<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1999
REGISTRATION NO. 333-72429
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------------------
OBJECTIVE COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3669 54-1707962
(State or other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------------
<TABLE>
<S> <C>
OBJECTIVE COMMUNICATIONS, INC. ROBERT H. EMERY
50 INTERNATIONAL DRIVE 50 INTERNATIONAL DRIVE
PORTSMOUTH, NEW HAMPSHIRE 03801 PORTSMOUTH, NEW HAMPSHIRE 03801
(603) 334-6700 (603) 334-6700
(Address, and telephone number of principal executive (Name, address and telephone
offices and principal place of business) of number agent for service)
</TABLE>
COPY TO:
<TABLE>
<S> <C>
ELLEN C. GRADY, ESQ. DAVID ALAN MILLER, ESQ.
SHAW PITTMAN POTTS & TROWBRIDGE GRAUBARD MOLLEN & MILLER
1501 FARM CREDIT DRIVE 600 THIRD AVENUE
MCLEAN, VIRGINIA 22102 NEW YORK, NEW YORK 10016
(703) 790-7946 (212) 818-8661
</TABLE>
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
possible after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE AGGREGATE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each consisting of two shares of
common stock and one redeemable common
stock purchase warrant(1).................. N/A N/A $17,250,000(2) (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock included as part of the units... N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Warrants included as part of the units....... N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock underlying the warrants included
in the units............................... N/A N/A $10,000,000(4) $2,780
- ---------------------------------------------------------------------------------------------------------------------------------
Representative's purchase option............. 1 $ 100 $ 100 (5)
- ---------------------------------------------------------------------------------------------------------------------------------
Units underlying representative's purchase
option(6).................................. N/A N/A $ 2,475,000 $ 271(7)
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock underlying representative's
purchase option units(6)................... N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Warrants underlying representative's purchase
option units(6)............................ N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock underlying warrants underlying
representative's purchase option(6)........ N/A N/A $ 1,000,000(4) $ 278
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock issued in February 1999 private
placement(8)............................... 160,701 (9) (9) (9)
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock issuable upon conversion of
convertible debentures(10)................. 41,977 $3.875(11) $ 162,661 $ 45(12)
- ---------------------------------------------------------------------------------------------------------------------------------
Total........................................ N/A N/A N/A $3,374
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes continue on next page.)
------------------------------------
(1) The Registrant initially filed this registration statement on Form SB-2
(Registration No. 333-72429) on February 16, 1999 to register a public offering
of common stock with a maximum aggregate value of $17,250,000 and paid the
requisite registration fee. Subsequently, the Registrant has determined to
change the offering to which this Registration Statement relates to an offering
of units, with each unit consisting of two shares of common stock and one
redeemable common stock purchase warrant. The units being registered on this
registration statement also have a maximum aggregate value of $17,250,000, and
the Registrant is applying the registration fee previously paid with respect to
the common stock to the units being registered hereunder.
(2) Pursuant to Rule 457(o) under the Securities Act, the Registrant
proposes to offer and sell a maximum aggregate of $17,250,000 in value of units
in this offering, consisting of (i) $15,000,000 in maximum aggregate value of
units issuable in this offering, and (ii) $2,250,000 in maximum aggregate value
of units which the underwriters have the option to purchase from the Registrant
to cover over-allotments, if any.
<PAGE> 2
(3) On February 16, 1999, the Registrant paid a fee of $4,795.50 with
respect to the securities covered by this registration statement. Pursuant to
Rule 457(a), no additional registration fee is required.
(4) Pursuant to Rule 457(g), calculated based on the initial exercise price
to be paid to the Company by the holder upon exercise of the warrant.
(5) Pursuant to Rule 457(g), no fee is required.
(6) Pursuant to Rule 416, there are also being registered such additional
securities as may be issued pursuant to the anti-dilution provisions of the
representative's purchase option.
(7) On February 16, 1999, the Registrant paid a fee of $417.00 with respect
to the securities underlying the representative's purchase option. Pursuant to
Rule 457(a), an additional registration fee of $271.00 is paid with this filing.
(8) Consists of shares issued in a private placement completed in February
1999 that may be sold by certain stockholders of the Registrant on a delayed or
continuous basis.
(9) The Registrant previously registered for sale an aggregate of 162,844
shares of common stock issued in the February 1999 private placement for
offering and sale by certain selling stockholders of the Registrant and paid the
applicable filing fee. The filing fee was calculated using a proposed maximum
aggregate price per share determined in accordance with Rule 457(c) under the
Securities Act. Accordingly, pursuant to Rule 457(a), no additional registration
fee is required to be paid with respect to those shares of common stock.
(10) Consists of shares of common stock issuable upon the automatic
conversion of the Registrant's outstanding 5% convertible debentures due 2003
(the "Convertible Debentures") upon the completion of the offering, based on a
conversion price of $3.75 per share. The Convertible Debentures will
automatically convert to shares of common stock upon the completion of the
public offering of units by the Registrant to which this registration statement
relates, at a conversion price of $3.75 per share.
(11) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act, based on the average of the high
and low trading prices of the Registrant's common stock as reported on the
Nasdaq SmallCap on May 11, 1999.
(12) At the time this registration statement was initially filed, the
Registrant registered 267,035 shares of common stock for sale by certain selling
stockholders of the Registrant upon conversion of the Convertible Debentures.
Upon the filing of Amendment No. 1 to the registration statement on April 19,
1999, the Registrant increased to 826,283 the number of shares of common stock
registered for sale by certain selling stockholders upon conversion of the
Convertible Debentures. Subsequently, the conversion price changed and the
number of shares of common stock issuable upon conversion of the Convertible
Debentures increased to 868,260. Pursuant to Rule 457(a), an additional fee of
$45 is paid with this filing to pay the registration fee for the additional
shares of common stock registered on this Amendment No. 2 to Form SB-2.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 3
EXPLANATORY NOTE
This registration statement contains forms of prospectus relating to (1) a
primary offering of units, each consisting of two shares of common stock and a
warrant to purchase one share of common stock, in an underwritten offering (the
"Company Prospectus") and (2) shares of common stock owned by certain
stockholders of the Company which may be sold by such holders from time to time
(the "Selling Stockholder Prospectus").
The Selling Stockholder Prospectus will be identical to the Company
Prospectus in all respects except for the front cover page, an addition to the
"Table of Contents," the replacement of the second paragraph on page (i), a
replacement for the "Recent Developments" section in the "Prospectus Summary,"
the deletion from the "Prospectus Summary" of the section entitled "The
Offering," a replacement for the section entitled "Use of Proceeds," the
deletion of the section entitled "Dilution," the addition of a section entitled
"Selling Stockholders," and the replacement of the section entitled
"Underwriting" with a section entitled "Plan of Distribution."
The form of the Company Prospectus is included herein, and the form of the
alternate pages of the Selling Stockholder Prospectus are included herein on
pages X-1 through X-5.
<PAGE> 4
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 13, 1999
PROSPECTUS
OBJECTIVE COMMUNICATIONS, INC. [OBJECTIVE COMMUNICATIONS LOGO]
2,000,000 Units
Each unit consisting of two shares of common stock
and one redeemable common stock purchase warrant
-------------------------
All 2,000,000 units are being sold by Objective Communications, Inc. We
also have given the underwriters the option to purchase an additional 300,000
units to cover over-allotments.
The common stock is traded on The Nasdaq SmallCap Market under the symbol
OCOMC. Until April 30, 1999, our common stock traded on the Nasdaq National
Market under the symbol OCOM. On May 12, 1999, the last sale price of the common
stock as reported on The Nasdaq SmallCap Market was $3.8125 per share.
Prior to this offering, there has been no public market for the units or
the warrants and we cannot assure you that one will develop. We have applied for
quotation of the units and the warrants on The Nasdaq SmallCap Market under the
symbols "OCOMU" and "OCOMW." The common stock and warrants are immediately
detachable and may be separately transferred by the holders thereof.
INVESTING IN THE UNITS INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD INVEST IN
THE UNITS ONLY IF YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
<TABLE>
<CAPTION>
PER UNIT TOTAL
-------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discounts and Commissions.....................
Proceeds to the Company....................................
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The underwriters are offering the units on a firm commitment basis subject
to various conditions and may reject all or part of any order.
SOUTHEAST RESEARCH PARTNERS, INC. LADENBURG THALMANN & CO. INC.
, 1999
<PAGE> 5
[Inside Front Cover]
VidPhone Video Network System
[Image of a photograph of a user looking at a desktop computer equipped with a
VidPhone system.]
The VidPhone system is a full-motion, high resolution cost-effective video
network system that uses the same wiring as the telephone. Users of the VidPhone
video network system can view broadcast video, stored video and participate in
multi-party video conferences.
VidPhone Switch
[Image of a VidPhone Switch]
The VidPhone switch is the video, audio and data
switch that is the cornerstone of our VidPhone video
network system. It enables users to access all
VidPhone system functions within a building or
across a small business campus and, using one of our
gateway products, to communicate with remote
locations through a wide area network. A VidPhone
switch is a scalable, modular video network switch
that supports from five to 50 concurrent users. The
VidPhone switch can be mounted in standard 19-inch
racks. Up to four VidPhone switches may be connected
to support up to 150 concurrent users.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 7
Use of Proceeds................... 13
Price Range of Common Stock....... 14
Dividend Policy................... 14
Dilution.......................... 15
Capitalization.................... 16
Selected Financial Data........... 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 18
Business.......................... 28
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management........................ 38
Executive Compensation............ 41
Principal Stockholders............ 44
Certain Transactions.............. 46
Description of Securities......... 49
Shares Eligible for Future Sale... 54
Underwriting...................... 57
Legal Matters..................... 59
Experts........................... 59
Additional Information............ 59
Index to Financial Statements..... F-1
</TABLE>
-------------------------
Objective Communications was incorporated in 1993. Our executive offices
are located at 50 International Drive, Portsmouth, New Hampshire 03801, and our
telephone number is (603) 334-6700.
Each unit offered by this prospectus consists of two shares of common stock
and one redeemable common stock purchase warrant with an initial exercise price
of $5.00 per share. Unless otherwise indicated in this prospectus, all
information in this prospectus, other than the financial statements and the
notes thereto included in this prospectus beginning on page F-1, assumes that
the underwriters will not exercise their option to purchase up to 300,000 units
to cover over-allotments and gives effect to a one share for seven shares
reverse stock split of the issued and outstanding common stock effected on April
14, 1999. In addition, unless otherwise indicated in this prospectus, all
outstanding share information after the offering also gives effect to the
automatic conversion of the outstanding Series B 5% Cumulative Convertible
Preferred Stock (and accrued and unpaid dividends on the preferred stock through
May 10, 1999) to 61,852 shares of common stock upon completion of this offering
at a conversion price of $19.25 per share, and gives effect to the automatic
conversion of the outstanding 5% Convertible Debentures due 2003 (and accrued
and unpaid interest on the convertible debentures through May 10, 1999) to
868,260 shares of common stock upon completion of this offering at a conversion
price of $3.75. References in this prospectus to the number and percentage of
shares of common stock have not been adjusted to give effect to the cashing out
of fractional shares as a result of the reverse stock split effected on April
14, 1999. We do not believe that the cashing out of fractional shares will
materially change these numbers or percentages.
Some of the statements contained in this prospectus including statements
under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" are
forward-looking and may involve a number of risks and uncertainties. Actual
results and future events may differ significantly based upon a number of
factors, including:
- risks in product and technology development;
- customer and market acceptance of new products;
- demand for our products; and
- the impact of competitive products and pricing.
In this prospectus, we refer to Objective Communications, Inc., a Delaware
corporation, as we, the Company or Objective Communications. We refer to
Southeast Research Partners, Inc. as the representative of the underwriters and
to Southeast Research Partners, Inc., Ladenburg Thalmann & Co. Inc. and the
other underwriters listed on page 57 of this prospectus as the underwriters. We
refer to prospective investors as you or the investor(s).
Objective Communications(R), VidPhone(R) and VidModem(R) are registered
trademarks of Objective Communications. This prospectus also contains trademarks
and trade names of other companies.
(i)
<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information you
should consider before investing in the common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section.
GENERAL
Objective Communications designs, develops and markets the VidPhone system,
a full-motion, high resolution, cost-effective video network system that uses
the same wiring as the telephone. Users of the VidPhone video network system can
view broadcast video from a variety of sources including direct broadcasts of
"live" communications, satellite broadcasts and stored video, and participate in
multi-party video conferences from desktop personal computers or conference
rooms. With the introduction of Release 1.5 of our VidPhone software, which we
expect to occur in June 1999, users also will be able to retrieve and view
stored video on demand. The VidPhone system is designed to be compatible with
existing video conferencing systems while offering additional features.
The VidPhone video network system:
- enables simultaneous two-way transmission of TV-quality full-motion
video, FM-quality audio, and data;
- has no transmission delays within a building or small business campus so
audio and video are fully synchronized;
- uses the same wiring as the telephone;
- is independent of the local area network ("LAN"), so no additional
wiring or local area network management is required; and
- requires minimal computer processing power, which permits concurrent use
of other computer applications.
We introduced the VidPhone system in July 1997, and we shipped the first
commercial version of the system in August 1998. To date, we have recognized
minimal revenues from sales of the VidPhone system and its components.
We market our video network system primarily through telephone product and
service providers, systems integrators and value-added resellers ("VARs") that
sell it as an enhancement to existing information and telephone systems. These
distribution partners provide sales, service and support to their customers, and
often have large existing customer bases. We currently have agreements with 16
resellers to market and sell the VidPhone system, including Unisys Corp., Sprint
Communications Corporation and Bell Atlantic Corp.
RECENT DEVELOPMENTS
In July 1998, we began a significant restructuring of our operations,
including changes in senior management. We hired James Bunker, who has extensive
experience "turning-around" businesses, as our President and Chief Executive
Officer. Steven Rogers, our founder, became Chief Technology Officer and Vice
President, Engineering and assumed responsibility for completing the development
of our commercial VidPhone system. We shipped the first commercial version of
our VidPhone system in August 1998. To lower our operating expenses, in July
1998, we reduced the number of our employees to
1
<PAGE> 8
approximately 90 from approximately 135. Since then, we have reduced our staff
by approximately 40 additional people. We also implemented new cash management
and expense policies. We believe that these changes will reduce our total
operating expenses in 1999 by approximately 50% compared to 1998.
During this period we also refined our sales and marketing strategy,
focusing on promoting the VidPhone system to our large resellers and their
customers. In October 1998, we entered into a strategic partnership with Unisys,
under which Unisys is the preferred systems integrator that will sell our
VidPhone system to the federal government. We are also pursuing a number of
other joint marketing initiatives with Unisys. In particular, Unisys exhibited
the VidPhone system at 11 trade shows in 1998 and at two trade shows in the
first quarter of 1999. Bell Atlantic and Sprint also recently renewed their
reseller agreements with us.
Our financial results for the first quarter of 1999 reflect the positive
effects of the restructuring that we began last July. As a result of the
introduction of the first commercial version of the VidPhone system in August
1998, which incorporated our Release 1.4 software, we reported revenues of
$655,457 for the quarter ended March 31, 1999, an increase of $255,628 or 64%
compared to the fourth quarter of 1998. As a result of our aggressive cost
reduction program, total operating expenses were reduced in the first quarter of
1999 to $2,240,797, a decrease of $2,058,291 or 48% compared to the fourth
quarter of 1998. We believe that our first quarter results are a positive first
step toward our goal of achieving commercial acceptance of the VidPhone system.
We require additional cash to fund our operations. To date in 1999, we
funded our operations principally with the net proceeds of a private placement
of units consisting of $2,850,000 principal amount of unsecured promissory notes
and 160,701 shares of common stock completed in February 1999. We used the net
proceeds of approximately $2,393,000 from the February 1999 private placement
for working capital and general corporate purposes, including approximately
$560,000 used to repay certain outstanding accounts payable. At March 31, 1999,
we had approximately $640,000 in cash and, as of the date of this prospectus, we
are essentially out of cash. We intend to fund our operations until the closing
of this offering with cash generated from customer payments on outstanding
accounts receivable. However, the timing and amount of customer payments is
uncertain. We estimate that the net proceeds from this offering will fund our
operations for approximately 12 months.
STRATEGY
Our objective is to become a leading provider of video network systems. The
key elements of our strategy are to:
- create brand-name recognition of the VidPhone system;
- position the VidPhone system as an enhancement to existing telephone and
information systems; and
- distribute the VidPhone system through established distribution channels
with large customer bases.
2
<PAGE> 9
THE OFFERING
Securities offered(1)........... 2,000,000 units, each consisting of two
shares of common stock and one warrant. Each
warrant entitles the holder to purchase one
share of common stock for an initial
exercise price of $5.00 during the four-year
period commencing one year after the date of
this prospectus. We may redeem the warrants
at any time after they become exercisable,
at a price of $.01 per warrant on not less
than 30 days' prior written notice if the
last sale price of the common stock has been
at least 160% of the then exercise price per
warrant (initially $8.00) for the 20
consecutive trading days ending on the third
day prior to the date on which the notice is
given. The common stock and the warrants
that comprise the units are immediately
detachable and separately transferable. We
provide you with additional information
about the units, the common stock and the
warrants being offered and sold in this
offering later in this prospectus under the
caption "Description of Securities."
Common stock outstanding prior
to the offering................. 980,848 shares
Common stock to be outstanding
after the offering (1)(2)(3).... 5,910,960 shares
Use of proceeds................. We will use the net proceeds of this
offering to pay (i) $2,850,000 in principal
amount of outstanding promissory notes
issued in the February 1999 private
placement, (ii) approximately $1,150,000 of
other outstanding indebtedness, and (iii) an
estimated $1,500,000 of other outstanding
obligations, principally trade payables. We
intend to use the remainder of the net
proceeds for working capital and general
corporate purposes.
Nasdaq SmallCap Market symbol... Common Stock: OCOMC
Proposed Nasdaq SmallCap Market
symbols (4):.................... Units: OCOMU
Warrants: OCOMW
- ---------------
(1) If the underwriters exercise their option to purchase additional units, the
total number of units to be offered in this offering would increase by up to
300,000 units and the total number of shares to be outstanding after this
offering would increase by up to 600,000 shares.
(2) Includes (i) the 61,852 shares of common stock to be issued upon the
automatic conversion of the 209,091 outstanding shares of Series B 5%
Cumulative Convertible Preferred Stock upon completion of this offering at a
conversion price of $19.25 per share, and (ii) 868,260 shares of common
stock to be issued upon the automatic
3
<PAGE> 10
conversion of the outstanding $3,125,000 original principal amount 5%
Convertible Debentures due 2003 upon completion of this offering at a
conversion price of $3.75. Excludes shares issuable as a part of the units
that may be issued upon exercise of the representative's purchase option and
the underwriters' over-allotment option.
(3) Does not include (i) 22,142 shares of common stock issuable upon exercise of
outstanding options granted to outside directors in August 1994, (ii) 38,477
shares of common stock issuable upon exercise of outstanding options granted
under our 1994 Stock Option Plan, (iii) 206,812 shares of common stock
reserved for issuance upon the exercise of options under our 1996 Stock
Incentive Plan under which plan we have granted options to purchase 125,768
shares of common stock as of the date of this prospectus, (iv) 43,571 shares
of common stock issuable upon exercise of other outstanding options, (v)
2,000,000 shares of common stock issuable upon exercise of the warrants
issued as part of the units being offered in this offering (up to 2,300,000
shares if the underwriters exercise their option to purchase additional
units), and (vi) 157,056 shares of common stock issuable upon exercise of
other outstanding warrants.
(4) We may voluntarily terminate the quotation of the units on The Nasdaq
SmallCap Market at any time without notice to our securityholders. The
termination of quotation of the units will not affect the continued trading
and quotation of the common stock or warrants on The Nasdaq SmallCap Market.
4
<PAGE> 11
SUMMARY FINANCIAL DATA
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED FOR THE PERIOD
YEAR ENDED DECEMBER 31, MARCH 31, OCTOBER 5, 1993
----------------------------------------- ------------------------- (DATE OF INCEPTION) TO
1996 1997 1998 1998 1999 MARCH 31, 1999
----------- ------------ ------------ ----------- ----------- ----------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues-net......... $ 81,375 $ -0- $ 765,617 $ 110,505 $ 655,457 $ 1,916,734
Cost of sales........ 62,353 -0- 544,853 64,304 368,702 1,162,930
----------- ------------ ------------ ----------- ----------- ------------
Gross margin......... 19,022 -0- 220,764 46,201 286,755 753,804
Operating expenses:
Research and
development........ 1,106,901 6,218,637 11,488,262 2,616,588 823,244 21,034,896
Selling, general and
administrative..... 1,043,553 4,334,754 9,015,437 1,741,344 1,123,655 16,743,714
Depreciation and
amortization....... 158,714 829,462 2,240,878 398,008 293,898 3,587,012
----------- ------------ ------------ ----------- ----------- ------------
Total operating
expenses....... 2,309,168 11,382,853 22,744,577 4,755,940 2,240,797 41,365,622
----------- ------------ ------------ ----------- ----------- ------------
Loss from
operations......... (2,290,146) (11,382,853) (22,523,813) (4,709,739) (1,954,042) (40,611,818)
Interest (income)
expense, net....... 404,290 203,441 (120,236) (166,040) 460,577 944,587
----------- ------------ ------------ ----------- ----------- ------------
Net loss............. $(2,694,436) $(11,586,294) $(22,403,577) $(4,543,699) $(2,414,619) $(41,556,405)
----------- ------------ ------------ ----------- ----------- ------------
Cumulative Series B
dividend........... -0- -0- (23,958) -0- (116,450)
----------- ------------ ------------ ----------- -----------
Net loss attributable
to common
stockholders....... $(2,694,436) $(11,586,294) $(22,427,535) $(4,543,699) $(2,531,069)
=========== ============ ============ =========== ===========
Net loss per common
share -- basic and
diluted............ $ (5.23) $ (19.90) $ (27.45) $ (5.60) $ (2.76)
=========== ============ ============ =========== ===========
Weighted average
shares
outstanding -- basic
and diluted........ 515,376 582,307 816,972 810,979 916,568
=========== ============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
--------------------------
ACTUAL PRO FORMA(1)
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 640,349 7,981,123
Working capital (deficit)................................... (2,515,429) 12,169,852
Total assets................................................ 11,581,169 18,668,376
Total liabilities........................................... 14,028,055 6,393,245
Total stockholders' equity (deficit)........................ (2,446,886) 12,275,131
</TABLE>
- ---------------
(1) The pro forma column presents our unaudited financial information at March
31, 1999, on a pro forma basis adjusted to reflect (i) the issuance of the
2,000,000 units in this offering at an assumed public offering price of
$7.50 per unit, after deducting the underwriting discounts and commissions
and estimated offering expenses payable by us, (ii) the issuance of 61,852
shares of common stock upon the automatic conversion of the Series B
preferred stock, (iii) the issuance of 868,260 shares of
5
<PAGE> 12
common stock upon the automatic conversion of the convertible debentures,
and (iv) the application of a portion of the net proceeds of this offering
to repay certain outstanding indebtedness. You should read the information
presented in this prospectus under the caption "Use of Proceeds" for more
information about how we intend to use the net proceeds of this offering.
6
<PAGE> 13
RISK FACTORS
Investing in our common stock is very risky. You should be able to bear a
complete loss of your investment. You should consider carefully the following
factors, among others.
WE MAY NOT HAVE SUFFICIENT CASH TO CONTINUE OPERATIONS
At December 31, 1998, we had essentially no cash remaining to fund
operations and at March 31, 1999, we had only $640,349 in cash and cash
equivalents. Between December 31, 1998 and February 4, 1999, the closing date of
the February 1999 private placement, we paid only those expenses that were
essential to continue operating, and we financed those payments in part by
borrowing from executive officers. Since completing the February 1999 private
placement, we have continued to monitor payments carefully. We used the net
proceeds of approximately $2,393,000 from the February 1999 private placement to
fund our operations since early February. As of the date of this prospectus, we
have essentially no cash remaining from the proceeds of that private placement.
We intend to fund operations through the date of completion of this offering
with customer payments on outstanding accounts receivable. However, the amount
and timing of customer payments is uncertain. As a result of our liquidity
problems, we have not been able to fund the continued marketing and development
of the VidPhone system or any expansion of our business operations since
mid-1998. In addition, we have not paid many of our creditors, including trade
creditors, on a timely basis and we remain in default on a number of significant
overdue obligations. Some of our creditors have instituted or threatened to
institute legal proceedings against us to obtain repayment of these debts. If we
continue not paying our debts as they become due, it is likely that other
creditors will take legal action against us and that other firms will refuse to
sell us the products and services we need to operate.
WE MAY NEED SUBSTANTIAL ADDITIONAL FINANCING
We need substantial additional capital to continue operations. We estimate
that the net proceeds from this offering will fund operations for at least the
next twelve months. However, changes in the market in which we operate, in our
business, or in our business plan could change our expected capital
requirements. Our future capital requirements could exceed our current
expectations as a result of increases in the cost of manufacturing and marketing
activities, the size of our research and development programs, the length of
time required to collect accounts receivable, and competing technological and
market developments.
After the proceeds from this offering are exhausted, we will depend on cash
flows from operations for funding. If our cash flows cannot satisfy our capital
needs, we will have to raise additional capital through debt or equity
financings. We do not currently have any lines of credit or bank financing, and
we do not anticipate having access to bank financing for the foreseeable future.
We may not be able to raise any additional money through equity or debt
financings on acceptable terms or at all. If we were to raise additional funds
through the issuance of equity or convertible debt securities, your investment
in Objective Communications could be substantially diluted and those securities
could have preferences and privileges that your securities do not have. If we
are not able to complete additional financings when needed, we will not be able
to continue operating.
7
<PAGE> 14
CUSTOMERS MAY NOT BUY OUR PRODUCTS DUE TO CONCERNS OVER OUR VIABILITY
Due to our recurring losses from operations and lack of cash, some
potential customers may decide not to purchase the VidPhone system because of
concerns that we may be unable to service, enhance or upgrade the systems. If we
are not able to alleviate concerns about our long-term viability, we may not be
able to market and sell the VidPhone system successfully and continue
operations.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES TO CONTINUE
We have incurred substantial losses from operations to date and had an
accumulated deficit of approximately $41.6 million through March 31, 1999. As
reflected in our financial statements for the year ended and as of December 31,
1998, and the report of our independent accountants on those financial
statements, there is substantial doubt about our ability to continue as a going
concern. We expect to continue to lose money for the foreseeable future.
We recognized only $765,617 in revenues from the sale of products during
the year 1998, and recognized only $655,457 in revenues during the quarter ended
March 31, 1999. We did not recognize any revenues in 1997. Accordingly, there is
no historical basis for you to expect that we will be able to realize operating
revenues or profits in the future. We have a limited number of orders for
delivery in the second quarter of 1999. Our ability to recognize operating
revenues in the future will depend on a number of factors, certain of which are
beyond our control, including:
- customer acceptance of products shipped and installed to date and in the
future;
- our ability to generate new sales of products and secure customer
acceptance; and
- the timing of customer payments.
WE HAVE A LIMITED OPERATING HISTORY
Although Objective Communications was incorporated in 1993, we focused on
research and development until we shipped our first commercial VidPhone system
in the third quarter of 1998. We did not earn any revenues from operations in
1997, recognized only $765,617 in revenues during 1998 and recognized only
$655,457 in revenues during the quarter ended March 31, 1999. James F. Bunker,
our President and Chief Executive Officer, has been with us since only July
1998. Accordingly, we have limited experience managing the Company since we
shipped our first commercial VidPhone system. Because of our limited operating
history, you have limited information on which to assess our ability to realize
operating revenues or profits in the future.
WAIVER OF NONCOMPLIANCE WITH NASDAQ SYSTEM REQUIREMENTS; PENNY STOCK REGULATION
As of May 3, 1999, our common stock is listed on the Nasdaq SmallCap Market
system. Previously, from October 31, 1997 to April 30, 1999, our common stock
traded on the Nasdaq National Market system. As a result of our failure to meet
certain Nasdaq National Market system continued listing requirements, Nasdaq
determined to transfer the listing of our common stock to the Nasdaq SmallCap
Market effective as of the opening of business on May 3, 1999. Our common stock
will continue to be listed on the Nasdaq SmallCap Market only if (i) on or
before June 30, 1999, we make a public filing with the SEC and Nasdaq containing
a May 31, 1999 balance sheet (with pro forma adjustments for any significant
events or transactions occurring on or before the filing date) evidencing a
minimum of $9,000,000 in net tangible assets, and (ii) we demonstrate compliance
with
8
<PAGE> 15
all requirements for continued listing on the Nasdaq SmallCap Market. We believe
that with the net proceeds of this offering, we will have in excess of
$9,000,000 in net tangible assets as of May 31, 1999 and that we will be able to
demonstrate to Nasdaq compliance with the additional requirements of the
exception under which our common stock is currently trading within the time
required. However, there can be no assurance that we will meet these
requirements. If we fail to meet any of the terms of this exception, our common
stock will be delisted from the Nasdaq SmallCap Market and the trading, if any,
in our securities would thereafter be on the OTC-Bulletin Board.
Trading on the OTC-Bulletin Board may:
- adversely affect the securities' trading market and prices;
- limit the ability of investors and market professionals to determine the
market prices of our securities;
- diminish the likelihood that our press releases and other news about us
will be republished;
- diminish investors' interest in our securities; and
- restrict our ability to issue additional securities or to secure
additional financing.
If our common stock is delisted from Nasdaq and its trading price is below
$5.00 per share, our common stock may become subject to regulations of the
Securities and Exchange Commission relating to the market for penny stocks.
These regulations generally require that a disclosure schedule explaining the
penny stock market and the risks associated therewith be delivered to purchasers
of penny stocks and impose various sales practice requirements on broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors. If our securities become subject to the regulations applicable to
penny stocks, the market liquidity for our common stock could be severely
affected. In such event, the regulations on penny stocks could limit your
ability to sell your common stock in the secondary market.
WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS EFFECTIVELY
We Are Dependent on Resellers. We distribute our products primarily
through major sellers of telephony products, system integrators and VARs.
Currently, we have agreements with 16 resellers. These arrangements are for
relatively short contractual periods and may be terminated under certain
circumstances. Developing and maintaining reseller relationships is complex, and
we cannot assure you that we will be able to maintain existing relationships or
establish new relationships. We compete with larger, better-established
companies with substantially greater financial resources for relationships with
third-party resellers. If we cannot maintain our current reseller relationships
and cannot develop new relationships, we may not be able to sell our video
network system.
Resellers May Not Be Effective Distributors. Sales to third-party
resellers are expected to generate a significant part of our future revenues.
However, we have sold only a limited number of VidPhone systems and components
under our reseller arrangements, and to date have recognized minimal revenues
from those sales. We currently have limited orders from our resellers for
additional sales of VidPhone systems. If our resellers fail to market and sell
our products, or our products fail to become an accepted part of the resellers'
product offerings, the value of your investment could be reduced.
