
Net cash used in investing activities in the six months ended June 30,
1998 was approximately $2.2 million. The approximately $3.6 million in cash
used for capital items was partially offset by the approximately $1.4
million sale to the Pease Development Authority of leasehold improvements
made to the Company's leased headquarters. Of the total of approximately
$4.3 million in additions to property and equipment in the six month
period, approximately $702,000 were financed by additions to capital lease
obligations. Total additions to property and equipment in the six months
ended June 30, 1998 consisted of additions to offices, furniture and
fixtures, and related items and to computer and telecommunications
equipment and software.
Net cash used in financing activities was approximately $199,000
consisting of approximately $357,000 of principal payments on capital lease
obligations and approximately $63,000 of principal payments on the note
payable, offset by approximately $221,000 of proceeds received from the
exercise of warrants by certain warrant holders after contractual
restrictions lapsed on a portion of their warrants in the second quarter of
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. As
reflected in the audited financial statements of the Company for the year
ended December 31, 1997, and the report of the Company's independent
accountants 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 debt and equity
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. In July, the Company raised $3.125 million in gross proceeds from
a
10
<PAGE> 11
private placement of 5% Convertible Debentures, $625,000 of which was
purchased by certain directors, executive officers and affiliated investors
of the Company. The proceeds of the financing will be used for working
capital and general corporate purposes. The Company believes that its
existing resources will be sufficient to fund operations through October
1998. The Company currently is seeking additional sources of debt or equity
financing. 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.
Part II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1998 Annual Meeting of Stockholders was held on May 28, 1998.
(c) The stockholders voted on the following matters:
1. Amendment of the Restated Certificate of Incorporation of the
Company to increase to 30,000,000 the number of shares of Common Stock
authorized to be issued by the Company.
<TABLE>
<CAPTION>
Shares Shares Shares
Voted For Voted Against Abstained
--------- ------------- ---------
<S> <C> <C>
5,379,347 84,995 13,365
</TABLE>
2. Amendment and restatement of the Restated Certificate of
Incorporation of the Company to classify the Board of Directors into
three classes.
<TABLE>
<CAPTION>
Shares Shares Shares Shares
Voted For Voted Against Abstained Not Voted
--------- ------------- --------- ---------
<S> <C> <C> <C>
3,014,888 184,273 31,920 2,246,626
</TABLE>
3. Election of the following eleven directors of the Company:
<TABLE>
<CAPTION>
Shares Shares
Directors Voted For Withheld
--------- --------- --------
<S> <C> <C>
Clifford M. Kendall 5,457,149 20,558
Anthony M. Agnello 5,457,149 20,558
Robert L. Barnett 5,457,149 20,558
Donald W. Barrett 5,457,149 20,558
Eugene R. Cacciamani 5,457,149 20,558
Marc S. Cooper 5,457,149 20,558
Lincoln D. Faurer 5,457,149 20,558
Richard T. Liebhaber 5,457,149 20,558
</TABLE>
11
<PAGE> 12
<TABLE>
<S> <C> <C>
Roy C. Nash 5,457,149 20,558
John B. Torkelsen 5,457,149 20,558
</TABLE>
4. Amendment of the Company's 1996 Stock Incentive Plan to increase to
1,450,000 shares the number of shares of Common Stock available for
issuance under the Plan.
<TABLE>
<CAPTION>
Shares Shares Shares Shares
Voted For Voted Against Abstained Not Voted
--------- ------------- --------- ---------
<S> <C> <C> <C>
2,911,579 257,373 28,950 2,279,805
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit No. 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 (Incorporated by reference to Exhibit
3.2 forming a part of Amendment No. 2 to the Company's Registration
Statement on Form SB-2 (File No. 333-20625) filed with the
Securities and Exchange Commission under the Securities Act of 1933,
as amended).
4.1 Form of Warrant for the Purchase of Shares of Common Stock, issued
in connection with the private placement of $2,000,000 aggregate
principal amount of Bridge Notes (Incorporated by reference to
Exhibit 3.4 forming a part of the Company's Registration Statement
on Form SB-2 (File No. 333-20625) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended).
4.2 Form of Warrant to Purchase Common Stock of the Company, issued in
connection with the private placement of units in June 1995 and
August 1996 (Incorporated by reference to Exhibit 3.5 forming a part
of the Company's Registration Statement on Form SB-2 (File No.
333-20625) filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended).
4.3 Form of Warrants for the Purchase of 100,000 Shares of Common Stock,
$.01 par value per share, issued in connection with the private
placement of Series A Convertible Preferred Stock and warrants in
December 1996 and January 1997 (Incorporated by reference to Exhibit
3.7 forming a part of the Company's Registration Statement on Form
SB-2 (File No. 333-20625) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended).
4.4 Form of Option for the Purchase of 180,000 shares of Common Stock
issued to Barington Capital Group, L.P. (Incorporated by reference
to Exhibit 3.8 forming a part of the Company's Registration
Statement on Form SB-2 (File No. 333-20625) filed with the
Securities and Exchange Commission under the Securities Act of 1933,
as amended).
4.5 Form of Stock Option Agreement, dated December 18, 1997, by and
between the Company and Barington Capital Group, L.P. (Incorporated
by reference to Exhibit 10.8 forming a part of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997 filed with
the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended).
4.6 Specimen certificate evidencing shares of Common Stock of the
Company (Incorporated by reference to Exhibit 4.2 forming a part of
Amendment No. 2 to the Company's Registration Statement on Form SB-2
(File No. 333-20625) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended).
