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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ________ to ________
Commission File Number 000-22235
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OBJECTIVE COMMUNICATIONS, INC.
(Name of Small Business Issuer in Its Charter)
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DELAWARE 54-1707962
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
50 INTERNATIONAL DRIVE, 03801
PORTSMOUTH, NEW HAMPSHIRE (Zip Code)
(Address of Principal Executive Offices)
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(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE): (603) 334-6700
Securities registered under Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.01
(TITLE OF CLASS)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. (Not applicable)
The aggregate market value of the voting common equity held by
non-affiliates as of March 15, 1999, was $6,132,460.
The number of shares of the issuer's Common Stock outstanding as of March
15, 1999, was 6,881,035 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business.................................................... 1
2. Properties.................................................. 7
3. Legal Proceedings........................................... 8
4. Submission of Matters to a Vote of Security Holders......... 8
PART II
5. Market for Common Equity and Related Stockholder Matters.... 8
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
7. Financial Statements........................................ 15
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 35
PART III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act......................................................... 35
10. Executive Compensation...................................... 37
11. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
12. Certain Relationships and Related Transactions.............. 41
13. Exhibits, Lists and Reports on Form 8-K..................... 44
14. Signatures.................................................. 46
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PART I
Unless otherwise indicated, all information in this Form 10-KSB gives
effect to a one-for-two reverse stock split of our common stock effective as of
December 5, 1996.
Some of the statements in this Form 10-KSB are "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
involve a number of risks and uncertainties. We have made these statements based
on currently available operating, financial and competitive information.
However, actual results and future events may differ significantly from the
results contemplated in the forward-looking statements because of a number of
factors, including product and technology development, customer and market
acceptance of our product, demand for our product, the impact of competitive
products and pricing, and other risks detailed in this Form 10-KSB and in our
Securities and Exchange Commission filings.
In this Form 10-KSB, we refer to Objective Communications, Inc., a Delaware
corporation, as we, the Company or Objective Communications.
ITEM 1. 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 and participate in multi-party video conferences. With the introduction of
Release 1.5 of our VidPhone software, which we expect to occur in the second
quarter of 1999, users also will be able to retrieve 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.
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 approximately 90 from
approximately 135. Since then, we have reduced our staff by approximately 35
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. For example, Unisys exhibited the
VidPhone system at 11 trade shows in 1998. Bell Atlantic and Sprint also
recently renewed their reseller agreements with us.
We require additional financing for our operations. At December 31, 1998,
we had essentially no cash from which to fund operations. In February 1999, we
completed a private placement of $2,850,000 of unsecured promissory notes and
1,140,000 shares of common stock, from which we received net proceeds of
approximately $2,430,000. Before completing the February 1999 private placement,
we were able to pay only those expenses that were essential to continue
operations. We financed those payments, in part, with advances of $125,000 from
two of our executive officers. Since completing the February 1999 private
placement, we have continued to monitor payments carefully. On February 16,
1999, we filed a registration statement with the Securities and Exchange
Commission relating to a proposed firm commitment underwritten public offering
of $15,000,000 of our common stock. Although we currently expect to complete
that public offering in late April 1999, our ability to complete the offering is
subject to a number of factors, many of which are
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beyond our control. Therefore, we cannot assure you that we will be able to
complete the proposed public offering or, if we complete the offering, the
timing of the offering.
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 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 local area network ("LAN") to transmit video data. Some desktop
video conferencing systems use dedicated Integrated Services Digital Network
("ISDN") lines to achieve acceptable video quality (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 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
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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 do not expect business users to 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 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 the second quarter of 1999, users also will be able to
retrieve stored video on demand.
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
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. With the introduction of our Release
1.5 VidPhone software, 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.
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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 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 the second quarter of 1999. The
VidServer will permit VidPhone users access to and control of stored video.
SYSTEM FUNCTIONALITY
The VidPhone system can support three business video requirements.
Broadcast Video. Sources of broadcast video material include, but are not
limited to, satellite broadcasts, 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 the second quarter of
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 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 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.
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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.
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
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
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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 to a
U-channel interface device. We cannot predict when we will receive a dispositive
ruling 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.
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 we had approximately $1,100,000 in
value of our inventory and materials located at Sanmina. In January 1999, we
restructured these obligations by converting the outstanding $3,200,000
obligation to Sanmina and the $1,100,000 in inventory and materials 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 275,000
shares of our common stock at an exercise price of $2.75 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.
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
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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 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 registration 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 March 31, 1999, we had approximately 55 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.
ITEM 2. 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.
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ITEM 3. 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 Form 10-KSB, the total amount of damages
sought in these proceedings is approximately $137,000, 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 the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock traded on the Nasdaq SmallCap from April 3, 1997 to
October 30, 1997 and has traded on the Nasdaq National Market since October 31,
1997. The following table sets forth, for the periods indicated, the range of
high and low bid quotations per share, in the case of the Nasdaq SmallCap, and
sales prices per share, in the case of the Nasdaq National Market, as reported
on such quotation systems.
<TABLE>
<CAPTION>
PERIOD ENDING: HIGH LOW
-------------- ------- -------
<S> <C> <C>
June 30, 1997 (from April 3, 1997).......................... $14.250 $ 5.875
September 30, 1997.......................................... 38.250 11.125
December 31, 1997........................................... 36.750 12.750
March 31, 1998.............................................. 24.750 14.438
June 30, 1998............................................... 20.250 6.625
September 30, 1998.......................................... 9.625 2.625
December 31, 1998........................................... 5.500 1.750
</TABLE>
At March 24, 1999, the last sale price per share of common stock as
reported on the Nasdaq National Market was $1.0625. As of February 16, 1999,
there were approximately 157 holders of record of our common stock.
We have not paid cash dividends on our common stock in the past. 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
holders of our common stock 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.
Information regarding the 5% convertible debentures that we issued in July
1998 and the Series B preferred stock that we issued in August 1998 previously
was disclosed in our Quarterly Report on Form 10-QSB filed with the Commission
relating to the quarter ended September 30, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 Form
10-KSB.
OVERVIEW
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 the second quarter of
1999, users also will be able to retrieve stored video on demand. Our VidPhone
system distributes video to and from desktop or
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<PAGE> 11
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 35
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 added features to the VidPhone system, including ATM and
enhanced ISDN wide area connectivity. Release 1.5, which we expect to introduce
in the second quarter of 1999, will add additional features to our VidPhone
system, including the VidServer and the VidPhone gateways. We expect that the
VidServer will permit VidPhone users access to and control of stored video on
demand and that the VidPhone gateways will permit VidPhone systems or a VidPhone
system and another vendor's video network to be connected across a wide area
network. With the introduction of Release 1.5, our VidPhone system will offer a
complete video network system providing the three basic video functions to
users: broadcast video, videoconferencing, and retrieval of stored video.
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.
We generally recognize revenues after the end-user customer accepts the
products ordered and pays. In the future, we may recognize a portion of the
revenues generated when products are shipped to customers and collection is
reasonably assured.
In 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
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<PAGE> 12
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 commercialization 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.
We require additional financing for our operations. To date, we have
financed operations principally through public and private sales of debt and
equity. In July 1998, we raised $3.125 million in gross proceeds from the
private placement of 5% convertible debentures. In August 1998, we completed a
private placement of preferred stock and warrants, from which we received $1.15
million in gross proceeds. We used the proceeds of both financings for working
capital and general corporate purposes. However, at December 31, 1998, we had
essentially no cash remaining from which to fund operations. In February 1999,
we completed a private placement of $2,850,000 of unsecured promissory notes and
1,140,000 shares of common stock, from which we received net proceeds of
approximately $2,430,000. We are using the net proceeds from the offering for
working capital and general corporate purposes, including using approximately
$560,000 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. We financed those payments, in part, with
advances of $125,000 from our executive officers. Since completing the February
1999 private placement, we have continued to monitor payments carefully. We
estimate that our current cash will be sufficient to fund operations only until
we complete our proposed $15,000,000 public offering, which is expected to occur
in late April 1999.
YEAR 2000
As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk for possible
miscalculations or systems failures causing disruptions in their business
operations. This is commonly known as the Year 2000 (or "Y2K") issue. The Y2K
issue can arise at any point in 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 problem
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 these vendors 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 such products 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
10
<PAGE> 13
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 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 Form 10-KSB.
RESULTS OF OPERATIONS
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 in 1998 to support research and development increased to $544,000,
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
11
<PAGE> 14
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 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
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<PAGE> 15
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.
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
follow-on offering completed in November 1997. 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 incurred cumulative losses aggregating approximately $39.1 million from
inception through December 31, 1998. We expect to continue 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. During 1998, we satisfied our cash
requirements principally from the proceeds of a follow-on public offering of
common stock completed during November 1997 (the "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 have been to fund research and development, sales, general
and administrative expenses, and to build inventory levels to support future
sales.
Our cash and cash equivalents decreased by $18.2 million to $8,500 at
December 31, 1998, compared to $18.2 million at December 31, 1997. Cash was used
to produce inventory for future anticipated shipments, to fund research and
development costs related to new functions on which we were working in response
to market demands, and to increase our marketing capabilities to support
anticipated and existing reseller relationships.
Net cash used in operating activities in 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.
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
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<PAGE> 16
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.
In February 1999, we completed a private placement of $2,850,000 in
aggregate principal amount of unsecured promissory notes and 1,140,000 shares of
common stock. The net proceeds from the February 1999 private placement were
$2,430,000. We believe, based upon our current plan of operations, that our
existing resources will only be sufficient to fund operations through the
completion of our proposed public offering, which is expected to be in late
April 1999. If we complete our proposed public offering of common stock we
estimate that the net proceeds from that offering will be sufficient to fund
operations for the next 12 months.
Although we believe that we will be successful in our efforts to raise
additional capital, there can be no assurance that we will be able to do so,
particularly given our current cash position. Our ability to attract capital has
been hampered by a number of adverse conditions, certain of which are beyond our
control, including uncertainty regarding economic conditions generally and the
uneven performance in the market for technology stocks. In addition, adverse
conditions in our operations have impeded financing efforts, including our
inability to secure substantial additional orders for our products, concern
about product reliability and customer acceptance, and concern about the market
for video conferencing products generally. Accordingly, there can be no
assurance we will be successful in our efforts to secure additional debt or
equity financing through a strategic alliance, private placement, or otherwise,
on terms acceptable to us, or at all.
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. If we are not successful in securing additional financing,
we will be forced to consider alternative methods of maximizing shareholder
value, which could include sales of our assets, a sale of the company, workout
alternatives or bankruptcy.
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.
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.
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ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 16
Balance Sheets.............................................. 17
Statements of Operations.................................... 18
Statements of Changes in Stockholders' Equity (Deficit)..... 19
Statements of Cash Flows.................................... 20
Notes to Financial Statements............................... 21
</TABLE>
15
<PAGE> 18
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.