We May Not Be Able To Develop Direct Sales and Marketing Capabilities. We
expect to depend on the marketing efforts of our resellers for the foreseeable
future. However, we are developing a small direct marketing capability to
promote our VidPhone
9
<PAGE> 16
system and to support our resellers. We cannot assure you that we will be able
to create awareness of, and demand for, our products through our marketing
efforts, or that the development of our direct marketing capabilities will lead
to sales of our products and services. If we cannot successfully develop our own
sales and marketing capabilities, we may not succeed in building brand-name
recognition of the VidPhone system, and we will remain solely dependent on
reseller efforts.
THE MARKET FOR VIDEO COMMUNICATIONS PRODUCTS MAY NOT DEVELOP
The market for video communications products is new and is rapidly
evolving. As is typical for a new technology, demand for and market acceptance
of new products is unpredictable. If the market for video communications
products fails to develop or develops more slowly than expected, our business
and financial condition could be materially and adversely affected.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY
Our success will depend, in part, on our ability to protect our
intellectual property rights to our proprietary hardware products. Toward that
end, we rely in part on trademark, copyright and trade secret law to protect our
intellectual property in the U.S. and abroad. The degree of protection provided
by patents is uncertain and involves largely unresolved complex legal and
factual questions. Our proprietary VidModem transmission technology,
incorporated in our VidPhone system, is covered by two U.S. patents issued in
April 1997 and July 1998, which relate to a method and apparatus for
transmitting video information over telephone wiring and variations of the basic
VidModem technology.
We also are currently prosecuting a patent application covering the
VidPhone system's networking and switching technology, and we have pending
patent applications with respect to a scalable high-speed packet switch and a
U-channel interface device. We cannot predict when we will receive dispositive
rulings from the U.S. Patent and Trademark Office concerning these patent
applications. We expect to file approximately six to nine new U.S. patent
applications in 1999 covering improvements in the field of video distribution,
but we do not expect to receive any notice from the U.S. Patent and Trademark
Office for at least one year after filing. We also have registered our
trademarks Objective Communications, VidPhone and VidModem.
The process of seeking patent and trademark protection can be long and
expensive, and there is no assurance that any pending or future applications
will result in patents and/or registered trademarks. Further, we cannot assure
you that any proprietary rights granted will provide meaningful protection or
any commercial advantage to us. We also cannot assure you that claims for
infringement will not be asserted or prosecuted against us in the future,
although we are not presently aware of any basis for claims. A number of
companies have developed and received proprietary rights to technologies that
may be competitive with our technologies. Most of these entities are larger and
have significantly greater resources than we do. Given the rapid development of
technology in the telecommunications industry, we cannot assure you that our
products do not or will not infringe upon the proprietary rights of others.
WE ARE DEPENDENT ON THIRD PARTIES FOR MANUFACTURING
We outsource the manufacturing and assembly of many of the components of
our products. To date, we have relied on a single manufacturer, Sanmina
Corporation, for the manufacture and assembly of the components used in the
VidPhone switch. Several other
10
<PAGE> 17
manufacturers also produce smaller sub-assemblies and components for us on a
per-project basis. We cannot assure you that our subcontractors will continue to
perform under our agreements with them or that we will be able to negotiate
continuing arrangements with these manufacturers on acceptable terms and
conditions, or at all. In particular, our failure to pay these manufacturers
could affect their willingness to continue working with us. If we cannot
maintain relationships with our current subcontractors, we may not be able to
find other suitable manufacturers. Any difficulties encountered with these
manufacturers could cause product defects and/or delays and cost overruns and
may cause us to be unable to fulfill orders on a timely basis. Any of these
difficulties could materially and adversely affect us and the value of your
investment.
A SIGNIFICANT PORTION OF THE PROCEEDS WILL BE USED TO PAY DEBT AND WE HAVE BROAD
DISCRETION OVER USE OF PROCEEDS
We expect to repay indebtedness and trade payables totaling approximately
$5,500,000 from the net proceeds of this offering, of which approximately
$161,000 will be paid to our officers, directors or affiliates. We intend to use
the remaining net proceeds for working capital and general corporate purposes.
However, we are not committed to any designated use of those proceeds and we
have broad discretion to determine how to use them. The "Use of Proceeds"
section of this prospectus provides you with additional information about our
expected use of net proceeds of this offering.
THE BOOK VALUE OF THE SHARES YOU BUY WILL BE SUBSTANTIALLY LESS THAN THE
PURCHASE PRICE YOU PAY
After the completion of this offering, our pro forma net tangible book
value per share of common stock as of March 31, 1999 would have been
approximately $1.99 based on an assumed offering price of $7.50 per unit
(attributing no value to the warrants). This is $1.76 less than the price you
are paying per share in this offering. A more complete discussion of the
dilution suffered by investors in this offering appears later in this prospectus
under the heading "Dilution."
SALES OF A LARGE NUMBER OF SHARES IN THE PUBLIC MARKET COULD REDUCE OUR STOCK
PRICE
Substantially all of our currently outstanding shares of common stock have
been registered for sale under the Securities Act, are eligible for sale under
an exemption from the registration requirements or are subject to registration
rights pursuant to which holders may require us to register their shares in the
future. Sales or the expectation of sales of a substantial number of shares of
our common stock in the public market could adversely affect the prevailing
market price of our common stock.
The sale of 1,272,810 shares of common stock available for sale in the
public market after completion of the offering is limited by restrictions under
agreements entered into with us or Southeast Research Partners, Inc., the
representative of the underwriters of this offering, for periods from six months
to 15 months following the effective date of the registration statement of which
this prospectus constitutes a part. A more complete discussion of shares
eligible for future sale appears later in this prospectus under the heading
"Shares Eligible for Future Sale."
11
<PAGE> 18
EXERCISE OF OPTIONS AND WARRANTS MAY ADVERSELY AFFECT OUR STOCK PRICE AND YOUR
PERCENTAGE OF OWNERSHIP
Prior to this offering, there are outstanding options and warrants to
purchase an aggregate of 387,014 shares of our common stock. Upon completion of
this offering, there will be outstanding options and warrants to purchase an
aggregate of 2,387,014 shares of common stock, including the 2,000,000 warrants
to be issued in this offering. In the future, we may grant more warrants or
options under stock option plans. The exercise or conversion of outstanding
stock options, warrants or other convertible securities will dilute the
percentage ownership of our other stockholders. In addition, any sales in the
public market of shares of our common stock issuable upon the exercise or
conversion of such stock options, warrants or convertible securities, or the
perception that such sales could occur, may adversely affect the prevailing
market price of our common stock.
OUR MARKET VALUE IS HIGHLY VOLATILE
The market price of our common stock has been highly volatile and may
continue to fluctuate in the future. We completed an initial public offering of
295,714 shares of our common stock at a price of $38.50 per share in April 1997.
Subsequently, in November 1997 we completed a follow-on public offering of
142,857 shares of common stock at a price of $161.875 per share. On May 12,
1999, the last sale price per share of our common stock as reported on the
Nasdaq SmallCap Market was $3.8125. As a result of our stock price volatility,
it is difficult to determine the market value of Objective Communications. You
cannot be sure how the price of the common stock might change after you purchase
it.
POSSIBLE TERMINATION OF SEPARATE QUOTATION/TRADING OF UNITS
Once the common stock and warrants are detached and become separately
transferable, we may voluntarily terminate the trading and/or quotation of the
units on the Nasdaq SmallCap Market at any time without notice to our
securityholders. The termination of trading and/or quotation of the units would
result in a securityholder having to sell the common stock and warrants
separately, thereby possibly resulting in increased brokerage commissions as
contrasted with selling the units separately.
12
<PAGE> 19
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of units in
this offering of approximately $12,900,000 (approximately $14,902,000 if the
underwriters exercise their over-allotment option in full), after deducting
underwriting discounts and commissions and other expenses payable by us
estimated at approximately $2,100,000 (approximately $2,348,000 if the
underwriters exercise the over-allotment option in full). We intend to use the
net proceeds as follows, approximately:
- $2,900,000 to pay the unsecured promissory notes issued in the February
1999 private placement, which had an aggregate original principal amount
of $2,850,000, mature on the date on which this offering is consummated,
and bear interest at 10% per year;
- $1,100,000 to pay a portion of the outstanding principal amount of
certain trade payables converted to a term loan that matures in January
2002 and bears interest at 7% per year;
- $50,000 to pay a portion of a note to our counsel for outstanding bills,
which matures in January 2001 and bears interest at 7% per year;
- $1,500,000 to pay certain other outstanding obligations, including trade
payables; and
- $7,350,000 for working capital and general corporate purposes, which
include product enhancement and sales and marketing expenses and may
include the repayment of accrued salary to an executive officer.
Our management will have broad discretion in allocating the proceeds to be
applied for working capital and general corporate purposes. If the underwriters
exercise their over-allotment option in full, we intend to use the net proceeds
from the sale of the units sold pursuant to the exercise of the over-allotment
option for working capital and general corporate purposes.
Pending application of the net proceeds as described above, we intend to
invest the net proceeds in short-term, interest-bearing investment grade
securities, money market accounts, certificates of deposit, or direct or
guaranteed obligations of the United States government.
13
<PAGE> 20
PRICE RANGE OF COMMON STOCK
Our common stock traded on the Nasdaq SmallCap Market from April 3, 1997 to
October 30, 1997 and traded on the Nasdaq National Market from October 31, 1997
to April 30, 1999. As of May 3, 1999, our common stock trades on the Nasdaq
SmallCap Market. The following table sets forth, for the periods indicated, the
range of high and low sales prices per share reported on such quotation systems
as adjusted to reflect the one share for seven shares reverse split in the
common stock that occurred on April 14, 1999.
<TABLE>
<CAPTION>
AS ADJUSTED
--------------------
HIGH LOW
-------- --------
<S> <C> <C>
PERIOD ENDING:
June 30, 1997 (from April 3, 1997)..... $ 99.750 $ 41.125
September 30, 1997..................... 267.750 77.875
December 31, 1997...................... 257.250 89.250
March 31, 1998......................... 173.250 101.066
June 30, 1998.......................... 141.750 46.375
September 30, 1998..................... 67.375 18.375
December 30, 1998...................... 38.500 12.250
March 31, 1999......................... 24.941 5.908
May 12, 1999........................... 7.658 3.500
</TABLE>
The market price of our common stock historically has been highly volatile.
We completed an initial public offering of 295,714 shares of our common stock at
a price of $38.50 per share in April 1997. Subsequently, in November 1997 we
completed a follow-on public offering of 142,858 shares of common stock at a
price of $161.875 per share. On May 12, 1999, the last sale price per share of
our common stock as reported on the Nasdaq SmallCap Market was $3.8125 per
share. It is difficult to predict the future market price per share of our
common stock, and you cannot be sure how the price per share of our common stock
may change after this offering.
As of February 16, 1999, there were approximately 157 holders of record of
our common stock. The Company believes there are over 3,000 beneficial owners of
its common stock.
DIVIDEND POLICY
We expect to retain all earnings generated by our operations for the
development and growth of our business, and do not anticipate paying any cash
dividends to our stockholders in the foreseeable future. The payment of future
dividends on the common stock and the rate of such dividends, if any, will be
determined by our Board of Directors in light of our earnings, financial
condition, capital requirements and other factors.
14
<PAGE> 21
DILUTION
A company's net tangible book value is equal to its total assets minus its
total tangible liabilities. A company's net tangible book value per share is
calculated by dividing its net tangible book value by the total number of shares
of common stock outstanding. As of March 31, 1999, we had net tangible book
value (deficit) of ($2,647,213), or approximately ($2.70) per share of common
stock.
As of March 31, 1999, after giving pro forma effect to (i) the issuance of
61,852 shares of common stock upon the automatic conversion of the Series B
preferred stock upon the completion of this offering, (ii) the issuance of
868,260 shares of common stock upon the automatic conversion of the convertible
debentures upon the completion of this offering, and (iii) the sale of the
2,000,000 units (attributing no value to the warrants) in this offering at an
assumed public offering price of $7.50 per unit, the receipt by us of the net
proceeds from this offering and the application of a portion of the net proceeds
to repay certain outstanding indebtedness as described under the caption "Use of
Proceeds," our pro forma net tangible book value at March 31, 1999, would have
been approximately $11,784,501, or approximately $1.99 per share of common
stock. This represents an immediate increase in our net tangible book value at
March 31, 1999 of approximately $4.69 per share of common stock to existing
stockholders and an immediate dilution of approximately $1.76 per share to new
investors purchasing units in this offering. The following table illustrates
this dilution using an assumed public offering price of $7.50 per unit:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $3.75
Net tangible book value per share of common stock as of
March 31, 1999......................................... ($2.70)
Increase per share attributable to conversion of the
Series B preferred stock and the convertible debentures
to common stock upon the completion of this offering... 3.01
Increase per share attributable to sale of units in this
offering............................................... 1.68
------
Pro forma net tangible book value per share of common stock
after this offering....................................... 1.99
-----
Dilution per share of common stock to investors in this
offering.................................................. $1.76
=====
</TABLE>
15
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization. The actual column shows
our capitalization on March 31, 1999. The pro forma column shows our
capitalization on March 31, 1999, on a pro forma basis adjusted to reflect the
issuance of the 2,000,000 units in this offering at an assumed public offering
price of $7.50 per unit and without attributing any value to the warrants issued
as part of the units, the issuance of 61,852 shares of common stock upon the
automatic conversion of the Series B preferred stock (including accrued and
unpaid dividends through May 10, 1999) upon the completion of this offering, the
issuance of 868,260 shares of common stock upon the automatic conversion of the
convertible debentures (including accrued and unpaid interest through May 10,
1999) upon the completion of this offering, and the application of a portion of
the net proceeds from this offering to pay certain outstanding obligations as
set forth under the caption "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------
ACTUAL PRO FORMA
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Long-term debt and obligations under capital lease, less
current portion........................................ $ 3,126,538 $ 3,126,538
------------ ------------
Stockholders' equity:
Preferred stock, Series B, at liquidation preference,
par value $.01, 954,545 shares authorized; 209,091
issued and outstanding at March 31, 1999; none
issued and outstanding pro forma.................... 1,188,333 --
Common stock, par value $.01, 30,000,000 shares
authorized; 980,848 issued and outstanding at March
31, 1999; and 5,910,960 shares issued and
outstanding, pro forma (a).......................... 9,808 59,109
Additional paid-in capital............................. 38,318,275 55,322,997
Deficit accumulated during development stage........... (41,963,302) (43,397,278)
------------ ------------
Total stockholders' equity (deficit)................ (2,446,886) 11,984,828
------------ ------------
Total capitalization........................... $ 679,652 $ 15,111,366
============ ============
</TABLE>
- ---------------
(a) Does not include options and warrants to purchase 387,014 shares of common
stock outstanding prior to the offering or options and warrants to purchase
2,387,014 shares of common stock to be outstanding after the offering.
16
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The selected financial data as of December 31, 1996, 1997, and
1998, and for each of the three years in the period ended December 31, 1998 have
been derived from our financial statements included in this prospectus, which
have been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report thereon, which includes an explanatory paragraph on our ability to
continue as a going concern, is also included in this prospectus. The selected
financial data for the quarters ended March 31, 1998 and 1999 have been derived
from our unaudited financial statements, which in the opinion of our management,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the information set forth in those financial
statements. The results for the quarter ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the full year or for any
future period.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, MARCH 31, OCTOBER 5, 1993
----------------------------------------- ------------------------- (DATE OF INCEPTION) TO
1996 1997 1998 1998 1999 MARCH 31, 1999
----------- ------------ ------------ ----------- ----------- ----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues -- net.......... $ 81,375 $ -0- $ 765,617 $ 110,505 $ 655,457 $ 1,916,734
Cost of sales............ 62,353 -0- 544,853 64,304 368,702 1,162,930
----------- ------------ ------------ ----------- ----------- ------------
Gross margin............. 19,022 -0- 220,764 46,201 286,755 753,804
OPERATING EXPENSES:
Research and
development............. 1,106,901 6,218,637 11,488,262 2,616,588 823,244 21,034,896
Selling, general and
administrative.......... 1,043,553 4,334,754 9,015,437 1,741,344 1,123,655 16,743,714
Depreciation and
amortization............ 158,714 829,462 2,240,878 398,008 293,898 3,587,012
----------- ------------ ------------ ----------- ----------- ------------
Total operating
expenses............ 2,309,168 11,382,853 22,744,577 4,755,940 2,240,797 41,365,622
----------- ------------ ------------ ----------- ----------- ------------
Loss from operations..... (2,290,146) (11,382,853) (22,523,813) (4,709,739) (1,954,042) (40,611,818)
Interest (income)
expense, net............ 404,290 203,441 (120,236) (166,040) 460,577 944,587
----------- ------------ ------------ ----------- ----------- ------------
Net loss................. $(2,694,436) $(11,586,294) $(22,403,577) $(4,543,699) $(2,414,619) $(41,556,405)
=========== ============ ============ =========== =========== ============
Cumulative Series B
dividend................ -0- -0- (23,958) -0- (116,450)
----------- ------------ ------------ ----------- -----------
Net loss attributable to
common stockholders..... $(2,694,436) $(11,586,294) $(22,427,535) $(4,543,699) $(2,531,069)
=========== ============ ============ =========== ===========
Net loss per common
share -- basic and
diluted................. $ (5.23) $ (19.90) $ (27.45) $ (5.60) $ (2.76)
=========== ============ ============ =========== ===========
Weighted average shares
outstanding --
basic and diluted....... 515,376 582,307 816,972 810,979 916,568
=========== ============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
------------------------- -----------
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $18,199,434 $ 8,532 $ 640,349
Working capital (deficit)................................. 16,422,283 (4,905,789) (2,515,429)
Total assets.............................................. 23,082,700 9,622,989 11,581,169
Obligations under capital lease, less current portion..... 57,196 76,008 60,358
Total liabilities......................................... 4,210,571 11,219,509 14,028,055
Total stockholders' equity (deficit)...................... $18,872,129 $(1,596,520) $(2,446,886)
</TABLE>
17
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our audited
financial statements and notes thereto which are included elsewhere in this
prospectus.
OVERVIEW
Our financial results for the quarter ended March 31, 1999 reflect the
positive effects of our cost reduction program and the introduction of the first
commercial version of the VidPhone(R) system, both of which occurred in the
second half of 1998. We reported revenues of $655,457 in the first quarter of
1999, an increase of $255,628, or 64% when compared with revenues reported in
the fourth quarter of 1998. Total operating expenses were reduced to $2,240,797
in the first quarter of 1999, a decrease of $2,058,291, or 48% compared to the
fourth quarter of 1998. We believe that our first quarter results reflect a
positive first step towards our goal of achieving commercial acceptance of our
VidPhone system.
Objective Communications was formed in 1993 to design, develop and market a
full motion, high resolution, cost-effective video network system, the VidPhone
system. Users of the VidPhone video network system can view broadcast video and
participate in multi-party video conferences. With the introduction of Release
1.5 of our VidPhone software, which we expect to occur in June 1999, users also
will be able to retrieve and view stored video on demand. Our VidPhone system
distributes video to and from desktop or laptop personal computers and
conference rooms configured with a VidPhone station, over the same wiring used
by the telephone.
Our operations focused on research and development until we shipped our
first commercial VidPhone system in the third quarter of 1998. To date, we have
not generated substantial revenues from the sale of our VidPhone system. Since
shipping our first commercial VidPhone system, we have focused on sales and
marketing of our product and customer support, while continuing to enhance our
product's development.
In July 1998, we began a significant restructuring of our operations,
including changes in senior management. We hired James Bunker, who has extensive
experience "turning-around" businesses, as our President and Chief Executive
Officer. Steven Rogers, our founder, became Chief Technology Officer and Vice
President, Engineering and assumed responsibility for completing the development
of our commercial VidPhone system. We shipped the first commercial version of
our VidPhone system in August 1998. To lower our operating expenses, in July
1998, we reduced the number of our employees to approximately 90 from
approximately 135. Since then, we have reduced our staff by approximately 40
additional people. We also implemented new cash management and expense policies.
We believe that these changes will reduce our total operating expenses in 1999
by approximately 50% compared to 1998.
Our first commercial VidPhone system included Release 1.4 of our VidPhone
software. Release 1.4 enabled certain features of the VidPhone system, including
asynchronous transmission mode (ATM) and enhanced Integrated Services Digital
Network (ISDN) wide area connectivity. Release 1.5, which we expect to introduce
in June 1999, will add additional features to our VidPhone system, including the
VidServer and enhancements to the VidPhone gateways. VidPhone gateways can be
used to connect VidPhone systems or a VidPhone system and another vendor's video
network across a wide area network. The VidServer will permit VidPhone users
access to and control of stored video on demand. With the introduction of
Release 1.5, our VidPhone system will offer a
18
<PAGE> 25
complete video network system providing the following video functions to users:
broadcast video, videoconferencing, and retrieval of stored video on demand.
We have a limited operating history and, therefore, we do not have any
substantial basis on which to predict our sales cycle. However, we expect that
the sales cycle for our products will be relatively long primarily for two
reasons. First, it takes substantial time for us to establish relationships with
our resellers. It also takes time to familiarize resellers with the VidPhone
system and to train their sales forces. Second, our VidPhone video network
system is a new product that requires a substantial capital commitment.
Accordingly, we believe that it is likely to take the end-user customer at least
several months to decide to purchase our VidPhone video network system. We
expect our sales cycle will decrease after we establish customer reference
accounts, create brand name recognition of the VidPhone system and have longer,
more established relationships with resellers.
Although we distribute and sell our products through resellers, we
typically ship VidPhone systems directly to end-user customers and install the
systems at customers' locations. The VidPhone system technology is new and the
purchase of a VidPhone system requires a significant capital investment.
Generally, our policy currently is to permit new prospective end-user customers
to evaluate the VidPhone system for 30 to 45 days. Following that period, our
policy generally requires customers to pay for the VidPhone system in full
within 30 days, or to return the product. In some cases, we require a down
payment at the time an order is placed.
For the remainder of 1999, we intend to focus on sales and marketing of the
VidPhone system, and continuing product development to meet customer demands for
new functionality and to lower costs. Specifically, we intend to: (i) use
current strategic and reseller arrangements to increase sales of the VidPhone
system and create brand name recognition of our product, (ii) distribute the
VidPhone system through established distribution channels, (iii) position the
VidPhone system as an enhancement to existing telephone and information systems,
(iv) develop our direct sales capabilities, and (v) continue engineering on our
VidPhone system to refine and improve current functionality to meet new customer
requirements and to lower costs through improved design. However, we cannot
assure you that we will be able to meet these objectives. We plan to continue to
subcontract all major manufacturing and production activities for the
foreseeable future, but we will continue to retain test and quality assurance
functions until all subcontractors are certified with respect to quality.
In 1999, we expect to continue to incur operating expenses to support our
product development efforts and to enhance our sales and marketing capabilities
and organization but we anticipate that our development expenditures will be
lower than in prior years due to the commercial introduction of the VidPhone
system in 1998. Our results of operations may vary significantly from quarter to
quarter during this period of product introduction and initial sales.
YEAR 2000
As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk for possible
miscalculations or systems failures causing disruptions in their business
operations. This is commonly known as the Year 2000 (or "Y2K") issue. The
19
<PAGE> 26
Y2K issue can arise at any point in a company's supply, manufacturing,
processing, distribution, and financial chains.
We have evaluated the impact of the Y2K issue on our operations. This
evaluation consisted of identifying the sources of potential exposure to risk of
systems malfunction or failure in internal information technology ("IT")
infrastructure, in our product, including embedded systems and software, and in
systems utilized by significant vendors and customers. The evaluation process
also developed contingency plans in order to mitigate the negative effects to us
of any failure of these systems. We have completed our review process, and the
costs associated with our Y2K compliance evaluation were not material.
We believe that the VidPhone system is not susceptible to Y2K problems
because the VidPhone system does not contain an internal clock. We also have
evaluated whether equipment and software that we use or that is embedded in the
VidPhone system is Y2K compliant. Our evaluation consisted principally of
securing certifications from each of the vendors of these products that their
product is Y2K compliant and we did not independently assess whether a product
has Y2K problems. With respect to our internal IT infrastructure, including the
commercial financial software that we use, we have also obtained certifications
that the products that we use are Y2K compliant.
If, however, the equipment or software currently used or produced by us
proves to be susceptible to the Y2K issue, we may incur significant costs to
modify, re-program or replace the affected equipment or software. In addition,
because the VidPhone operates in a Windows environment, any susceptibility of
the Microsoft Windows operating system to Y2K issues could affect the operation
of the VidPhone system.
We began an evaluation of the compliance of our current and future major
supplier's systems in the fourth quarter of 1998. Failure of any of our
significant supplier's systems could result in our inability to supply products
to our customers and adversely affect our operating results and cash flow. Our
Y2K plan includes contingency plans to reduce the risk of a disruption to normal
access to required components and materials or services. Our evaluation consists
of obtaining Y2K compliance certification from major software and hardware
suppliers. Although the cost of assessing Y2K compliance by third parties has
not been material to date and we believe that it will not be material in the
future, at this time we cannot estimate the costs of any steps that will need to
be taken to resolve any problems or secure alternative relationships with Y2K
compliant third parties.
In addition, we have evaluated the impact of the existence of Y2K issues on
our customer base. Based on those evaluations, we do not expect our potential
customers to reduce their capital expenditure budgets or to defer purchases of
the VidPhone system because of concern about potential Y2K issues. We provide
all of our customers with Y2K certifications with respect to our VidPhone
system, and we do not believe that the existence of Y2K issues with respect to
other technologies will materially adversely impact sales of the VidPhone
system.
Our assessment of the impact of Y2K on our operations is based on current
facts and our assessment process is not complete. Accordingly, we cannot assure
you that there will not be interruptions or other limitations of financial and
operation systems functionality or that we will not incur greater costs than
projected to avoid such interruptions. Our expectations about future costs
associated with the Y2K issue are subject to certain uncertainties that could
cause actual results to have a greater financial impact than currently
anticipated. Factors that could influence the amount and timing of future costs
include our success in identifying Y2K issues, the costs of remediation or
avoidance, the
20
<PAGE> 27
costs of assessing third-party compliance and its impact on our operations, and
other factors. The forward-looking statements discussed in this section
regarding Y2K compliance involve a number of risks and uncertainties, including
those described above, and general economic conditions, the competitive
environment in which we operate, and other risks and uncertainties identified
elsewhere in this prospectus.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Revenues. We recognized $655,457 in revenues during the three months ended
March 31, 1999 compared to approximately $110,500 in the comparable period in
1998, representing an increase of approximately $545,000, or 493%. The revenues
recognized in 1999 relate primarily to shipments of VidPhone systems shipped to
and accepted by three customers in the first three months of 1999. We believe
that the significant increase in sales and revenues during the first quarter of
1999 is reflective of initial commercial acceptance of our technology
incorporated into our VidPhone system. We believe that the sales and revenues
reflect customer acceptance of our VidPhone software Release 1.4, which added
features to the VidPhone system.
Cost of sales. Cost of sales for the three months ended March 31, 1999 was
approximately $368,700. This represents an increase of approximately $304,400
over the $64,300 recorded in the comparable period in 1998. Cost of sales as a
percentage of sales was approximately 56% and 58% in the periods ending March
31, 1999 and 1998, respectively.
Gross Margin on Sales. Gross margin on sales was approximately $286,800,
or 44%, for the period ending March 31, 1999 compared to gross margin of
$46,200, or 42%, for the comparable period in 1998.
Research and Development. Research and development costs decreased to
$823,000 in the three months ended March 31, 1999, a decrease of approximately
$1,800,000, or 69%. The overall decrease in costs is a result of our
cost-reduction plan implemented in mid-1998. Approximately $407,000 of the
reduction resulted from reduced staffing costs as overall staffing in the
research and development departments declined from 56 at March 31, 1998 to 25 at
March 31, 1999, the use of contract labor was reduced, and recruiting costs were
eliminated. Materials and supplies purchased to support research and development
activities also decreased by approximately $811,000. In addition, decreased use
of rented or uncapitalized equipment resulted in approximately $181,000 in cost
reductions. Lower fees associated with design and consulting services also
contributed approximately $254,000 to the cost reductions during the three
months ended March 31, 1999, compared to the same period in 1998. Allocated
costs from service departments were reduced by approximately $118,000 as
research and development benefited by cost reductions attained in those
departments.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses decreased to approximately $1,124,000 during the three
months ended March 31, 1999, from approximately $1,740,000 during the three
months ended March 31, 1998, a decrease of approximately $616,000 or 35%. The
decrease in selling, general and administrative expenses reflects the results of
our cost reduction program implemented in mid-1998.
Sales and marketing expenses decreased approximately $416,000 in the first
three months of 1999 as compared to the same period of 1998. Approximately
$225,000 of this
21
<PAGE> 28
reduction was due to lower marketing personnel costs, partially offset by an
increase of approximately $89,000 in staffing costs related to sales personnel.
Approximately $70,000 of the reduction was due to the elimination of recruiting
costs, $72,000 was due to reduced costs associated with advertising and
trade-show attendance, and $54,000 was due to lower professional services fees.
Customer support costs decreased by approximately $138,000 in the three months
ended March 31, 1999 compared to the same period in 1998. Approximately $56,000
of the decrease was due to lower costs associated with materials and
uncapitalized tools and equipment, $46,000 was due to a decline in travel costs,
and approximately $16,000 was due to lower staffing costs.
General and administrative costs declined by approximately $64,000 in the
three months ended March 31, 1999 compared to the same period in 1998. General
and administrative staff costs were reduced by approximately $55,000, and
recruiting and relocation costs were reduced by approximately $26,000. Overall
costs allocated to the sales, general and administrative department from service
departments also were reduced by $115,000.
Depreciation and Amortization. Depreciation and amortization decreased to
approximately $294,000 during the three months ended March 31, 1999, from
$398,000 in the three months ended March 31, 1998, a decrease of approximately
$104,000, or 26%. We use the accelerated depreciation method for book purposes
and, accordingly, we experience higher levels of depreciation in the early years
of depreciable assets' service lives. Also contributing to the overall reduction
in depreciation expense was the disposition or retirement of assets held at one
of our locations in January 1999.
Net Interest (Income) Expense. We recorded approximately $460,600 of net
interest expense in the three months ended March 31, 1999, compared to
approximately $166,000 of net interest income in the comparable period of 1998.
Interest expense totaled approximately $464,000 during the first quarter of
1999, compared to approximately $12,000 during the first quarter of 1998. Of the
interest expense recorded in the 1999 period, approximately $309,000 was
interest expense on the outstanding unsecured promissory notes with an aggregate
principal amount of $2,850,000, that we issued in a unit offering completed in
February of 1999. Included in the interest expense recorded in connection with
the unsecured promissory notes was approximately $198,000 of amortization of
debt discount and $67,000 of amortization of debt issuance costs. In addition,
during the first quarter of 1999, we incurred approximately $81,000 in interest
expense related to long-term debt issued in connection with restructured vendor
accounts payable (including $11,000 of amortization of debt discount), $41,000
in interest incurred on our outstanding convertible debentures, and an
additional $22,000 related to capital lease obligations.
We earned approximately $4,000 in interest income during the first quarter
of 1999, compared to $178,000 in interest income during the first quarter of
1998. The interest income recorded in the first quarter of 1998 was earned on
the invested proceeds of the public offering of common stock that we completed
in November 1997 (the "1997 Follow-on Offering"). We had less cash during the
first quarter of 1999 available for investment and accordingly earned less
interest income.