12
<PAGE> 13
4.7 Form of 5% Convertible Debenture due 2003, dated as of July 8, 1998,
issued by the Company to Leonardo, L.P., AG Super Fund International
Partners, L.P., Raphael, L.P., AGR Halifax Fund, Ltd., Ramius Fund,
Ltd., and GAM Arbitrage Investments, Inc. (the "Institutional
Investors") (Incorporated by reference to Exhibit 4.3 forming a part
of the Company's Current Report on Form 8-K dated July 1, 1998 and
filed July 16, 1998 with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended).
4.8 Form of 5% Convertible Debenture due 2003, dated as of July 8, 1998,
issued by the Company to Messrs. Clifford M. Kendall, Eugene R.
Cacciamani, Marc S. Cooper, Richard T. Liebhaber, James F. Bunker,
Roger A. Booker, and Robert H. Emery, Ms. Mary C. Murphy, and
certain other investors including outside consultants to the Company
(collectively, the "Additional Investors") (Incorporated by
reference to Exhibit 4.4 forming a part of the Company's Current
Report on Form 8-K dated July 1, 1998 and filed July 16, 1998 with
the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended).
4.9 Form of Warrant to Purchase Shares of Common Stock, $.01 par value
per share, for issuance by the Company to the Investors upon early
redemption of the 5% Convertible Debentures due 2003 (Incorporated
by reference to Exhibit 4.5 forming a part of the Company's Current
Report on Form 8-K dated July 1, 1998 and filed July 16, 1998 with
the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended).
10.1 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.1
forming a part of the Company's Registration Statement on Form SB-2
(File No. 333-20625) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended).
10.2 1996 Stock Incentive Plan (Incorporated by reference to Exhibit No.
10.2 forming a part of the Company's Registration Statement on Form
SB-2 (File No. 333-20625) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended).
10.3 Employment Agreement between the Company and Steven A. Rogers
(Incorporated by reference to Exhibit No. 10.3 forming part of
Amendment No. 2 to the Company's Registration Statement on Form SB-2
(File No. 333-20625) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended).
10.4 Form of Consulting Agreement by and between the Company and
Barington Capital Group, L.P. (Incorporated by reference to Exhibit
No. 10.4 forming a part of the Company's Registration Statement on
Form SB-2 (File No. 333-20625) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended).
10.5 Letter Agreement, dated October 7, 1996, between Barington Capital
Group and the Company (Incorporated by reference to Exhibit No. 10.5
forming a part of Amendment No. 2 to the Company's Registration
Statement on Form SB-2 (File No. 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 Company, Steven A. Rogers and John B.
Torkelsen (Incorporated by reference to Exhibit No. 10.6 forming a
part of Amendment No. 2 to the Company's Registration Statement on
Form SB-2 (File No. 333-20625) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended).
10.7 Voting Agreement, dated December 19, 1996, by and among the Company,
Steven A. Rogers, Applewood Associates, L.P. and Acorn Technology
Partners, L.P. (Incorporated by reference to Exhibit No. 10.7
forming a part of Amendment No. 2 to the Company's Registration
Statement on Form SB-2 (File No. 333-20625) filed with the
Securities and Exchange Commission under the Securities Act of 1933,
as amended).
10.8 Subscription Agreement, dated as of July 1, 1998, by and among the
Company and the Institutional Investors (Incorporated by reference
to Exhibit 4.1 forming a part of the Company's Current Report on
Form 8-K dated July 1, 1998 and filed July 16, 1998 with the
Securities and Exchange Commission under the Securities Exchange Act
of 1934, as amended).
10.9 Form of Subscription Agreement, dated as of July 8, 1998, by and
among the Company and the Additional Investors (Incorporated by
reference to Exhibit 4.2 forming a part of the Company's Current
Report on Form 8-K dated July 1, 1998
13
<PAGE> 14
and filed July 16, 1998 with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended).
11 Statement re: computation of per share earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K during the quarter ended March 31, 1998.
(1) The Company's Current Report on Form 8-K dated April 10, 1998 and
filed April 15, 1998 for the purpose of filing as an exhibit a press
release relating to shipments made by the Company during the first
quarter of 1998 and revenue recognition for the period.
(2) The Company's Current Report on form 8-K filed July 16, 1998
reporting certain events including the private placement of $3,125,000
aggregate principal amount 5% Convertible Debentures due 2003.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Objective Communications, Inc.
By: /s/ James F. Bunker
-------------------
James F. Bunker
President and Chief Executive Officer
(duly authorized executive officer)
/s/ Robert H. Emery
-------------------
Robert H. Emery
Vice President, Administration and Finance
(principal financial officer)
August 14, 1998
15
<PAGE> 1
Objective Communication
Weighted average
<TABLE>
<CAPTION>
Exhibit 11
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 5,715,359 4,346,569 5,696,211 3,196,822
Shares issued within one year of filing of initial
public offering - - - -
Options issues within one year of filing of initial
public offering - - - -
Warrants issued within one year of filing of initial
public offering - - - -
Convertible securities issued within one year of
filing of initial public offering - - - -
------------ ------------ ------------ ------------
5,715,359 4,346,569 5,696,211 3,196,822
========= ========= ========= =========
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,643,783
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 8,131,039
<CURRENT-ASSETS> 11,312,362
<PP&E> 5,961,790
<DEPRECIATION> 1,752,748
<TOTAL-ASSETS> 15,799,060
<CURRENT-LIABILITIES> 8,691,291
<BONDS> 0
0
0
<COMMON> 57,410
<OTHER-SE> 6,920,379
<TOTAL-LIABILITY-AND-EQUITY> 15,799,060
<SALES> 110,505
<TOTAL-REVENUES> 110,505
<CGS> 64,304
<TOTAL-COSTS> 64,304
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (198,698)
<INCOME-PRETAX> (12,397,424)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,397,424)
<EPS-PRIMARY> (2.18)
<EPS-DILUTED> (2.18)
</TABLE>