Boston, Massachusetts
February 26, 1999 PricewaterhouseCoopers LLP
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OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $18,199,434 $ 8,532
Account receivable, less allowance for doubtful accounts
of $22,246 in 1998........................................ -- 184,670
Inventory................................................... 1,700,935 5,793,801
Other current assets........................................ 675,289 250,709
----------- ------------
Total current assets........................................ 20,575,658 6,237,712
Property and equipment, net................................. 2,306,048 3,096,752
Trademarks and patents, less accumulated amortization of
$11,220 and $22,660 in 1997 and 1998, respectively........ 108,475 200,204
Other assets................................................ 92,519 88,321
----------- ------------
$23,082,700 $ 9,622,989
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable............................................... $ -- $ 125,543
Subordinated convertible debentures......................... -- 3,200,674
Accounts payable............................................ 3,077,723 6,748,538
Deferred revenue............................................ 133,180 40,000
Accrued liabilities......................................... 752,018 841,526
Obligations under capital lease, current portion............ 190,454 187,220
----------- ------------
Total current liabilities................................... 4,153,375 11,143,501
Obligations under capital lease............................. 57,196 76,008
COMMITMENTS (Note 6)
Stockholders' equity (deficit):
Series B Convertible Preferred Stock, par value $.01,
954,545 shares authorized; none and 209,091 issued and
outstanding at December 31, 1997 and 1998, respectively... -- 1,173,958
Common stock, par value $.01, 30,000,000 shares authorized;
5,676,850 and 5,741,035 issued and outstanding at December
31, 1997 and 1998, respectively........................... 56,769 57,411
Additional paid-in capital.................................. 35,960,466 36,720,794
Deficit accumulated during development stage................ (17,145,106) (39,548,683)
----------- ------------
Total stockholders' equity (deficit)........................ 18,872,129 (1,596,520)
----------- ------------
$23,082,700 $ 9,622,989
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 20
OBJECTIVE COMMUNICATIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<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>
Revenues-net..................... $ 81,375 $ -- $ 765,617 $ 1,261,277
Cost of sales.................... 62,353 -- 544,853 794,228
----------- ------------ ------------ ------------
19,022 -- 220,764 467,049
Operating expenses:
Research and development......... 1,106,901 6,218,637 11,488,262 20,211,652
Selling, general and
administrative................. 1,043,553 4,334,754 9,015,437 15,620,059
Depreciation and amortization.... 158,714 829,462 2,240,878 3,293,114
----------- ------------ ------------ ------------
Total operating expenses......... 2,309,168 11,382,853 22,744,577 39,124,825
----------- ------------ ------------ ------------
Loss from operations............. (2,290,146) (11,382,853) (22,523,813) (38,657,776)
Interest (income) expense, net 404,290 203,441 (120,236) 484,010
----------- ------------ ------------ ------------
Net loss......................... (2,694,436) (11,586,294) (22,403,577) $(39,141,786)
----------- ------------ ------------ ============
Cumulative Series B dividend -- -- (23,958)
----------- ------------ ------------
Net loss attributable to common
stockholders................... $(2,694,436) $(11,586,294) $(22,427,535)
=========== ============ ============
Net loss per common share --
basic and diluted.............. $ (0.75) $ (2.84) $ (3.92)
=========== ============ ============
Weighted average shares
outstanding -- basic and
diluted........................ 3,607,634 4,076,149 5,718,807
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 21
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
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL SERIES B DURING
COMMON PAID-IN CONVERTIBLE DEVELOPMENT
SHARES STOCK CAPITAL PREFERRED STOCK STAGE TOTAL
--------- ------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 5, 1993...................... 500 $ 5 $ 995 $ -- $ -- $ 1,000
Net loss...................................... -- -- -- -- (4,521) (4,521)
Balance, December 31, 1993.................... 500 5 995 -- (4,521) (3,521)
Stock dividend................................ 1,299,500 12,995 -- (12,995) --
Issuance of common stock at $2/share.......... 171,000 1,710 340,290 -- -- 342,000
Issuance of common stock at $2/share (issued
in exchange for services)................... 16,666 167 33,167 -- -- 33,334
Issuance of common stock at $6/share.......... 45,000 450 269,550 -- -- 270,000
Expenses associated with issuance of common
stock....................................... -- -- (47,418) -- -- (47,418)
Issuance of common stock at $2.68/share
(issued in exchange for services)........... 8,375 84 22,416 -- -- 22,500
Net loss...................................... -- -- -- -- (406,842) (406,842)
--------- ------- ----------- ---------- ------------ ------------
Balance, December 31, 1994.................... 1,541,041 15,411 619,000 -- (424,358) 210,053
Issuance of common stock at $6/share.......... 111,666 1,117 668,883 -- -- 670,000
Expenses associated with issuance of common
stock....................................... -- -- (81,389) -- -- (81,389)
Notes payable converted to commons stock at
$6/share.................................... 58,704 587 351,636 -- -- 352,223
Net loss...................................... -- -- -- -- (2,046,116) (2,046,116)
--------- ------- ----------- ---------- ------------ ------------
Balance, December 31, 1995.................... 1,711,411 17,115 1,558,130 -- (2,470,474) (895,229)
Exercise of common stock options at
$2/share.................................... 10,000 100 19,900 -- -- 20,000
Issuance of common stock at $6/share.......... 175,166 1,751 1,052,232 -- -- 1,053,983
Expenses associated with issuance of common
stock....................................... -- -- (166,936) -- -- (166,936)
Interest expense incurred for issuance of
warrants.................................... -- -- 907,789 -- -- 907,789
Net loss...................................... -- -- -- -- (2,694,436) (2,694,436)
--------- ------- ----------- ---------- ------------ ------------
Balance, December 31, 1996.................... 1,896,577 18,966 3,371,115 -- (5,164,910) (1,774,829)
Issuance of common stock pursuant to warrant
exchange agreement.......................... 165,267 1,653 659,415 -- (320,902) 340,166
Reversal of interest expense upon surrender of
Bridge Warrants............................. -- -- (201,000) -- -- (201,000)
Shares issued in connection with initial
public offering, net of expenses............ 2,070,000 20,700 9,331,379 -- -- 9,352,079
Conversion of Redeemable Series A Convertible
Preferred Stock to common stock............. 500,000 5,000 1,805,643 -- -- 1,810,643
Exercise of warrants.......................... 45,006 450 29,550 -- -- 30,000
Shares issued in connection with secondary
public offering, net of expenses............ 1,000,000 10,000 20,891,364 -- -- 20,901,364
Interest expense incurred for issuance of
warrants.................................... -- -- 73,000 -- (73,000) --
Net loss...................................... -- -- -- -- (11,586,294) (11,586,294)
--------- ------- ----------- ---------- ------------ ------------
Balance, December 31, 1997.................... 5,676,850 56,769 35,960,466 -- (17,145,106) 18,872,129
Exercise of warrants.......................... 61,875 619 205,318 -- -- 205,937
Exercise of common stock options at
$6.63/share................................. 2,310 23 15,281 -- -- 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.................... 5,741,035 $57,411 $36,720,794 $1,173,958 $(39,548,683) $ (1,596,520)
========= ======= =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 22
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
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)
Cash flows from investing activities:
Purchase of property and equipment....................... (116,892) (2,036,190) (3,763,231) (6,455,724)
Sale of other fixed assets............................. -- -- 5,000 5,000
Sale of leasehold improvements........................... -- -- 1,470,000 1,470,000
------------ ------------ ------------ ------------
Net cash used in investing activities................ (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
Repayments of notes payable............................ (250,000) (2,300,000) (144,661) (2,694,661)
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 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 year.......... 86,491 623,241 18,199,434 --
------------ ------------ ------------ ------------
Cash and cash equivalents, at end of year................ $ 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
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
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 23
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 1,140,000 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 marketing 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.
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.
21
<PAGE> 24
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 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.
22
<PAGE> 25
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 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 1,986,507 and
2,779,184 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."
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
23
<PAGE> 26
3. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Raw materials............................................. $ 901,548 $5,750,733
Work in process........................................... 24,272 --
Finished goods............................................ 775,115 43,068
---------- ----------
$1,700,935 $5,793,801
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Computer and laboratory equipment......................... $2,070,415 $3,186,976
Computer software......................................... 220,711 368,441
Leasehold improvements.................................... 174,697 787,484
Furniture and fixtures.................................... 342,835 1,148,210
Office equipment 5,190 173,333
Construction in progress.................................. 279,754 443,116
---------- ----------
3,093,602 6,107,560
Accumulated depreciation.................................. (787,554) (3,010,808)
---------- ----------
$2,306,048 $3,096,752
========== ==========
</TABLE>
5. SALE OF LEASEHOLD IMPROVEMENTS
In the fourth quarter of 1997, the Company reached an agreement with the
Pease Development Authority (the "PDA") to enter into a lease agreement for
additional office space and, in exchange for a favorable rental rate, the
Company agreed to fund significant improvements to the facility. Through June
1998 the Company had invested in excess of $1.8 million in improvements to the
new offices. In June 1998, the Company and the PDA modified the previous
agreement in that the PDA agreed to purchase $1,470,000 of the leasehold
improvements in consideration of the Company's agreement to adjust the
previously agreed rental rate to a market rate. In June 1998, the Company
received the proceeds from the sale, less accrued rent of $83,870.
24
<PAGE> 27
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.
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>
25
<PAGE> 28
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
$6.00 per share, for an aggregate of 37,333 warrants. The exercise price of
these warrants was $8.00 per share. In June 1995, one of the lenders converted a
$30,000 loan plus accrued interest into 5,009 shares of common stock.
Additionally, during 1995, the Company borrowed an aggregate of $320,000
from a financial advisory firm hired to assist the Company in raising equity.
This amount 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 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 33,750 shares of the
Company's common stock at an initial exercise price of $8.90 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 42,755 at an
exercise price of $7.03.
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 500,000 shares of the Company's common stock at an
exercise price of $3.30 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
26
<PAGE> 29
expense over the terms of the related notes. As of December 31, 1996,
approximately $196,000 had been amortized to interest expense. The effective
interest rate of the bridge notes is 43.3% per annum based on the 10% stated
interest rate pursuant to the bridge notes and the fair value of the 500,000
warrants that were originally issued in connection with the notes.
All notes payable were repaid in full concurrent with the receipt of the
proceeds of the Company's IPO in April 1997. Of the $586,000 unamortized
discount recorded as at December 31, 1996, $385,000 was charged to interest
expense. The remaining $201,000 of the unamortized discount was charged against
equity as the warrant holder to whom the Bridge Warrants had been granted
returned a portion thereof.
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 (the "5% Convertible Debentures") with certain
institutional, affiliated and other investors, from which it received gross
proceeds of approximately $3.125 million. Interest thereon accrues daily and is
payable quarterly in arrears, payable in cash or, at the Company's option, by
increasing the principal amount of the 5% Convertible Debentures. For the 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 $10.87, 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.
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
27
<PAGE> 30
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) $12.50 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.
10. CAPITAL STOCK TRANSACTIONS
COMMON STOCK
The Company was initially capitalized in the amount of $1,000 by the
issuance of 500 shares of common stock, par value $.01. On June 28, 1994, the
Company filed a Certificate of Amendment of Certificate of Incorporation
increasing the authorized shares to 10,000,000.
On June 28, 1994, the Company issued a stock dividend of 1,299,500 shares
to the Company's sole stockholder and then President and Chief Executive
Officer, Mr. Steven A. Rogers.
On August 3, 1994, the Company sold 187,666 shares of common stock for
$2.00 per share. Of the shares issued, 171,000 shares were sold for cash and
16,666 were issued in exchange for services rendered. On December 31, 1994, the
Company sold an additional 45,000 shares of common stock for $6.00 per share.
On December 31, 1994, the Company issued 8,375 shares in fulfillment of an
obligation of $22,500 for services rendered in connection with the previous
stock offerings.
In December 1994, the Company entered into 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 111,667 shares of common stock
for $6.00 per share during June 1995. Each share of common stock sold entitled
the investor to a warrant to purchase an additional share of the Company's
common stock, at an exercise price of $8.00 per share. Further, the Company
converted $30,057 in notes payable and accrued interest into 5,009 shares of
common stock. Additionally, the Company converted $202,166 in outstanding notes
payable and accrued interest to the financial advisory firm into 33,694 shares
of common stock. Each share of common stock issued in the conversion as
accompanied by a warrant to purchase one share of common stock, at an exercise
price of $8.00 per share. The Company also converted an additional $120,000 loan
from the financial advisory firm into 20,000 shares of common stock, subject to
the warrant provision described above. In connection with this transaction,
holders of the converted notes were also issued an aggregate of warrants to
purchase 85,666 shares of common stock at an exercise price of $8.00 per share.