Net Loss. As a result of the foregoing factors, the net loss for the
period ended March 31, 1999 decreased to approximately $2,400,000, from
$4,500,000 in the three months ended March 31, 1998, a decrease of approximately
$2,100,000 or 48%.
22
<PAGE> 29
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Revenues. We had $765,617 in revenues in 1998, compared to no revenues in
1997. Revenues are presented net of a $22,000 reserve for returns and
allowances.
Gross Margin. Cost of sales for 1998 were $544,853, resulting in a gross
margin of $220,764 or approximately 28.8% of revenues. Cost of sales includes
the costs of materials, labor, and production overhead necessary to convert
purchased components to finished products. In the future, we expect to lower the
costs of production through engineering advances and purchasing economies, and
to increase gross margin while also reducing the cost of the VidPhone system per
user.
Research and Development. Research and development expenses increased
significantly to $11,488,000 in 1998, from $6,219,000 in the prior year, an
increase of $5,269,000, or 85%. Of the increase, $2,342,000 was attributable to
higher staffing costs as we added a significant number of product development
personnel during the first half of 1998. Product development staffing costs
declined during the second half of 1998, as we reduced personnel as part of our
overall cost-reduction plan. Of the overall increase in research and development
costs, $1,705,000 was due to increased materials costs, again primarily in the
first half of 1998. We also incurred approximately $610,000 in additional costs
in 1998 related to the increased use of facilities and information technology,
representing a 139% increase over 1997. In addition, equipment and equipment
rental costs to support research and development increased to $544,000 in 1998,
compared to $187,000 in 1997, an increase of approximately $357,000, or 191%.
Computer and software costs increased to $215,000 in 1998 from $91,000 in 1997,
an increase of $124,000, or 136%.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses increased significantly to $9,015,000 in 1998 from
$4,335,000 in 1997, an increase of $4,680,000, or 108%. Staffing-related costs
increased to $3,798,000 in 1998 from $1,927,000 in 1997, an increase of
$1,871,000, or 97%. Of this increase, $2,075,000 was attributable to additional
sales and marketing staff, offset by a reduction of $204,000 in general and
administrative staffing costs. General and administrative staffing costs
declined in 1998 compared to 1997 because we had a one-time, non-cash
compensation charge of $340,000 in 1997 related to a warrant exchange
transaction. Costs associated with the use of consultants and other professional
services increased during 1998 relative to 1997 by $767,000, or 123%. Of that
increase, $564,000 was attributable to non-cash charges associated with granting
options to an investment banking firm in December 1997. Sales and marketing
costs increased significantly during 1998 compared to 1997 as we introduced the
first commercial version of our VidPhone system. Advertising and promotion
costs, including installations of demonstration equipment at potential customer
or reseller sites and attendance at trade shows (exclusive of travel expenses)
increased to $1,085,000 in 1998, representing an approximately 258% increase
over 1997. In January 1999, we sold furniture and equipment to a third party in
connection with our relinquishment of a lease on excess space in Portsmouth, New
Hampshire. The loss on the sale of this equipment and on the abandonment of
leasehold improvements was an estimated $195,000, which was accrued in 1998. We
did not record any similar charge in 1997. Allocated costs related to facilities
and information technology infrastructure also increased to $580,000 in 1998
from $407,000 in 1997, an increase of $173,000, or 43%. This increase primarily
is due to significantly higher telephone costs in 1998, as we increased the
testing of the VidPhone system over ISDN lines, and higher personnel costs and
uncapitalized equipment in our information technology department. Recruiting and
relocation costs declined in 1998 by
23
<PAGE> 30
approximately $190,000 to approximately $203,000. The higher level of such costs
in 1997 was associated with the move of the Company's headquarters.
Depreciation and Amortization. Depreciation and amortization increased to
$2,241,000 in 1998 from $829,000 in 1997, an increase of $1,412,000, or 170%.
The $1,616,000 increase in depreciation costs was offset by a $209,000 decrease
in amortization costs. Depreciation increased as a result of the significantly
higher level of depreciable fixed assets in 1998. Amortization decreased because
we amortized $209,000 of capitalized debt issuance costs upon the repayment of
debt paid from the proceeds of our initial public offering in April 1997, but we
did not incur any similar charge in 1998.
Interest Income, Net. We earned $120,000 in net interest income in 1998
compared to incurring $203,000 of net interest expense in 1997. We earned
interest income of $292,000 on invested excess cash during 1998, compared to
interest income of $272,000 in 1997. We paid interest expense of $172,000 in
1998 related to capital lease obligations and notes payable, compared to
$475,000 in 1997. Of the interest expense incurred in 1997, $385,000 related to
the write-off of unamortized debt discount representing the fair value of
warrants we issued to holders of notes in connection with a financing completed
in November 1996.
Net Loss. Our net loss for 1998 increased by $10.8 million, or 93%, to
$22.4 million, from $11.6 million for 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Revenues. We had no revenues in the year ended December 31, 1997 compared
to revenues of $81,375 in the same period in 1996. The revenues recorded in 1996
were generated from consulting arrangements, not from our primary business. In
1997, we devoted all of our resources to the development, production, and sale
and delivery of the VidPhone system and related software products.
Gross Margin. We recorded 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 and, to a
lesser extent, costs incurred in connection with preparing our new production
facilities. Research and development expenses include the costs associated with
all personnel, materials and contract personnel engaged in research and
development for Objective Communications, 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 $3,293,000, 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 our 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 increased as a result
of our growth, becoming a publicly traded company and the increased size and
complexity of operations.
24
<PAGE> 31
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, we charged to
amortization expense $209,000 of capitalized debt issuance costs upon the
repayment of the debt from the proceeds of our initial public 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. We 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 our initial public offering completed in April 1997 and the 1997
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 we issued to holders of notes issued in connection with a 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 million during the year ended
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative losses aggregating approximately $41.6 million
from our inception through March 31, 1999. We expect to incur additional
operating losses for the foreseeable future, principally as a result of expenses
associated with our product development efforts and anticipated sales, marketing
and general and administrative expenses. As of December 31, 1998, we had
essentially no cash remaining from which to finance our operations. During the
first three months of 1999 we satisfied our cash requirements from the
approximately $2,393,000 in net proceeds from the February 1999 private
placement of $2,850,000 in aggregate principal amount of unsecured promissory
notes and 160,701 shares of our common stock.
During 1998, we satisfied our cash requirements principally from the
proceeds of the 1997 Follow-on Offering and approximately $3.1 million of net
proceeds from the issuance of the 5% convertible debentures and approximately
$1.1 million of proceeds from the issuance of the Series B preferred stock. In
June 1998, we sold to the Portsmouth Development Authority ("PDA") certain
leasehold improvements that we had made to our principal office building. We
received approximately $1.5 million from the sale, but we also are obligated to
pay higher rental costs on our current headquarters in the future as a result of
the transaction. Our primary uses of cash were to fund research and development,
sales, general and administrative expenses, and to build inventory levels to
support future sales.
We had cash and cash equivalents of $640,349 at March 31, 1999, compared to
$8,532 at December 31, 1998. Net cash used in operations during the three months
ended March 31, 1999 was approximately $1,728,000. The net loss in the first
quarter of 1999, reduced by depreciation, amortization, non-cash compensation
and other non-cash charges was approximately $1,663,000. Inventory decreased by
approximately $232,000 during the first quarter of 1999, primarily as a result
of sales made during the quarter. Accounts receivable increased by $412,000
during the first quarter of 1999 as a result of $619,000 of
25
<PAGE> 32
new sales during the quarter, offset by approximately $207,000 in cash received
from customers relating to outstanding accounts receivable.
We generated $81,000 in cash from investing activities during the quarter
ended March 31, 1999 through the sale of certain office furniture and equipment
to a third party who assumed a lease on property that we previously occupied. We
did not use any cash in investing activities during the period.
Net cash used in operating activities for 1998 was $19.6 million. The net
loss reduced by depreciation and amortization and the non-cash compensation and
other non-cash charges, was $19.5 million. Inventories increased by $4.1
million, funded in part by an increase of $3.7 million in accounts payable.
Inventory at December 31, 1998 was $5.8 million, compared to $1.7 million at
December 31, 1997. Inventory at December 31, 1998 included $43,000 of finished
goods representing the cost of equipment shipped in the fourth quarter of 1998
which was not recorded as sales in that quarter.
Net cash used in investing activities in 1998 was $2.3 million. The $3.8
million in cash used for capital items was partially offset by the $1.5 million
received from the sale of leasehold improvements to the PDA. Of the $3.0 million
in additions to property and equipment in 1998, $719,000 was financed by
additions to capital lease obligations. Total additions to property and
equipment consisted of additions to offices, furniture and fixtures and related
items, and computer and telecommunications equipment and software.
We generated approximately $2,280,000 in cash from financing activities
during the three months ended March 31, 1999. We received approximately
$2,393,000 in net proceeds from the February 1999 private placement of units,
consisting of $2,850,000 aggregate principal amount of unsecured promissory
notes and 160,701 shares of common stock. The net proceeds from the February
1999 private placement provided most of our operating funds during the period.
We also received $36,000 as an unsecured loan from an employee. Offsetting these
sources of funds was the repayment of $42,000 of notes payable, a payment of
$25,000 against newly issued long-term debt, and the payment $82,000 of capital
lease obligations.
Net cash provided by financing activities was $3.6 million in 1998. In
July, we raised $3.125 million from the issuance of 5% convertible debentures,
$625,000 of which was purchased by certain directors and executive officers and
certain other affiliated investors. In August, we raised $1.15 million by
issuing Series B preferred stock. We also received $221,000 of proceeds from the
exercise of warrants and options by certain warrant and option holders in the
second quarter of 1998. The proceeds from financing activities were partially
offset by $703,000 of principal payments on capital lease obligations and
$145,000 of principal payments on a note payable.
To date, we have not generated substantial revenues from the sale of our
products and services. We earned $765,600 in revenues for the year 1998, and
recognized $655,457 in revenues for the three months ended March 31, 1999. We
have suffered recurring losses from operations, recurring negative cash flow
from operations and had an accumulated deficit of $41,963,300 at March 31, 1999
that raise substantial doubt about our ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. We have required substantial funding through
debt and equity financings since our inception to complete our development plans
and commence full-scale operations.
We require additional cash to fund operations. At December 31, 1998, we had
essentially no cash from which to fund operations. In February 1999, we
completed a
26
<PAGE> 33
private placement of units consisting of an aggregate of $2,850,000 unsecured
promissory notes and 160,701 shares of common stock, from which we received net
proceeds of $2,393,000. We used the net proceeds from the February 1999 private
placement to fund our operations, including approximately $560,000 used to repay
certain outstanding accounts payable. Before completing the February 1999
private placement, we were able to pay only those expenses that were essential
to continue operations and we have continued to monitor payments carefully.
At March 31, 1999, we had $640,349 in cash and, as of the date of this
prospectus, we are again essentially out of cash. We intend to fund operations
until the closing of this offering with cash generated from customer payments on
outstanding accounts receivable. However, the timing and amount of customer
payments is uncertain. We anticipate that this offering will be completed in
late May. As a result of our liquidity problems, we have not been able to fund
any significant further development of the VidPhone system or any expansion of
our operations since mid-1998, and we anticipate that this will continue until
we complete this offering. In addition, we have not paid many of our creditors,
including trade creditors, on a timely basis and remain in default on a number
of significant overdue obligations. Some of these creditors have initiated or
threatened to initiate legal proceedings against us to obtain repayment of these
debts. If we continue not paying our debts as they become due, it is likely that
other creditors will take legal action against us and that other firms will
refuse to sell us the products and services we need to continue operations. We
estimate that the net proceeds from this offering will be sufficient to fund our
operations for approximately 12 months.
With respect to our plan of operations, we intend to continue to focus on
seeking to operate efficiently and preserve cash by closely monitoring
expenditures and payments to vendors on outstanding payables, reviewing
appropriate staffing levels without sacrificing product performance, and
continuing to increase product functionality and promote customer acceptance of
the VidPhone system.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value, gains or losses, depends
on the intended use of the derivative and its resulting designation. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Adoption of this standard will not have a material impact our
financial results.
INFLATION
The impact of inflation on our business has been insignificant to date, and
we believe that it will continue to be insignificant for the foreseeable future.
27
<PAGE> 34
BUSINESS
INTRODUCTION
Objective Communications is a Delaware corporation formed in 1993 to
design, develop and market a full motion, high resolution, cost-effective video
network system. Users of the VidPhone video network system can view broadcast
video from a variety of sources and participate in multi-party video
conferences. With the introduction of Release 1.5 of our VidPhone software,
which we expect to occur in June 1999, users also will be able to retrieve and
view stored video on demand. Our VidPhone system distributes video to and from
desktop or laptop personal computers and conference rooms configured with a
VidPhone station, over the same wiring used by the telephone. We believe that
the VidPhone system offers greater functionality and compatibility with existing
infrastructure and higher quality than other video network or conferencing
systems available today.
STRATEGY
Our objective is to become a leading provider of video network systems. The
key elements of our strategy are:
- Seek Brand-Name Recognition of the VidPhone System. We intend to
promote the VidPhone system as a brand-name video network. The
initiatives that we are pursuing include press releases, presentations
to industry analysts, technology announcements, formal product launches
and participation in trade shows.
- Position the VidPhone System as an Upgrade to Existing Telephone
Systems. We market the VidPhone system as an enhancement to existing
telephone systems to capitalize on the drive by telephone product and
service companies to regain prominence in the corporate information
systems market. These resellers can offer the VidPhone system as a fully
functional video network that we believe outperforms video network
functionality deployed on the LAN. We believe that the VidPhone system
is more attractive to information technology administrators than
LAN-based systems because it does not use LAN bandwidth, compromise LAN
integrity, affect LAN reliability or impede the performance of the
desktop personal computer.
- Distribute the VidPhone System Through Large Established Distribution
Channels. We are marketing the VidPhone system primarily through
telephone product and service providers, systems integrators and VARs.
These resellers provide us with immediate access to large,
well-established sales forces and credibility for our product. Most
telephone system providers have large sales, service and support
organizations and have long-term relationships with significant customer
bases, including large corporate customers. We currently have agreements
with 16 resellers, including Unisys, Sprint and Bell Atlantic, and we
intend to add more resellers.
INDUSTRY BACKGROUND
Business demand for video communications, historically limited primarily to
video conferencing, is driven by the desire to achieve the most effective means
of communication. Information that is exchanged or presented visually, such as
during in-person meetings or video presentations, has a stronger impact on the
end-user than non-visual communication. People cannot always exchange or present
information in person, and
28
<PAGE> 35
technology limitations and cost constraints have restricted the use of video
applications. Consequently, people rely on non-visual forms of communication,
such as telephony, voice mail and e-mail. Recent video application developments
such as targeted broadcasting and conferencing achieve the effectiveness of
face-to-face meetings while retaining the convenience of a telephone call.
We believe that video networks that fully support video broadcast, video
retrieval and video conferencing applications address many of the communications
requirements of the business community. Video networks can improve worker
productivity by facilitating the efficient exchange of information between
geographically dispersed parties and reducing travel expenses. In addition, they
can enable the use of video material for training and research at the
convenience of the user rather than the presenter and permit businesses to
access business broadcasts, such as CNN, CNNfn and CNBC, at a desktop or laptop
computer. To date, however, infrastructure and transmission constraints, costs
and other limitations have precluded business quality video broadcast, retrieval
and conferencing applications at desktop computers.
Until recently, most video communications systems were boardroom video
conferencing systems. These systems were expensive for most businesses. Even
today, most boardroom video conferencing systems require substantial capital
expenditures and trained personnel for set up and maintenance during video
conferencing calls. 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. In
addition, these systems normally require the use of the public telephone system
for all video calls, including those within a building or across a small
business campus, thereby incurring telephone usage charges for each call.
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. We believe that this is
primarily because most video network systems produce inadequate video quality
for business purposes.
Most desktop video conferencing systems use either dedicated telephone
lines or the LAN to transmit video data. Some desktop video conferencing systems
use dedicated Integrated Services Digital Network ("ISDN") lines to achieve
acceptable video quality (384 Kbps) for business purposes. However, to achieve
this quality, a minimum of three dedicated ISDN 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 prohibitively
expensive 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 conferencing.
Some video conferencing systems attempt to use the LAN rather than
dedicated telephone lines. These are referred to as IP or H.323 systems.
LAN-based systems also require the installation of hardware or software CODECs
in each user's desktop or laptop computer. Data LANs were not designed for
isochronous, i.e., time dependent, data such as video and audio. LANs were
designed to be shared by individuals using the transmission medium for short
periods of time. Most LANs today 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 volume of data and new infrastructure and
the
29
<PAGE> 36
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, we believe that these new
technologies do not adequately address the transmission delay problems plaguing
such systems. We believe that, in the future, synchronous fiber optic networks
and Asynchronous Transfer Mode ("ATM") switching will dominate in the wide area
network ("WAN"). However, we do not believe that ATM will reach desktop
computers due to the high cost.
We believe that business users will not adopt video applications on any
significant scale until video systems are capable of providing TV-quality video
and FM-quality stereo audio and are cost effective. We believe that our VidPhone
video network meets these requirements because it takes advantage of existing
telephone wiring and supports high quality video and audio, but does not
interfere with the existing LAN-based computer system or impede the performance
of an individual desktop or laptop computer.
PRODUCTS AND TECHNOLOGY
Our VidPhone system is a full-motion, high resolution, cost-effective video
network system that uses the same wiring as the telephone, which gives it a
competitive cost advantage over other types of video network systems. Users of
the VidPhone video network system can view broadcast video from a variety of
sources including direct broadcasts of "live" communications, satellite
broadcasts and stored video, and participate in multi-party video conferences
from desktop personal computers or conference rooms. With the introduction of
Release 1.5 of our VidPhone software, which we expect to occur in June 1999,
users also will be able to retrieve and view stored video on demand.
[chart]
30
<PAGE> 37
[Image of a remote terminal (wide area network) connected by a line to a
VidPhone switch which in turn is connected by three telephone lines equipped
with VidModems to a laptop computer, a television or large screen display and a
desktop computer within a building or small business campus. A fourth line
connects the Vidphone switch to a PBX or Centrex.]
Typical VidPhone(R) System Configuration
<PAGE> 38
Our VidPhone system is comprised of the following core components:
VidPhone Switch. The VidPhone switch is the video, audio and data switch
that is the cornerstone of our VidPhone video network system. It enables users
to access all VidPhone system functions within a building or across a small
business campus and, using one of our gateway products, to communicate with
remote locations through a WAN. A VidPhone switch is a scalable, modular video
network switch that supports from five to 50 concurrent users. Up to four
VidPhone switches may be connected to support up to 150 concurrent users. The
VidPhone switches normally reside near the PBX or CENTREX point of entry and can
be mounted in standard 19-inch racks.
VidModem. The VidModem connects the desktop and the VidPhone switch using
the existing telephone wiring. The desktop and VidPhone switch versions of the
VidModem incorporate the patented VidModem technology that enables distribution
of TV-quality video, FM-quality stereo audio and high speed data over the single
twisted pair of copper wire that connects the telephone to the PBX or CENTREX.
The transmission does not require compression or decompression of data. The
connection is transparent to the telephone and the PBX, so the user also can use
the telephone concurrently with the VidPhone system, and the telephone operates
independent of any video applications.
VidPhone Station Software. VidPhone station software is the software
platform supporting users of the VidPhone system. It provides an easy-to-use
graphical user interface for all video applications offered by the VidPhone
system and transforms a user's desktop or laptop computer into a VidPhone
station. The user's computer is configured with non-proprietary equipment such
as a microphone, speakers and a camera. VidPhone stations connect to the
VidPhone switch through a VidModem. A VidPhone station user can view broadcast
video and participate in video conferences. VidPhone stations may be located up
to 1,000 feet from the VidPhone switch when using category 3 wiring, and up to
2,000 feet when using category 5 wiring. We believe that most modern business
telephone systems use at least category 3 wire. VidPhone stations do not need a
terminal-resident ISDN or ATM CODECs because they connect directly to the
VidPhone switch. VidPhone stations may be easily and inexpensively modified for
conference room systems. The VidPhone system also supports all video network
applications in a large screen multi-party conference room setting.
VidPhone Remote Terminal. VidPhone remote terminals connect remote users
who are not directly connected to a VidPhone switch through a VidModem to the
VidPhone system. Employees in branch offices, individuals working from home, and
other parties outside a building or business campus are potential users of
VidPhone remote terminals. VidPhone remote terminal users have access to all
video network functions of the VidPhone 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 remote terminal connectivity
may be over a variety of communications circuits, such as single or multi-line
ISDN.
We also have developed and are continuing to develop additional components
that enhance the VidPhone system. Three of these components are the VidPhone
Gateway2, the ATM Gateway2 and our VidServer video storage and access device.
Our VidPhone Gateway2 and ATM Gateway2 can be used to connect VidPhone systems
across a wide area network. The VidPhone Gateway2 interfaces with and transmits
signals across a WAN using the public telephone system's ISDN lines, which are a
network of ISDN lines operating worldwide. The VidPhone system ATM Gateway2
interfaces with and transmits signals over a fiber optic network WAN. Both the
VidPhone Gateway2 and the ATM
31
<PAGE> 39
Gateway2 compress the video data signal at the location where the video call is
initiated, interface with the WAN, decompress the video signal at the location
where the video call is received, and transmit the video signal to the VidModem
switch for distribution to the VidPhone user to whom the call is directed. The
VidPhone VidServer will be available with software Release 1.5 expected to occur
in June 1999. The VidServer will permit VidPhone users access to and control of
stored video.
SYSTEM FUNCTIONALITY
The VidPhone system is capable of supporting three business video
requirements.
Broadcast Video. Users of the VidPhone system can view video broadcast
from a variety of sources. Sources of broadcast video material include, but are
not limited to, direct broadcasts of "live" communications, satellite
broadcasts, stored video, cable television, and narrowcasts over an ATM network.
These sources are connected to the VidPhone 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 switch
permits multiple users to simultaneously access the same broadcast video source
without degrading system performance.
Video Conferencing. The VidPhone system supports two-way and multi-party
video conferencing. A VidPhone system user can maintain a telephone directory
and contact other VidPhone users using standard point-and-click techniques at
any time without prior coordination.
Retrieval of Stored Video. With the commercial introduction of Release 1.5
of the VidPhone software, which we expect to occur in June 1999, VidPhone system
users will be able to access stored video material. The stored video material
may reside on a variety of different types of devices, such as a video server, a
video jukebox or a video tape player. Users will be able to access stored video
using point-and-click techniques similar to those used to access broadcast
video.
SALES AND MARKETING
Our sales and marketing strategy is to create brand-name recognition of the
VidPhone video network system. We actively promote the VidPhone system through
various initiatives including press releases, targeting key media outlets,
presentations to industry analysts and consultants, technology announcements,
formal product launches, and participation in trade shows. In the first quarter
of 1999, our VidPhone system was exhibited at three trade shows, including two
trade shows at which our strategic partner, Unisys, exhibited the VidPhone. In
1998, we exhibited the VidPhone system at five trade shows held in Washington,
D.C., Boston and three cities in California. Our strategic partner, Unisys,
exhibited the VidPhone system at 11 additional trade shows. Those shows targeted
the federal government, including the Department of Defense and U.S. military
bases. We also made a presentation and exhibited the VidPhone system at the
Sprint ATM User's Conference held in Atlanta in 1998.
Resellers. We market our VidPhone system primarily through telephone
product and service companies, systems integrators and VARs who generally will
market and sell our video network system as an upgrade to their existing
customers' telephone and information systems. We currently have agreements with
16 resellers. In part, our strategy is to capitalize on the drive by some of the
telephone product and service resellers to gain prominence in the corporate
information systems market. The attributes of the VidPhone system enable our
resellers to offer a fully functional video network that competes directly
32
<PAGE> 40
with video network functions offered by computer and LAN vendors. We believe the
VidPhone system is more attractive to information technology administrators than
LAN-based systems because it does not use LAN bandwidth, compromise LAN
integrity, affect LAN reliability or use significant personal computer
processing power. The VidPhone system architecture also enables information
technology administrators to centrally manage system resources and feature
upgrades. The VidPhone system provides higher quality video and audio than any
LAN-based system currently available.
Telephone product and service providers, systems integrators and VARs offer
sales, service and support and have large customer bases. These distribution
channels have a large existing customer base that is generally receptive to
system upgrades. We have an agreement with Bell Atlantic, expiring in October
1999, to market and sell our video network to the Department of Defense and
other governmental agencies. We also have a reseller agreement with Sprint to
market and sell VidPhone systems worldwide which terminates in July 1999. In
October 1998, we entered into a strategic alliance with Unisys under which
Unisys is the preferred systems integrator that resells our VidPhone system to
the federal government.
We have a limited operating history and, therefore, we do not have any
substantial basis on which to predict our sales cycle. However, we expect that
we will have a relatively long sales cycle for our products, in part because of
our strategy of marketing our VidPhone system through resellers. It takes a
relatively long time for us to establish a relationship with our resellers. It
also takes time for us to familiarize our resellers and their personnel with the
VidPhone system and to train the resellers' sales force. However, we also expect
that the time involved in our sales cycle will decrease after we establish
customer reference accounts, create brand name recognition of the VidPhone
system and have longer, more established relationships with our resellers.
Direct Sales. We have a small internal direct sales force to promote our
VidPhone system, to create reference accounts in major markets, and to support
our third-party resellers. We intend to continue to develop our direct sales
force, focusing on adding a small number of sales people in specific geographic
areas to further our sales and marketing efforts.
Vertical Distribution Channels. We are developing vertical distribution
channels for our VidPhone system. Initially, our sales and marketing efforts
target the government sector and the financial and medical industries. We are
targeting the government sector because it tends to adopt technology early and
has many uses for a video network system. We are targeting the financial and
medical industries because these industries have a demonstrated need to
broadcast and distribute video to many users at their desktop computers.
Customer Service and Support. We expect that our resellers will provide
their customers with service and support for the VidPhone system. In addition,
we maintain a customer support department that assists our resellers and
end-user customers with problems related to our video network system, including
the initial installation of the VidPhone system, technical questions, problem
resolution and systems engineering. As our resellers become more familiar with
the VidPhone system, we expect that they will be the primary customer support
for our products to their customers, and that our customer support department
will become a secondary customer support, focusing on providing service
regarding issues like software performance and hardware re-engineering
requirements. We also expect that, in the future, our customer support
department will provide services to our resellers rather than to the end-user
customer.
33
<PAGE> 41
Training. To promote reseller sales and marketing efforts, as well as
resellers' support for our products, we hold in-depth training programs to
educate our resellers about our products. During 1998, we held training classes
for reseller sales, support and service personnel, both at our facilities and at
our resellers' facilities. We intend to increase the number and availability of
our training programs in the future, which we believe will help build brand
awareness, promote reseller sales and marketing of the VidPhone system, and
improve reseller service and support for our VidPhone systems.
PRODUCT RESEARCH AND DEVELOPMENT
We spent $17,707,000 on research and development during 1997 and 1998.
During 1997, our research and development efforts focused on completing the
initial development and production of the VidPhone system. We introduced the
VidPhone system in the fourth quarter of 1997, and we made the first shipments
of the commercial VidPhone system in the third quarter of 1998. Since then, our
research and development has focused on:
- adding new features requested by our customers;
- adding additional user capacity to the VidPhone system; and
- lowering production costs.
Our engineering staff closely monitors technical developments and works
with our marketing personnel to assess evolving business video network
requirements. We will monitor emerging technologies that support new video
applications for business and tailor our research and development accordingly.
In addition to our internal research and development resources, we engage
contract engineering services when we believe that the use of such services will
be efficient. Research and development efforts target both hardware and software
enhancements to video network capabilities. Our research and development efforts
are complemented by internal quality and assurance procedures.
INTELLECTUAL PROPERTY
Our proprietary VidModem transmission technology, incorporated in our
VidPhone system, is covered by two U.S. patents issued in April 1997 and July
1998, which relate to a method and apparatus for transmitting video information
over telephone wiring and variations of the basic VidModem technology.
We also are currently prosecuting a patent application covering the
VidPhone system's networking and switching technology, and we have pending
patent applications with respect to a scalable high-speed packet switch and a
U-channel interface device. We cannot predict when we will receive dispositive
rulings from the U.S. Patent and Trademark Office concerning these patent
applications. We expect to file approximately six to nine new U.S. patent
applications in 1999 covering various improvements in the field of video
distribution, but we do not expect to receive notice from the U.S. Patent and
Trademark Office for at least one year after filing. The success of our products
depends in part on our continuing ability to obtain and protect patents,
licenses and other intellectual property rights covering our significant
hardware and software products. We have registered the trademarks Objective
Communications, VidPhone, and VidModem.
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 us.
34
<PAGE> 42
MANUFACTURING
We outsource the manufacture and assembly of components used in the
VidPhone system. In particular, we outsource to Sanmina Corporation the
manufacture and assembly of components used in the VidPhone switch. Several
other manufacturers are producing smaller sub-assemblies and components for us.
We believe we will be able to continue to outsource production and that there
are a number of manufacturers qualified to produce components of our VidPhone
system, because the production process is relatively routine and does not
require any unique expertise. Although our products incorporate unique, patented
technology, we also believe that all of the components used in our equipment are
readily available from commercial suppliers. As a result, we do not believe that
we depend on any single manufacturer or supplier to a material extent. All
products produced by third-party manufacturers are shipped to us for final
assembly, systems integration and quality assurance testing. We plan to retain
test and quality assurance functions until 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. Any of these difficulties could
have a material adverse effect on us.
As of December 31, 1998, we had overdue accounts payable to Sanmina of an
aggregate of approximately $3,200,000 and additional commitments to purchase our
inventory and other materials located at Sanmina of approximately $1,100,000 in
value. In January 1999, we restructured these obligations by converting the
outstanding $3,200,000 obligation to Sanmina and the $1,100,000 in inventory
commitments to a three-year term note in the principal amount of $4,300,000. The
note bears interest at 7% per year. We also issued to Sanmina warrants to
purchase 39,285 shares of our common stock at an exercise price of $19.25 per
share. We are obligated to pay Sanmina $1,100,000 in principal on the note at
the time this offering is completed and, at that time, Sanmina will transfer to
us title to our inventory and materials located at its facilities. We provide
you with more information about the restructuring later in this prospectus under
the caption "Description of Securities -- Other Warrants."
COMPETITION
The market for our products is new, highly competitive and rapidly
evolving. We believe that the principal competitive factors in the markets in
which we compete are product performance, price and product support. Our
principal competitors in the video network market are MMAC, FVC.com and VTEL
Corp. We also expect to compete with new entrants in the market and with
providers supporting IP and LAN-based video networks, including Intel,
Microsoft, and Cisco. To date, no desktop system has captured any significant
portion of the potential market.
Our video network system permits users to view broadcast video and
participate in multi-party video conferences from the desktop and, upon the
introduction of our Release 1.5 software, will permit retrieval of stored video
on demand. As a result, we also compete with companies that offer video
broadcast and video retrieval products. Competitors in the video broadcast
market include cable television and direct satellite broadcast system providers
such as DirecTV, TCI, and News Network Vision.
Our principal competitors in the video conferencing market have been
PictureTel, VTEL and its wholly-owned subsidiary CLI, Intel and Polycom. We
believe that PictureTel currently has the largest market share in both the group
and desktop video conferencing markets. We also expect to compete with new
market entrants in the video
35
<PAGE> 43
conferencing market. We are not aware of any current competitors in the video
retrieval market.
Virtually all of our competitors have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. We believe that we will be able to
compete effectively against larger companies with substantially greater
resources on the basis of our product's capabilities, our distribution strategy,
and price. We do not believe that LAN-based competitors will be able to provide
business quality video network systems in the foreseeable future. There can be
no assurance, however, that we will be able to compete successfully against
these or future competitors.
GOVERNMENT REGULATION
The Federal Communications Commission ("FCC") regulates the operation of
telecommunications equipment for use in the United States. The VidModem and
VidPhone switch components of the VidPhone system must comply with certain FCC
regulations.
VidModem. The VidModem is a Class A digital device that may be operated
without an individual license. Under FCC regulations, we will be required to
follow a verification procedure consisting of a self-certification that the
radio frequency device complies with applicable regulations. A qualified,
independent testing facility tested the VidModem, and it was found to comply
with FCC regulations.
VidPhone. We obtained equipment registrations from the FCC for certain
VidPhone system components, including the VidPhone switch, that are connected to
the public switched telephone network.
Future government regulations could increase the cost of bringing products
to market or adversely affect our ability to market and sell our products or
technology.
EMPLOYEES
As of May 12, 1999, we had 50 employees, all of whom were full-time. We
also use 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 us for a period
of 24 months after performing services for us. We do not have employment
agreements with any of our employees, except for James F. Bunker, our President
and Chief Executive Officer, and Steven A. Rogers, our founder, Chief Technology
Officer and Vice President.
PROPERTIES
We lease one facility in Portsmouth, New Hampshire at a current monthly
rental rate of $11.00 per square foot under a lease that expires in March 2008.
Rent on the facility increases over the term of the lease from an initial rate
of $11.00 per square foot to $15.00 per square foot. That facility consists of
approximately 26,000 square feet, of which approximately 13,000 square feet is
office space, approximately 6,500 square feet is a research and development
laboratory, and approximately 6,500 square feet is a production facility used
for equipment assembly and testing, customer support, and training.
36
<PAGE> 44
LEGAL PROCEEDINGS
We are a party to a number of lawsuits and proceedings relating to overdue
obligations. Most of these proceedings seek to recover relatively small amounts
of money and, as of the date of this prospectus, the total amount of damages
sought in these proceedings is approximately $122,000, plus in certain cases,
court costs and attorney's fees. We are seeking to negotiate payment terms
regarding many of these obligations, but to date our efforts to resolve them
have not been successful. We have numerous other overdue obligations which could
result in additional lawsuits being filed against us. We are not aware of any
other legal proceedings pending or threatened against us.
37
<PAGE> 45
MANAGEMENT
Our current directors and executive officers 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 April 30,
1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mr. James F. Bunker.................................. 64 President, Chief Executive
Officer and Director
Mr. Roger A. Booker.................................. 44 Vice President, Operations
Mr. Robert H. Emery.................................. 54 Vice President, Administration
and Finance and Secretary
Mr. David P. Martin.................................. 40 Vice President, Sales
Mr. Steven A. Rogers................................. 47 Chief Technology Officer and
Vice President, Engineering and
Director
Mr. Anthony M. Agnello............................... 49 Director
Dr. Eugene R. Cacciamani............................. 62 Director
Mr. Marc S. Cooper................................... 37 Director
Mr. Richard S. Friedland............................. 48 Director
Mr. John B. Torkelsen................................ 53 Director
</TABLE>
James F. Bunker has served as President and Chief Executive Officer since
July 1998 and was elected as a director in January 1999. From January 1994 until
he joined our company in July 1998, Mr. Bunker was actively involved as an
outside consultant to high technology companies, advising them with respect to
the development of a business plan, funding, recruiting management and other key
personnel, and serving as an executive member of management teams. Previously,
from 1986 until his retirement at the end of 1993, Mr. Bunker served in various
capacities with M/A-COM and General Instrument Corporation, most recently as the
President of the VideoCipher Division of General Instrument. Mr. Bunker also is
a director of Viasat, a public satellite telecommunications company located in
Carlsbad, California.
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. until July 1990, 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.
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 is a
CPA.
38
<PAGE> 46
David P. Martin has served as Vice President, Sales since October 1998.
Previously, Mr. Martin served as the Chief Information Officer from April 1998
to October 1998. Prior to joining Objective Communications, Mr. Martin served as
the Director of Information Systems at Healthsource Inc., a healthcare
maintenance organization, from 1990 until October 1998. He also served in sales
and sales management positions at IBM Corporation in the ROLM (PBX) division and
with Western Union in the advanced transmission (ATS) division.
Steven A. Rogers founded Objective Communications in 1993, and currently
serves as our Chief Technology Officer and Vice President, Engineering and as a
director. He served as President and Chief Executive Officer from our inception
until July 1998 and has served as a director since our inception. 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 founded Cryptek, Inc.
and, from January 1986 to July 1990, when it was acquired by General Kinetics,
Inc., served as its President and Chief Operating Officer. Mr. Rogers is a
co-author of the Company's patent covering the VidModem technology, and holds
several other patents.
Anthony M. Agnello has served as a director since January 1997. Mr. Agnello
co-founded Ariel Corporation, a digital signal processing equipment provider, in
1982 and currently serves as Chairman of the Board of Ariel Corporation. Mr.
Agnello holds several patents in digital signal processing.
Eugene R. Cacciamani has served as a director since August 1994. Dr.
Cacciamani has been a Senior Vice President of Hughes Network Systems, Inc.,
which furnishes 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 Qwest Communications.
Marc S. Cooper has served as a director since April 1997. Mr. Cooper has
been Vice Chairman of Barington Capital Group, L.P. responsible for the
Syndicate, Investment Banking and Research Departments since January 1998. 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.
Richard S. Friedland was elected as a director in March 1999. Since October
1997, Mr. Friedland has been actively involved as an investor and consultant to
emerging high technology companies, with a focus on video and communications.
From 1978 to October 1997, Mr. Friedland served in various capacities with
General Instrument Corporation, a provider of systems and equipment to the cable
telephone and telephony industries. Most recently, from September 1995 to
October 1997, he served as Chairman of the Board of Directors and Chief
Executive Officer of General Instrument, and he served as President, Chief
Operating Officer and Director of that company from September 1993 to September
1995. Mr. Friedland also is a director of Premark International, Zilog, Inc. and
Tech-Sym, Inc.
John B. Torkelsen has served as a director since March 1996. Mr. Torkelsen
has served as President of Princeton Venture Research, Inc. since 1984,
President of its affiliate PVR Securities, Inc. since 1987, President of its
affiliate, PVR Management, Inc.
39
<PAGE> 47
since 1997, and General Partner of its affiliate, Acorn Technology Fund, L.P.
since 1997. Mr. Torkelsen also is a director of Voice Control Systems, Inc.,
Mikros Systems Corporation and Princeton Video Image, Inc.
DIRECTOR COMPENSATION
We reimburse directors for expenses incurred in connection with attending
Board and committee meetings, but we have not paid cash compensation for
services rendered as a director.
In August 1994, we granted options to purchase an aggregate of 28,568
shares of common stock ("Directors' Non-Qualified Options") to the persons then
serving as our directors. The options are exercisable for a period of ten years
from the date of grant, have an exercise price of $14.00 per share and vest 20%
per year on each of the first, second, third, fourth and fifth anniversaries of
the date of grant. Directors may forfeit options if they do not meet certain
performance requirements. As of April 30, 1999, Directors' Non-Qualified Options
to purchase 21,427 shares of common stock were vested, Directors' Non-Qualified
Options to purchase 1,428 shares of common stock had been exercised and
Directors' Non-Qualified Options to purchase 4,998 shares of common stock had
been forfeited.
In April 1997, we granted options to purchase an aggregate of 9,224 shares
of common stock under the 1996 Stock Incentive Plan to the persons then serving
as our directors (other than Mr. Steven A. Rogers). The options are exercisable
for a period of five years from the date of grant, have an exercise price of
$46.38 per share and vest ratably on each of the first, second and third
anniversaries of the date of grant. Directors may forfeit options if they do not
meet certain performance requirements. As of April 30, 1999, 4,295 of these
options were vested, and 3,711 had been forfeited.
In May 1998, we granted options to purchase an aggregate of 12,780 shares
of common stock under the 1996 Stock Incentive Plan to the persons then serving
as our directors (other than Mr. Steven A. Rogers). The options are exercisable
for a period of five years from the date of grant, have an exercise price of
$92.75 per share and vest ratably on each of the first, second and third
anniversaries of the date of grant. Directors may forfeit options if they do not
meet certain performance requirements. As of April 30, 1999, none of these
options were vested and 7,639 had been forfeited.
The compensation committee of the Board of Directors will meet annually to
determine option grants to the directors.
40
<PAGE> 48
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table lists the cash remuneration paid or accrued during 1998
and 1997 to our President and Chief Executive Officer, and to each of our other
three most highly compensated executive officers who earned more than $100,000
in 1998 (the "Named Executive Officers"). We do not have any pension or
long-term incentive plans, and did not grant any restricted stock awards, bonus
stock awards or stock appreciation rights to any of the executive officers named
in this table during 1998 or 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
------------------
AWARDS
ANNUAL COMPENSATION ------------------
-------------------- SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James F. Bunker(1) 1998 $ 93,151 $ -0- 14,285
President & Chief Executive Officer
- ---------------------------------------------------------------------------------------
Roger A. Booker 1998 $105,000 $ -0- 6,428
Vice President, Operations 1997 85,000 45,000 5,000
- ---------------------------------------------------------------------------------------
Robert H. Emery 1998 $105,000 $ -0- 9,285
Vice President, Administration and 1997 90,000 45,000 5,000
Finance
- ---------------------------------------------------------------------------------------
Steven A. Rogers(2) 1998 $165,000 $ -0- 9,285
Chief Technology Officer and Vice 1997 120,000 60,000 7,142
President, Engineering
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Bunker joined the Company as President and Chief Executive Officer on
July 13, 1998.
(2) Mr. Rogers served as President and Chief Executive Officer of the Company
until July 13, 1998, when he became Chief Technology Officer and Vice
President, Engineering.
41
<PAGE> 49
STOCK OPTION GRANTS IN 1998
The following table sets forth certain information about the stock options
granted during 1998 to the Named Executive Officers. As of the date of this
prospectus, we have not granted any stock appreciation rights under the 1996
Stock Incentive Plan.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION
NAME GRANTED EMPLOYEES IN 1998 ($/SH) DATE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James F. Bunker 14,285(1) 9.8% $38.50 07/12/08
- ---------------------------------------------------------------------------------------------
Roger A. Booker 6,428(2) 4.4 $92.75 05/27/08
- ---------------------------------------------------------------------------------------------
Robert H. Emery 6,428(2) 4.4 $92.75 05/27/08
2,857(3) 2.0 30.63 10/01/08
- ---------------------------------------------------------------------------------------------
Steven A. Rogers 9,285(2) 6.4 $92.75 05/27/08
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Options to purchase 7,143 shares vested on January 13, 1999, six months from
the date of grant, and the remaining options to purchase 7,142 shares vest
ratably on a monthly basis over the period from February 13, 1999 through
July 13, 2000. Vesting of these options will accelerate in the event of a
"change in control" of Objective Communications.
(2) These options vest on May 27, 2004, the date that is six years from the date
of grant.
(3) These options vest ratably over a three-year period, annually on the
anniversary of the date of grant.
STOCK OPTION EXERCISES IN 1998
The Named Executive Officers did not exercise any options in 1998. The
following table sets forth the number of shares of common stock underlying
unexercised options held by the Named Executive Officers at December 31, 1998.
At December 31, 1998, no Named Executive Officer held any "in-the-money" stock
options.
1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS AT
DECEMBER 31, 1998
EXERCISABLE/
NAME UNEXERCISABLE
- -----------------------------------------------------------------
<S> <C>
James F. Bunker............................... 0/14,285
Roger A. Booker............................... 4,108/12,533
Robert H. Emery............................... 6,179/16,534
Steven A. Rogers.............................. 3,808/16,190
- -----------------------------------------------------------------
</TABLE>
FUTURE STOCK OPTION GRANTS
As a result of the reverse stock split in our outstanding common stock
effective on April 14, 1999, the number of shares of common stock held by our
stockholders and the
42
<PAGE> 50
number of shares of common stock underlying options held by our directors,
management and employees has been reduced by more than eighty five percent
(85%). The exercise prices of substantially all of these options are
significantly above the current market value per share of common stock. Our
management and Board of Directors believe that granting additional stock options
with an exercise price that approximates the current market value to
substantially all of our directors and employees is important for the future
success of the Company. As of the date of this prospectus, only approximately
81,000 shares of common stock were available for issuance to directors,
executive officers and employees under our existing stock option plans.
Accordingly, we expect in the near future to seek stockholder approval of a new
stock option plan providing for the issuance of up to the number of shares of
common stock equal to 30% of the number of shares of common stock outstanding
after this offering, including shares issued upon conversion of the Series B
preferred stock and the convertible debentures.
We have agreed with the representative of the underwriters of this offering
that, if the proposed new stock option plan is approved, in the future we will
not issue any options under our other existing stock option plans including the
1996 Stock Incentive Plan, and that all future options issued to directors,
officers, employees and consultants during the 12 months following this offering
will be granted under that new stock option plan. We also have agreed with the
representative of the underwriters that all future options granted during the 12
months following this offering, whether or not granted under the new stock
option plan, will have exercise prices of not less than the greater of the
public offering price per share of common stock in this offering, or the fair
market value of the common stock on the date of grant.
EXECUTIVE EMPLOYMENT CONTRACTS
We entered into an Employment and Consulting Agreement with Mr. Bunker as
of July 13, 1998. The agreement is for a one-year term, unless earlier
terminated or extended as provided in the agreement. At the conclusion of the
initial term, the term may be extended by mutual agreement for additional
successive one-month periods. If the aggregate term of employment is for less
than two years, then the agreement provides that Mr. Bunker will provide us with
consulting and advisory services for not fewer than two days per month through
July 13, 2000. The agreement also provides for a base salary of $200,000 per
year. Under the agreement, Mr. Bunker was granted stock options to purchase
14,285 shares of common stock at an exercise price of $38.50 per share, which
was the fair market value of the common stock on the date the options were
granted. The options are subject to certain vesting requirements. Mr. Bunker
also has entered into a Confidentiality, Inventions and Noncompetition Agreement
with Objective Communications.
We also entered into an employment agreement with Mr. Rogers effective on
March 13, 1997. The agreement was for an initial period of one year and renews
automatically for successive one-year periods on the anniversary date of the
agreement unless terminated by either party upon 90 days' written notice prior
to the end of the applicable term. The agreement also is terminable at any time
by the Company for "cause," or by Mr. Rogers for "good reason," in each case as
defined in the agreement. Under the terms of this agreement, Mr. Rogers
currently has an annual base salary of $165,000. 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.
43
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of May 12, 1999, by (i) all persons known by us
to beneficially own 5% or more of the outstanding shares of common stock, (ii)
each current director, (iii) each of the Named Executive Officers and (iv) all
of our current directors and executive officers, 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>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1)
------------------------- ---------------------
NUMBER OF NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
------------------------ ----------- --------- ---------- --------
<S> <C> <C> <C> <C>
Anthony M. Agnello(2)................ 994 *% 994 *%
Roger A. Booker(3)................... 7,521 * 7,521 *
James F. Bunker(4)................... 19,643 2.0 19,643 *
Eugene R. Cacciamani(5).............. 8,167 * 8,167 *
Marc S. Cooper(6).................... 42,692 4.2 42,692 *
Robert H. Emery(7)................... 18,910 1.9 18,910 *
Richard S. Friedland(8).............. -- -- -- --
Steven A. Rogers(9).................. 141,414 14.3 141,414 2.4
John B. Torkelsen(10)................ 59,973 6.0 59,973 1.0
All directors and executive officers
as a group (10 persons)(11)........ 299,314 27.3% 299,314 5.0%
</TABLE>
- -------------------------
* Less than one percent.
(1) Applicable percentage of ownership prior to this offering is based on
980,848 shares of common stock outstanding as of May 12, 1999. Applicable
percentage of ownership after this offering is based on 5,910,960 shares of
common stock outstanding after the offering, including 930,112 shares of
common stock to be issued upon conversion of the outstanding Series B
preferred stock and convertible debentures upon completion of this
offering. 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 warrants exercisable within 60 days
of the date of this prospectus are deemed outstanding.
(2) The address of Mr. Agnello is 2540 Route 130, Cranbury, New Jersey 08512.
Consists of 994 shares of common stock issuable upon exercise of options.
(3) The address of Mr. Booker is c/o Objective Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Consists of 6,132
shares of common stock issuable upon exercise of options and 1,389 shares
of common stock issuable upon conversion of outstanding convertible
debentures of which Mr. Booker owns $5,000 original principal amount.
(4) The address of Mr. Bunker is c/o Objective Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Consists of 9,126
shares of common stock that may be acquired upon exercise of outstanding
options, 3,571 shares of common stock purchased in the February 1999
private placement by a limited partnership controlled by Mr. Bunker and
6,946 shares of common stock issuable upon conversion of outstanding
convertible debentures of which Mr. Bunker beneficially owns, through a
limited partnership, $25,000 original principal amount.
(5) The address of Dr. Cacciamani is 10100 New London Drive, Potomac, Maryland
20854. Includes 3,961 shares of common stock issuable upon exercise of
options and
44
<PAGE> 52
2,778 shares of common stock issuable upon conversion of outstanding
convertible debentures of which Dr. Cacciamani owns $10,000 original
principal amount.
(6) The address of Mr. Cooper is c/o Barington, Capital Group, L.P., 888
Seventh Avenue, 17th Floor, New York, New York 10019. Consists of 25,714
shares of common stock that may be acquired upon exercise of an option held
by Barington (the "Barington Option"), 8,928 shares of common stock
issuable upon the exercise of another option held by Barington, 1,104
shares of common stock issuable upon the exercise of other options held by
Mr. Cooper and 6,946 shares of common stock issuable upon conversion of
outstanding convertible debentures of which Mr. Cooper owns $25,000
original principal amount. We granted Barington the Barington Option in
connection with our initial public offering in April 1997. Mr. Cooper also
is a stockholder in LNA Capital Corp., the corporate general partner of
Barington. Includes options to acquire 3,857 shares of common stock which
Cross Connect, L.L.C. has the right to acquire from Barington under certain
conditions. Cross Connect, L.L.C. is not affiliated with Barington or Mr.
Cooper, and Mr. Cooper disclaims beneficial ownership of the 3,857 shares
of common stock that may be acquired upon exercise of such options.
(7) The address of Mr. Emery is c/o Objective Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Includes 833 shares
of common stock issuable upon exercise of warrants, 8,989 shares of common
stock issuable upon exercise of options, 1,428 shares of common stock
purchased in the February 1999 private placement by Mr. Emery and 6,946
shares of common stock issuable upon conversion of outstanding convertible
debentures of which Mr. Emery owns $25,000 original principal amount.
(8) The address of Mr. Friedland is 5894 Partridge Lane, Long Grove, Illinois
60047.
(9) The address of Mr. Rogers is c/o Objective Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. All of the shares of
common stock owned by Mr. Rogers are pledged to Merrill Lynch Credit
Corporation to secure certain obligations. Includes 2,380 shares of common
stock issuable upon exercise of warrants and 6,189 shares of common stock
issuable upon exercise of options.
(10) The address of Mr. Torkelsen is 240 Library Place, Princeton, New Jersey
08540. Includes (i) 947 shares of common stock issuable upon the exercise
of options; (ii) 40,082 shares of common stock beneficially owned by
Princeton Venture Research, Inc. ("PVR"), of which Mr. Torkelsen is the
President and majority stockholder, and which are pledged to BT Alex. Brown
to secure certain obligations; (iii) 15,373 of common stock that may be
acquired upon the exercise of warrants beneficially owned by PVR; and (iv)
2,857 shares of common stock owned by Pamela Torkelsen, Mr. Torkelsen's
wife, and 714 shares of common stock that may be acquired upon the exercise
of warrants beneficially owned by Pamela Torkelsen. Mr. Torkelsen disclaims
beneficial ownership of common stock and warrants owned by Mrs. Torkelsen.
(11) Includes 91,384 shares of common stock issuable to executive officers and
directors upon exercise of warrants and options, and 25,005 shares of
common stock issuable to executive officers and directors upon conversion
of outstanding convertible debentures.
45
<PAGE> 53
CERTAIN TRANSACTIONS
RELATED PARTY LOANS
The following is a description of loan transactions of $60,000 or more
between Objective Communications and its directors, executive officers and 5% or
greater stockholders (or members of their families) since February 1997.
In April 1996, Clifford M. Kendall, then Chairman of the Board of
Directors, loaned us $100,000 in aggregate principal amount, on which interest
accrued quarterly at a fixed rate of 7% per year. We repaid the principal amount
of and accrued interest on the loan after our initial public offering of common
stock was completed in April 1997. In July 1997, Mr. Kendall exercised an option
granted by Mr. Steven A. Rogers and purchased 7,142 shares of common stock from
Mr. Rogers at an exercise price of $14.00 per share.
Mr. Rogers, our founder, Chief Technology Officer and Vice President,
Engineering and a director of Objective Communications, loaned us 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 year. 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 us, we also issued to Mr. Rogers warrants to purchase an
aggregate of 2,380 shares of common stock. The warrants have an exercise price
of $28.00 per share and are exercisable for a period of five years from the date
of issuance. We paid all loans outstanding to Mr. Rogers in full in April 1997
upon the completion of our initial public offering.
On January 8, 1999, a limited partnership controlled by Mr. Bunker made a
loan to us to permit us to continue operations. The principal amount of the loan
made by Mr. Bunker was $100,000. The principal amount of the loan was converted
into units in the February 1999 private placement. The purchases of securities
made by Mr. Bunker in the February 1999 private placement was made on the same
terms and conditions as unaffiliated third parties purchasing units in the
offering, except that Mr. Bunker was issued only 3,571 shares of common stock in
the February 1999 private placement and unaffiliated third party investors
investing the same dollar amount were issued 5,714 shares of the units purchased
in that private placement. We will use a portion of the net proceeds from this
offering to repay the notes issued in the February 1999 private placement,
including the note held by Mr. Bunker.
Mr. Bunker has voluntarily deferred the payment of his salary from November
9, 1998, through the date on which this offering is completed. As of April 29,
1999, we owe Mr. Bunker $92,308 in accrued and unpaid salary. Following the
closing of this offering, we will again pay Mr. Bunker his salary on a current
basis in accordance with our normal payroll practices. In addition, under a
letter agreement between us and Mr. Bunker dated February 4, 1999, after the
closing of this offering, we are obligated to repay Mr. Bunker his accrued and
unpaid salary at the rate of $5,000 per week, until the obligation is repaid in
full. We may also, at our discretion, repay the obligation in full at any time
after completion of this offering.
46
<PAGE> 54
EQUITY TRANSACTIONS
The following is a description of equity transactions between us and our
directors, executive officers and 5% or greater stockholders (or members of
their families) since February 1997.
Barington Capital Group, L.P.
Barington acted as underwriter of our initial public offering of common
stock completed in April 1997, for which it received underwriting discounts and
commissions of approximately $1,100,000. In addition, Barington received a
non-accountable expense allowance of $341,550, and was issued an option to
purchase 25,714 shares of common stock. That option is exercisable until April
8, 2002 at an exercise price of $63.53 per share. Barington also served as an
underwriter of our follow-on offering of common stock completed in October 1997,
for which it received underwriting fees and commissions of approximately
$500,000. Mr. Marc S. Cooper, a director of the Company, is the Vice Chairman of
Barington.
In December 1997, we granted Barington an option to acquire 17,857 shares
of common stock at an exercise price of $96.67 per share, the fair market value
of the common stock on the date of grant. The option was granted as
consideration for business and financial services to be provided to us over a
two-year period, including investment banking services and consulting services
relating to mergers and acquisitions.
We have agreed to use our best efforts (including the solicitation of
proxies, if necessary) to elect one designee of Barington to the Board of
Directors until April 8, 2002. Mr. Cooper has served as a director since April
1997 and was elected pursuant to this agreement. Mr. Cooper currently is a
member of the Audit Committee of the Board of Directors.
In July 1998, the Company issued $3,125,000 aggregate principal amount of
convertible debentures in a private placement. Directors and executive officers
purchased an aggregate of $315,000 aggregate original principal amount of
convertible debentures. The purchasers included Mr. Cooper, who purchased
$25,000 original principal amount of convertible debentures. In addition, other
principals and employees of Barington purchased in the aggregate $135,000
original principal amount of convertible debentures. The convertible debentures
will automatically convert into shares of common stock upon the completion of
this offering.
PVR Securities, Inc.
John B. Torkelsen, the President of Princeton Venture Research and its
affiliate, PVR Securities, Inc., has served as a director since March 1996 and
is a member of the Compensation Committee of the Board of Directors. In
connection with private placements of our equity securities by PVR Securities in
1995 and 1996, Mr. Torkelsen and Mr. Rogers entered into an agreement that
provides that, until December 5, 2000, each of them will vote any shares of
common stock that he controls for the election to the Board of Directors of an
individual nominated by the other and, on a best efforts basis, will seek
additional votes for the other party's nominee. Mr. Torkelsen was elected to the
Board pursuant to this agreement.
47
<PAGE> 55
PVR Securities, a corporation of which Mr. Torkelsen is the President,
acted as the investment advisor to the two investors that purchased the
$1,150,000 stated value of Series B preferred stock in a private placement
completed in August 1998. Neither PVR Securities nor Mr. Torkelsen received any
compensation for acting in that capacity.
ISSUANCE OF 5% CONVERTIBLE DEBENTURES DUE 2003
As described above, in July 1998, we issued $3,125,000 aggregate principal
amount of convertible debentures. $2,500,000 aggregate original principal amount
of convertible debentures were purchased by certain institutional investors (the
"Institutional Investors"), and $625,000 aggregate original principal amount of
convertible debentures were purchased by certain directors and executive
officers of, and outside consultants to, the Company. Messrs. Kendall, Cooper,
Liebhaber and Dr. Cacciamani, then directors of the Company, and Messrs. Bunker,
Booker and Emery and Ms. Murphy, then executive officers of the Company,
purchased convertible debentures in the offering. Following the issuance of the
convertible debentures, the following persons held beneficially the principal
amount of debentures indicated: Mr. Bunker -- $25,000; Mr. Booker -- $5,000; Mr.
Emery -- $25,000; Ms. Murphy -- $25,000; Mr. Kendall -- $100,000; Dr.
Cacciamani -- $10,000; Mr. Cooper -- $25,000; and Mr. Liebhaber -- $100,000. The
offering, issuance and sale of the convertible debentures to certain directors
and executive officers was a condition precedent to the consummation of the
financing with the Institutional Investors.
It was a condition precedent to the consummation of the February 1999
private placement that we enter into an agreement with the holders of the
convertible debentures, including the directors and executive officers indicated
above, amending certain terms of those securities. In the letter agreements,
each of the holders of the convertible debentures agreed that: (i) it would not
exercise its right to convert the convertible debentures to common stock until
the date on which a public or private equity financing with specified minimum
gross proceeds to us (a "qualified financing") is completed; (ii) upon the
closing of a qualified financing, the principal amount of and accrued and unpaid
interest on the convertible debentures will automatically convert into the
securities issued in the qualified financing at a conversion price of $3.75 and
that the anti-dilution provisions of the convertible debentures would be
inapplicable to the conversion; and (iii) it waives any default by us with
respect to our obligation to register or maintain the effectiveness of a
registration statement for the shares of common stock issuable upon conversion
of the convertible debentures. The holders of the convertible debentures also
agreed to hold the shares of common stock issued upon conversion of the
convertible debentures for at least 12 months following the effective date of
our registration statement that relates to the qualified financing. We agreed to
include the shares of common stock issuable upon conversion of the convertible
debentures in the registration statement filed with the SEC relating to the
qualified financing.
We believe that all of the above transactions were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties,
and all of the transactions since our initial public offering were approved by
at least a majority of our Board of Directors, including a majority of the
disinterested members of the Board of Directors. All future transactions between
us and any of our 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 disinterested members of the Board of Directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
48
<PAGE> 56
DESCRIPTION OF SECURITIES
COMMON STOCK
Our Certificate of Incorporation authorizes us to issue up to 30,000,000
shares of common stock, par value $.01 per share. Of the 30,000,000 shares of
common stock authorized, 980,848 shares are issued and outstanding as of the
date of this prospectus. Upon completion of this offering, there will be
5,910,960 shares of common stock issued and outstanding.
Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors from funds legally available for such
dividends. Upon liquidation, holders of shares of common stock are entitled to a
pro rata share in any distribution available to holders of common stock. The
holders of common stock have one vote per share on each matter to be voted on by
stockholders, but are not entitled to vote cumulatively. Holders of common stock
have no preemptive rights. All of the outstanding shares of common stock are,
and all of the shares of common stock to be issued in connection with this
offering will be, validly issued, fully paid and non-assessable.
PREFERRED STOCK
Our Certificate of Incorporation authorizes the Board of Directors to issue
up to 2,500,000 shares of preferred stock, par value $0.01 per share, to
establish one or more series of preferred stock and to determine, with respect
to each such series, the preferences, rights and other terms thereof. We
currently have outstanding 209,091 shares of Series B preferred stock. The
holders of the Series B preferred stock have registration rights with respect to
the shares of common stock issuable upon conversion of the Series B preferred
stock. The holders waived any registration rights with respect to those shares
in connection with this offering. The Series B preferred stock will
automatically convert into common stock upon consummation of this offering. Upon
completion of this offering, no shares of preferred stock will be outstanding,
and the Board has no present intention to issue any such shares.
THE UNITS
Each Unit consists of two shares of common stock and one warrant. The
shares of common stock and the warrants are immediately detachable and may be
separately transferred by the holders thereof.
WARRANTS OFFERED AS PART OF THE UNITS
Each of the warrants offered hereby, and the warrants included in the units
issuable upon exercise of the representative's purchase option, will entitle the
holder to purchase one share of common stock at an initial exercise price of
$5.00 per share during a four-year period commencing one year after the date of
this prospectus. No fractional shares of common stock will be issued in
connection with the exercise of warrants. Upon exercise, we will pay the holder
the value of any such fractional shares in cash, based upon the market value of
the common stock at the time of exercise.
The warrants will expire at 5:00 p.m., New York time, on the fifth
anniversary of the date of this prospectus. In the event that a holder of
warrants fails to exercise the warrants
49
<PAGE> 57
prior to their expiration, the warrants will expire and the holder thereof will
have no further rights with respect to the warrants.