28
<PAGE> 31
Pursuant to its 1995 agreement with the financial advisory firm, during
June 1996, the Company sold 175,166 shares of common stock for $6.00 per share.
Each share of 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 $8.00 per share. In connection with the provisions of the agreement, the
president of the financial advisory firm received 34,553 warrants at an exercise
price of $6.60 per share and 34,553 warrants at an exercise price of $8.80 per
share in consideration of the services performed to assist the Company in
obtaining equity financing. Additionally, the Company issued to certain lenders
as an inducement to make loans to the Company, warrants to purchase 16,666
shares of common stock at $8.00 per share.
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 in the Company
during a comparable time period. Under the Exchange Agreement, each such
investor was given the opportunity to exchange existing warrants to purchase
5,000 shares of common stock at an exercise price of $8.00 per share for new
warrants to purchase 2,500 shares of common stock at an exercise prices of $4.00
per share and an additional 2,500 newly issued shares of common stock. In
addition, in the original offering, certain investors purchased shares of common
stock from Mr. Steven A. Rogers at a purchase price of $2.00 per share at a time
during which other investors were purchasing shares of common stock from the
Company at $6.00 per share. As part of the warrant exchange, such investors also
were required to pay Mr. Rogers $2.00 per share of common stock purchased from
him in the original offering, so as to cause such transactions to be consummated
upon terms and conditions more closely reflecting market conditions. Mr. Rogers
received an aggregate of $340,166 in the warrant exchange transaction. As a
result of the Exchange Agreement, the Company issued an aggregate of 165,267
shares of common stock. Of the fair market value of such shares, the Company
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 345,536 warrants with an exercise price of $8.00
per share were exchanged for 165,269 warrants with an exercise price of $4.00
per share and 15,000 warrants with an exercise price of $8.00 per share.
Further, in connections with the Warrant Agreement, the Company also exchanged
warrants held by the president of the financial advisory firm to purchase 34,553
warrants to purchase shares of common stock at an exercise price of $6.60 per
share, and 34,553 warrants to purchase shares of commons stock at an exercise
price of $8.80 per share, for an aggregate of 69,106 warrants to purchase shares
of common stock at an exercise price of $4.00 per share. Additionally, the
Company exchanged warrants originally issued to other investors as an inducement
to loan funds to the Company, representing the right to purchase an aggregate of
102,332 shares of common stock at an exercise price of $8.00 per share for
warrants to purchase 102,332 shares of common stock at an exercise price of
$4.00 per share. The Company did not receive any additional cash proceeds as a
result of the Exchange Agreement.
During April 1997, the Company issued 2,070,000 shares of common stock, par
value $.01 for approximately $9.5 million in proceeds, net of underwriting
discounts and commissions and certain other expenses of the initial public
offering of $1.9 million. The issuance of these shares was pursuant to an
initial public offering price of $5.50 per share. The net proceeds of the
initial public offering were used primarily to repay certain outstanding notes
payable and to fund the continued research and development and the working
capital deficiencies of the Company. In connection with the initial public
offering, all of the issued and outstanding shares of Redeemable Series A
Convertible Preferred Stock were converted into common stock on a one-for-one
basis.
In April 1997, in connection with the initial public offering, certain
holders of Bridge Warrants surrendered such warrants to acquire an aggregate of
150,000 shares of common stock with a fair value of $1.34 per warrant, resulting
in a decrease of $201,000 in stockholders' equity due to the reversal of
interest expense. The surrender and cancellation of such warrants did not have
any other effect on the Bridge Financing, nor did the Company pay any
consideration in connection with such surrender.
29
<PAGE> 32
On November 5, 1997, the company completed the offering and sale of
1,000,000 shares of the Company's common stock at a public offering price of
$23.125 per share, resulting in net proceeds to the Company of approximately
$20.9 million (net of underwriting discounts and commissions and other expenses
of the offering).
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>
EXERCISE PRICE NUMBER OF SHARES
-------------- ----------------
<S> <C>
$4.00............................................ 426,707
$3.30............................................ 290,625
$6.00............................................ 52,273
$8.00............................................ 15,000
-------
784,605
=======
</TABLE>
STOCK OPTIONS
On August 3, 1994, the Company granted certain outside directors of the
Company options to purchase 200,000 shares of common stock. These options vest
on the anniversary of the options grant date in accordance with a five-year
vesting schedule, 20% each year. The exercise price is $2.00 per share, which
was in excess of the fair value of the stock on the date of the grant, as
determined by the Board of Directors. As of December 31, 1998, 10,000 of these
options had been exercised and 150,000 of these options were exercisable. The
right to exercise these options terminates ten years from the grant date.
In October 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "1994 Plan") pursuant to which 343,000 shares of common stock are reserved
for issuance. These options vest on the anniversary of the option grant date in
accordance with a vesting schedule ranging from two to five years. The options
granted under this plan are granted at an exercise price per share equal to the
fair value per share of the Company's common stock on the date of grant. As of
December 31, 1998, none of these options had been exercised and 173,700 of these
options were exercisable. The right to exercise these options terminates ten
years from the grant date.
In January 1997, the Board of Directors adopted the 1996 Stock Option Plan
(the "1996 Plan") pursuant to which 450,000 shares of common stock 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
1,450,000 shares during 1998. 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, 2,310 of these
options had been exercised and 86,880 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 180,000 shares of common stock at an
exercise price equal to 165% of the price of the common stock offered to the
public, or $9.075 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 125,000 shares of common stock at an exercise price $13.81 per
share, which was the fair value of the stock on the date of the grant. Since
this grant is for future services to be provided, the related compensation
expense, in accordance with SFAS No. 123, will be recorded over two years, the
expected term of services. In 1997, the compensation expense was $20,355, 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.
30
<PAGE> 33
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
1995
Granted................................................... 232,500 $ 4.00
Forfeited................................................. -- --
Exercised................................................. -- --
Outstanding at December 31, 1995.......................... 432,500 $ 3.075
Exercisable at December 31, 1995.......................... 40,000 $ 2.00
Available for grant at December 31, 1995.................. 110,500
1996
Granted................................................... 138,000 $ 4.00
Forfeited................................................. (27,500) $ 4.00
Exercised................................................. 10,000 $ 2.00
Outstanding at December 31, 1996.......................... 533,000 $ 3.287
Exercisable at December 31, 1996.......................... 111,000
Available for grant at December 31, 1996.................. --
1997
Granted................................................... 669,300 $10.933
Forfeited................................................. (10,000) $11.725
Exercised................................................. -- --
Outstanding at December 31, 1997.......................... 1,192,300 $ 7.508
Exercisable at December 31, 1997.......................... 218,600 $ 2.994
Available for grant at December 31, 1997.................. 90,700
1998
Granted................................................... 1,134,700 $ 8.811
Forfeited................................................. (539,202) $11.101
Exercised................................................. 2,310 $ 6.625
Outstanding at December 31, 1998.......................... 1,785,488 $ 7.253
Exercisable at December 31, 1998.......................... 653,580 $ 6.261
Available for grant at December 31, 1998.................. 428,402
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------- -------------------------------
WEIGHTED-AVE.
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING CONTRACTUAL WEIGHTED-AVE. EXERCISABLE WEIGHTED-AVE.
EXERCISE PRICES AS OF 12/31/98 LIFE (YEARS) EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE
- --------------- -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$2.00 185,000 5.6 $ 2.00 150,000 $ 2.00
$3.00 -$5.50 511,950 6.8 $ 4.38 173,700 $ 4.00
$6.125-$9.075 724,705 4.2 $ 7.52 263,547 $ 8.30
$11.50-$13.813 363,833 6.4 $13.43 65,833 $13.70
---------- --------
1,785,488 653,080
========== ========
</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
$4.00 per share, to reflect an exercise price consistent with the price per
share paid by outside investors of the Series A preferred stock issued in
December of 1996 and January 1997 (see Note 11).
31
<PAGE> 34
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 $7.25 or vesting periods in excess of three years,
were cancelled and replaced by the same number of options exercisable at $7.25
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 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........................................ $ (2.84) $ (3.92)
Pro forma, basic.......................................... $ (2.92) $ (4.20)
</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 100,000 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 $4.00 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 $4.00 and dividing that result by the conversion price, which as
defined by the agreement will not exceed $4.00 per share. The Series A shares
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 $4.00 per share. As a fee for the placement of the Series A shares and
related warrants, the underwriting firm received a $140,000 underwriter's
discount and commission in consideration of its services on this transaction.
32
<PAGE> 35
In December 1996 and January 1997, the Company issued 500,000 Series A
shares and 100,000 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 500,000 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 52,273 shares of Common Stock at an exercise price
of $6.00 per share which were valued at $94,000 (the "Series B Warrants"). The
shares of Series B Preferred Stock and the Series B Warrants were issued at an
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 $5.50 per share, subject to adjustment in connection
with certain events, including a reclassification, reorganization or exchange of
the Company's Common Stock. The shares of Series B Preferred Stock are subject
to automatic conversion, without further action on the part of the holder or the
Company, if the closing price of the Company's common stock equals or exceeds
$11.00 per share for 15 consecutive trading days.
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 $2.75 per share, and the
exercise price of Series B Warrants would be reduced to $2.75 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 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.
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<PAGE> 36
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.
13. SUBSEQUENT EVENTS
In February 1999, the Company completed a private placement of $2,850,000
of unsecured promissory notes and 1,140,000 share of common stock, from which we
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.
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<PAGE> 37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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 March 31,
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. Stevan Vigneaux.................................. 46 Vice President, Marketing
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 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.
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,
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<PAGE> 38
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.
Stevan Vigneaux has served as Vice President, Marketing since October 1998.
Previously, he served as the Director of Product Marketing and Product
Management from February to October 1998. From July 1997 to February 1998, Mr.
Vigneaux served as a consultant to Synctrix, a manufacturer of ATM-based video
networking equipment in Glendale, California. From 1992 to July 1997, Mr.
Vigneaux was with Avid Technology, a video multi-media production systems
manufacturer in Tewksbury, Massachusetts, serving as the Director of Industry
Marketing from June 1996 to July 1997, and as Senior Product Marketing Manager
from 1992 to June 1996.
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. 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.
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<PAGE> 39
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, executive
officers and persons who own more than 10% of a registered class of our equity
securities to file with the Securities and Exchange Commission and the Nasdaq
Stock Market, Inc. initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the Company. In
addition, under Section 16(a), trusts for which a reporting person is a trustee
and a beneficiary (or for which a member of his immediate family is a
beneficiary) may have a separate reporting obligation with regard to ownership
of the common stock and our other equity securities. Such reporting persons are
required by rules of the Securities and Exchange Commission to furnish us with
copies of all Section 16(a) reports they file. In 1998, we received Section
16(a) reports and written representations that certain reports were not
required. Based upon a review of that information, we believe that all members
of the Board of Directors, executive officers and each beneficial owner of more
than 10% of our common stock timely filed all reports required by Section 16(a)
of the Securities Exchange Act of 1934 except for the failure to file Forms 5,
by Robert H. Emery with respect to two transactions and by each of the following
directors and executive officers with respect to one transaction: James F.
Bunker, Robert A. Booker, Anthony M. Agnello, Eugene R. Cacciamani, Marc S.
Cooper, Steven A. Rogers, Clifford M. Kendall, Robert I. Barnett, Donald W.
Barnett, Lincoln D. Faurer, Richard T. Liebhaber, and Roy C. Nash.
ITEM 10. 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
ANNUAL COMPENSATION AWARDS
-------------------- SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
--------------------------- ---- --------- -------- ------------------
<S> <C> <C> <C> <C>
James F. Bunker(1)
President & Chief Executive Officer................ 1998 $ 93,151 $ -0- 100,000
Roger A. Booker 1998 $105,000 $ -0- 45,000
Vice President, Operations......................... 1997 $ 85,000 $45,000 35,000
Robert H. Emery 1998 $105,000 $ -0- 65,000
Vice President, Administration and Finance......... 1997 $ 90,000 $45,000 35,000
Steven A. Rogers(2)
Chief Technology Officer and 1998 $165,000 $ -0- 65,000
Vice President, Engineering........................ 1997 $120,000 $60,000 50,000
</TABLE>
- ---------------
(1) Mr. Bunker joined the Company as President and Chief Executive Officer on
July 13, 1998.
(2) Mr. Rogers served as President and Chief Executive Officer of the Company
until July 13, 1998, when he became Chief Technology Officer and Vice
President, Engineering.
STOCK OPTION GRANTS IN 1998
The following table sets forth certain information about the stock options
granted during 1998 to the Named Executive Officers. As of the date of this Form
10-KSB, we have not granted any stock appreciation rights under the 1996 Stock
Incentive Plan.
37
<PAGE> 40
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION
NAME GRANTED EMPLOYEES IN 1998 ($/SH) DATE
---- ------------------ ------------------ -------------- ----------
<S> <C> <C> <C> <C>
James F. Bunker....................... 100,000(1) 9.8% $ 5.500 07/12/08
Roger A. Booker....................... 45,000(2) 4.4% $13.250 05/27/08
Robert H. Emery....................... 45,000(2) 4.4% $13.250 05/27/08
20,000(3) 2.0% $ 4.375 10/01/08
Steven A. Rogers...................... 65,000(2) 6.4% $13.250 05/27/08
</TABLE>
- ---------------
(1) Options to purchase 50,000 shares vested on February 13, 1999, six months
from the date of grant, and the remaining options to purchase 50,000 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.
AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT
DECEMBER 31, 1998
NAME EXERCISABLE/UNEXERCISABLE
---- -------------------------
<S> <C>
James F. Bunker............................................. 0/100,000
Roger A. Booker............................................. 28,766/87,734
Robert H. Emery............................................. 43,266/115,734
Steven A. Rogers............................................ 26,666/113,334
</TABLE>
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
100,000 shares of common stock at an exercise price of $5.50 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 is terminable by either the Company or Mr. Rogers
upon 90 days' notice. The agreement provided for a base salary in 1998 of
$120,000, which was raised by the Board of Directors to $165,000 in January
1998.
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<PAGE> 41
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.
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 200,000
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 $2.00 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 December 31, 1998, Directors' Non-Qualified
Options to purchase 150,000 shares of common stock were vested, Directors'
Non-Qualified Options to purchase 10,000 shares of common stock had been
exercised and Directors' Non-Qualified Options to purchase 5,000 shares of
common stock had been forfeited.
In April 1997, we granted options to purchase an aggregate of 64,600 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
$6.625 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 December 31, 1998, 21,531 of these
options were vested, and 4,267 had been forfeited.
In May 1998, we granted options to purchase an aggregate of 89,500 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
$13.250 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 December 31, 1998, none of these
options were vested and 9,000 had been forfeited.
The compensation committee of the Board of Directors will meet annually to
determine option grants to the directors.
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<PAGE> 42
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 25, 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>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT(1)
------------------------ ---------------- -----------
<S> <C> <C>
Anthony M. Agnello(2)....................................... 6,966 *%
Roger A. Booker(3).......................................... 57,933 *
James F. Bunker(4).......................................... 90,000 1.3
Eugene R. Cacciamani(5)..................................... 37,733 *
Marc S. Cooper(6)........................................... 250,233 3.5
Robert H. Emery(7).......................................... 98,766 1.4
Richard S. Friedland(8)..................................... -- --
Steven A. Rogers(9)......................................... 1,011,581 14.5
John B. Torkelsen(10)....................................... 419,833 6.0
All directors and executive officers as a group (11
persons)(11).............................................. 1,973,045 26.1%
</TABLE>
- ---------------
* Less than one percent
(1) Applicable percentage of ownership as of March 25, 1999, is based on
6,881,035 shares of common stock outstanding. 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 March 31, 1999 are deemed
outstanding. Figures for ownership exclude shares issuable upon exercise of
the convertible debentures upon consummation of the proposed public
offering.
(2) The address of Mr. Agnello is 2540 Route 130, Cranbury, New Jersey 08512.
Consists of 6,966 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 57,933
shares of common stock issuable upon exercise of options.
(4) The address of Mr. Bunker is c/o Objective Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Includes 50,000
shares of common stock that may be acquired upon exercise of outstanding
options and 40,000 shares of common stock purchased in the February 1999
private placement by a limited partnership controlled by Mr. Bunker.
Excludes 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 27,733 shares of common stock issuable upon exercise of
options. Excludes shares 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 180,000
shares of common stock that may be acquired upon exercise of an option that
is currently exercisable (the "Barington Option"), and 70,233 shares of
common stock issuable upon the exercise of other options. We granted
Barington that 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
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<PAGE> 43
27,000 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 27,000 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 5,833 shares
of common stock issuable upon exercise of warrants and 77,933 shares of
common stock issuable upon exercise of options. Excludes shares 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 16,666 shares of common
stock issuable upon exercise of warrants and 64,999 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) 6,633 shares of common stock issuable upon the exercise
of options; (ii) 280,580 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) 107,620 of common stock that may be
acquired upon the exercise of warrants beneficially owned by PVR; and (iv)
$20,000 shares of common stock owned by Pamela Torkelsen, Mr. Torkelsen's
wife, and 5,000 shares of common stock that may be acquired upon the
exercise of warrants beneficially owned by Pamela Torkelsen. Mr. Torkelsen
disclaims beneficial ownership of common stock and warrants owned by Mrs.
Torkelsen.
(11) Includes 89,400 shares of common stock issuable to executive officers and
directors upon exercise of warrants and options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 50,000 shares of common stock from
Mr. Rogers at an exercise price of $2.00 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 16,666 shares of common stock. The warrants have an exercise price
of $4.00 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. We will use a portion of the net
41
<PAGE> 44
proceeds from the proposed public 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 our proposed public offering is completed. As
of March 26, 1999, we owe Mr. Bunker $76,923 in accrued and unpaid salary.
Following the closing of the proposed public 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 the proposed public offering, we will
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. If, at any time, we decide not to pursue a public
offering, then Mr. Bunker has the right to elect in his discretion not to
continue his agreement to defer payment of accrued and unpaid salary. If the
proposed public offering is not completed by June 30, 1999, then we will be
obligated to pay the accrued and unpaid salary obligation in full on that date.
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 180,000 shares of common stock. That option is exercisable until April
8, 2002 at an exercise price of $9.075 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 125,000 shares
of common stock at an exercise price of $13.81 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 Executive and Audit Committees 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 to common stock upon the completion of the proposed
public 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 Nominating 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.
42
<PAGE> 45
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 gross proceeds to us
of not less than $8 million (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 equal to
the lesser of (A) $2.50 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 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.
43
<PAGE> 46
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith or are incorporated herein by
reference, as indicated.
<TABLE>
<S> <C>
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant (Incorporated by reference to Exhibit 3.1
forming a part of the Registrant's Quarterly Report on Form
10-QSB, as amended by Amendment No. 1 to the Form 10-QSB on
Form 10-QSB/A, for the quarter ended June 30, 1998).
3.2 Amended and Restated Bylaws 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 (Incorporated by reference to Exhibit 4.2
forming a part of Amendment No. 2 to the 1997 SB-2).
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 Form of Senior Note issued to Sanmina Corporation by the
Registrant with a principal amount of $4,300,000.
4.11 Form of Note issued to Shaw Pittman Potts & Trowbridge by
the Registrant with a principal amount of $375,000.
4.12 Form of Warrant for the purchase of 275,000 shares of common
stock issued to Sanmina Corporation.
4.13 Form of Warrant for the purchase of 40,000 shares of common
stock issued to Shaw Pittman Potts & Trowbridge.
4.14 Form of Unsecured Promissory Note, issued on February 4,
1999 to various subscribers in a private placement
(Incorporated by reference to Exhibit 4.14 forming a part of
the Registrant's Registration Statement on Form SB-2 (File
No. 333-72429) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the
"1999 SB-2").
10.1* 1994 Stock Option Plan (Incorporated by reference to Exhibit
10.1 forming a part of the 1997 SB-2).
</TABLE>
44
<PAGE> 47
<TABLE>
<S> <C>
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, dated October 22, 1998.
10.10 Letter of Intent, dated January 14, 1999, between Southeast
Research Partners, Inc. and the Registrant (Incorporated by
reference to Exhibit 10.10 forming a part of the 1999 Form
SB-2).
10.11 Agency Agreement, dated as of January 25, 1999, between
Southeast Research Partners, Inc. and the Registrant
(Incorporated by reference to Exhibit 10.11 forming a part
of the 1999 Form SB-2).
10.12 Form of Subscription Agreement, dated January 25, 1999,
between the Registrant and certain Investors (Incorporated
by reference to Exhibit 10.12 forming a part of the 1999
Form SB-2).
10.13* Employment Agreement, dated July 13, 1998, between the
Registrant and James F. Bunker (Incorporated by reference to
Exhibit 10.13 forming a part of the 1999 Form SB-2).
10.14* Employment Agreement between the Registrant and Steven A.
Rogers (Incorporated by reference to Exhibit 10.3 forming
part of Amendment No. 2 to the 1997 SB-2).
10.15 Letter Agreement, dated January 12, 1999, between the
Registrant and Sanmina Corporation.
10.16 Letter Agreement, dated January 21, 1999, between the
Registrant and Shaw Pittman Potts & Trowbridge.
10.17 Form of Letter Agreement between the Registrant and the
holders of the Series B 5% Convertible Cumulative Preferred
Stock.
10.18 Form of Letter Agreement between the Registrant and the
holders of 5% Convertible Debentures due 2003.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
** Confidential portions omitted and supplied separately to the Securities and
Exchange Commission.
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated October 26, 1998.
45
<PAGE> 48
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunder
duly authorized.
Date: March 31, 1999
OBJECTIVE COMMUNICATIONS, INC.
(Registrant)
By: /s/ JAMES F. BUNKER
------------------------------------
James F. Bunker
President and Chief Executive
Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and as
of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ JAMES F. BUNKER President and Chief Executive March 31, 1999
- ----------------------------------------------------- Officer, Chairman of the Board
James F. Bunker (Principal Executive Officer)
/s/ ROBERT H. EMERY Vice President of March 31, 1999
- ----------------------------------------------------- Administration and Finance and
Robert H. Emery Secretary (Principal Financial
and Accounting Officer)
/s/ ANTHONY M. AGNELLO Director March 31, 1999
- -----------------------------------------------------
Anthony M. Agnello
/s/ EUGENE R. CACCIAMANI Director March 31, 1999
- -----------------------------------------------------
Eugene R. Cacciamani
/s/ MARC S. COOPER Director March 31, 1999
- -----------------------------------------------------
Marc S. Cooper
/s/ RICHARD S. FRIEDLAND Director March 31, 1999
- -----------------------------------------------------
Richard S. Friedland
/s/ STEVEN A. ROGERS Director March 31, 1999
- -----------------------------------------------------
Steven A. Rogers
/s/ JOHN B. TORKELSEN Director March 31, 1999
- -----------------------------------------------------
John B. Torkelsen
</TABLE>
46
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant (Incorporated by reference to Exhibit 3.1
forming a part of the Registrant's Quarterly Report on Form
10-QSB, as amended by Amendment No. 1 to the Form 10-QSB on
Form 10-QSB/A, for the quarter ended June 30, 1998).
3.2 Amended and Restated Bylaws 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 (Incorporated by reference to Exhibit 4.2
forming a part of Amendment No. 2 to the 1997 SB-2).
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 Form of Senior Note issued to Sanmina Corporation by the
Registrant with a principal amount of $4,300,000.
4.11 Form of Note issued to Shaw Pittman Potts & Trowbridge by
the Registrant with a principal amount of $375,000.