We may, with the consent of the representative, redeem the warrants, at any
time after they become exercisable, at a price of $.01 per warrant upon not less
than 30 days' prior written notice if the last sale price of the common stock
has been at least 160% of the then exercise price of the warrants (initially
$8.00 per share) for the 20 consecutive trading days ending on the third day
prior to the day on which notice is given.
No warrants will be exercisable unless at the time of exercise there is a
current prospectus covering the shares of common stock issuable upon exercise of
such warrants under an effective registration statement filed with the SEC and
such shares have been qualified for sale or are exempt from qualification under
the securities laws of the state of residence of the holder of such warrants. We
have undertaken to file and keep current a prospectus which will permit the
purchase and sale of the common stock underlying the warrants, but there can be
no assurance that we will be able to do so. Although we intend to seek to
qualify for sale the shares of common stock underlying the warrants in those
states where the units are being offered, there can be no assurance that we will
be able to do so.
A holder of warrants will not have any rights, privileges or liabilities as
a stockholder of Objective Communications prior to the exercise of the warrants.
We are required to keep available a sufficient number of authorized shares of
common stock to permit exercise of the warrants. The exercise price of the
warrants and the number of shares issuable upon exercise of the warrants will be
subject to adjustment to protect against dilution in the event of stock
dividends, stock splits, combinations, subdivisions and reclassifications. No
assurance can be given that the market price of our common stock will exceed the
exercise price of the warrants at any time during the exercise period.
OTHER WARRANTS
Upon completion of this offering, in addition to the warrants described
above, the following warrants to purchase an aggregate of 200,627 shares of
common stock will be outstanding: warrants to purchase 46,662 shares at an
exercise price of $28.00 per share; warrants to purchase 2,142 shares at $56.00
per share; the 1996 warrants to purchase 41,501 shares at an exercise price of
$23.10 per share; the Series A warrants to purchase 14,284 at an exercise price
of $28.00 per share; warrants to purchase 7,467 shares at $19.25 per share;
warrants to purchase 39,286 shares at $19.25 per share; warrants to purchase
5,714 shares at $18.59 per share; options to purchase 25,714 shares of common
stock at $63.53 per share; and options to purchase 17,857 shares of common stock
at $96.67 per share. The following discussion of the material terms and
provisions of the warrants is qualified in its entirety by reference to the
detailed provisions of the agreements relating to the issuance of the warrants
and the forms of warrants, which are filed as exhibits to the Registration
Statement on Form SB-2 of which this prospectus constitutes a part.
PVR Warrants. In connection with our private placement of common stock in
June 1995 and August 1996, we issued warrants to purchase an aggregate of 63,981
shares of common stock, of which warrants to purchase 49,363 shares of common
stock were issued to investors and warrants to purchase 14,618 shares of common
stock were issued as inducements to make loans to us. We also issued to Mr. John
B. Torkelsen, President of PVR Securities, as partial compensation for the
services of PVR Securities as placement agent for the offering, warrants to
purchase 9,872 shares of common stock. Including those
50
<PAGE> 58
warrants issued to Mr. Torkelsen as compensation, we originally issued warrants
to acquire 4,936 shares of common stock with an exercise price of $46.20 per
share, warrants to acquire 63,981 shares of common stock with an exercise price
of $56.00 per share, and warrants to acquire 4,936 shares of common stock with
an exercise price of $61.60 per share. Certain of these warrants were issued to
our directors, officers and affiliates to induce them to make loans to us.
Certain investors subsequently converted the principal amount of and accrued
interest on their outstanding loans to us to units consisting of common stock
and warrants.
The exercise price of the warrants and the number of shares of common stock
issuable upon exercise thereof are subject to adjustment in certain
circumstances, including the event of a stock dividend, subdivision or
combination of the common stock, the issuance of common stock or rights, options
or warrants to acquire common stock at a price per share less than the exercise
price of the warrants in effect immediately prior to such issuance. These
warrants are exercisable in whole or in part. Warrants to purchase 46,662 shares
of common stock at an exercise price of $28.00 per share and warrants to
purchase 2,142 shares of common stock at an exercise price of $56.00 per share
expire on January 24, 2001. The holders of these warrants have certain
registration rights with respect to the warrants and the shares of common stock
underlying the warrants.
The holders of the warrants issued in the private placements by PVR
Securities in 1995 and 1996 waived any registration rights with respect to the
warrants and the shares of common stock issuable upon exercise of these warrants
in connection with this offering.
1996 Warrants. In October and November 1996, we issued to investors
warrants to purchase, in the aggregate, up to 49,976 shares of common stock at
an exercise price equal to $23.10 per share. Warrants to purchase 41,501 shares
of common stock are outstanding as of the date of this offering. The 1996
warrants are exercisable in whole or in part and expire on dates ranging from
October 2001 to December 2001. The exercise price of the 1996 warrants and the
number of shares of common stock issuable upon exercise of the warrants are
subject to adjustment in certain circumstances, including stock dividends, stock
splits, combinations or reclassifications involving or in respect of our common
stock. In addition, the holders of these warrants have certain registration
rights with respect to the warrants and the shares of common stock issuable upon
exercise of these warrants. Holders of these warrants have waived any
registration rights for the warrants and the shares issuable upon exercise of
the warrants in connection with this offering. In addition, the holders also
waived any anti-dilution adjustment in the number of shares of common stock
issuable upon exercise of the warrants and the warrant exercise price as a
result of the February 1999 private placement and this offering.
Series A Warrants. In connection with the private placement of Series A
preferred stock in December 1996 and January 1997, all of which converted to
common stock upon our initial public offering, we issued warrants to purchase an
aggregate of 14,284 shares of common stock at an exercise price of $28.00 per
share. The Series A warrants are currently exercisable and expire on December
20, 2001 and January 22, 2002. The holders of the Series A warrants have certain
registration rights with respect to the shares of common stock underlying the
Series A warrants. The exercise price of these warrants and the number of shares
of common stock issuable upon exercise thereof are subject to adjustment in
certain circumstances, including the event of a stock dividend, subdivision or
combination of the common stock, the issuance of common stock or rights, options
or warrants to acquire common stock at a price per share less than the exercise
price of the warrants in effect immediately prior to such issuance. Holders of
the Series A warrants
51
<PAGE> 59
waived any registration rights for the shares issuable upon exercise of the
warrants in connection with this offering. They also waived any anti-dilution
adjustment in the number of shares of common stock issuable upon exercise of the
warrants and the exercise price as a result of the February 1999 private
placement and this offering.
Series B Warrants. In August 1998, in connection with our private
placement of 209,091 shares of Series B preferred stock to two institutional
investors, we issued warrants to purchase an aggregate of 7,467 shares of common
stock with an original exercise price of $42.00 per share. In connection with
the February 1999 private placement, under a letter agreement with each of the
holders of the Series B warrants, we agreed that: (i) the holders would not
exercise their right to convert the Series B preferred stock to common stock, or
exercise the Series B warrants for common stock, until the date on which we
complete a public or private equity financing with gross proceeds to us of not
less than $8 million (a "qualified financing"); (ii) upon the closing of a
qualified financing, the stated value of and accrued and unpaid dividends on the
Series B preferred stock will automatically convert into shares of common stock
at a conversion price equal to $19.25 per share, and the exercise price of
Series B warrants would be reduced to $19.25 per share; (iii) the anti-dilution
provisions of the Series B preferred stock and the Series B warrants would not
apply to a qualified financing which would include this offering, the
convertible debenture conversion, the February 1999 private placement, the
conversion of the Series B preferred stock or the exercise of the Series B
warrants; (iv) the holders waived and agreed not to exercise any registration
rights they may have as to the common stock issuable upon conversion of the
Series B preferred stock or the exercise of the Series B warrants in connection
with this offering; and (v) the holders would not sell any common stock issuable
upon conversion of the Series B preferred stock for at least six months after
the effectiveness of this registration statement (or up to 24 months, if
necessary to obtain regulatory approval of this offering).
Other Warrants. In January 1999, in connection with the restructuring of
certain outstanding obligations to Sanmina Corporation, we issued to Sanmina
warrants to purchase 39,286 shares of our common stock, with a $19.25 exercise
price per share. As part of the transaction, we converted outstanding accounts
payable of $3,200,000 and $1,100,000, the latter amount representing the value
of our inventory and materials located at Sanmina, to a $4,300,000 three-year
term loan accruing interest at 7% per year. We are obligated to pay Sanmina
$1,100,000 in principal on the note at the time this offering is completed and,
at that time, Sanmina will transfer to us the title to our inventory and
materials located at Sanmina. In January 1999, we also converted outstanding
bills to our counsel totaling approximately $375,000 to a two-year term loan
accruing interest at 7% per year. In connection with the transaction, we issued
to our counsel warrants to purchase 5,714 shares of common stock with a $18.59
per share exercise price. We are obligated to pay our counsel $50,000 in
principal on the note at the time this offering is completed.
Barington Options. We issued to Barington options to purchase 25,714
shares of common stock at an exercise price of $63.53 per share in connection
with our initial public offering. Cross Connect, L.L.C. has the right to acquire
options to purchase 3,857 shares of common stock from Barington in certain
circumstances. Cross Connect, L.L.C. is not affiliated with Barington or Marc S.
Cooper. The Barington option is exercisable until April 8, 2002. The Barington
option may be exercised as to all or a lesser number of shares covered by the
option, and has certain registration rights and anti-dilution provisions
providing for appropriate adjustment of the exercise price and number of shares
which may be purchased upon exercise, upon the occurrence of certain events.
Barington waived any
52
<PAGE> 60
registration rights relating to its options and the shares issuable upon
exercise of its options in connection with this offering. We also issued to
Barington in December 1997 options to purchase 17,857 shares of common stock at
an exercise price of $96.67 per share. These options were granted as
consideration for business and financial services to be provided to us over a
two-year period. Barington also waived any anti-dilution adjustment in the
number of shares issuable upon exercise of its options or the option exercise
price as a result of the February 1999 private placement and this offering.
53
<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of this offering, there will be outstanding 5,910,960
shares (6,510,960 shares if the underwriters' over-allotment option is exercised
in full) of our common stock (including 61,852 shares of common stock issuable
upon the automatic conversion of the Series B preferred stock at a conversion
price of $19.25 per share upon completion of this offering, and 868,260 shares
of common stock issuable upon the automatic conversion of the outstanding
convertible debentures at a conversion price of $3.75 upon completion of this
offering). Of such shares, 4,532,690 shares (5,132,690 shares if the
underwriters' over-allotment option is exercised in full) of common stock,
consisting of (i) the 4,000,000 shares of common stock being sold as part of the
units in this offering, (ii) 438,571 shares sold in our prior public offerings
of common stock, (iii) 85,637 shares previously resold in reliance on Rule 144
under the Securities Act, and (iv) 8,482 shares sold under an effective
registration statement filed by us on Form S-3 with the Securities and Exchange
Commission, will be freely transferable without restriction by persons other
than our affiliates, subject to certain lock-up arrangements. The lock-up
arrangements are described in detail below.
In addition, subject to the lock-up arrangements, certain selling
stockholders may offer and sell from time to time up to 1,028,961 outstanding
shares of common stock in negotiated transactions or otherwise, consisting of
the 160,701 shares of common stock issued by the Company in the February 1999
private placement and 868,260 shares of common stock issuable upon the
conversion of the outstanding convertible debentures upon completion of this
offering. The registration statement we filed relating to this offering also
registers those shares, all of which are freely transferable under the
Securities Act without restriction by persons other than our affiliates. Sales
of shares of common stock by the selling stockholders may have an adverse effect
on the market price of the common stock.
The remaining 349,309 outstanding shares of common stock will be
"restricted securities" under Rule 144. These shares may be sold in the future
without registration under the Securities Act to the extent permitted by Rule
144, pursuant to another exemption from registration under the Securities Act,
or under an effective registration statement. Certain of our outstanding shares
of common stock that are restricted securities have registration rights, which
are discussed below in this prospectus under the heading "-- Registration
Rights." As currently in effect, Rule 144 provides that any person (or persons
whose shares are aggregated) holding "restricted securities," and any of our
affiliates, who has beneficially owned the shares for at least one year (as
computed under Rule 144), is entitled to sell within any three-month period the
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the common stock (approximately 59,109 shares after the
offering and giving effect to the conversion of the convertible debentures and
the Series B preferred stock) and (ii) the reported average weekly trading
volume of the then outstanding shares of common stock during the four calendar
weeks immediately preceding the date on which the notice of sale is filed with
the Securities and Exchange Commission. Sales under Rule 144 also are subject to
certain provisions relating to the manner and notice of sale and the
availability of current public information about Objective Communications. A
person (or persons whose shares are aggregated) who is not deemed one of our
affiliates at any time during the 90 days immediately preceding a sale, and who
has beneficially owned the shares for at least two years (as computed under Rule
144), would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitation and the other conditions mentioned above.
54
<PAGE> 62
We cannot predict the effect that any future sales of shares of common
stock, or the availability of such shares for sale, will have on the market
price of the common stock from time to time. We believe that sales of
substantial numbers of shares of common stock, or the perception that such sales
could occur, would adversely affect prevailing market prices of the common stock
and our ability to raise capital in the future through the sale of additional
securities.
In addition to the outstanding shares of common stock and the shares
issuable upon the conversion of the convertible debentures and the Series B
preferred stock upon the completion of the offering, we have reserved a total of
3,968,058 shares of common stock for issuance upon exercise of other outstanding
warrants and options including (i) the warrants that constitute part of the
units issued in connection with this offering (ii) the shares of common stock
and warrants issuable as part of the units to be issued upon exercise of the
underwriters' over-allotment option, and (iii) the shares of common stock and
warrants issuable as part of the units to be issued upon exercise of the
representative's purchase option. Shares of common stock issuable in the future
could hinder future financings. In addition, the holders of some of these
options and warrants have registration rights, and the sale of shares of common
stock upon exercise of those rights or the availability of such shares for sale
could adversely affect the market price of the common stock.
REGISTRATION RIGHTS
Subject to the lock-up arrangements described below, we have granted demand
and/or "piggyback" registration rights to the holders of 160,701 shares of
common stock, the holders of 930,112 shares of common stock issuable upon
conversion of the Series B preferred stock and the convertible debentures upon
completion of this offering, and the holders of options and warrants to purchase
an additional 137,770 shares of common stock. Subject to certain conditions and
limitations, the registration rights grant to the holders the right to register
all or any portion of the common stock held by them or issuable upon the
exercise of warrants or options held by them. In addition, the holders of
warrants to purchase 97,800 shares of common stock also have the right to cause
us to register the warrants for resale by the holders in certain circumstances.
The registration rights are subject to certain notice requirements, timing
restrictions and volume limitations which may be imposed by the underwriters of
an offering. We generally are required to bear the expenses of all such
registrations, except for the underwriting discounts and commissions relating to
the sale of the shares of common stock by the holders.
LOCK-UP AGREEMENTS
The sale of certain of the shares of common stock available for sale in the
public market after completion of this offering is limited by restrictions under
agreements entered into with Southeast Research Partners, Inc., the
representative of the underwriters of this offering. Without the prior written
consent of the representative of the underwriters of this offering, the holders
of the following securities have agreed not to offer, sell, transfer or
otherwise dispose of the number of shares of common stock for the periods
indicated: (i) the holders of 160,701 shares of common stock we issued in the
February 1999 private placement have agreed not to dispose of any of such shares
for a period of six months from the effective date of the registration statement
filed with respect to this offering; (ii) directors and executive officers
holding an aggregate of 207,930 shares of common stock (including 4,999 shares
of common stock purchased in the February 1999 private
55
<PAGE> 63
placement) have agreed not to dispose of any shares of common stock for fifteen
months from the effective date of the registration statement filed with respect
to this offering; (iii) the holders of the 868,820 shares of common stock
issuable upon the conversion of the convertible debentures have agreed not to
dispose of any shares of common stock issuable upon conversion of the debentures
for one year (including 25,005 shares of common stock issuable to certain of our
directors and executive officers upon conversion of the convertible debentures)
following the effective date of the registration statement filed with respect to
this offering; and (iv) the holders of the 61,852 shares of common stock
issuable upon the conversion of the Series B preferred stock have agreed not to
dispose of any shares of common stock issuable upon conversion of the preferred
stock or the 7,467 shares of common stock issuable upon exercise of the warrants
issued in connection with the original issuance of the Series B preferred stock
for six months following the effective date of the registration statement filed
with respect to this offering.
56
<PAGE> 64
UNDERWRITING
The underwriters named below, for whom Southeast Research Partners, Inc.
("SERP") is acting as representative, have severally agreed, subject to the
terms and conditions of the underwriting agreement, to purchase from us a total
of 2,000,000 units. The number of units that each such underwriter has agreed to
purchase is set forth opposite its name:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF UNITS
- ----------- ----------------
<S> <C>
Southeast Research Partners, Inc. .........................
Ladenburg Thalmann & Co. Inc. .............................
----------
Total............................................ 2,000,000
</TABLE>
The obligations of the underwriters under the underwriting agreement are subject
to approval of certain legal matters by counsel and various other conditions
precedent, and the underwriters are obligated to purchase all of the units
offered by this prospectus (other than the units covered by the over-allotment
option described below) if any are purchased.
The representative has advised us that the underwriters propose to offer
the units to the public at the public offering price set forth on the cover page
of this prospectus and to certain dealers at that price less a concession not in
excess of $ per unit. The underwriters may allow and such dealers may
reallow a concession not in excess of $ per unit to certain other dealers.
After this offering the offering price and other selling terms may be changed by
the underwriters.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act. We have also agreed to pay to
the representative of the underwriters an expense allowance on a non-accountable
basis equal to 3% of the gross proceeds derived from the sale of the units
underwritten (including the sale of any units subject to the underwriters'
over-allotment option), $50,000 of which has been paid to date. We have also
agreed to pay all expenses in connection with qualifying the units offered
hereby for sale under the laws of such states as the representative may
designate and registering this offering with the National Association of
Securities Dealers, Inc. including fees and expenses of counsel retained for
such purposes by the representative.
We have granted to the underwriters an option, exercisable during the
45-day period after the date of this prospectus, to purchase from us at the
offering price, less underwriting discounts and the non-accountable expense
allowance, up to an aggregate of 300,000 additional units for the sole purpose
of covering over-allotments, if any.
In connection with this offering, we have agreed to sell to the
representative for an aggregate of $100 the representative's purchase option,
consisting of the right to purchase up to an aggregate of 200,000 units. The
representative's purchase option will be exercisable at any time between the
first and the fifth anniversary of the date of this prospectus at a price of
$ per unit (165% of the per unit offering price). The representative's
purchase option may not be transferred, sold, assigned or hypothecated during
the one-year period following the date of this prospectus except to the
underwriters,
57
<PAGE> 65
the selected dealers and to officers or partners of the representative, the
underwriters and the selected dealers. The representative's purchase option
grants to the holders thereof certain "piggyback" and demand rights for periods
of five and seven years, respectively, from the date of this prospectus with
respect to the registration under the Securities Act of the securities directly
and indirectly issuable upon exercise of the representative's purchase option.
The underwriting agreement provides that for a period of three years from
the date of this prospectus we will appoint or elect a designee of SERP as a
member of our Board of Directors. Alternatively, if SERP chooses, SERP may send
a non-voting representative to observe each meeting of the Board of Directors.
To the extent permitted by Delaware law, we have agreed to indemnify SERP and
its designee for the actions of such designee as a director of Objective
Communications. SERP has not yet selected a designee.
Until February 4, 2002, SERP has the right to purchase for its account or
to sell for the account of our officers and directors and certain stockholders
(and any family member or affiliate of any of the foregoing persons), any
securities sold by any of such persons in the open market.
In connection with this offering, the representative, on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while this offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when the representative, in covering syndicate short
positions, repurchases shares originally sold by that syndicate member. These
activities may cause the price of our common stock to be higher than the price
that otherwise would exist in the open market in the absence of such
transactions. These transactions may be effected on the Nasdaq Small Cap Market,
in the over-the-counter market or otherwise and, if commenced, may be
discontinued at any time.
In addition, in connection with this offering, the underwriters (and
selling group members) may engage in passive market making transactions in the
common stock on the Nasdaq Small Cap Market, prior to the pricing and completion
of this offering. Passive market making consists of displaying bids on the
Nasdaq Small Cap Market no higher than the bid prices of independent market
makers and making purchases at prices no higher than those independent bids and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specific percentage of the passive market maker's
average daily trading volume in the common stock during a specified period and
must be discontinued when such limit is reached. Passive market making may cause
the price of our common stock to be higher than the price that otherwise would
exist in the open market in the absence of such transactions. If passive market
making is commenced, it may be discontinued at any time.
We have engaged the representative, on a non-exclusive basis, as our agent
for the solicitation of the exercise of the warrants. To the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Commission, we have agreed to pay the representative for bona fide services
rendered a commission equal to 5% of the
58
<PAGE> 66
exercise price of each warrant exercised after one year from the date of this
prospectus if the exercise was solicited by the representative. In addition to
soliciting, either orally or in writing, the exercise of the warrants, such
services may also include disseminating information, either orally or in
writing, to warrant holders about the Company or the market for our securities,
and assisting in the processing of the exercise of the warrants. No compensation
will be paid to the representative in connection with the exercise of the
warrants if the market price of the underlying shares of common stock is lower
than the exercise price, the warrants are held in a discretionary account, the
warrants are exercised in an unsolicited transaction, the warrant holder has not
confirmed in writing that the representative solicited such exercise or the
arrangement to pay the commission is not disclosed in the prospectus provided to
warrant holders at the time of exercise. In addition, unless granted an
exemption by the Commission from Regulation M under the Exchange Act, any
broker-dealer soliciting the exercise of the warrants, including the
representative, may be prohibited from engaging in any market activities or
solicited brokerage activities with regard to our securities. If one or more
broker-dealers making a market in our securities are required temporarily to
suspend such market making, such suspension could adversely affect the liquidity
of the market for such securities.
SERP and Ladenburg Thalmann & Co. Inc. acted as the placement agents for
the February 1999 private placement and were paid aggregate commissions of
$228,000 and a non-accountable expense allowance of $85,500.
LEGAL MATTERS
Shaw Pittman Potts & Trowbridge, Washington, D.C., a partnership including
professional corporations, will pass on the validity of the units, common stock
and warrants offered in this offering and certain legal matters for us. Graubard
Mollen & Miller, New York, New York, has served as counsel to the underwriters
in connection with this offering.
EXPERTS
The balance sheets as of December 31, 1997 and 1998 and the statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1998 and for the period October
5, 1993 (date of inception) to December 31, 1998, included in this prospectus,
have been included herein in reliance on the report, which includes an
explanatory paragraph on our ability to continue as a going concern, of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We are subject to the information requirements of the Securities Exchange
Act of 1934, and, in accordance therewith, file reports and other information
with the SEC. Such reports, proxy statements, and other information can be
inspected without charge at the public reference facilities maintained by the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Seven
World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be
obtained from the public reference section of the SEC, 450 Fifth
59
<PAGE> 67
Street, N.W., Washington, D.C., 20549, at prescribed rates. The registration
statement is also publicly available through the SEC's web site located at
http://www.sec.gov. Our common stock is quoted on the Nasdaq SmallCap Market and
other information concerning the Company can be inspected at the office of the
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006-1500.
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act with respect to the units offered under this prospectus. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement, certain
terms of which are omitted in accordance with the rules and regulations of the
SEC. Statements contained in this prospectus as to the contents of any contract
or other documents are not necessarily complete, and in each instance, reference
is made to the copy of such contract or documents filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding Objective Communications and the units offered under this prospectus,
we refer you to the registration statement and such exhibits and schedules which
may be obtained from the SEC at its principal office in Washington, D.C. upon
payment of the fees prescribed by the SEC.
60
<PAGE> 68
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (Unaudited)...................................... F-3
Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and for the period October 5, 1993
(date of inception) to December 31, 1998, and for the
quarters ended March 31, 1998 and 1999 (Unaudited) and for
the period October 5, 1993 (date of inception) to March
31, 1999 (Unaudited)...................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for
the period October 5, 1993 (date of inception) to December
31, 1998 and for the quarter ended March 31, 1999
(Unaudited)............................................... F-5
Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and for the period October 5, 1993
(date of inception) to December 31, 1998, and for the
quarters ended March 31, 1998 and 1999 (Unaudited) and for
the period October 5, 1993 (date of inception) to March
31, 1999 (Unaudited)...................................... F-8
Notes to Financial Statements............................... F-11
</TABLE>
F-1
<PAGE> 69
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Objective Communications, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Objective
Communications, Inc. (the "Company") at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 and for the period October 5, 1993 (date of
inception) to December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
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.
PricewaterhouseCoopers
LLP
Boston, Massachusetts
February 26, 1999, except for
Note 14, as to which the
date is April 14, 1999
F-2
<PAGE> 70
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 18,199,434 $ 8,532 $ 640,349
Accounts receivable, less allowance for
doubtful accounts of $22,246 at December 31,
1998 and $25,952 at March 31, 1999.......... -- 184,670 596,439
Inventory..................................... 1,700,935 5,793,801 5,561,762
Advance payment............................... -- -- 1,100,000
Other current assets.......................... 675,289 250,709 487,538
------------ ------------ ------------
Total current assets.......................... 20,575,658 6,237,712 8,386,088
Property and equipment, net................... 2,306,048 3,096,752 2,544,353
Trademarks and patents, less accumulated
amortization of $22,660, $11,220, and
$26,417 at December 31, 1997 and 1998, and
March 31, 1999, respectively................ 108,475 200,204 200,327
Other assets.................................. 92,519 88,321 450,401
------------ ------------ ------------
$ 23,082,700 $ 9,622,989 $ 11,581,169
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable................................. $ -- $ 125,543 $ 119,281
Unsecured promissory notes, net of unamortized
debt discount............................... -- -- 1,743,360
Subordinated convertible debentures........... -- 3,200,674 3,241,450
Accounts payable.............................. 3,077,723 6,748,538 3,347,617
Deferred revenue.............................. 133,180 40,000 40,000
Accrued liabilities........................... 752,018 841,526 840,871
Current portion of long term debt............. -- -- 1,448,254
Obligations under capital lease, current
portion..................................... 190,454 187,220 120,684
------------ ------------ ------------
Total current liabilities..................... 4,153,375 11,143,501 10,901,517
Obligations under capital lease............... 57,196 76,008 60,358
Long term debt................................ -- -- 3,066,180
Commitments (Notes 6 and 13)
Stockholders' equity (deficit):
Series B Convertible Preferred Stock, par
value $.01, 954,545 shares authorized; none
issued and outstanding at December 31, 1997,
209,091 issued and outstanding at December
31, 1998 and March 31, 1999, respectively... -- 1,173,958 1,188,333
Common stock, par value $.01, 30,000,000
shares authorized; 810,978, 820,147 and
980,848 issued and outstanding at December
31, 1997 and 1998, and March 31, 1999,
respectively................................ 8,110 8,201 9,808
Additional paid-in capital.................... 36,009,125 36,770,004 38,318,275
Deficit accumulated during development
stage....................................... (17,145,106) (39,548,683) (41,963,302)
------------ ------------ ------------
Total stockholders' equity (deficit).......... 18,872,129 (1,596,520) (2,446,886)
------------ ------------ ------------
$ 23,082,700 $ 9,622,989 $ 11,581,169
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 71
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE QUARTER ENDED
FOR THE YEARS ENDED DECEMBER 31, OCTOBER 5, 1993 MARCH 31,
----------------------------------------- (DATE OF INCEPTION) TO -------------------------
1996 1997 1998 DECEMBER 31, 1998 1998 1999
----------- ------------ ------------ ---------------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues-net....................... $ 81,375 $ -- $ 765,617 $ 1,261,277 $ 110,505 $ 655,457
Cost of sales...................... 62,353 -- 544,853 794,228 64,304 368,702
----------- ------------ ------------ ------------ ----------- -----------
19,022 -- 220,764 467,049 46,201 286,755
Operating expenses:
Research and development........... 1,106,901 6,218,637 11,488,262 20,211,652 2,616,588 823,244
Selling, general and
administrative................... 1,043,553 4,334,754 9,015,437 15,620,059 1,741,344 1,123,655
Depreciation and amortization...... 158,714 829,462 2,240,878 3,293,114 398,008 293,898
----------- ------------ ------------ ------------ ----------- -----------
Total operating
expenses......................... 2,309,168 11,382,853 22,744,577 39,124,825 4,755,940 2,240,797
----------- ------------ ------------ ------------ ----------- -----------
Loss from operations............... (2,290,146) (11,382,853) (22,523,813) (38,657,776) (4,709,739) (1,954,042)
Interest (income)
expense, net..................... 404,290 203,441 (120,236) 484,010 (166,040) 460,577
----------- ------------ ------------ ------------ ----------- -----------
Net loss........................... (2,694,436) (11,586,294) (22,403,577) $(39,141,786) (4,543,699) (2,414,619)
----------- ------------ ------------ ============ ----------- -----------
Cumulative Series B dividend....... -- -- (23,958) -- (116,450)
----------- ------------ ------------ ----------- -----------
Net loss attributable to common
stockholders..................... $(2,694,436) $(11,586,294) $(22,427,535) $(4,543,699) $(2,531,069)
=========== ============ ============ =========== ===========
Net loss per common share -- basic
and diluted...................... $ (5.23) $ (19.90) $ (27.45) $ (5.60) $ (2.76)
=========== ============ ============ =========== ===========
Weighted average shares outstanding
-- basic and diluted............. 515,376 582,307 816,972 810,979 916,568
=========== ============ ============ =========== ===========
<CAPTION>
FOR THE PERIOD
OCTOBER 5, 1993
(DATE OF INCEPTION) TO
MARCH 31, 1999
----------------------
(UNAUDITED)
<S> <C>
Revenues-net....................... $ 1,916,734
Cost of sales...................... 1,162,930
------------
753,804
Operating expenses:
Research and development........... 21,034,896
Selling, general and
administrative................... 16,743,714
Depreciation and amortization...... 3,587,012
------------
Total operating
expenses......................... 41,365,622
------------
Loss from operations............... (40,611,818)
Interest (income)
expense, net..................... 944,587
------------
Net loss........................... $(41,556,405)
============
Cumulative Series B dividend.......
Net loss attributable to common
stockholders.....................
Net loss per common share -- basic
and diluted......................
Weighted average shares outstanding
-- basic and diluted.............
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 72
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, 1998
AND FOR THE QUARTER ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
SERIES B ACCUMULATED
ADDITIONAL CONVERTIBLE DURING
COMMON PAID-IN PREFERRED DEVELOPMENT
SHARES STOCK CAPITAL STOCK STAGE TOTAL
--------- ------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 5,
1993................. 71 $ 1 $ 999 $ -- $ -- $ 1,000
Net loss............... -- -- -- -- (4,521) (4,521)
Balance, December 31,
1993................. 71 1 999 -- (4,521) (3,521)
Stock dividend......... 185,644 1,856 11,139 -- (12,995) --
Issuance of common
stock at $14/share... 24,429 244 341,756 -- -- 342,000
Issuance of common
stock at $14/share
(issued in exchange
for services)........ 2,380 24 33,310 -- -- 33,334
Issuance of common
stock at $42/share... 6,429 64 269,936 -- -- 270,000
Expenses associated
with issuance of
common stock......... -- -- (47,418) -- -- (47,418)
Issuance of common
stock at $18.76/share
(issued in exchange
for services)........ 1,196 12 22,488 -- -- 22,500
Net loss............... -- -- -- -- (406,842) (406,842)
--------- ------- ----------- ------------ ------------
Balance, December 31,
1994................. 220,149 2,201 632,210 -- (424,358) 210,053
Issuance of common
stock at $42/share... 15,952 160 669,840 -- -- 670,000
Expenses associated
with issuance of
common stock......... -- -- (81,389) -- -- (81,389)
Notes payable converted
to commons stock at
$42/share............ 8,386 84 352,139 -- -- 352,223
Net loss............... -- -- -- -- (2,046,116) (2,046,116)
--------- ------- ----------- ------------ ------------
Balance, December 31,
1995................. 244,487 2,445 1,572,800 -- (2,470,474) (895,229)
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-5
<PAGE> 73
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, 1998
AND FOR THE QUARTER ENDED MARCH 31, 1999 (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
SERIES B ACCUMULATED
ADDITIONAL CONVERTIBLE DURING
COMMON PAID-IN PREFERRED DEVELOPMENT
SHARES STOCK CAPITAL STOCK STAGE TOTAL
--------- ------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Exercise of common
stock options at
$14/share............ 1,428 14 19,986 -- -- 20,000
Issuance of common
stock at $42/share... 25,024 250 1,053,733 -- -- 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................. 270,939 2,709 3,387,372 -- (5,164,910) (1,774,829)
Issuance of common
stock pursuant to
warrant exchange
agreement............ 23,610 236 660,832 -- (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............. 295,714 2,957 9,349,122 -- -- 9,352,079
Conversion of
Redeemable Series A
Convertible Preferred
Stock to common
stock................ 71,429 714 1,809,929 -- -- 1,810,643
Exercise of warrants... 6,429 64 29,936 -- -- 30,000
Shares issued in
connection with
secondary public
offering, net of
expenses............. 142,857 1,430 20,899,934 -- -- 20,901,364
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-6
<PAGE> 74
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, 1998
AND FOR THE QUARTER ENDED MARCH 31, 1999 (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
SERIES B ACCUMULATED
ADDITIONAL CONVERTIBLE DURING
COMMON PAID-IN PREFERRED DEVELOPMENT
SHARES STOCK CAPITAL STOCK STAGE TOTAL
--------- ------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest expense
incurred for issuance
of
warrants............. -- -- 73,000 -- (73,000) --
Net loss............... -- -- -- -- (11,586,294) (11,586,294)
--------- ------- ----------- ---------- ------------ ------------
Balance, December 31,
1997................. 810,978 8,110 36,009,125 -- (17,145,106) 18,872,129
Exercise of warrants... 8,839 88 205,849 -- -- 205,937
Exercise of common
stock options at
$48.38/share......... 330 3 15,301 -- -- 15,304
Compensation expense
related to options
granted to financial
advisor.............. -- -- 563,687 -- -- 563,687
Issuance of Series B
Convertible Preferred
Stock................ -- -- -- 1,150,000 -- 1,150,000
Dividend............... -- -- (23,958) 23,958 -- --
Net loss............... -- -- -- -- (22,403,577) (22,403,577)
--------- ------- ----------- ---------- ------------ ------------
Balance, December 31,
1998................. 820,147 8,201 36,770,004 1,173,958 (39,548,683) (1,596,520)
Compensation expense
related to options
granted to financial
advisor.............. -- -- 140,922 -- -- 140,922
Issuance of common
stock from private
placement of units,
net of expenses...... 160,701 1,607 1,275,382 -- -- 1,276,989
Issuance of warrants
associated with long-
term debt............ -- -- 146,342 -- -- 146,342
Dividend............... -- -- (14,375) 14,375 -- --
Net loss............... -- -- -- -- (2,414,619) (2,414,619)
--------- ------- ----------- ---------- ------------ ------------
Balance, March 31, 1999
(unaudited).......... 980,848 $9,808 $38,318,275 $1,188,333 $(41,963,302) $ (2,446,886)
========= ======= =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 75
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED DECEMBER 31, OCTOBER 5, 1993
------------------------------------------ (DATE OF INCEPTION) TO
1996 1997 1998 DECEMBER 31, 1998
------------ ------------ ------------ ----------------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $ (2,694,436) $(11,586,294) $(22,403,577) $(39,141,786)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation...................... 109,025 614,467 2,229,437 3,016,989
Amortization...................... 49,689 214,995 11,440 276,124
Interest expense related to
issuance of warrants............ 321,789 385,000 -- 706,789
Interest accrued on debentures.... -- -- 75,674 75,674
Amortization of debt discount..... -- -- -- --
Amortization of debt issuance
costs........................... -- -- -- --
Non-cash compensation expense..... -- 340,166 563,687 903,853
Stock issued in exchange for
services rendered............... -- -- -- 55,834
Other non-cash charges............ -- -- 18,819 18,819
Changes in operating assets and
liabilities:
Accounts receivable............... (19,385) 84,855 (184,670) (184,670)
Other current assets.............. (166,792) (496,913) 654,643 (20,646)
Inventory......................... (335,105) (1,689,140) (4,125,091) (5,826,026)
Other assets...................... -- (87,852) 4,198 (83,654)
Trademarks and patents............ (19,595) (81,202) (103,169) (222,864)
Accounts payable.................. (324,937) 2,687,285 3,710,956 6,788,679
Deferred revenues................. -- 133,180 (93,180) 40,000
Accrued liabilities............... 163,038 488,642 89,508 841,526
------------ ------------ ------------ ------------
Net cash used in operating
activities................. (2,916,709) (8,992,811) (19,551,325) (32,755,359)
<CAPTION>
FOR THE QUARTER ENDED FOR THE PERIOD
MARCH 31, OCTOBER 5, 1993
--------------------------- (DATE OF INCEPTION) TO
1998 1999 MARCH 31, 1999
------------ ------------ ----------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $ (4,543,699) $ (2,414,619) $(41,556,405)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation...................... 395,871 290,141 3,307,130
Amortization...................... 2,137 3,757 279,881
Interest expense related to
issuance of warrants............ -- 10,776 717,565
Interest accrued on debentures.... -- 40,776 116,450
Amortization of debt discount..... -- 198,360 198,360
Amortization of debt issuance
costs........................... -- 67,058 67,058
Non-cash compensation expense..... 140,922 140,922 1,044,775
Stock issued in exchange for
services rendered............... -- -- 55,834
Other non-cash charges............ -- -- 18,819
Changes in operating assets and
liabilities:
Accounts receivable............... -- (411,769) (596,439)
Other current assets.............. (189,554) 19,088 (1,558)
Inventory......................... (4,588,621) 232,039 (5,593,987)
Other assets...................... 2,553 -- (83,654)
Trademarks and patents............ (24,082) (3,880) (226,744)
Accounts payable.................. 2,116,530 (81,838) 6,706,841
Deferred revenues................. (54,746) -- 40,000
Accrued liabilities............... (146,756) 181,023 1,022,549
------------ ------------ ------------
Net cash used in operating
activities................. (6,889,445) (1,728,166) (34,483,525)
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-8
<PAGE> 76
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED DECEMBER 31, OCTOBER 5, 1993
------------------------------------------ (DATE OF INCEPTION) TO
1996 1997 1998 DECEMBER 31, 1998
------------ ------------ ------------ ----------------------
<S> <C> <C> <C> <C>
Cash flows from investing
activities:
Proceeds from sale of property and
equipment....................... $ -- $ -- $ -- $ --
Purchase of property and
equipment....................... (116,892) (2,036,190) (3,763,231) (6,455,724)
Sale of leasehold improvements.... -- -- 1,470,000 1,470,000
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities....... (116,892) (2,036,190) (2,288,231) (4,980,724)
------------ ------------ ------------ ------------
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 Series B preferred stock... -- -- 1,150,000 1,150,000
Net proceeds from the issuance
of common stock............... 887,047 30,253,443 -- 32,294,683
Net proceeds from the exercise
of stock options.............. 20,000 -- 15,304 35,304
Net proceeds from the exercise
of warrants................... -- 30,000 205,937 235,937
Net proceeds from the issuance
of debentures................. -- -- 3,125,000 3,125,000
Net proceeds from the issuance
of notes payable.............. 2,300,000 -- -- 2,550,000
Net proceeds from the issuance
of unsecured promissory notes
and common stock..............
<CAPTION>
FOR THE QUARTER ENDED FOR THE PERIOD
MARCH 31, OCTOBER 5, 1993
--------------------------- (DATE OF INCEPTION) TO
1998 1999 MARCH 31, 1999
------------ ------------ ----------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from investing
activities:
Proceeds from sale of property and
equipment....................... $ -- $ 80,580 $ 85,580
Purchase of property and
equipment....................... (2,615,306) -- (6,455,724)
Sale of leasehold improvements.... -- -- 1,470,000
------------ ------------ ------------
Net cash provided by (used in)
investing activities....... (2,615,306) 80,580 (4,900,144)
------------ ------------ ------------
Cash flows from financing
activities:
Net proceeds from the issuance
of Series A preferred stock... -- -- 1,810,643
Net proceeds from the issuance
of Series B preferred stock... -- -- 1,150,000
Net proceeds from the issuance
of common stock............... -- -- 32,294,683
Net proceeds from the exercise
of stock options.............. -- -- 35,304
Net proceeds from the exercise
of warrants................... -- -- 235,937
Net proceeds from the issuance
of debentures................. -- -- 3,125,000
Net proceeds from the issuance
of notes payable.............. -- -- 2,550,000
Net proceeds from the issuance
of unsecured promissory notes
and common stock.............. 2,392,851 2,392,851
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 77
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED DECEMBER 31, OCTOBER 5, 1993
------------------------------------------ (DATE OF INCEPTION) TO
1996 1997 1998 DECEMBER 31, 1998
------------ ------------ ------------ ----------------------
<S> <C> <C> <C> <C>
Repayments of notes payable..... $ (250,000) $ (2,300,000) $ (144,661) $ (2,694,661)
Repayment of long term debt..... -- -- -- --
Proceeds from the issuance of
notes payable to related
parties....................... 170,000 -- -- 716,223
Repayments of notes payable to
related parties............... (135,000) (199,000) -- (364,000)
Debt issuance costs............. (258,131) -- -- (258,131)
Principal payments on capital
leases........................ (12,005) (141,452) (702,926) (856,383)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities....... 3,570,351 28,605,194 3,648,654 37,744,615
------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents............ 536,750 17,576,193 (18,190,902) 8,532
Cash and cash equivalents, at
beginning of period............. 86,491 623,241 18,199,434 --
------------ ------------ ------------ ------------
Cash and cash equivalents, at end
of period....................... $ 623,241 $ 18,199,434 $ 8,532 $ 8,532
============ ============ ============ ============
Supplemental disclosure of cash
flow information:
Interest paid..................... $ 57,628 $ 115,739 $ 94,272 $ 280,777
Supplemental disclosure of
non-cash investing and financing
activities:
Conversion of notes payable-
related parties and accrued
interest into common
stock...................... -- -- -- $ 352,223
<CAPTION>
FOR THE QUARTER ENDED FOR THE PERIOD
MARCH 31, OCTOBER 5, 1993
--------------------------- (DATE OF INCEPTION) TO
1998 1999 MARCH 31, 1999
------------ ------------ ----------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Repayments of notes payable..... $ -- $ (42,262) $ (2,736,923)
Repayment of long term debt..... -- (25,000) (25,000)
Proceeds from the issuance of
notes payable to related
parties....................... -- 36,000 752,223
Repayments of notes payable to
related parties............... -- -- (364,000)
Debt issuance costs............. -- -- (258,131)
Principal payments on capital
leases........................ (153,535) (82,186) (938,569)
------------ ------------ ------------
Net cash provided by (used in)
financing activities....... (153,535) 2,279,403 40,024,018
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents............ (9,658,286) 631,817 640,349
Cash and cash equivalents, at
beginning of period............. 18,199,434 8,532 --
------------ ------------ ------------
Cash and cash equivalents, at end
of period....................... $ 8,541,148 $ 640,349 $ 640,349
============ ============ ============
Supplemental disclosure of cash
flow information:
Interest paid.....................
Supplemental disclosure of
non-cash investing and financing
activities:
Conversion of notes payable-
related parties and accrued
interest into common
stock...................... -- -- $ 352,223
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 78
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED DECEMBER 31, OCTOBER 5, 1993
------------------------------------------ (DATE OF INCEPTION) TO
1996 1997 1998 DECEMBER 31, 1998
------------ ------------ ------------ ----------------------
<S> <C> <C> <C> <C>
Capital lease obligations..... $ 53,158 $ 347,950 $ 718,504 $ 1,119,612
Reclassification of inventory
to fixed assets............ -- 354,304 32,225 32,225
Current asset financed by
issuance of note payable... -- -- 230,063 230,063
Dividend on preferred stock... -- -- 23,958 23,958
Accounts payable transferred
to notes payable........... -- -- 40,141 40,141
Accounts payable transferred
to long term debt.......... -- -- -- --
Common stock issued with
private placement.......... -- -- -- --
Warrants issued with long term
debt....................... -- -- -- --
Advanced payment financed with
long term debt............. -- -- -- --
Prepaid equity financing costs
financed in accounts
payable.................... -- -- -- --
Reduction in accrued
liabilities due to sale of
assets..................... -- -- -- --
Cost of fixed assets
sold -- net................ -- -- -- --
Debt issuance costs related to
unsecured promissory
notes...................... -- -- -- --
Costs related to issuing
common stock with unit
financing.................. $ -- $ -- $ -- $ --
<CAPTION>
FOR THE QUARTER ENDED FOR THE PERIOD
MARCH 31, OCTOBER 5, 1993
--------------------------- (DATE OF INCEPTION) TO
1998 1999 MARCH 31, 1999
------------ ------------ ----------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Capital lease obligations..... $ -- $ -- $ 1,119,612
Reclassification of inventory
to fixed assets............ -- -- 32,225
Current asset financed by
issuance of note payable... 230,063 -- 230,063
Dividend on preferred stock... -- 14,375 38,333
Accounts payable transferred
to notes payable........... -- -- 40,141
Accounts payable transferred
to long term debt.......... -- 3,575,000 3,575,000
Common stock issued with
private placement.......... -- 1,305,000 1,305,000
Warrants issued with long term
debt....................... -- 146,342 146,342
Advanced payment financed with
long term debt............. -- 1,100,000 1,100,000
Prepaid equity financing costs
financed in accounts
payable.................... -- 255,917 255,917
Reduction in accrued
liabilities due to sale of
assets..................... -- 181,678 181,678
Cost of fixed assets
sold -- net................ -- 262,258 262,258
Debt issuance costs related to
unsecured promissory
notes...................... -- 429,138 429,138
Costs related to issuing
common stock with unit
financing.................. $ -- $ 28,011 $ 28,011
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 79
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
1. NATURE OF BUSINESS
Objective Communications is a Delaware corporation formed in 1993 to
design, develop and market a full motion, high resolution, cost-effective video
network system. Users of the VidPhone video network system can view broadcast
video and participate in multi-party video conferences. With the introduction of
Release 1.5 of the VidPhone software, which management expects to occur in the
first half of 1999, users also will be able to retrieve stored video on demand.
The VidPhone system distributes video to and from desktop or laptop personal
computers and conference rooms configured with a VidPhone station, over the same
wiring used by the telephone.
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 $765,617 in
revenues from the sale of products during 1998. 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. At December 31, 1998, the Company had essentially no cash from which
to fund operations. In February 1999, the Company completed a private placement
of $2,850,000 of unsecured promissory notes and 162,844 shares of common stock,
from which the Company received net proceeds of approximately $2,430,000. Before
completing the February 1999 private placement, the Company was able to pay only
those expenses that were essential to continue operations. The Company estimates
that the net proceeds from the private placement will fund operations only
through April 1999. Those net proceeds are not sufficient to fund the continued
development of the VidPhone system or any expansion of the Company's business
operations. As a result of these liquidity problems, the Company has not paid
many of its creditors, including trade creditors, on a timely basis and remains
in default on a number of significant overdue obligations. Some of these
creditors have instituted or threatened to institute legal proceedings against
the Company to obtain repayment of these debts. If the Company continues not
paying its debts as they become due, it is likely that other creditors will take
legal action against the Company and that other firms will refuse to sell the
products and services the Company need to continue operations. In February 1999,
the Company announced that it had filed a registration statement relating to a
proposed $15,000,000 underwritten offering of common stock. The Company
anticipates that the public offering will be completed in the second quarter of
1999; however, its ability to complete the offering, the timing of the offering
and its terms are subject to a number of conditions, some of which are beyond
its control, including market conditions. There can be no assurance that the
Company will complete the public offering. If the Company is not successful in
securing additional financing, the Company will be forced to consider
alternative methods of maximizing shareholder value, which could include sales
of the Company's assets, a sale of the Company, workout alternatives, or
bankruptcy. (Information in this Note 1 is presented as of February 26,
F-12
<PAGE> 80
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
1999, the date on which these financial statements were issued. See Note 15,
"Subsequent Events (Unaudited)" pertaining to an update of the items described
in Note 1.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company's principal activities to date have been planning and
organizing, 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. Cash and cash equivalents are stated at
cost, which approximates fair value because of the short maturity of these
investments.
REVENUE RECOGNITION
The Company's revenues, consisting principally of sales of the Company's
video network system and related products, are recognized upon delivery and
acceptance by customers.
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 technological feasibility and the general availability
of such software has been short, and the 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. Expenditures for maintenance and
repairs are charged to expense as incurred. 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
F-13
<PAGE> 81
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
asset lives: computer and lab equipment, 3 to 5 years; capitalized software, 3
years; furniture and fixtures, 5 years; office equipment, 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.
TRADEMARKS AND PATENTS
Trademarks and patents are stated at cost and are amortized on a
straight-line basis over 15 years.
LONG-LIVED ASSETS
The Company periodically evaluates the net realizable value of long-lived
assets, including trademarks and patents and property and equipment, relying on
a number of factors including operating results, business plans, economic
projections and anticipated future cash flows. An impairment in the carrying
value of an asset is recognized when the expected future operating cash flows
derived from the asset are less than its carrying value. In addition, the
Company's evaluation considers non-financial data such as market trends, product
and development cycles, and changes in management's market emphasis.
INVENTORY
Inventory, consisting principally of hardware for the Company's video
networking products, is valued at the lower of cost or market, with the 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 and liabilities.
NET LOSS PER COMMON SHARE
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per Share".
Net loss per
F-14
<PAGE> 82
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
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, warrants, convertible preferred
stock, and convertible debentures and are presented only if the effect is not
anti-dilutive. As the Company incurred losses for all periods, there is no
difference between basic and diluted earnings per share. Had options, warrants
and convertible preferred stock been included in the computation, shares for the
diluted computation would have increased by 283,786 and 397,026 as of December
31, 1997 and 1998, respectively. The convertible debentures would also be
included in the diluted computation based on the conversion calculation in note
9. See note 10, Subsequent Events, with regards to shares issued subsequent to
year-end.
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 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
those instruments.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation" in 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
the 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 10).
SEGMENT INFORMATION
The Company is in one business segment; the design, development, and
marketing of a video network system. The Company follows the requirements of
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information."
F-15
<PAGE> 83
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
INTERIM INFORMATION (UNAUDITED)
The interim information as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 is unaudited. The unaudited interim financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial position as of and for the
periods presented. The unaudited interim financial information should be read in
conjunction with the audited financial statements and related notes thereto. The
results for the interim periods presented are not necessarily indicative of
results to be expected for the full year.
3. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- -----------
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials...................... $ 901,548 $5,750,733 $ 4,794,179
Work in process.................... 24,272 -- --
Finished goods..................... 775,115 43,068 767,583
---------- ---------- -----------
$1,700,935 $5,793,801 $ 5,561,762
========== ========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and laboratory
equipment........................ $2,070,415 $3,186,976 $ 3,186,976
Computer software.................. 220,711 368,441 368,441
Leasehold improvements............. 174,697 787,484 606,912
Furniture and fixtures............. 342,835 1,148,210 850,432
Office equipment 5,190 173,333 173,333
Construction in progress........... 279,754 443,116 443,116
---------- ---------- -----------
3,093,602 6,107,560 5,629,210
Accumulated depreciation........... (787,554) (3,010,808) (3,084,857)
---------- ---------- -----------
$2,306,048 $3,096,752 $ 2,544,353
========== ========== ===========
</TABLE>
F-16
<PAGE> 84
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
5. SALE OF LEASEHOLD IMPROVEMENTS
In the fourth quarter of 1997, the Company reached an agreement with the
Portsmouth Development Authority ("PDA") to enter into a lease agreement for
additional office space and, in exchange for a favorable rental rate, the
Company agreed to fund significant improvements to the facility. Through June
1998 the Company had invested in excess of $1.8 million in improvements to the
new offices. In June 1998, the Company and the PDA modified the previous
agreement in that the PDA agreed to purchase $1,470,000 of the leasehold
improvements in consideration of the Company's agreement to adjust the
previously agreed rental rate to a market rate. In June 1998, the Company
received the proceeds from the sale, less accrued rent of $83,870.
6. COMMITMENTS
The Company leases office 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, 1998 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1999.......................................... $214,772 $ 295,800
2000.......................................... 49,031 315,139
2001.......................................... 17,040 321,350
2002.......................................... 17,040 321,585
2003.......................................... 2,840 328,759
Thereafter.................................... -- 1,511,646
-------- ----------
Total minimum lease payments.................. 300,723 $3,094,279
==========
Less amount representing interest............. (37,495)
--------
Present value of net minimum lease payments... $263,228
========
</TABLE>
Property, plant, and equipment at year-end include the following amounts
for capitalized leases:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Computer and laboratory equipment............. $275,608 $ 407,039
Furniture and fixtures........................ 273,320 760,041
Office equipment.............................. -- 64,545
-------- ----------
548,928 1,231,625
Less: allowance for depreciation.............. (78,752) (447,864)
-------- ----------
$470,176 $ 783,761
======== ==========
</TABLE>
Rent payments made in 1996, 1997, and 1998 were $228,000, $293,000, and
$793,000, respectively.
F-17
<PAGE> 85
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
7. INCOME TAXES
At December 31, 1998, the Company has available net operating loss
carryforwards for federal and state tax purposes of approximately $35,518,000
and $5,633,000, respectively. The federal and state net operating losses begin
to expire in 2009 and 1999, respectively. As of December 31, 1998, a valuation
allowance of $11,685,000 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 the temporary differences giving rise to the Company's deferred tax
assets (liabilities) as of December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Net operating loss carryforwards......... $ 5,817,000 $ 10,598,000
Accrued liabilities...................... 116,000 158,000
Reserves................................. 68,000 539,000
Depreciation and amortization............ 144,000 390,000
Valuation allowance...................... (6,145,000) (11,685,000)
----------- ------------
Total deferred tax asset................. $ -- $ --
=========== ============
</TABLE>
Ownership changes, as defined in the 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.
8. NOTES PAYABLE
During 1995 and 1996, the Company borrowed $224,000 and $170,000,
respectively, from various stockholders of the Company. The loans accrued
interest at 7% per annum and were 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
$42.00 per share, for an aggregate of 5,333 warrants. The exercise price of
these warrants was $56.00 per share. In June 1995, one of the lenders converted
a $30,000 loan plus accrued interest into 715 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 and $2,166 in accrued interest were converted to common stock during
1995.
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
F-18
<PAGE> 86
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
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 bore interest at the NationsBank prime rate plus 1.5% per annum,
adjusted quarterly beginning September 30, 1996. Interest was 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 was 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 4,821 shares of the
Company's common stock at an initial exercise price of $62.30 per share. Each
time the Company declared a stock split or dividend, sold previously unissued
shares, or issued additional options, warrants or rights to purchase shares of
the Company's common stock, the Company applied a formula, pursuant to the terms
of the warrant, to determine if the number of warrants and the exercise price
thereof was required to be adjusted. As of December 31, 1996, the number of
shares subject to the warrant pursuant to the loan agreement was 6,107 at an
exercise price of $49.21.
In November 1996, the underwriter of the Company's proposed initial public
offering of common stock (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 were collateralized by substantially all of
the assets of the Company. The bridge notes were 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 least $2,000,000, and the notes bore 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 71,428 shares of the Company's common stock at an
exercise price of $23.10 per share. These fee warrants were to 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 was to be 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 71,428
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 IPO in April 1997. Of the $586,000 unamortized
discount recorded as at
F-19
<PAGE> 87
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
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.
Notes payable outstanding at December 31, 1998 consisted of the remaining
balance due on a note that financed an insurance policy, $85,000, and two notes
to vendors for services rendered during the year, totaling $40,000.
9. 5% CUMULATIVE CONVERTIBLE DEBENTURES DUE 2003
In July 1998, the Company completed a private placement of 5% Cumulative
Convertible Debentures due 2003 ("5% Convertible Debentures") with certain
institutional, affiliated and other investors, from which it received gross
proceeds of approximately $3.125 million. Interest thereon accrues daily and is
payable quarterly in arrears, payable in cash or, at the Company's option, by
increasing the principal amount of the 5% Convertible Debentures. For the year
ended December 31, 1998, the Company elected to pay the interest due at that
date by increasing the principal amount by approximately $76,000. The 5%
Convertible Debentures are senior in right of payment to substantially all
existing and future indebtedness of the Company and the Company's equity
securities. The Company sold and issued such securities in reliance on an
exemption from registration provided by Section 4(2) of the Securities Act of
1933, Regulation D and Rule 506.
At the option of each holder, the Company is obligated to redeem all or any
portion of such holder's 5% Convertible Debentures effective as of the effective
date of an "Extraordinary Transaction", as defined in such debenture, and the
holder shall be entitled to receive a redemption price per $100 principal amount
of 5% Convertible Debentures being redeemed equal to 112.5% of the aggregate
principal amount of the 5% Convertible Debentures, plus accrued and unpaid
interest thereon. Also at the option of each holder, the Company is obligated to
redeem all or any portion of such holder's outstanding 5% Convertible Debentures
effective as of the date of the occurrence of certain "Triggering Events", as
defined in such debenture, and the holder shall be entitled to receive a
redemption price per $100 principal amount of 5% Convertible Debentures being
redeemed equal to 130% of the principal amount of the 5% Convertible Debentures,
plus accrued and unpaid interest.
Subject to the contractual agreement described below, the holders of the
debentures may, in whole or in part, convert the 5% Convertible Debentures into
shares of common stock at any time. The original terms of the debentures provide
that the conversion rate of the 5% Convertible Debentures is determined by
dividing the principal amount of the 5% Convertible Debentures plus any accrued
and unpaid interest by a conversion price equal to the lesser of (i) the fixed
conversion price of $76.09, or (ii) a floating conversion price equal to the
average of the three lowest closing prices of the Common Stock on its principal
exchange during the 12 trading days immediately preceding the date upon which
the Company is notified of such conversion. The number of shares of Common Stock
issuable upon conversion of the 5% Convertible Debentures is subject to
adjustment in certain events, including without limitation a reclassification,
reorganization or exchange of the Company's Common Stock.
F-20
<PAGE> 88
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
On or after July 8, 2003, the Company has the option to cause the
outstanding 5% Convertible Debentures to be automatically converted to shares of
Common Stock pursuant to the Conversion Rate, as defined in such debenture, or
to redeem all outstanding 5% Convertible Debentures at a redemption price equal
to the principal amount of the 5% Convertible Debentures plus any accrued and
unpaid interest thereon. As a condition precedent to the consummation of a
private placement of units (consisting of unsecured promissory notes and common
stock) completed in February 1999, the Company entered into an agreement with
the holders of the convertible debentures, including the directors and executive
officers affiliated with the Company, amending certain terms of those
securities. In particular, each of the holders of the 5% Convertible Debentures
agreed that: (i) it would not exercise its right to convert the 5% Convertible
Debentures to common stock until the date on which the Company completes a
public or private equity financing with gross proceeds of not less than $8
million (a "qualified financing"); (ii) upon the closing of a qualified
financing, the principal amount of and accrued and unpaid interest on the
convertible debentures will automatically convert into the securities issued in
the qualified financing at a conversion price equal to the lesser of (A) $17.50
per share, or (B) 75% of the price at which the securities are sold in the
qualified financing and that the anti-dilution provisions of the convertible
debentures would be inapplicable to the conversion; and (iii) it waives any
default by the Company with respect to the obligation to register or maintain
the effectiveness of a registration statement for the shares of common stock
issuable upon conversion of the 5% Convertible Debentures. The holders of the 5%
Convertible Debentures also agreed to hold the shares of common stock issued
upon conversion of the 5% Convertible Debentures for at least 12 months
following the effective date of the registration statement that relates to the
qualified financing. The Company also agreed to include the shares of common
stock issuable upon conversion of the 5% Convertible Debentures in the
registration statement filed with the Securities and Exchange Commission
relating to the qualified financing. The Company currently has outstanding
$3.125 million original principal amount of 5% Convertible Debentures. If the
proposed public offering of common stock by the Company is completed, the 5%
Convertible Debentures will automatically convert into common stock upon
consummation of that offering (see Note 15).
10. CAPITAL STOCK TRANSACTIONS
COMMON STOCK
The Company was initially capitalized in the amount of $1,000 by the
issuance of 71 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 185,644 shares to
the Company's sole stockholder and then President and Chief Executive Officer,
Mr. Steven A. Rogers.
On August 3, 1994, the Company sold 26,809 shares of common stock for
$14.00 per share. Of the shares issued, 24,429 shares were sold for cash and
2,380 were issued in
F-21
<PAGE> 89
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
exchange for services rendered. On December 31, 1994, the Company sold an
additional 6,429 shares of common stock for $42.00 per share.
On December 31, 1994, the Company issued 1,196 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 a 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 price or the warrant exercise price.
Pursuant to this agreement, the Company sold 15,952 shares of common stock
for $42.00 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 $56.00 per share. Further, the Company
converted $30,057 in notes payable and accrued interest into 716 shares of
common stock. Additionally, the Company converted $202,166 in outstanding notes
payable and accrued interest to the financial advisory firm into 4,813 shares of
common stock. Each share of common stock issued in the conversion as accompanied
by a warrant to purchase one share of common stock, at an exercise price of
$56.00 per share. The Company also converted an additional $120,000 loan from
the financial advisory firm into 2,857 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
12,238 shares of common stock at an exercise price of $56.00 per share.
Pursuant to its 1995 agreement with the financial advisory firm, during
June 1996, the Company sold 25,024 shares of common stock for $42.00 per share.
Each share of the 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 $56.00 per share. In connection with the provisions of the agreement, the
president of the financial advisory firm received 4,936 warrants at an exercise
price of $46.20 per share and 4,936 warrants at an exercise price of $61.60 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 2,381 shares
of common stock at $56.00 per share.