4.12 Form of Warrant for the purchase of 275,000 shares of common
stock issued to Sanmina Corporation.
4.13 Form of Warrant for the purchase of 40,000 shares of common
stock issued to Shaw Pittman Potts & Trowbridge.
4.14 Form of Unsecured Promissory Note, issued on February 4,
1999 to various subscribers in a private placement
(Incorporated by reference to Exhibit 4.14 forming a part of
the Registrant's Registration Statement on Form SB-2 (File
No. 333-72429) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the
"1999 SB-2").
10.1* 1994 Stock Option Plan (Incorporated by reference to Exhibit
10.1 forming a part of the 1997 SB-2).
</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
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, dated October 22, 1998.
10.10 Letter of Intent, dated January 14, 1999, between Southeast
Research Partners, Inc. and the Registrant (Incorporated by
reference to Exhibit 10.10 forming a part of the 1999 Form
SB-2).
10.11 Agency Agreement, dated as of January 25, 1999, between
Southeast Research Partners, Inc. and the Registrant
(Incorporated by reference to Exhibit 10.11 forming a part
of the 1999 Form SB-2).
10.12 Form of Subscription Agreement, dated January 25, 1999,
between the Registrant and certain Investors (Incorporated
by reference to Exhibit 10.12 forming a part of the 1999
Form SB-2).
10.13* Employment Agreement, dated July 13, 1998, between the
Registrant and James F. Bunker (Incorporated by reference to
Exhibit 10.13 forming a part of the 1999 Form SB-2).
10.14* Employment Agreement between the Registrant and Steven A.
Rogers (Incorporated by reference to Exhibit 10.3 forming
part of Amendment No. 2 to the 1997 SB-2).
10.15 Letter Agreement, dated January 12, 1999, between the
Registrant and Sanmina Corporation.
10.16 Letter Agreement, dated January 21, 1999, between the
Registrant and Shaw Pittman Potts & Trowbridge.
10.17 Form of Letter Agreement between the Registrant and the
holders of the Series B 5% Convertible Cumulative Preferred
Stock.
10.18 Form of Letter Agreement between the Registrant and the
holders of 5% Convertible Debentures due 2003.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
** Confidential portions omitted and supplied separately to the Securities and
Exchange Commission.
<PAGE> 1
EXHIBIT 4.10
SENIOR NOTE
$4,300,000 Portsmouth, New Hampshire
January 12, 1999
FOR VALUE RECEIVED, the undersigned maker, Objective Communications,
Inc., a Delaware corporation (the "Maker"), hereby promises to pay to the order
of Sanmina Corporation/Golden Eagle Systems, Inc. (hereinafter referred to as
"Holder," which term shall include any future holder of this Note), at 50
International Drive, Portsmouth, New Hampshire 03801, or at such other place as
Holder may designate from time to time, in lawful money of the United States,
the principal sum of four million three hundred thousand dollars ($4,300,000),
together with interest as hereinafter provided.
From the date hereof until this Note is paid in full, interest shall
accrue on the principal amount of the Note outstanding from time to time at an
annual rate of 7.00%, payable in arrears as hereinafter set forth in this Note.
This Note shall mature, and all principal and interest on this Note then
outstanding shall be due and payable in full, on January 12, 2002 (the "Maturity
Date"). The principal amount of this Note shall be subject to prepayment as
hereinafter set forth in this Note. During the first year that the indebtedness
evidenced by this Note is outstanding, the Maker will make payments of interest
only on the principal amount outstanding semi-annually on July 12, 1999 and
January 12, 2000, in arrears. Thereafter, the remaining outstanding principal
amount of and accrued and unpaid interest on the Note will be amortized equally
over the remaining twenty-four (24) month term of the Note. The Maker will make
equal monthly payments of principal and accrued interest to the Holder beginning
on February 12, 2000, and continuing monthly until January 12, 2002, at which
time the outstanding principal amount of this Note and all accrued and unpaid
interest thereon will be paid in full by the Maker.
This Note may be prepaid, in full or in part, by the Maker at any time
without any premium or penalty. The Maker shall make a prepayment of principal
in the amount of one million one hundred thousand dollars ($1,100,000) in the
event that the Maker completes a public offering or a private placement of its
securities with gross proceeds to the Maker in excess of $8 million prior to the
Maturity Date. Such principal prepayment shall be due and payable by the Maker
on the date on which such financing closes. The obligation of the Maker to make
the prepayment of the principal amount mentioned above shall be expressly
conditioned upon the transfer to the Maker by the original Holder of this Note
good and marketable title, free and clear of all liens and encumbrances, to
certain materials (piece parts), inventory and unreturnable inventory located at
the Holder.
In the event that Maker fails to make any payment as and when due
hereunder, Maker agrees to pay all costs of collection when incurred, including,
without limitation, attorneys' fees and expenses and court costs.
<PAGE> 2
Sanmina Note Page 2
This Note shall be binding upon Maker's successors and assigns and
shall inure to the benefit of the heirs, legal representatives, successors and
assigns of Holder. Maker waives presentment, demand, protest, notice of dishonor
and all other notices and demands. This Note supersedes all prior written
agreements and understandings between Maker and Holder with respect to its
subject matter. None of the terms or provisions of this Note may be excluded,
modified or amended except by a written instrument duly executed on behalf of
Holder expressly referring hereto and setting forth the provisions so excluded,
modified or amended.
The validity and performance of the terms hereof shall be governed by
and construed in accordance with the laws of the State of New Hampshire, without
regard to the conflict of laws provisions.
Maker: OBJECTIVE COMMUNICATIONS, INC.
By:
------------------------------------
Name: Robert H. Emery
Title: Vice President Administration & Finance
<PAGE> 1
EXHIBIT 4.11
NOTE
$375,000 Portsmouth, New Hampshire
January 22, 1999
FOR VALUE RECEIVED, the undersigned maker, Objective Communications,
Inc., a Delaware corporation (the "Maker"), hereby promises to pay to the order
of Shaw Pittman Potts & Trowbridge (hereinafter referred to as "Holder," which
term shall include any future holder of this Note), at 50 International Drive,
Portsmouth, New Hampshire 03801, or at such other place as Holder may designate
from time to time, in lawful money of the United States, the principal sum of
three hundred seventy five thousand dollars ($375,000), together with interest
as hereinafter provided.
From the date hereof until this Note is paid in full, interest shall
accrue on the principal amount of the Note outstanding from time to time at an
annual rate of 7.00%, payable in arrears as hereinafter set forth in this Note.
This Note shall mature, and all principal and interest on this Note then
outstanding shall be due and payable in full, on January 22, 2001 (the "Maturity
Date"). The principal amount of this Note shall be subject to prepayment as
hereinafter set forth in this Note. During the first year that the indebtedness
evidenced by this Note is outstanding, the Maker will make payments of interest
only on the principal amount outstanding semi-annually on July 22, 1999 and
January 22, 2000, in arrears. Thereafter, the remaining outstanding principal
amount of and accrued and unpaid interest on the Note will be amortized equally
over the remaining twelve (12) month term of the Note. The Maker will make equal
monthly payments of principal and accrued interest to the Holder beginning on
February 22, 2000, and continuing monthly until January 22, 2001, at which time
the outstanding principal amount of this Note and all accrued and unpaid
interest thereon will be paid in full by the Maker. In the event that Maker
completes a bridge financing with aggregate gross proceeds of $3,000,000, the
Company will make a prepayment on the Note to Holder of $25,000 within thirty
days of the final closing of the bridge financing. In the event that Maker
completes an equity financing in the range of $12 million to $15 million, then
Maker will make a prepayment on the Note to Shaw Pittman of $50,000 within three
days of the closing of the equity financing.
This Note shall be binding upon Maker's successors and assigns and
shall inure to the benefit of the heirs, legal representatives, successors and
assigns of Holder. Maker waives presentment, demand, protest, notice of dishonor
and all other notices and demands. This Note supersedes all prior written
agreements and understandings between Maker and Holder with respect to its
subject matter. None of the terms or provisions of this Note may be excluded,
modified or amended except by a written instrument duly executed on behalf of
Holder expressly referring hereto and setting forth the provisions so excluded,
modified or amended.
<PAGE> 2
Shaw Pittman Potts & Trowbridge Note Page 2
The validity and performance of the terms hereof shall be governed by
and construed in accordance with the laws of the State of New Hampshire, without
regard to the conflict of laws provisions.
Maker: OBJECTIVE COMMUNICATIONS, INC.
By:
--------------------------------------
Name: Robert H. Emery
Title: Vice President Administration & Finance
<PAGE> 1
EXHIBIT 4.12
COMMON STOCK WARRANT
- --------------------------------------------------------------------------------
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE UNDERLYING SHARES OF COMMON
STOCK OF OBJECTIVE COMMUNICATIONS, INC. HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED
UNLESS THE REGISTRATION PROVISIONS OF SUCH ACT AND LAWS HAVE BEEN COMPLIED WITH
OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION PROVISIONS IS
CONFIRMED TO THE SATISFACTION OF OBJECTIVE COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
OBJECTIVE COMMUNICATIONS, INC.
COMMON STOCK WARRANT
- --------------------------------------------------------------------------------
This is to certify that, for value received, Sanmina Corporation
("Sanmina") or any subsequent permitted transferee of the Warrant (together with
Sanmina, a "Holder"), is entitled to purchase, on or before the time specified
below and upon and subject to the terms and conditions hereinafter set forth,
two hundred seventy five thousand (275,000) shares of the common stock, par
value $.01 per share (the "Common Stock"), of Objective Communications, Inc., a
Delaware corporation (the "Company"), at a purchase price of $2.750 per share
(the "Purchase Price"), upon presentation of this Warrant and payment of the
Purchase Price, by cash, certified check or wire transfer made payable to or
directed to the account of the Company.
1. This Warrant may be exercised in whole or in part at any time, or
from time to time, from the date of issuance until its termination date (the
"Termination Date"), which shall be the earlier of: (1) the date that is five
years from the date of issuance; or (2) the occurrence of a Triggering Event (as
hereinafter defined), by presentation to the Company of a Subscription in the
form attached hereto as Exhibit A and incorporated herein by reference. For
purposes of this Warrant, a "Triggering Event" shall mean (i) the merger of the
Company with another entity if the Company is not the surviving entity in such
merger; or (ii) the sale of all or substantially all of the assets of the
Company. The Company shall give each Holder not less than 20 days notice of a
Triggering Event; provided, however, that prior to giving any notice pursuant to
this Warrant, the Holder acknowledges and agrees that the Company may require
the Holder to enter into a confidentiality agreement with respect to any
confidential or proprietary information that may be disclosed to it in
connection with or relating to the Triggering Event and that, if the Holder
fails to enter into such confidentiality agreement, then the Company shall be
relieved of its obligation to give the notice contemplated by this Warrant with
respect to such Triggering Event without breach of this Warrant. This Warrant
shall be null and void after the Termination Date.
<PAGE> 2
2. The Holder hereby represents and warrants to the Company, as of the
date of this Warrant and on any subsequent date on which this Warrant is
exercised, in whole or in part, as follows:
(a) The Holder is an "accredited investor" (as defined in Rule 501 of
Regulation D promulgated under the Securities Act) and has such
experience in business and financial matters that it is capable of
evaluating the merits and risks of an investment in the Warrants and
the shares of Common Stock of the Company that may be purchased upon
exercise of this Warrant (the "Warrant Shares"). The Holder is
purchasing this Warrant and the Warrant Shares for its own account and
not with a view to distribution and the Holder has no present intention
or arrangement to sell the Warrant or the Warrant Shares, as the case
may be, to or through any person or entity. The Holder understands that
this Warrant and the Warrant Shares, as applicable, must be held
indefinitely unless such securities are subsequently registered under
the Securities Act, or an exemption therefrom is available. The Holder
is aware of the provisions of Regulation D and Rule 144 promulgated
under the Securities Act.