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 of the IPO 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
F-22
<PAGE> 90
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
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 714 shares of common stock at an exercise price of $56.00 per share for
new warrants to purchase 357 shares of common stock at an exercise prices of
$28.00 per share and an additional 357 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 $14.00 per share at a
time during which other investors were purchasing shares of common stock from
the Company at $42.00 per share. As part of the warrant exchange, such investors
also were required to pay Mr. Rogers $14.00 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 23,610 shares of common stock. Of the fair market value of such
shares, the Company reflected a non-cash compensation expense of $340,166, and
the remaining $320,902 was directly charged to equity as a cost of equity
financing. Additionally, an aggregate of 49,362 warrants with an exercise price
of $56.00 per share were exchanged for 23,610 warrants with an exercise price of
$28.00 per share and 2,143 warrants with an exercise price of $56.00 per share.
Further, in connections with the Warrant Agreement, the Company also exchanged
warrants held by the president of the financial advisory firm to purchase 4,936
warrants to purchase shares of common stock at an exercise price of $46.20 per
share, and 4,936 warrants to purchase shares of commons stock at an exercise
price of $61.60 per share, for an aggregate of 9,872 warrants to purchase shares
of common stock at an exercise price of $28.00 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
14,619 shares of common stock at an exercise price of $56.00 per share for
warrants to purchase 14,619 shares of common stock at an exercise price of
$28.00 per share. The Company did not receive any additional cash proceeds as a
result of the Exchange Agreement.
During April 1997, the Company issued 295,714 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 initial public
offering of $1.9 million. The issuance of these shares was pursuant to an
initial public offering price of $38.50 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
21,428 shares of common stock with a fair value of $9.38 per warrant, resulting
in a decrease of $201,000 in stockholders' equity due to the reversal of
interest expense. The surrender and cancellation
F-23
<PAGE> 91
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
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 142,857
shares of the Company's common stock at a public offering price of $161.88 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).
The Company's stockholders authorized the increase in the total number of
shares of common stock authorized for issuance from 10,000,000 shares to
30,000,000. The Company filed a Second Amended and Restated Certificate of
Incorporation to effectuate such increase in May 1998.
A summary of the number of shares of common stock subject to purchase under
all warrant agreements and related exercise prices as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
NUMBER OF
EXERCISE PRICE SHARES
-------------- ----------------
<S> <C>
$28.00............................... 60,946
$23.10............................... 41,501
$42.00............................... 7,467
$56.00............................... 2,142
-------
112,056
=======
</TABLE>
STOCK OPTIONS
On August 3, 1994, the Company granted certain outside directors of the
Company options to purchase 28,568 shares of common stock. These options vest on
the anniversary of the options grant date in accordance with a five-year vesting
schedule, 20% each year. The exercise price is $14.00 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, 1998, 1,428 of these options had been
exercised and 21,427 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 49,000 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, 1998, none of these options had been exercised and 24,814 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 64,285 shares of common stock were reserved
for issuance. The Board of Directors, with shareholder approval, authorized the
increase in the number of shares reserved for issuance under the 1996 Plan to
207,142 shares during 1998.
F-24
<PAGE> 92
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
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, 1998, 330 of these options had been exercised and
12,411 options were exercisable. The right to exercise these options ranges from
five to ten years from the grant date.
In connection with the IPO in April 1997, the Company issued to an
investment banking firm options to purchase 25,714 shares of common stock at an
exercise price equal to 165% of the price of the common stock offered to the
public, or $63.525 per share. The right to exercise these options terminates
five years from the grant date.
In December 1997, the Company granted to an investment banking firm options
to purchase 17,857 shares of common stock at an exercise price $96.67 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, in 1998 it was
$563,687, and will be $543,332 in 1999. The right to exercise these options
terminates five years from the grant date.
F-25
<PAGE> 93
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------------
<S> <C> <C>
1995
Granted.............................................. 33,214 $28.000
Forfeited............................................ -- --
Exercised............................................ -- --
Outstanding at December 31, 1995..................... 61,785 $21.525
Exercisable at December 31, 1995..................... 5,714 $14.000
Available for grant at December 31, 1995............. 15,785
1996
Granted.............................................. 19,714 $28.000
Forfeited............................................ (3,928) $28.000
Exercised............................................ 1,428 $14.000
Outstanding at December 31, 1996..................... 76,142 $23.009
Exercisable at December 31, 1996..................... 15,857 $22.498
Available for grant at December 31, 1996............. --
1997
Granted.............................................. 95,614 $76.531
Forfeited............................................ (1,428) $82.075
Exercised............................................ -- --
Outstanding at December 31, 1997..................... 170,328 $52.556
Exercisable at December 31, 1997..................... 31,228 $20.958
Available for grant at December 31, 1997............. 12,957
1998
Granted.............................................. 162,100 $61.677
Forfeited............................................ (77,104) $77.707
Exercised............................................ 330 $46.375
Outstanding at December 31, 1998..................... 254,994 $50.771
Exercisable at December 31, 1998..................... 92,940 $43.827
Available for grant at December 31, 1998............. 61,200
</TABLE>
F-26
<PAGE> 94
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------- ------------------------------
WEIGHTED-
NUMBER AVE. WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVE. EXERCISABLE AVE.
RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
EXERCISE PRICES 12/31/98 LIFE (YEARS) PRICE 12/31/98 PRICE
- --------------- -------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$14.00 26,429 5.6 $14.00 21,429 $14.00
$21.00-$38.50 73,135 6.8 $30.66 24,457 $28.00
$42.875-$63.525 103,453 4.2 $52.64 37,650 $58.10
$80.50-$96.691 51,977 6.4 $94.01 9,404 $95.90
---------- --------
254,994 92,940
========== ========
</TABLE>
All stock options granted by the Company from its inception through
December 31, 1998 were granted with an exercise price per share equal to the
fair value of the Company's common stock on the date of grant. In December 1996,
the Company repriced the exercise price of all options previously granted to
$28.00 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 1997 (see Note 11).
In July 1998, the Board approved a repricing plan to reprice employee stock
options under the Plan to restore the long-term employee retention and
performance incentives of the stock options outstanding. In accordance with the
repricing plan, all stock options held by current, active full-time employees,
with exercise prices above $50.75 or vesting periods in excess of three years,
were cancelled and replaced by the same number of options exercisable at $50.75
per share and vesting over a three year period. The options were granted at a
price equal to the fair value of the Company's common stock on the date of the
repricing.
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
F-27
<PAGE> 95
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
Company's net loss and net loss per share would have increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Net loss:
As Reported................................... $(11,586,294) $(22,403,577)
Pro forma..................................... $(11,915,198) $(23,970,089)
Net loss per common share:
As Reported, basic............................ $ (19.90) $ (27.45)
Pro forma, basic.............................. $ (20.46) $ (29.34)
</TABLE>
The fair value of each option granted in 1997 and 1998 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 years
ended December 31, 1997 and 1998: expected volatility of 75% and 95%,
respectively, risk-free interest rate of 6.4% and 5.4%, respectively; dividend
of 0% for both 1997 and 1998; and an expected term of 5 years was assumed in
both 1997 and 1998.
PREFERRED STOCK
SERIES A CONVERTIBLE PREFERRED STOCK
On December 9, 1996, the Board of Directors and a majority of the holders
of the outstanding common stock authorized 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 14,284 shares of common stock for
aggregate consideration of $2,000,000. The Series A shares had liquidation
preferences over the common stock and any series of preferred stock authorized
in the future. The holders of Series A shares were 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 received had they converted the
Series A shares into common stock or the liquidation value of $28.00 per share,
whichever is greater. The Series A shares were convertible to common stock as
determined by multiplying the Series A stated value plus all declared but unpaid
dividends by $28.00 and dividing that result by the conversion price, which as
defined by the agreement will not exceed $28.00 per share. The Series A shares
automatically converted to shares of common stock upon the consummation of the
Company's IPO in April 1997.
The warrants issued in conjunction with the Series A shares had an exercise
price of $28.00 per share. As a fee for the placement of the Series A shares and
related
F-28
<PAGE> 96
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
warrants, the underwriting firm received a $140,000 underwriter's discount and
commission in consideration of its services on this transaction.
In December 1996 and January 1997, the Company issued 500,000 Series A
shares and 14,284 warrants for the purchase of common stock and had received
$1.8 million of consideration for the sale of the Series A shares. The Series A
shares were recorded net the underwriting 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 automatically
converted into 71,428 shares of common stock on the closing of the IPO.
5% CUMULATIVE CONVERTIBLE SERIES B PREFERRED STOCK
In August 1998, the Company issued to certain unaffiliated investors in a
private placement 209,091 shares of 5% Cumulative Convertible Series B Preferred
Stock, par value $.01 per share (the "Series B Preferred Stock"), and warrants
to purchase an aggregate of 7,467 shares of Common Stock at an exercise price of
$42.00 per share which were valued at $94,000 (the "Series B Warrants"). The
shares of Series B Preferred Stock and the Series B Warrants were issued at an
original exercise price of $5.50 per share, resulting in gross proceeds to the
Company of $1.15 million. Dividends accrue at 5% annually, are cumulative, and
are payable in additional shares of Series B Preferred Stock. The Company sold
and issued such securities in reliance on an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, Regulation D and Rule
506.
Shares of Series B Preferred Stock are convertible at any time after the
issuance date and at the option of the holder, into shares of common stock at an
initial conversion rate of $38.50 per share, subject to adjustment in connection
with certain events, including a reclassification, reorganization or exchange of
the Company's Common Stock. The shares of Series B Preferred Stock are subject
to automatic conversion, without further action on the part of the holder or the
Company, if the closing price of the Company's common stock equals or exceeds
$77.00 per share for 15 consecutive trading days.
In connection with the private placement by the Company of units completed
in February 1999, the Company entered into a letter agreement with both of the
holders of the Series B Preferred Stock modifying certain terms of those
securities. Specifically, the Company and the holders agreed that: (i) the
holders would not exercise their right to convert the Series B preferred stock
to common stock, or exercise the Series B Warrants for common stock, until the
date on which the Company completes a public or private equity financing with
gross proceeds to us of not less than $8 million (a "qualified financing"); (ii)
upon the closing of a qualified financing, the stated value of and accrued and
unpaid dividends on the Series B preferred stock will automatically convert into
shares of common stock at a conversion price equal to $19.25 per share, and the
exercise price of Series B Warrants would be reduced to $19.25 per share; (iii)
the anti-dilution provisions of the Series B preferred stock and the Series B
Warrants would not apply to the qualified financing, the 5% Convertible
Debenture conversion, the February 1999 private placement, the conversion of the
Series B preferred stock or the exercise of the Series B Warrants; (iv) the
holders waived and agreed not to exercise any registration rights they may have
as
F-29
<PAGE> 97
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
to the common stock issuable upon conversion of the Series B preferred stock or
the exercise of the Series B Warrants in connection with this offering; and (v)
the holders would not sell any common stock issuable upon conversion of the
Series B preferred stock for at least six months after the effectiveness of the
registration statement (or up to 24 months, if necessary to obtain regulatory
approval of this offering) filed relating to the qualified financing. The
Company currently has outstanding 209,091 shares of Series B preferred stock. If
the proposed public offering of common stock by the Company is completed, the
Series B preferred stock will automatically convert into common stock upon
consummation of that offering.
11. EMPLOYEE BENEFIT PLAN
The Company implemented a profit-sharing plan under Section 401(k) of the
Internal Revenue Code (the "Code") covering substantially all employees in 1998.
The plan allows employees to make contributions up to the maximum allowed by the
Code. The Company will contribute one dollar to an employees account for each
two dollars contributed by the employee until the employee's contribution equals
6% of the employee's annual salary. The Company contributed $183,000 to the
employees' accounts during 1998.
12. NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company plans to adopt this method of accounting
in January 1999.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities."
This statement provides guidance in the financial reporting of start-up costs
and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The statement is effective for
fiscal years beginning after December 15, 1998. Adoption of this standard will
not impact the financial results of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value, gains or losses, depends
on the intended use of the derivative and its resulting designation. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Adoption of this standard will not impact the financial results
of the Company.
F-30
<PAGE> 98
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
13. SUBSEQUENT EVENTS (ALSO SEE NOTE 15)
In January 1999, the Company restructured $3,575,000 in obligations to
vendors through the issuance of long-term notes of $4,675,000, including a
$1,100,000 increase in additional commitments to purchase inventory. In
connection with the restructuring of the commitments the Company issued warrants
to purchase an aggregate of 45,000 shares of common stock.
In February 1999, the Company completed a private placement of $2,850,000
of unsecured promissory notes and 160,701 shares of common stock, from which it
received net proceeds of approximately $2,430,000.
On February 16, 1999, the Company filed a registration statement with the
Securities and Exchange Commission relating to a proposed firm commitment
underwritten public offering of $15,000,000 of common stock.
14. REVERSE STOCK SPLIT
On April 14, 1999, the stockholders approved a one share for seven shares
reverse stock split of the issued and outstanding Common Stock which was
previously approved by the Board of Directors. The reverse stock split was
effected on April 14, 1999. All references throughout these financial statements
to number of shares, per share amounts, stock option and warrant data and market
prices of the Company's Common Stock have been restated. In addition, Common
Stock and additional paid-in capital for all periods presented, have been
restated to reflect this reverse stock split. The number of shares as restated
to reflect the reverse stock split has not been adjusted to give effect to the
cashing out of fractional shares. The Company believes that the cashing out of
fractional share interests will not materially change the number of shares of
Common Stock, as restated.
15. SUBSEQUENT EVENTS (UNAUDITED)
Going Concern Update. The Company has continued to suffer recurring losses
from operations and negative cash flows during the three months ended March 31,
1999, that raise substantial doubt about its ability to continue as a going
concern. At March 31, 1999, the Company had approximately $640,000 in cash and,
as of the date of this prospectus, the Company was again essentially out of
cash. The Company intends to obtain financing from a proposed public offering of
equity securities in the estimated amount of $15,000,000. The Company intends to
fund its operations until the closing of the proposed public offering with cash
generated from payments by customers on outstanding customer receivables.
However, the timing and amount of customer payments is uncertain. In May 1999,
the Company's Board of Directors approved a change of the securities to be
offered in the proposed $15,000,000 public offering. The Company intends to
offer and sell units, with each unit consisting of two shares of common stock
and one redeemable common stock purchase warrant. The Company anticipates that
the offering will be completed in late May. However, the Company's ability to
complete the offering, the timing of the offering and its terms are subject to a
number of conditions, some of which are beyond the Company's control, including
market conditions. There can be no assurance that the
F-31
<PAGE> 99
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
Company will complete the public offering or, if it is completed, the timing or
the terms of the offering. If the Company is not successful in securing
additional financing, it will be forced to consider alternative methods of
maximizing stockholder value, which could include sales of assets, workout
alternatives or bankruptcy.
Sanmina Note. In January 1999, the Company converted outstanding accounts
payable to Sanmina Corporation of $3,200,000 and $1,100,000, the latter
representing the value of inventory and materials located at a subcontract
manufacturer, to a $4,300,000 three-year term note accruing interest at 7% per
year. The Company is obligated to pay Sanmina $1,100,000 in principal on the
note at the time the proposed public offering is completed and, at that time,
Sanmina will transfer to the Company the title to the inventory and materials
located at Sanmina. During the first year, the note requires interest-only
payments, in arrears, semi-annually, beginning in July 1999. Thereafter, the
Company will amortize the remaining principal and interest in equal monthly
payments over the remaining life of the note.
In connection with converting the accounts payable balance, the Company
issued to Sanmina warrants to purchase 39,286 shares of common stock, with a
$19.25 exercise price per share. An independent appraisal assigned a market
value of $127,759 to these warrants. The Company has recorded the value of the
warrants as a discount against the face amount of the note and will amortize the
value over the life of the note.
Legal Counsel Note. In January 1999, the Company also converted $375,000
of outstanding accounts payable to legal counsel to a two-year term loan
accruing interest at 7% per year. The Company paid $25,000 of this initial
balance from the proceeds of the private placement in February 1999 and the
Company is obligated to pay an additional $50,000 in principal on the note at
the time the proposed public offering is completed. Other than the principal
repayments noted above, the Company is obligated to make two semi-annual
interest-only payments commencing in July 1999. Commencing in February 2000, the
Company will commence making twelve equal monthly payments to fully amortize the
remaining balance of the note.
In connection with converting the accounts payable balance, the Company
issued to legal counsel warrants to purchase 5,714 shares of common stock, with
a $18.59 exercise price per share. An independent appraisal assigned a market
value of $18,583 to these warrants. The Company has recorded the value of the
warrants as a discount against the face amount of the note and will amortize the
value over the life of the note.
Private Placement of Units. In February 1999, the Company completed a
private placement of 28.5 units of unsecured promissory notes with a principal
amount of $2,850,000 and 160,701 shares of common stock, from which the Company
received net proceeds of approximately $2,393,000. The notes accrue interest at
10% per year. The principal and accrued interest are payable at the earlier of
1) February 2000, 2) the closing date of the proposed public offering, or 3) one
of several specified events. Two principal officers of the Company invested a
total of $125,000 in units and were issued unsecured promissory notes with an
aggregate original principal amount of $125,000, and 4,999 shares of common
stock.
F-32
<PAGE> 100
OBJECTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
An independent appraisal assigned a market value of $186,413 to the common
stock issued in the February 1999 private placement. The Company has recorded
the value of the common stock as a discount against the face amount of the
unsecured promissory notes and will amortize the value over the life of the
notes.
Convertible Debentures. In July 1998, the Company issued $3,125,000
aggregate principal amount of convertible debentures. It was a condition
precedent to the completion of the February 1999 private placement that the
Company enter into an agreement with the holders of the convertible debentures,
including the directors and officers who hold convertible debentures, changing
the terms upon which the convertible debentures will convert to equity
securities. Pursuant to letter agreements dated May 1999, each of the holders of
convertible debentures agreed that: (i) it would not exercise its right to
convert the convertible debentures to common stock until the date on which a
public or private equity financing with specified minimum gross proceeds to us
(a "qualified financing") is completed; (ii) upon the closing of a qualified
financing, the principal amount of and accrued and unpaid interest of the
convertible debentures will automatically convert into common at a fixed
conversion price of $3.75, and that the anti-dilution provisions of the
convertible debentures would not apply to the conversion; and (iii) it waives
any default by the Company with respect to the Company's obligations to register
or maintain the effectiveness of a registration statement for the shares of
common stock issuable upon conversion of the convertible debentures. The holders
of the convertible debentures also agreed to hold the shares of common stock
issued upon conversion of the convertible debentures for at least 12 months
following the effective date of the registration statement that relates to the
qualified financing. The Company agreed to include the shares of common stock
issuable upon conversion of the convertible debentures in the registration
statement filed with the SEC relating to the qualified financing. In the event
that the proposed public offering is not completed on or before June 30, 1999,
then the May 1999 letter agreements will be null and void and the terms of
conversion will revert to the original terms.
F-33
<PAGE> 101
[Inside Back Cover]
[Image of a satellite, a TV monitor, a video camera and a DVD connected by lines
to a direct access card with an arrow pointing from the direct access card to a
VidPhone switch. The VidPhone switch has an arrow pointing to a VidModem Card
which is in turn connected through four lines with VidModems to a laptop
computer, a large screen display, a monitor and a desktop computer.]
Video Inputs
Satellite Video Direct Access Card
A specially designed circuit card connects sources
of video material to the VidPhone switch. Sources of
broadcast video material include, but are not
limited to, satellite broadcasts, cable television,
and narrowcasts over an ATM network. The
non-blocking architecture of the VidPhone switch
permits multiple users to simultaneously access the
same broadcast video source without degrading system
performance. Users select video sources using
standard point-and-click
Broadcast & Cable TV techniques.
Video Recorders
Laser Disc Players
The VidPhone system can display or broadcast stored
video or video conferences on non-proprietary
display stations using a desktop or laptop computer.
The user's computer is configured with
non-proprietary equipment such as a microphone,
speakers and a camera. VidPhone stations can be
configured with a single-user display such as a
desktop or laptop computer monitor or a large screen
multi-party conference room display station.
User Stations
Single User Laptop VidModem Card
Group Configuration with Large Screen Display
Stand Alone Monitor for Video Viewing
Single User Desktop VidModem
<PAGE> 102
OBJECTIVE COMMUNICATIONS, INC.
[OBJECTIVE COMMUNICATIONS LOGO]
SOUTHEAST RESEARCH PARTNERS, INC. LADENBURG THALMANN & CO. INC.
<PAGE> 103
[ALTERNATIVE PAGES FOR SELLING STOCKHOLDER PROSPECTUS]
PROSPECTUS
OBJECTIVE COMMUNICATIONS, INC. [OBJECTIVE COMMUNICATIONS LOGO]
- ------ Shares of Common Stock
-------------------------
This prospectus relates to the offering by certain stockholders of
Objective Communications, Inc. of shares of our common stock. The
selling stockholders are identified under the heading "Selling Stockholders"
later in this prospectus. We will not receive any proceeds from sales of the
common stock. The common stock is traded on The Nasdaq SmallCap Market under the
symbol OCOM.
The stockholders may sell the common stock from time to time in
transactions on The Nasdaq SmallCap Market, in negotiated transactions, or a
combination of such selling methods, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices, or at negotiated prices. The stockholders may sell the common
stock to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchasers of the common stock for whom the
broker-dealers may act as agent or to whom they may sell as principal, or both.
The selling stockholders may pay brokerage fees or commissions in connection
with the sales of the common stock.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
INVEST IN THE COMMON STOCK ONLY IF YOU CAN AFFORD TO LOSE YOUR ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 1999.
X-1
<PAGE> 104
[TO REPLACE THE "TABLE OF CONTENTS"]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............
Risk Factors...................
Use of Proceeds................
Price Range of Common Stock....
Dividend Policy................
Capitalization.................
Selected Financial
Information..................
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations...................
Business.......................
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management.....................
Executive Compensation.........
Principal Stockholders.........
Certain Transactions...........
Description of Securities......
Shares Eligible For Future
Sale.........................
Underwriting...................
Legal Matters..................
Experts........................
Additional Information.........
Index to Financial
Statements................... F-1
</TABLE>
[TO REPLACE THE SECOND PARAGRAPH ON PAGE (i)]
Unless otherwise indicated in this prospectus, all information gives effect
to a one share for seven shares reverse stock split of the issued and
outstanding common stock effected on April 14, 1999, gives effect to the
conversion of the outstanding Series B 5% Cumulative Convertible Preferred Stock
to shares of common stock on , 1999, and gives effect to the
conversion of the outstanding 5% Convertible Debentures due 2003 to
shares of common stock on , 1999.
[TO BE ADDED TO THE END OF "RECENT DEVELOPMENTS" IN THE "PROSPECTUS SUMMARY"]
On May , 1999, we completed a public offering of units, each
consisting of two shares of common stock and one warrant, from which we received
net proceeds of $ . Upon the completion of that offering, all of our
outstanding convertible debentures automatically converted into shares
of common stock, all of our outstanding Series B preferred stock automatically
converted into shares of common stock, and we paid all of the
outstanding principal of and interest on the unsecured promissory notes issued
in the February 1999 private placement and certain other obligations. We believe
that the proceeds from the May 1999 public offering will provide sufficient
capital to fund our operations for at least twelve months.
[TO REPLACE "USE OF PROCEEDS"]
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
Selling Stockholders.
X-2
<PAGE> 105
[TO BE ADDED AFTER "CERTAIN TRANSACTIONS"]
SELLING STOCKHOLDERS
The following table sets forth certain information provided to us by each
Selling Stockholder regarding the beneficial ownership of shares of common stock
by each Selling Stockholder as of February 9, 1999. 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>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING NUMBER OF AFTER THE OFFERING
--------------------- SHARES ---------------------
NUMBER OF BEING NUMBER OF
NAME OF SELLING STOCKHOLDER SHARES PERCENT SOLD SHARES PERCENT
--------------------------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
A.C. Providenti...............
AG Super Fund International
Partners, L.P...............
AGR Halifax Fund, Ltd.........
David Alexander...............
Applewood Associates, L.P.....
Aus Per #1, Inc...............
Marc C. Bailin................
Ralph A. Bard III.............
Kenneth Baronoff..............
Daniel L. Berger..............
Stanley H. Blum...............
Roger A. Booker...............
James F. Bunker...............
Eldon Burdo...................
Eugene R. Cacciamani..........
Concetta Capotorto, custodian
for Alexandra Capotorto,
UTMA/ NJ....................
Dr. Sidney Chonowski..........
John R. and Barbara
Constantino, JTWROS.........
Marc S. Cooper................
Edwin K. Dimes................
Robert H. Emery...............
Kenneth M. Endelson...........
Rick Etra & Ken Etra, JTWROS..
Steven Etra...................
Phillip H. Fauver.............
Andrew Feiner.................
GAM Arbitrage Investments,
Inc.........................
Gary C. Granoff...............
Martin Grant..................
Scott Greiper.................
John W. Heilshorn.............
Clifford M. Kendall...........
Carl G. Kleidman..............
</TABLE>
X-3
<PAGE> 106
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING NUMBER OF AFTER THE OFFERING
--------------------- SHARES ---------------------
NUMBER OF BEING NUMBER OF
NAME OF SELLING STOCKHOLDER SHARES PERCENT SOLD SHARES PERCENT
--------------------------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Leonardo, L.P.................
Richard T. Liebhaber..........
Kenneth F. Logue..............
Allan R. Lyons................
William R. Maines.............
James Mitarotonda.............
Howard W. Muchnick............
Mary C. Murphy................
Samuel Musnikow...............
Tony Peyser...................
Jerald S. Politzer............
Ramius Fund, Ltd..............
Raphael, L.P..................
Dr. Malladi Sudhakar Reddy....
Raymond D. Rice Revocable
Trust dated 4/11/96.........
Martin Rosenman and Ellen
Rosenman, JTWROS............
Stewart Shiman................
Carl E. Siegel................
Eric R. Sisser................
Edward and Linda Steinberg,
JTWROS......................
Jack M.Threadgill.............
Leonard Zelin.................
</TABLE>
- -------------------------
* Less than one percent
The registration of the shares of common stock under the Securities Act shall
not be deemed an admission by the Selling Stockholders or us that the Selling
Stockholders are underwriters for purposes of the Securities Act of any shares
offered under this prospectus. See "Certain Transactions" for a discussion of
material transactions between Objective Communications and any selling
stockholders.
LOCK-UP ARRANGEMENTS
The Selling Stockholders selling shares of common stock received upon
conversion of the convertible debentures have agreed not to sell such shares
until the first anniversary of the effective date of the registration statement
of which this prospectus constitutes a part (the "Registration Statement").
The Selling Stockholders selling shares of common stock purchased in the
February 1999 private placement have agreed not to sell, transfer or otherwise
dispose of such shares, without the consent of Southeast Research Partners,
Inc., for a period of six months from the effective date of the Registration
Statement. If necessary to obtain regulatory approval of our May 1999 public
offering, this lock-up period may be extended until the second anniversary of
the effective date of the Registration Statement.
X-4
<PAGE> 107
In addition, six directors or former directors and executive officers of
the Company who are Selling Stockholders, in particular, Anthony M. Agnello,
Roger A. Booker, James F. Bunker, Eugene R. Cacciamani, Marc S. Cooper, Robert
H. Emery and Clifford M. Kendall, have agreed not to sell any of their shares of
common stock, including the shares of common stock offered by them in
this prospectus, for a period of 15 months from the effective date of the
Registration Statement.
PLAN OF DISTRIBUTION
The distribution of the common stock by the Selling Stockholders, or by
pledgees, donees, transferees or other successors in interest, may be effected
from time to time in transactions on The Nasdaq SmallCap Market, other exchanges
or in the over-the-counter market, or in negotiated transactions or otherwise at
prices and at terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. The common stock may be sold by one
or more of the following methods: (i) a block trade in which the broker or
dealer engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (ii)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this prospectus; (iii) an exchange distribution in
accordance with the rules of such exchange; and (iv) ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus. Broker-dealers through which transactions involving the common stock
are effected may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of the common
stock for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both. Usual and customary or specifically negotiated brokerage
fees or commissions may be paid by the Selling Stockholders in connection with
sales of the common stock. The Selling Stockholders have not entered into any
underwriting arrangements.
In effecting sales, brokers or dealers engaged by the Selling Stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated immediately prior to the sale. The Selling Stockholders and agents
who execute orders on their behalf may be deemed to be underwriters as that term
is defined in Section 2(11) of the Securities Act and a portion of any proceeds
of sales and discounts, commissions or other compensation may be deemed to be
underwriting compensation for purposes of the Securities Act. We have agreed to
indemnify the Selling Stockholders against certain liabilities, including
liabilities under the Securities Act.
X-5
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be incurred by the
Registrant in connection with the issuance and distribution of the securities
registered hereby, all of which expenses, except for the registration fee and
The Nasdaq SmallCap Market filing fee, are estimates:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- --------
<S> <C>
SEC registration fee........................................ $ 11,265
NASD filing fee............................................. 3,957
Nasdaq filing fee........................................... 17,500
Blue Sky fees and expenses (including fees of counsel)...... 5,000
Printing expenses........................................... 125,000
Transfer agent and registrar's fee.......................... 3,000
Legal fees and expenses (other than Blue Sky)............... 150,000
Accounting fees and expenses................................ 125,000
Miscellaneous............................................... 9,278
--------
Total.................................................. $450,000
========
</TABLE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Third Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 Amended and Restated Bylaws of the Registrant (Incorporated
by reference to Exhibit 3.2 to the Registrant'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 (the "1997 SB-2")).
3.3 Certificate of Designations of the Series B 5% Cumulative
Convertible Preferred Stock of the Registrant (Incorporated
by reference to Exhibit 4.10 forming a part of Amendment No.
1 to the Registrant's Registration Statement on Form S-3
(File No. 333-62971) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the
"1998 S-3")).
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 to the 1997 SB-2).
4.2 Form of Warrant for the purchase of shares of common stock,
issued in connection with the private placement of units in
June 1995 and August 1996 (Incorporated by reference to
Exhibit 3.5 to the 1997 SB-2).
4.3 Form of Warrants for the purchase of 100,000 shares of
common stock, 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 to the 1997 SB-2).
</TABLE>
II-1
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
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 to the 1997 SB-2).
4.5 Specimen certificate evidencing shares of common stock of
the Registrant.
4.6 Form of 5% Convertible Debentures due 2003 of the Registrant
(Incorporated by reference to Exhibits 4.3 and 4.4 forming a
part of the Registrant'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 (the "July 8-K")).
4.7 Form of Warrants to be issued upon redemption of the 5%
Cumulative Convertible Debentures due 2003 of the Registrant
(Incorporated by reference to Exhibit 4.5 forming a part of
the July 8-K).
4.8 Specimen certificate evidencing shares of the Series B 5%
Cumulative Convertible Preferred Stock of the Registrant
(Incorporated by reference to Exhibit 4.9 forming a part of
the 1998 S-3).
4.9 Form of Warrant issued in connection with the Series B 5%
Cumulative Convertible Preferred Stock of the Registrant
(Incorporated by reference to Exhibit 4.11 forming a part of
the 1998 S-3).
4.10 Senior Note issued to Sanmina Corporation by the Registrant
with a principal amount of $4,300,000. (Incorporated by
reference to Exhibit 4.10 forming a part of the Registrant's
Annual Report on Form 10-KSB for the year ended December 31,
1998 (the "1998 Form 10-KSB").
4.11 Note issued to Shaw Pittman Potts & Trowbridge by the
Registrant with a principal amount of $400,000.