(b) The Holder understands and acknowledges that neither this Warrant
or the Warrant Shares have been registered under the Securities Act,
that this Warrant and the Warrant Shares, as applicable, are being
offered and sold to it in reliance on the exemption provided by Section
4(2) of the Securities Act and Regulation D promulgated thereunder and
that the Company is relying on the truth and accuracy of the
representations, warranties, agreements, acknowledgements and
understandings of the Subscriber set forth in this Warrant in order to
determine the availability of such provisions. The Holder acknowledges
that it has been informed by the Company of, or is otherwise familiar
with, the nature of the limitations imposed by the Securities Act and
the rules and regulations thereunder relating to the transfer of
securities.
3. No Holder may sell or otherwise transfer this Warrant or any Warrant
Shares unless such securities are subsequently registered under the Securities
Act and applicable state securities laws, or an exemption therefrom is
available. Any attempt to transfer this Warrant, any unregistered Warrant
Shares, or any interest in either this Warrant or the Warrant Shares, or to
subject any of the foregoing to execution, attachment or similar process,
contrary to the foregoing provisions shall be void and shall cause this Warrant
to terminate immediately and automatically without any action by the Company.
4. In case the Company shall at any time after the date this Warrant is
first issued (i) declare a dividend on the outstanding Common Stock payable in
shares of its Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then, in each case, the Purchase Price per share and the number of Warrant
Shares issuable upon exercise of this Warrant, in effect at the time of the
record date for such dividend or the effective date of such subdivision, or
combination, shall be proportionately adjusted so that the Holder after such
time shall be entitled to receive the aggregate number and kind of shares for
such consideration which, if such Warrant had been exercised immediately prior
to such time at the then-current Purchase Price per share, it would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, or combination. Such adjustment shall be made successively whenever
any event listed above shall occur.
Sanmina Corporation Warrant - 2 - January 12, 1999
<PAGE> 3
5. The Company shall not be required to issue fractions of shares of Common
Stock upon exercise of this Warrant. If any fraction of a share would be
issuable on the exercise of this Warrant, then, upon exercise of this Warrant,
the fraction shall be rounded up or down to the nearest whole number of shares
and the Company shall issue to the Holder such whole number of shares to which
the fraction is rounded.
6. This Warrant shall not entitle Holder to any of the rights of a
stockholder of the Company. In the absence of affirmative action by Holder to
purchase shares of the Company's Common Stock pursuant to this Warrant, no
provision hereof shall give rise to any liability of Holder for the Purchase
Price or as a stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company. Upon exercise of this Warrant,
Holder shall have all of the rights and obligations of holders of the Company's
Common Stock.
7. This Warrant shall be governed by, and construed and enforced in
accordance with, the laws of the State of New Hampshire, without reference to
conflict of laws principles. The Holder hereby consents to the personal
jurisdiction of the federal and state courts of the State of New Hampshire,
which will be the exclusive forum for all disputes arising under or in
connection with this Warrant. The provisions of this Warrant may be modified,
waived, discharged or terminated only by an instrument in writing executed by
the party against which enforcement of the same is sought.
Date: January 12, 1999
ATTEST: OBJECTIVE COMMUNICATIONS, INC.
A DELAWARE CORPORATION
- ----------------------------- ------------------------------------
Robert H. Emery James F. Bunker
Secretary President and Chief Executive Officer
[Corporate Seal]
Sanmina Corporation Warrant - 3 - January 12, 1999
<PAGE> 4
EXHIBIT A TO
OBJECTIVE COMMUNICATIONS, INC.
COMMON STOCK WARRANT
- --------------------------------------------------------------------------------
FORM OF SUBSCRIPTION
(TO BE EXECUTED ONLY ON EXERCISE OF WARRANT)
- --------------------------------------------------------------------------------
Objective Communications, Inc.
50 International Drive
Portsmouth, New Hampshire 03801
The undersigned, the registered holder of the enclosed Warrant, hereby
irrevocably elects to exercise such Warrant to purchase thereunder
___________________________ (_______) shares of the common stock, par value $.01
per share, of Objective Communications, Inc. and herewith makes payment of
__________________________________________________________($_______________)
therefore, and requests that the certificate(s) for such shares be issued to
______________ ___________________________________________________________, and
be delivered to ___________________________________________________________,
whose address is __________________________________________________________. The
undersigned holder hereby reaffirms the truth and accuracy of the
representations and warranties of the holder set forth in the Warrant.
If this subscription represents only a portion of the shares eligible
to be purchased under the Warrant, the undersigned requests that a new Warrant
for the remaining shares be issued to the undersigned.
Signed:
-----------------------------------------------
(Signature must conform in all respects to the name
of the registered holder as specified on the face of
the Warrant.)
Address:
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
Dated:
-----------------------------------------------
Sanmina Corporation Warrant - 4 - January 12, 1999
<PAGE> 1
EXHIBIT 4.13
- --------------------------------------------------------------------------------
COMMON STOCK WARRANT
- --------------------------------------------------------------------------------
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE UNDERLYING SHARES OF COMMON
STOCK OF OBJECTIVE COMMUNICATIONS, INC. HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED
UNLESS THE REGISTRATION PROVISIONS OF SUCH ACT AND LAWS HAVE BEEN COMPLIED WITH
OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION PROVISIONS IS
CONFIRMED TO THE SATISFACTION OF OBJECTIVE COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
OBJECTIVE COMMUNICATIONS, INC.
COMMON STOCK WARRANT
- --------------------------------------------------------------------------------
This is to certify that, for value received, Shaw Pittman Potts &
Trowbridge ("Shaw Pittman") or any subsequent permitted transferee of the
Warrant (together with Shaw Pittman, a "Holder"), is entitled to purchase, on or
before the time specified below and upon and subject to the terms and conditions
hereinafter set forth, forty thousand (40,000) shares of the common stock, par
value $.01 per share (the "Common Stock"), of Objective Communications, Inc., a
Delaware corporation (the "Company"), at a purchase price of $2.656 per share
(the "Purchase Price"), upon presentation of this Warrant and payment of the
Purchase Price, by cash, certified check or wire transfer made payable to or
directed to the account of the Company.
1. This Warrant may be exercised in whole or in part at any time, or
from time to time, from the date of issuance until its termination date (the
"Termination Date"), which shall be the earlier of: (1) the date that is five
years from the date of issuance; or (2) the occurrence of a Triggering Event (as
hereinafter defined), by presentation to the Company of a Subscription in the
form attached hereto as Exhibit A and incorporated herein by reference. For
purposes of this Warrant, a "Triggering Event" shall mean (i) the merger of the
Company with another entity if the Company is not the surviving entity in such
merger; or (ii) the sale of all or substantially all of the assets of the
Company. The Company shall give each Holder not less than 20 days notice of a
Triggering Event; provided, however, that prior to giving any notice pursuant to
this Warrant, the Holder acknowledges and agrees that the Company may require
the Holder to enter into a confidentiality agreement with respect to any
confidential or proprietary information that may be disclosed to it in
connection with or relating to the Triggering Event and that, if the Holder
fails to enter into such confidentiality agreement, then the Company shall be
relieved of its obligation to give the notice contemplated by this Warrant with
respect to such Triggering Event without breach of this Warrant. This Warrant
shall be null and void after the Termination Date.
<PAGE> 2
2. The Holder hereby represents and warrants to the Company, as of the
date of this Warrant and on any subsequent date on which this Warrant is
exercised, in whole or in part, as follows:
(a) The Holder is an "accredited investor" (as defined in Rule 501 of
Regulation D promulgated under the Securities Act) and has such
experience in business and financial matters that it is capable of
evaluating the merits and risks of an investment in the Warrants and
the shares of Common Stock of the Company that may be purchased upon
exercise of this Warrant (the "Warrant Shares"). The Holder is
purchasing this Warrant and the Warrant Shares for its own account and
not with a view to distribution and the Holder has no present intention
or arrangement to sell the Warrant or the Warrant Shares, as the case
may be, to or through any person or entity. The Holder understands that
this Warrant and the Warrant Shares, as applicable, must be held
indefinitely unless such securities are subsequently registered under
the Securities Act, or an exemption therefrom is available. The Holder
is aware of the provisions of Regulation D and Rule 144 promulgated
under the Securities Act.
(b) The Holder understands and acknowledges that neither this Warrant
or the Warrant Shares have been registered under the Securities Act,
that this Warrant and the Warrant Shares, as applicable, are being
offered and sold to it in reliance on the exemption provided by Section
4(2) of the Securities Act and Regulation D promulgated thereunder and
that the Company is relying on the truth and accuracy of the
representations, warranties, agreements, acknowledgements and
understandings of the Subscriber set forth in this Warrant in order to
determine the availability of such provisions. The Holder acknowledges
that it has been informed by the Company of, or is otherwise familiar
with, the nature of the limitations imposed by the Securities Act and
the rules and regulations thereunder relating to the transfer of
securities.
3. No Holder may sell or otherwise transfer this Warrant or any Warrant
Shares unless such securities are subsequently registered under the Securities
Act and applicable state securities laws, or an exemption therefrom is
available. Any attempt to transfer this Warrant, any unregistered Warrant
Shares, or any interest in either this Warrant or the Warrant Shares, or to
subject any of the foregoing to execution, attachment or similar process,
contrary to the foregoing provisions shall be void and shall cause this Warrant
to terminate immediately and automatically without any action by the Company.
4. In case the Company shall at any time after the date this Warrant is
first issued (i) declare a dividend on the outstanding Common Stock payable in
shares of its Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then, in each case, the Purchase Price per share and the number of Warrant
Shares issuable upon exercise of this Warrant, in effect at the time of the
record date for such dividend or the effective date of such subdivision, or
combination, shall be proportionately adjusted so that the Holder after such
time shall be entitled to receive the aggregate number and kind of shares for
such consideration which, if such Warrant had been exercised immediately prior
to such time at the then-current Purchase Price per share, it would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, or combination. Such adjustment shall be made successively whenever
any event listed above shall occur.
Shaw Pittman Potts & Trowbridge Warrant - 2 - January 22, 1999
<PAGE> 3
5. The Company shall not be required to issue fractions of shares of Common
Stock upon exercise of this Warrant. If any fraction of a share would be
issuable on the exercise of this Warrant, then, upon exercise of this Warrant,
the fraction shall be rounded up or down to the nearest whole number of shares
and the Company shall issue to the Holder such whole number of shares to which
the fraction is rounded.
6. This Warrant shall not entitle Holder to any of the rights of a
stockholder of the Company. In the absence of affirmative action by Holder to
purchase shares of the Company's Common Stock pursuant to this Warrant, no
provision hereof shall give rise to any liability of Holder for the Purchase
Price or as a stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company. Upon exercise of this Warrant,
Holder shall have all of the rights and obligations of holders of the Company's
Common Stock.
7. This Warrant shall be governed by, and construed and enforced in
accordance with, the laws of the State of New Hampshire, without reference to
conflict of laws principles. The Holder hereby consents to the personal
jurisdiction of the federal and state courts of the State of New Hampshire,
which will be the exclusive forum for all disputes arising under or in
connection with this Warrant. The provisions of this Warrant may be modified,
waived, discharged or terminated only by an instrument in writing executed by
the party against which enforcement of the same is sought.
Date: January 22, 1999
ATTEST: OBJECTIVE COMMUNICATIONS, INC.
A DELAWARE CORPORATION
- ----------------------------- -------------------------------------
Robert H. Emery James F. Bunker
Secretary President and Chief Executive Officer
[Corporate Seal]
Shaw Pittman Potts & Trowbridge Warrant - 3 - January 22, 1999
<PAGE> 4
EXHIBIT A TO
OBJECTIVE COMMUNICATIONS, INC.