(Incorporated by reference to Exhibit 4.11 forming a part of
the 1998 Form 10-KSB).
4.12 Form of Warrant for the purchase of 275,000 shares of common
stock, issued to Sanmina Corporation. (Incorporated by
reference to Exhibit 4.12 forming a part of the 1998 Form
10-KSB).
4.13 Form of Warrant for the purchase of 40,000 shares of common
stock, issued to Shaw Pittman Potts & Trowbridge.
(Incorporated by reference to Exhibit 4.13 forming a part of
the 1998 Form 10-KSB).
4.14* Form of Unsecured Promissory Note, issued on February 4,
1999 to various subscribers in a private placement.
4.15** Form of Representative's Purchase Option.
4.16 Specimen certificate evidencing Redeemable Common Stock
Purchase Warrant.
4.17** Form of Warrant Agreement.
5.1 Form of Opinion of Shaw, Pittman, Potts & Trowbridge as to
the legality of the securities being registered.
10.1 1994 Stock Option Plan (Incorporated by reference to Exhibit
10.1 forming a part of the 1997 SB-2).
10.2 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.2 forming a part of the 1997 SB-2).
10.3 Form of Consulting Agreement by and between the Registrant
and Barington Capital Group, L.P. (Incorporated by reference
to Exhibit No. 10.4 forming a part of the 1997 SB-2).
10.4 Letter Agreement, dated October 7, 1996, between Barington
Capital Group and the Registrant (Incorporated by reference
to Exhibit No. 10.5 forming a part of Amendment No. 2 to the
1997 SB-2).
</TABLE>
II-2
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.5 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 No. 10.6
forming a part of Amendment No. 2 to the 1997 SB-2).
10.6 Form of Stock Option Agreement, dated December 18, 1997, by
and between the Registrant and Barington Capital Group, L.P.
(Incorporated by reference to Exhibit 10.8 forming a part of
the Registrant's Annual Report on Form 10-KSB, as amended,
for the year ended December 31, 1997).
10.7 Subscription Agreement, dated as of July 1, 1998, by and
among the Registrant and certain Institutional Investors
(Incorporated by reference to Exhibit 4.1 forming a part of
the July 8-K).
10.8 Subscription Agreement, dated as of July 8, 1998, by and
among the Registrant and certain Investors (Incorporated by
reference to Exhibit 4.2 forming a part of the July 8-K).
10.9 Strategic Alliance and Marketing Agreement between the
Registrant and Unisys Corporation (Incorporated by reference
to Exhibit 10.9 to the 1998 Form 10-KSB.
10.10* Letter of Intent, dated January 14, 1999, between Southeast
Research Partners, Inc. and the Registrant.
10.11* Agency Agreement, dated as of January 25, 1999, between
Southeast Research Partners, Inc. and the Registrant.
10.12* Form of Subscription Agreement, dated January 25, 1999,
between the Registrant and certain Investors.
10.13* Employment Agreement, dated July 13, 1998, between the
Registrant and James F. Bunker.
10.14 Employment Agreement between the Registrant and Steven A.
Rogers (Incorporated by reference to Exhibit 10.3 forming a
part of Amendment No. 2 to the 1997 SB-2).
10.15 Letter Agreement dated January 12, 1999, between the
Registrant and Sanmina Corporation (Incorporated by
reference to Exhibit 10.15 to the 1998 Form 10-KSB).
10.16 Letter Agreement dated January 21, 1999 between the
Registrant and Shaw Pittman Potts & Trowbridge (Incorporated
by reference to Exhibit 10.16 to the 1998 Form 10-KSB).
10.17 Form of Letter Agreement between the Registrant and the
holders of the 5% Convertible Debentures due 2003, dated May
1999.
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Shaw Pittman Potts & Trowbridge (included as part
of Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24* Power of Attorney of Richard S. Friedland.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
II-3
<PAGE> 111
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies it has reasonable grounds to believe it meets
all the requirements for filing this Amendment No. 2 to Form SB-2 and has duly
caused this Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the County of Rockingham, New Hampshire, on May 13, 1999.
OBJECTIVE COMMUNICATIONS, INC.
By: /s/ JAMES F. BUNKER
-----------------------------------
James F. Bunker
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ JAMES F. BUNKER President and Chief Executive May 13, 1999
- ------------------------------------------ Officer, Chairman and
James F. Bunker Director (Principal
Executive Officer)
/s/ ROBERT H. EMERY Vice President of May 13, 1999
- ------------------------------------------ Administration and Finance
Robert H. Emery and Secretary (Principal
Financial and Accounting
Officer)
/s/ STEVEN A. ROGERS* Director May 13, 1999
- ------------------------------------------
Steven A. Rogers
/s/ ANTHONY M. AGNELLO* Director May 13, 1999
- ------------------------------------------
Anthony M. Agnello
/s/ EUGENE R. CACCIAMANI* Director May 13, 1999
- ------------------------------------------
Eugene R. Cacciamani
/s/ MARC S. COOPER* Director May 13, 1999
- ------------------------------------------
Marc S. Cooper
/s/ RICHARD S. FRIEDLAND* Director May 13, 1999
- ------------------------------------------
Richard S. Friedland
/s/ JOHN B. TORKELSEN* Director May 13, 1999
- ------------------------------------------
John B. Torkelsen
*By: /s/ ROBERT H. EMERY Attorney-in-Fact May 13, 1999
------------------------------------
Robert H. Emery
</TABLE>
II-4
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Third Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 Amended and Restated Bylaws of the Registrant (Incorporated
by reference to Exhibit 3.2 to the Registrant'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 (the "1997 SB-2")).
3.3 Certificate of Designations of the Series B 5% Cumulative
Convertible Preferred Stock of the Registrant (Incorporated
by reference to Exhibit 4.10 forming a part of Amendment No.
1 to the Registrant's Registration Statement on Form S-3
(File No. 333-62971) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the
"1998 S-3")).
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 to the 1997 SB-2).
4.2 Form of Warrant for the purchase of shares of common stock,
issued in connection with the private placement of units in
June 1995 and August 1996 (Incorporated by reference to
Exhibit 3.5 to the 1997 SB-2).
4.3 Form of Warrants for the purchase of 100,000 shares of
common stock, 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 to the 1997 SB-2).
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 to the 1997 SB-2).
4.5 Specimen certificate evidencing shares of common stock of
the Registrant.
4.6 Form of 5% Convertible Debentures due 2003 of the Registrant
(Incorporated by reference to Exhibits 4.3 and 4.4 forming a
part of the Registrant'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 (the "July 8-K")).
4.7 Form of Warrants to be issued upon redemption of the 5%
Cumulative Convertible Debentures due 2003 of the Registrant
(Incorporated by reference to Exhibit 4.5 forming a part of
the July 8-K).
4.8 Specimen certificate evidencing shares of the Series B 5%
Cumulative Convertible Preferred Stock of the Registrant
(Incorporated by reference to Exhibit 4.9 forming a part of
the 1998 S-3).
4.9 Form of Warrant issued in connection with the Series B 5%
Cumulative Convertible Preferred Stock of the Registrant
(Incorporated by reference to Exhibit 4.11 forming a part of
the 1998 S-3).
4.10 Senior Note issued to Sanmina Corporation by the Registrant
with a principal amount of $4,300,000. (Incorporated by
reference to Exhibit 4.10 forming a part of the Registrant's
Annual Report on Form 10-KSB for the year ended December 31,
1998 (the "1998 Form 10-KSB").
</TABLE>
II-5
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
4.11 Note issued to Shaw Pittman Potts & Trowbridge by the
Registrant with a principal amount of $400,000.
(Incorporated by reference to Exhibit 4.11 forming a part of
the 1998 Form 10-KSB.
4.12 Form of Warrant for the purchase of 275,000 shares of common
stock, issued to Sanmina Corporation. (Incorporated by
reference to Exhibit 4.12 forming a part of the 1998 Form
10-KSB.
4.13 Form of Warrant for the purchase of 40,000 shares of common
stock, issued to Shaw Pittman Potts & Trowbridge.
(Incorporated by reference to Exhibit 4.13 forming a part of
the 1998 Form 10-KSB.
4.14* Form of Unsecured Promissory Note, issued on February 4,
1999 to various subscribers in a private placement.
4.15** Form of Representative's Purchase Option.
4.16 Specimen certificate evidencing Redeemable Common Stock
Purchase Warrant.
4.17** Form of Warrant Agreement.
5.1 Form of Opinion of Shaw, Pittman, Potts & Trowbridge as to
the legality of the securities being registered.
10.1 1994 Stock Option Plan (Incorporated by reference to Exhibit
10.1 forming a part of the 1997 SB-2).
10.2 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.2 forming a part of the 1997 SB-2).
10.3 Form of Consulting Agreement by and between the Registrant
and Barington Capital Group, L.P. (Incorporated by reference
to Exhibit No. 10.4 forming a part of the 1997 SB-2).
10.4 Letter Agreement, dated October 7, 1996, between Barington
Capital Group and the Registrant (Incorporated by reference
to Exhibit No. 10.5 forming a part of Amendment No. 2 to the
1997 SB-2).
10.5 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 No. 10.6
forming a part of Amendment No. 2 to the 1997 SB-2).
10.6 Form of Stock Option Agreement, dated December 18, 1997, by
and between the Registrant and Barington Capital Group, L.P.
(Incorporated by reference to Exhibit 10.8 forming a part of
the Registrant's Annual Report on Form 10-KSB, as amended,
for the year ended December 31, 1997).
10.7 Subscription Agreement, dated as of July 1, 1998, by and
among the Registrant and certain Institutional Investors
(Incorporated by reference to Exhibit 4.1 forming a part of
the July 8-K).
10.8 Subscription Agreement, dated as of July 8, 1998, by and
among the Registrant and certain Investors (Incorporated by
reference to Exhibit 4.2 forming a part of the July 8-K).
10.9 Strategic Alliance and Marketing Agreement between the
Registrant and Unisys Corporation (Incorporated by reference
to Exhibit 10.9 to the 1998 Form 10-KSB).
10.10* Letter of Intent, dated January 14, 1999, between Southeast
Research Partners, Inc. and the Registrant.
</TABLE>
II-6
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.11* Agency Agreement, dated as of January 25, 1999, between
Southeast Research Partners, Inc. and the Registrant.
10.12* Form of Subscription Agreement, dated January 25, 1999,
between the Registrant and certain Investors.
10.13* Employment Agreement, dated July 13, 1998, between the
Registrant and James F. Bunker.
10.14 Employment Agreement between the Registrant and Steven A.
Rogers (Incorporated by reference to Exhibit 10.3 forming a
part of Amendment No. 2 to the 1997 SB-2).
10.15 Letter Agreement dated January 12, 1999, between the
Registrant and Sanmina Corporation (Incorporated by
reference to Exhibit 10.15 to the 1998 Form 10-KSB).
10.16 Letter Agreement dated January 21, 1999 between the
Registrant and Shaw Pittman Potts & Trowbridge (Incorporated
by reference to Exhibit 10.16 to the 1998 Form 10-KSB).
10.17 Form of Letter Agreement between the Registrant and the
holders of the 5% Convertible Debentures due 2003, dated May
1999.
11.1 Statement re: computation of per share earnings.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Shaw Pittman Potts & Trowbridge (included as part
of Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24* Power of Attorney of Richard S. Friedland.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
II-7
<PAGE> 1
EXHIBIT 4.5
<TABLE>
<S> <C> <C>
OBJECTIVE SHARES
COMMUNICATIONS
NUMBER
OBJECTIVE COMMUNICATIONS, INC.
OC
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE [ ]*
COMMON STOCK (subject to restrictions noted on reverse side) SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 674421 20 1
</TABLE>
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.01 OF
OBJECTIVE COMMUNICATIONS, INC., transferable on the books of the Corporation by
the holder hereof in person or by his duly authorized attorney upon surrender of
this certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Certificate of Incorporation and Bylaws of the Corporation as from time to time
amended, to all of which the holder by acceptance hereof assents. This
certificate is not valid until countersigned and registered by the Transfer
Agent and Registrar.
NEW COMMON STOCK
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
OBJECTIVE COMMUNICATIONS, INC.
CORPORATE
SEAL
1993
DELAWARE
Dated:
[sig] [sig]
Secretary President and Chief Executive Officer
Countersigned and Registered:
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY
(Jersey City, New Jersey) Transfer Agent
and Registrar,
By
Authorized Signature
* Represents former CUSIP number.
<PAGE> 2
OBJECTIVE COMMUNICATIONS, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT--.............Custodian..............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with rights under Uniform Gifts to Minors
of survivorship and not as Act..............................
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,........................hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------......................................
............................................................................
Please print or typewrite name and address including
postal zip code of assignee
............................................................................
............................................................................
..................................................................... Shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint..........................................
............................................................................
Attorney to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated,..................
..................................
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate in every particular without alteration
or enlargement, or any change whatever.
<PAGE> 1
EXHIBIT 4.16
WARRANT CERTIFICATE FOR
PURCHASE OF COMMON STOCK
VOID AFTER 5:00 P.M. -- ON MAY , 2004
NUMBER [OBJECTIVE COMMUNICATIONS LOGO] WARRANTS
OBJECTIVE COMMUNICATIONS, INC. CUSIP
OCW
THIS CERTIFIES THAT, for value received,
or registered assigns, ("Registered Holder") is the owner of the number of
warrants ("Warrants") specified above. Each Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Certificate and in the Warrant Agreement (as hereinafter defined), one
fully paid and nonassessable share (subject to adjustment as hereinafter
provided) of the Common Stock, par value $.01 per share ("Common Stock"), of
Objective Communications, Inc., a Delaware corporation ("Company"), at any time
commencing May , 2000, and before the Expiration Date (as hereinafter defined)
upon the presentation and surrender of this Warrant Certificate with the
Subscription Form on the reverse hereof duly executed, at the office of
Continental Stock Transfer & Trust Company, as warrant agent, or its successor
("Warrant Agent") accompanied by payment of the $5.00 ("Purchase Price") per
Warrant, subject to adjustment as hereinafter provided, in lawful money of the
United States in cash, or by good certified or official bank check payable to
the order of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms set forth in the
Warrant Agreement ("Warrant Agreement") dated as of May , 1999, by and between
the Company and the Warrant Agent, to all the terms and provisions of which the
Registered Holder, by acceptance of this Warrant Certificate, hereby assents. In
the event of certain contingencies provided for the Warrant Agreement, the
Purchase Price and the number of shares of Common Stock subject to purchase
upon the exercise of each Warrant represented hereby are subject to modification
or adjustment. Reference is made to the Warrant Agreement for a more complete
statement of the rights and limitations of the rights of the Registered Holder
hereof, the rights and duties of the Warrant Agent and the rights and
obligations of the Company thereunder. Copies of the Warrant Agreement are on
file at the corporate trust office of the Warrant Agent.
The terms "Expiration Date" shall mean 5:00 p.m. (New York time) on May ,
2004, or such earlier date as the Warrant shall be redeemed. If such date shall
in the State of New York be a holiday or a day on which the banks are
authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) the next following day which in the State of New York is not a holiday or
a day on which banks are authorized to close.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder. The Company shall not be required upon the exercise of the
Warrants represented hereby to issue any fractions of shares, but shall make an
adjustment therefor in cash on the basis of the market value or any such
fractional interest (computed as provided in the Warrant Agreement). In case
this Warrant is exercised with respect to less than all of such shares, a new
Warrant certificate or certificates will be issued on such surrender for the
number of Warrants represented hereby which were not so exercised. Prior to the
exercise of any Warrant represented hereby, the holder shall not be entitled to
any rights of a stockholder of the Company, including without limitation the
right to vote or to receive dividends or other distributions, and shall not be
entitled to receive any notice of any proceedings of the Company except as
provided in said Warrant Agreement. Prior to the due presentment for
registration of transfer of this Warrant Certificate, the Company and the
Warrant Agent may deem and treat the Registered Holder as the absolute owner
hereof and of each Warrant represented hereby (notwithstanding any notation of
ownership or other writing hereon made by anyone other than a duly authorized
officer of the Company or the Warrant Agent), for all purposes, and neither the
Company nor the Warrant Agent shall be affected by any notice to the contrary.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate, or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender.
Upon due presentment together with any tax or other governmental charge
imposed in connection therewith, for registration of transfer of the Warrant
Certificate at such office, a new Warrant Certificate or Warrant Certificates
representing an equal number of Warrants will be issued to the transferee in
exchange therefor, subject to the limitations provided in the Warrant Agreement.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of any Warrant unless a registration statement under the Securities
Act of 1933 with respect to such securities is effective. The Company has
covenanted and agreed that it will file a registration statement or a
post-effective amendment to its existing registration statement and will use its
best efforts to cause the same to become effective and to keep it current while
any of the Warrants are outstanding and exercisable. The Warrants represented
hereby shall not be exercisable by a Registered Holder in any state where such
exercise would be unlawful.
The Warrants may be redeemed at the option of the Company in whole at any
time or in part from time to time, after the Warrants become exercisable and
prior to their expiration, by paying in cash, or certified or bank check,
therefor $.01 per Warrant upon at least thirty (30) days' written notice mailed
to the Registered Holders at any time, if the last sale price of the Common
Stock has been at least 160% of the then effective exercise price of the
Warrants on twenty (20) out of the thirty (30) consecutive trading days ending
on the third day prior to the date on which the notice of redemption is given.
Each Warrant not exercised on or before the date called for in such notice shall
become void, and all rights thereunder shall terminate.
If this Warrant shall be surrendered for exercise within any period during
which the transfer books for Common Stock or other securities purchasable upon
the exercise of this Warrant are closed for any purpose, the Company shall not
be required to make delivery of certificates for the securities purchasable upon
such exercise until the date of the reopening of said transfer books.
The Company has agreed to pay a fee of 5% of the Purchase Price to
Southeast Research Partners, Inc., upon certain conditions as specified in the
Warrant Agreement upon the exercise of any Warrants represented hereby.
This Warrant Certificate and each Warrant represented hereby shall be
construed in accordance with and governed by the laws of the State of New York.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted herein.
<TABLE>
<S> <C> <C>
OBJECTIVE COMMUNICATIONS, INC.
Dated: By:
[SEAL] [sig]
COUNTERSIGNED ATTEST: PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONTINENTAL STOCK TRANSFER & TRUST COMPANY By:
[NEW YORK, N.Y.] WARRANT AGENT [sig]
By:
AUTHORIZED OFFICER SECRETARY
</TABLE>
<PAGE> 2
OBJECTIVE COMMUNICATIONS, INC.
PURCHASE FORM
TO BE EXECUTED
UPON EXERCISE OF WARRANT CERTIFICATE
TO Continental Stock Transfer and Trust Company
2 Broadway
New York, New York 10004
The undersigned hereby exercises, according to the terms and conditions
thereof, the right to purchase __________ Shares of Common Stock, evidenced by
the within Warrant Certificate, and herewith makes a payment of the purchase
price in full.
NAME:________________________________ ________________________________________
PAYMENT ENCLOSED
ADDRESS:_____________________________ ________________________________________
SOCIAL SECURITY NO. of Warrant Holder
________________________________________________________________________________
The undersigned represents that the exercise of the within Warrant was
solicited by Southeast Research Partners, Inc. or its assignee. If not solicited
by Southeast Research Partners, Inc. or its assignee, please write "unsolicited"
in the space below. Unless otherwise indicated it will be assumed that the
exercise was solicited by Southeast Research Partners, Inc. or its assignee.
________________________________________
(write "unsolicited" on above line if
not solicited by Southeast Research
Partners, Inc. or its assignee)
DATED:_______________________________ SIGNATURE:______________________________
TRANSFER FORM
For value received _____________________________________________ hereby
sells, assigns and transfer unto ______________________________________________
_______________________________________________________________________________
Warrants to purchase Shares of Common Stock represented by the within Warrant
Certificate and does hereby irrevocably constitute and appoint ________________
______________________________________________________________________ Attorney
to transfer such Warrants on the books of the within named Company with full
power of substitution in the premises.
DATED:_______________________________
NAME:___________________________________
The signature to this assignment
must correspond with the name as
written upon the ???? of this
Certificate in every particular.
________________________________________
Social Security Number of Assignee
or other identifying number
Signature(s) Guaranteed:
________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 5.1
Shaw Pittman Potts & Trowbridge
A Partnership Including Professional Corporations
2300 N Street, NW
Washington, DC 20037
May 13, 1999
Objective Communications, Inc.
50 International Drive
Portsmouth, NH 03801-2862
Ladies and Gentlemen:
We have acted as counsel to Objective Communications, Inc., a Delaware
corporation (the "Company"), in connection with the registration of units (the
"Units"), each consisting of two shares of the Company's common stock, par value
$.01 per share (the "Common Stock"), and one redeemable common stock purchase
warrant (each a "Warrant"), the shares of Common Stock that constitute a part of
the Units (the "Unit Stock"), the Warrants that constitute a part of the Units
(the "Unit Warrants"), an option to purchase Units with an estimated maximum
fair market value of $1,500,000 (the "Representative's Purchase Option"), shares
of Common Stock issuable upon exercise of the Unit Warrants (the "Warrant
Shares") and 202,678 shares of outstanding Common Stock (the "Stockholder
Shares") pursuant to a Registration Statement on Form SB-2 under the Securities
Act of 1933, as amended (No. 333-72429) (the "Registration Statement"). Of the
Units to be offered and sold, certain Units are to be offered by the Company on
a firm commitment underwritten basis (the "Primary Offering") and pursuant to a
45-day option granted by the Company to the underwriters of the Primary Offering
solely to cover over-allotments and certain Units are to be offered by certain
underwriters of the Primary Offering (the "Option Holders") for their own
account upon exercise by them of the Representative's Purchase Option. The
Warrant Shares will be issuable upon exercise by the holders thereof (the
"Warrant Holders") of the Unit Warrants in accordance with their terms. Of the
Stockholder Shares, certain shares are to be offered by convertible debenture
holders of the Company from time to time after the automatic conversion of their
convertible debentures into shares of Common Stock upon the closing of the
Primary Offering (the "Debenture Selling Stockholders"), and certain shares are
to be offered by certain stockholders of the Company from time to time (the
"Other Selling Stockholders").
Based upon our examination of the originals or copies of such documents,
corporate records, certificates of officers of the Company and such other
instruments as we have deemed necessary, and upon the laws as presently in
effect, we are of the opinion that:
<PAGE> 2
1. The Units, Unit Stock and Unit Warrants to be offered by the Company pursuant
to the Registration Statement have been duly authorized for issuance by the
Company and, upon issuance and delivery in accordance with the terms of the
underwriting agreement referred to in the Registration Statement, will be
validly issued, fully paid and non-assessable.
2. The Stockholder Shares to be offered by the Other Selling Stockholders
pursuant to the Registration Statement have been duly authorized and validly
issued, and are fully paid and non-assessable.
3. The Stockholder Shares to be offered by the Debenture Selling Stockholders
pursuant to the Registration Statement have been duly authorized and, upon
issuance by the Company in accordance with the terms of the convertible
debentures, as amended by those certain letter agreements executed in May
1999 between the Company and the Debenture Selling Stockholders, will be
validly issued, fully paid and non-assessable.
4. The Units, Unit Stock and Unit Warrants to be offered by the Option Holders
pursuant to the Registration Statement have been duly authorized and, upon
issuance by the Company in accordance with the terms of the Representative's
Purchase Option, will be validly issued, fully paid and non-assessable.
5. The Warrant Shares to be offered by the Warrant Holders pursuant to the
Registration Statement have been duly authorized and, upon issuance by the
Company in accordance with the terms of the Warrants, will be validly issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the prospectus that constitutes part of the Registration Statement.
Very truly yours,
/s/ Shaw Pittman Potts & Trowbridge
Shaw Pittman Potts & Trowbridge
<PAGE> 1
EXHIBIT 10.17
[Letterhead of Objective Communications, Inc.]
May __, 1999
[Debenture Holder]
[address]
[address]
RE: REVISED AGREEMENT REGARDING $3.125 MILLION AGGREGATE
PRINCIPAL AMOUNT OF 5% CUMULATIVE CONVERTIBLE DEBENTURES DUE
2003
Dear [Debenture Holder]:
Objective is currently in registration with respect to an equity financing
that the Company believes will allow it to continue operations for the next 12
months. Timely closing of this offering, prior to May 31, 1999, is required for
the Company to remain listed on the Nasdaq SmallCap Market. In order to complete
the offering in that time and to remain compliant with Nasdaq rules and
regulations, the underwriters are requiring changes to terms upon which the
Convertible Debentures will convert to equity securities. Please note that in
order to meet our schedule, we need to hear from you as soon as possible, and in
any event before the end of the day on Monday, May 10.
The Company is subject to certain Nasdaq rules that prohibit Objective
from issuing common stock or securities convertible into common stock in excess
of 20% of the outstanding common stock at the time of issuance, except in
certain limited circumstances or with prior stockholder approval of the
issuance. The proposed issuance of equity securities upon conversion of the
Convertible Debentures does not qualify for any of the available exceptions from
the Nasdaq rules, the Company has not obtained stockholder approval of the
proposed issuance, and could not obtain stockholder approval of the proposed
issuance in time to complete the proposed equity financing. Accordingly, this
letter is to set forth our mutual agreement as to the modified terms upon which
the Convertible Debentures will convert to equity securities.
This letter agreement is to set forth our mutual agreement and
understanding with respect to the outstanding $3.125 million aggregate principal
amount of 5% Cumulative Convertible Debentures due 2003 (the "Convertible
Debentures") of Objective Communications, Inc., a Delaware corporation
("Objective" or the "Company"). The undersigned investor (an "Investor" and,
collectively with the additional holders of the Convertible Debentures, the
"Investors") currently holds $_______ aggregate principal amount of the
Convertible Debentures. Each individual signing this letter agreement on behalf
of an entity that holds Convertible Debentures represents and warrants to
Objective that it is authorized and has full authority to execute, deliver and
enter into this agreement on behalf of, and to bind, such investor.
<PAGE> 2
-2- May __, 1999
In consideration of the mutual covenants and obligations set forth in this
letter agreement, and in the other documents and agreements among Objective and
the Investors, Objective and the undersigned Investor agree as follows:
1. The Investor agrees that he, she or it will not exercise its right to
convert the Convertible Debentures to common stock, par value $.01 per
share of Objective (the "Common Stock"), until the date on which a public
or private equity financing with gross proceeds to Objective of not less
than $8 million (a "Qualified Financing") is consummated. Immediately
following the closing of a Qualified Financing, the principal amount of
and accrued and unpaid interest on the Convertible Debentures will
automatically and without any further action on the part of the holder
convert into Common Stock at the conversion price set forth below.
2. The number of shares of Common Stock issuable upon such conversion will be
equal to the principal amount of the Convertible Debentures, plus accrued
and unpaid interest thereon, divided by a "conversion price" equal to
$3.75; provided, however, that notwithstanding the foregoing, the Company
shall not be obligated to issue shares of common stock in excess of the
number of shares of common stock permitted pursuant to the ExchangeCap (as
defined in the certificate evidencing the Convertible Debentures)
provision set forth in Section 13 of the certificate evidencing the
Convertible Debentures.
3. If the Qualified Financing is a public offering ("Qualified Public
Financing"), the shares of Common Stock issuable upon conversion of the
Convertible Debentures will be registered at the time of such offering. In
the event that the Qualified Financing is a private offering ("Qualified
Private Financing"), the shares of Common Stock issuable upon conversion
of the Convertible Debentures will be registered as promptly as
practicable following the conclusion of such financing, but in no event
will such shares be registered later than the time at which the shares
issued in the Qualified Private Financing are registered or the end of a
six-month lock-up period. The holders of the Convertible Debentures also
agree to hold the shares of Common Stock issued upon conversion of the
Convertible Debentures, in the case of a Qualified Public Financing, for a
period of at least twelve (12) months following the effective date of the
Company's registration statement that relates to the Qualified Public
Financing and, in the case of a Qualified Private Financing, for six
months following the date on which the Convertible Debentures are
converted.
4. The undersigned Investor also hereby waives any default by Objective with
respect to the failure to register the shares of Common Stock issuable
upon conversion of the Convertible Debentures for resale by the holders
thereof on a registration statement filed with the Securities and Exchange
Commission (the "Commission") and to maintain the effectiveness of the
registration statement. The undersigned Investor hereby waives any right
to have the Convertible Debentures registered on a registration statement
filed with the Commission prior to the Qualified Financing. In exchange
for such agreement, the Company agrees that if the Qualified Financing is
a public offering, then it will include the shares of Common Stock
issuable upon
<PAGE> 3
-3- May __, 1999
conversion of the Convertible Debentures in the registration statement
filed with the Commission with respect to the Qualified Financing, and to
use its best efforts to have the registration statement effective at the
time at which the lock-up agreement described above expires.
5. The undersigned Investor hereby consents to the amendment of the
certificate evidencing the Convertible Debentures and/or the Subscription
Agreements and/or other documents relating to the issuance of the
Convertible Debentures (the "Debenture Agreements") to the extent
necessary to incorporate the above agreements, and, promptly upon the
request of the Company, agrees to execute and deliver such amendments to
the Company.
6. To the extent that the provisions of the Debenture Agreements are not
inconsistent with the terms hereof, the undersigned recognizes and agrees
that such Debenture Agreements remain in full force and effect, including,
without limitation, the ExchangeCap provision set forth in Section 13 of
the certificate evidencing the Convertible Debentures.
7. This Agreement supercedes in all respects that letter agreement dated
______ __, 1999 between the Company and the undersigned Investor (the "Old
Agreement"), and the Old Agreement shall be null and void and of no force
and effect.
8. In the event that the Qualified Financing is not completed on or before
June 30, 1999, then this letter agreement shall be null and void and of no
force and effect.
This Agreement shall be effective upon and as of the date hereof. All
numbers and share amounts set forth in this letter agreement are based on the
current number of shares of common stock outstanding, and shall be adjusted for
any future stock splits, stock recapitalizations, reverse stock splits or
similar changes in the Company's capitalization.
If you are in agreement with the foregoing, please sign and return one
original copy of this letter to the undersigned at Objective Communications,
Inc., 50 International Drive, Portsmouth, New Hampshire 03801 by overnight mail
and by telecopy (Telecopy number: (603) 334-2212). If you have any
questions, you can reach me at (603) 334-6741.
Sincerely,
Robert H. Emery,
Vice President, Finance and
Administration
<PAGE> 4
-4- May __, 1999
The undersigned authorized representatives of the Investors listed below
hereby acknowledge and agree to the terms and conditions of this letter
agreement and agree to be legally bound by its terms.
Dated: May __, 1999 [DEBENTURE HOLDER]
By: ____________________________
Name:
<PAGE> 1
EXHIBIT 11.1
Statement Re: Computation of Per Share Earnings
Information regarding the computation of per share earnings is presented
in the notes to the Registrant's financial statements included in the
prospectus filed as part of this registration statement.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Objective
Communications, Inc. (a development stage enterprise) on Form SB-2 of our
report, dated February 26, 1999, except for Note 14, as to which the date is
April 14, 1999, on our audits of the financial statements of Objective
Communications, Inc. We also consent to the references to our firm under the
captions "Experts" and "Selected Financial Data."
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 13, 1999