COMMON STOCK WARRANT
- --------------------------------------------------------------------------------
FORM OF SUBSCRIPTION
(TO BE EXECUTED ONLY ON EXERCISE OF WARRANT)
- --------------------------------------------------------------------------------
Objective Communications, Inc.
50 International Drive
Portsmouth, New Hampshire 03801
The undersigned, the registered holder of the enclosed Warrant, hereby
irrevocably elects to exercise such Warrant to purchase thereunder
___________________________ (_______) shares of the common stock, par value $.01
per share, of Objective Communications, Inc. and herewith makes payment of
_________________________________________________________________($____________)
therefore, and requests that the certificate(s) for such shares be issued to
______________ ___________________________________________________________, and
be delivered to ___________________________________________________________,
whose address is __________________________________________________________. The
undersigned holder hereby reaffirms the truth and accuracy of the
representations and warranties of the holder set forth in the Warrant.
If this subscription represents only a portion of the shares eligible
to be purchased under the Warrant, the undersigned requests that a new Warrant
for the remaining shares be issued to the undersigned.
Signed:
---------------------------------------------
(Signature must conform in all respects to the name
of the registered holder as specified on the face of
the Warrant.)
Address:
---------------------------------------------
---------------------------------------------
---------------------------------------------
Dated:
---------------------------------------------
Shaw Pittman Potts & Trowbridge Warrant - 4 - January 22, 1999
<PAGE> 1
EXHIBIT 10.9
STRATEGIC ALLIANCE AND MARKETING AGREEMENT
This Agreement is entered into as of this 22nd day of October, 1998 (the
"Effective Date") by and between Unisys Corporation (hereinafter "Unisys"), a
Delaware corporation, with offices at 8008 Westpark Drive, McLean, Virginia
22102, and Objective Communications, Inc., (hereinafter "Seller" or
"Objective"), a Delaware corporation, with offices at 50 International Drive,
Portsmouth, New Hampshire 03801-2852.
RECITALS
The purpose of this document is to establish a strategic alliance and marketing
agreement ("Agreement") between Unisys and Objective. This Agreement outlines
the cooperative proposal activities, sales, marketing, delivery, support and
working relationship that Unisys and Objective will pursue in the U.S. Federal
Government (the "Government") market sector for the period covered by this
Agreement. Unisys and Objective agree to perform their respective obligations,
as set forth in this Agreement.
Unisys has need of particular types of hardware, software and related products
used in the production of video modems and related customer-premises video and
multimedia distribution and switching products, which are essentially Seller's
products as set forth in Seller's then-current standard Product and Price
Listing or as otherwise defined (hereinafter "Products") for its use and for
lease, rental, sublicense, and/or sale to others; and
Seller, among other things, is engaged in the design, manufacture, and sale of
said Products and elements thereof, and Seller is willing to sell such Products
to Unisys.
In consideration of the mutual covenants herein contained and intending to be
legally bound by the provisions of this Agreement, Unisys and Seller agree as
follows:
I. SCOPE
<TABLE>
<S> <C>
A. EXCLUSIVITY: Unisys shall be the exclusive reseller of Objective's Products to the United States
Courts. Unisys shall be the non exclusive reseller of Objective's Products to the Federal
Government* * * * * *
* * * * * *
* * * * * **
* *Unisys will:
1. Promote Objective's Products throughout the Unisys Federal customer base;
2. Provide Objective's Product and feature training to Unisys sales personnel;
3. Promote Objective's Products at key Industry Trade Shows;
4. Include Objective's Products in the Unisys / Microsoft Application Development Center of
Excellence;
5. Include Objective's Products, whenever possible and as mutually agreed by the parties,
on existing government contracts;* *
* * * * * *
* * * * *
* * * * *
* * *
</TABLE>
*Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934, as amended, and filed separately
with the Securities and Exchange Commission.
<PAGE> 2
B. PRODUCT SET: Unisys reserves the right to purchase any Product which
Seller offers to any other reseller pursuant to the terms of this
Agreement. Seller shall sell all new Products and Product
enhancements to Unisys if such Products are generally available for
sale to others. Unisys may productize and/or engage in proactive
marketing programs on any one or more of these Products.
Productization includes promoting the sale of the Products within the
Unisys sales force and to our customers and entering the Product data
and pricing in the on-line database for dissemination to the field
sales personnel.
C. SALE TO OTHERS: Unisys is authorized to sell and support the Products
for both end user and reseller customers of Unisys.
D. MAINTENANCE: Unisys is authorized to provide maintenance/support
services for Products to its customers regardless of whether or not
Unisys sold the customer the Products.
II. SALES AND MARKETING
A. MARKETING PROGRAMS: Unisys and Seller will work together to develop
marketing programs to promote visibility and customer awareness for
the Unisys/Seller relationship.
B. TRAINING: Seller will provide reasonable sales and configuration
training, at a location mutually agreed by the parties, at no charge
to Unisys. The training will be designed to familiarize Unisys sales,
marketing, technical and program management personnel with the
features and functionality of the Products. Unisys will be allowed to
videotape such training.
C. PRE-SALE SUPPORT: Seller shall provide pre-sale Product support,
including customer site support if needed. Seller shall advise Unisys
regarding availability of CD-ROM, Bulletin boards, telephone, and
Internet support and shall provide links to demo facilities.
D. MARKETING DEVELOPMENT FUNDS: Seller shall provide reasonable funds
for Unisys use to advertise and promote the sale of Objective's
Products in conjunction with Unisys contracts and solutions. Such
funds will be based on parameters to be mutually agreed by the
parties. Seller and Unisys may participate in co-advertising and
joint seminars.
E. CENTER OF EXCELLENCE: During the term of this Agreement, Seller
agrees to provide, at no charge to Unisys, the following Products and
related support:
1. Objective shall provide the following minimum
configuration for initial use and testing:
1 BDL-1020-0001-AGA VidPhone Switch - 20 User Bundle
20 BDL-6000-0101-WBM Win95 Station with AVD (NTSC)
1 BRD-0500-0001-AAA Conference Bridge
5 CBL-0015-0000-AAA Direct Access5 Extension Cable
1 GWY-1000-0001-AAA H.320 ISDN Gateway
1 Roll About Flat Panel VideoConferencing System
<PAGE> 3
2. Objective shall provide the technical support necessary to ensure
successful testing, use and demonstration of its Products during the
development phase and the operation of the Center of Excellence. At
a minimum, such support shall include:
- Technical points of contact
- Hardware support to repair / replace failed products or
components in a timely manner.
III. BUSINESS ADMINISTRATION
A. TERM OF AGREEMENT: This Agreement has an initial term of one (1) year
from the Effective Date and shall automatically renew for successive
one year terms unless earlier terminated. Either party may terminate
this Agreement with written notice issued at least ninety (90)
calendar days prior to the effective termination date. Any such
termination shall only affect continuation of this Agreement and may
not affect arrangements which were established as a result of this
Agreement.
B. ORDERING OF PRODUCTS:
Unisys authorized personnel may issue purchase orders for Products
under the provisions of this Agreement.
C. GOVERNMENT CONTRACT PROVISIONS:
If an order specifies that Products are for resale to a state, local
or federal government, Seller agrees to be bound by the specific
government contract provisions attached to or referred to in the
order which Unisys is required by law to include in its subcontracts.
Such orders are subject to Seller's acceptance.
D. ORDER CONTENT / ACCEPTANCE:
Each order shall specify quantities, prices, delivery schedules,
destination, and other similar matters necessary for the individual
transaction to be adequately described. Orders are deemed accepted by
Seller if issued in accordance with the provisions of this Agreement.
E. PURCHASE COMMITMENTS:
Unisys shall not be obligated to order or purchase any specific or
minimum quantity of Products under this Agreement. The sole
obligation and liability of Unisys to Seller shall be limited to the
actual quantities of Products specified by purchase orders issued
pursuant to this Agreement.
F. PRICING/TERMS: The net purchase price to Unisys is based on Seller's
then-current Standard Product and Price List as of the date of
shipment, less applicable discounts as set forth in Addendum A of
this Agreement. Seller shall use reasonable efforts to provide
Product and price change information to Unisys in electronic format
and in a timely manner so as to allow updates of the Unisys ordering
and sales support systems. The Unisys discount shall not change
except by mutual agreement of the parties. Payment terms are Net 30
days from receipt of a proper invoice. Unisys and Seller agree to
negotiate "bid specific" pricing on an as needed basis to effectively
meet customer needs or competition on specific sales opportunities.
G. TERMINATION/CANCELLATION/RETURNS: Unisys may cancel orders for
standard Products prior to shipment at no charge. Custom built or
configured Products may be canceled at terms mutually agreeable to
the parties. Either party may terminate this Agreement for default,
subject to the
<PAGE> 4
provision of written notice specifying such default and the allowance
of a sixty (60) day cure period after receipt of such notice to cure
the default. Unisys may return any non-defective properly packaged
Product for a full refund.
H. MOST FAVORED CUSTOMER: Seller warrants that the prices, payment terms
and other terms and conditions stated for the Products, spare parts,
and supplies covered by this Agreement are not less favorable than
prices, payment terms or other terms and conditions accorded to
Seller's most favored customer for like items in similar quantities.
If, at any time during the term of this Agreement, Seller provides to
such customer of Seller more favorable net prices, payment terms or
other terms and conditions for products and services which are
substantially comparable to those licensed or sold to Unisys
hereunder, Seller shall extend such prices, payment terms and other
terms and conditions to Unisys.
I. LOGISTICS: Seller shall provide to Unisys all current Product
lead-time information and update changes as needed. If lead-times
become non-competitive or fail to meet market demand, Seller and
Unisys will cooperate to reduce adverse impact on sales; an example
would be to establish forecasts of orders to manage availability, and
such order schedules would be modified to meet actual requirements in
a timely manner with sufficient notice to Seller prior to scheduled
delivery dates. Seller will promptly advise Unisys of any schedule
changes on all open orders. Seller agrees to pay Unisys liquidated
damages for late delivery in the amount of which the customer is
contractually entitled from Unisys, provided that Unisys had advised
Seller of the customer's inclusion of a liquidated damages provision
and Seller had agreed to such provision. Seller shall provide
expedited delivery capability to meet critical Products availability
dates as needed. Seller shall ship Products to domestic and
international destinations from the most cost effective
manufacturing/inventory location. Seller is not authorized to make
partial shipments unless Unisys requests or approves partial delivery
in writing.
J. PACKING: Products shall be suitably packed and shipped in accordance
with standard commercial packing, the requirements of common
carriers, and in such manner as to assure against damage from
transportation, weather, and other environmental conditions. The
Unisys purchase order number and part numbers, and any other
information required by the customer, must be plainly marked on all
invoices, inner-packages, outer packing, bills of lading, and
shipping orders. See Addenda C and D for further information and
requirements.
K. SHIPPING:
1. Unisys may, from time to time, direct the use of specific carriers
or premium modes of transportation and arrange for direct billing of
freight charges to Unisys. If such Unisys direction relative to
premium modes of transportation is necessitated by Seller's failure
to perform in accordance with established schedules, Seller shall
bear any resulting increase in transportation and packing costs.
2. All orders must ship complete. No partial shipments are authorized
unless Unisys provides explicit written authorization to do so. No
invoices should be submitted, nor will they be processed for payment
until the order ships complete unless otherwise authorized.
L. EXPORT: Unisys may request that Seller export Products to Unisys
organizations or Unisys customers located outside of the United
States, in which case Seller shall be the exporter of record. Seller
shall then be responsible for compliance with applicable export
regulations, including obtaining requisite export and/or re-export
licenses, if any, in Seller's name covering said shipment
<PAGE> 5
to the consignee (customer). Unisys shall provide Seller
documentation necessary for Seller's use in application for export
licenses or permits enough in advance of scheduled delivery dates so
that Seller's associated shipping schedules shall not be impacted by
government processing time. Any customs or duty charges will be the
responsibility of Unisys.
M. ADMINISTRATION/NOTICES: All official notices shall be in writing and
shall be sent by certified mail, return receipt requested, or by wire
communications (i.e., telex, twx, facsimile, etc.), to the respective
Contract Administrator, at the address noted below, or as may be
changed from time to time by notice similarly given. Written and
other forms of notices applicable to orders shall be sent to Unisys
procurement personnel at the addresses noted in the orders affected.
1. For Unisys
General administration and liaison shall be
performed by Valerie Meuleners, Manager
Contracts and Pricing (referred to herein as
"Unisys Contract Administrator"), or her
designee or successor.
Marketing liaison shall be performed by Frank
Zinzi (referred to herein as "Unisys Marketing
Administrator"), or his designee or successor.
2. For Seller
General administration and liaison shall be
performed by Robert Emery, Vice President
Administration & Finance (referred to herein as
"Seller's Contract Administrator"), or his
designee or successor.
Marketing liaison shall be performed by Ty
Glasgow, Director, Business Development
(referred to herein as Seller's Marketing
Administrator"), or his designee or successor.
.
3. The Marketing Administrators may clarify, explain, provide further
details, handle necessary marketing matters, implement marketing
aspects, and develop administrative procedures, but shall have no
authority to affect or change any of the terms and conditions of this
Agreement. The exercise of Unisys rights of termination or
cancellation and the exercise of other general rights of Unisys are
reserved to Unisys Contract Administrator.
IV. PRODUCT SUPPORT
A. Express Warranties:
1. Seller warrants that:
a. The Products shall be free of defects in material and
workmanship for a period of the greater of twelve (12) months from
the date of installation or fourteen (14) months from date of
invoice;
b. The Products shall be of new manufacture, in
conformance with applicable specifications and regulatory agencies'
requirements, free of defects in design, and free of any claim,
encumbrance or lien; and
c. The Products shall be free of latent defects. As used
herein, latent defects are defects that meet the following criteria:
(i) such defects are not apparent to either party during
<PAGE> 6
customary manufacturing or quality testing and/or inspection, (ii)
such defects result solely from defective material, workmanship, or
design and are not caused by misuse or misapplication of the Product,
and (iii) such defects occur in at least three percent (3%) of a
specific model of Product sold to Unisys during the life of the
Product but limited to a maximum of ten (10) years after the initial
delivery to Unisys of such Product,
2. Seller shall repair or replace Products which are not in
conformance with any of the foregoing warranties, and such obligation
to repair or replace shall apply to the future performance of the
Products so as to keep them in operating condition during each
warranty term.
3. Products repaired or replaced under the original warranty shall be
warranted for the longer of the remainder of the warranty period on
the original Products or three (3) months from reshipment of the
repaired or replacement Products by Seller.
4. Seller represents and warrants that it has title and the right to
sell Products free and clear of all liens and encumbrances and the
right to grant the software misappropriation or patent or copyright
infringement in connection with the sale and licensing of the
Products to Unisys.
5. Seller's warranties, together with its service guaranties, shall
run to Unisys and end users. Unisys inspection, approval, acceptance,
use of, or payment for Products shall in no way affect Unisys
warranty rights, whether or not a breach of warranty had become
evident at the time. Seller shall honor customer warranty claims
during the warranty period. However, Unisys reserves the rights to
sell Product warranty uplifts or maintenance services to its clients
and deliver such services directly to its clients during said
warranty period.
B. Remedies for Breach of Warranty
1. Any Product, which fails within the first thirty (30) days
after installation, shall be considered Dead on Arrival
("DOA"). DOA Products shall be replaced by Seller
immediately upon notification of such occurrence and prior
to the return of such DOA Products. For other than DOA
occurrences, Unisys may return to Seller any Products in
breach of any warranty, and Seller shall reship the
repaired or replacement Product to Unisys within thirty
( 30 ) days whenever possible and no later than ninety
( 90 ) days after receipt of the nonconforming Products
returned by Unisys.
2. Unisys or its authorized agent shall submit warranty
claims to Seller in writing, within a reasonable time,
stating the nature and date of the claim.
3. Special billing procedures for replacement Products may be
established as needed based upon mutual agreement of the
parties.
4. Seller shall bear all freight charges associated with
warranty claims for shipments to and from Unisys
locations.
5. Seller shall have the risk of loss, destruction, or damage
to all returned Products while in Seller's possession and
while in transit during return to Seller and reshipment to
Unisys.
6. Unisys rights under this Article are cumulative and
nonexclusive and in addition to all other rights and
remedies that Unisys may have in law or equity.
<PAGE> 7
C. Product Support
Unisys shall be authorized to perform first level support and
maintenance for the Products in a manner, which meets or exceeds
Seller's service provision standards whether or not Unisys sold the
Products to the customer. Seller shall provide secondary support to
Unisys, at Unisys request, in supporting and maintaining the
Products, at no charge to Unisys when the Products are under warranty
and at mutually agreed charges for time and material when the
Products are under extended warranty or maintenance.
D. Seller-Provided Technical Training
1. Unisys and Seller recognize the importance of training for
the successful support of all Products. Unisys agrees to
provide adequate staff and facilities to properly support
Seller's Products.
2. Seller shall, when requested by Unisys, provide sufficient
initial training sessions to train sixteen (16) people at
no additional charge. These initial training sessions will
cover installation procedures, configuration, operation,
trouble shooting and repair of the Products.
3. Seller shall provide all manuals and course materials for
the training specified in Paragraph 2, above. Seller
grants Unisys the right to reproduce, modify, translate,
and distribute manuals and course materials and the right
to disclose the information contained therein for its own
training purposes.
Seller shall provide camera ready copy and/or electronic
media of such manuals and course materials, as well as
course outlines, lesson guides, training aids, and other
related materials, as available, for Unisys use in setting
up its own training courses. Such manuals and course
materials furnished to Unisys, and all copies thereof made
by Unisys, shall become the property of Unisys.
4. The preferred methodology for delivering training provided
under Paragraph 2, above, is CBT (Computer Based
Training), Video, or Self-Study for first level support,
with more in-depth training reserved for second level
support. Should Instructor-led training be required, it
shall be done at times and locations mutually agreeable to
the parties; provided, however,
a. if the training is to be performed at Seller's
facility, Seller shall furnish all things required for
such training and Unisys shall bear the cost of travel and
living expenses of its personnel.
b. if the training is to be performed at other than
Seller's facility, Unisys shall provide adequate training
facilities and Seller shall bear the cost of travel and
living expenses for its personnel.
5. If improvements or enhancements are made or new Products
(s) are added to this Agreement, and training for same is
reasonably required by Unisys, Seller shall provide the
type of training noted in Paragraph D-2, above, as well as
manuals and course materials,
<PAGE> 8
for sixteen (16) people, at no charge or cost to Unisys
except as set forth in Paragraph b, of D-4 above.
6. Seller shall, as requested by Unisys, provide additional
training courses and/or training as noted herein for
additional Unisys personnel.
E. Software Update/Upgrade Distribution
Seller shall make available object code and user documentation for
all software maintenance releases, patches, bug fixes, updates and/or
upgrades in accordance with the following priority of option
preferences:
1. Electronic Bulletin Board (Dial-Up) - Preferred.
2. Seller maintains current software release status
directly with Unisys customers based upon Seller's drop
ship customer record.
3. Seller provides packaged deliverable Product for
distribution by Unisys.
4. Seller provides gold master copies of materials for
Unisys reproduction and distribution.
F. Spare Parts
Parts pricing shall be established at a discount equal to or greater
than the discounts available from published list prices for Products
under this Agreement. Seller shall ship parts in stock within one
( 1 ) days after receipt of order and lead time plus five (5) days
for parts not in stock. Seller agrees to provide spares and/or repair
services for a period of three (3) years after the end of Product
life or the termination of this Agreement, whichever period is
longer, at prices consistent with those afforded to other similarly
situated resellers during the applicable time period.
G. Information
Seller will provide to Unisys a reasonable number of sets of Product
documentation as needed to provide support to its customers, and the
limited right to reproduce such documents from time to time for use
within its support organization.. Seller must maintain a Product
quality database, including records substantiating Product compliance
with regulatory requirements and, upon reasonable request, allow
Unisys to examine such database. Seller must have a problem
prioritization and tracking system with response time commitments for
problem resolution as mutually agreed by the parties.
H. Diagnostic Software
When applicable, Seller shall, at no cost to Unisys, provide Unisys
with sufficient copies of existing Diagnostic Software for the
Products. Seller hereby grants to Unisys non-exclusive and
non-transferable license to copy and reproduce the Diagnostic
Software solely for the purpose of the Unisys maintenance
organization to meet the demands of the service delivery. The terms
of this license shall continue until such time that Unisys no longer
provides Product support services to its end-users.
I. Configuration Control
Seller shall provide Unisys at least ninety (90) days notice of any
change in the Products which affects form, fit, function, regulatory
approvals, interface, interchangeability, reliability, or
maintainability.
<PAGE> 9
J. Escrow
Seller agrees that Unisys shall have the option to require Seller to
place source code and other technical documentation into escrow,
should it become evident that Seller will no longer be able to
perform pursuant to this Agreement. This right is deemed to include
firmware which is downloadable to "flash" memory.
V. LEGAL PROVISIONS
This Article contains standard legal terms and conditions relating to the
purchase and resale of Products under this Agreement.
A. CONFIDENTIAL INFORMATION AND DISCLOSURE
1) Any information which either party may disclose to the other party
shall not be deemed to be confidential and shall be acquired free
from any restriction, unless the information is proprietary to the
disclosing party and, if it is disclosed in tangible form, the
disclosing party marks such information as being confidential to it
by marking such information as "Proprietary", "Restricted", or
"Confidential." Any confidential information disclosed orally shall
be identified as confidential at the time of disclosure and
thereafter reduced to tangible form with a copy, prominently marked
as aforesaid, delivered to the receiving party within ten (10) days
of the verbal disclosure. When a writing contains both confidential
and nonconfidential information, the disclosing party shall
specifically note the information, which is confidential.
However, notwithstanding the above, the identities, addresses, and
other specific information regarding Unisys customers provided by
Unisys to Seller shall be deemed Unisys confidential information.
2) Each party shall exercise the same degree of care to avoid the
publication or dissemination of the confidential information of the
other party as it affords to its own confidential information of a
similar nature which it desires not to be published or disseminated,
but in any case not less care than a reasonable person would
exercise.
3) Confidential information disclosed under this Agreement shall only be
used by the receiving party in the furtherance of this Agreement or
the performance of its obligations hereunder.
4) The obligations of the parties with respect to confidential
information shall survive the termination or cancellation of this
Agreement. However, neither party shall be obligated to protect
confidential information of the other party which:
a. is rightfully received by the receiving party from
another party without restriction, or
b. is known to or developed by the receiving party
independently without use of the confidential information,
or
c. is or becomes generally known to the public by other
than a breach of duty hereunder by the receiving party, or
d. has been or is hereafter furnished to others without
restriction on disclosure, or
<PAGE> 10
e. is known or available to the receiving party by
inspection or analysis of products available in the
market.
The obligation not to use or disclose said confidential information
shall end; either, two (2) years after the date of receipt of said
confidential information, or years after the termination of this
Agreement, whichever is later, except with respect to software for
which the obligation shall continue until the occurrence of any of
the events listed in Subparagraphs a through e, above.
5) Unisys shall be permitted to disclose said confidential information
to subsidiaries, Affiliates, third parties and subcontractors for
their use in the furtherance of this Agreement in accordance with the
rights and licenses granted; provided, however, that subsidiaries,
Affiliates, third parties and subcontractors agree to protect such
information to the extent provided herein.
6) Nothing contained in this Section V.A., or elsewhere, shall be
construed as preventing Unisys from marketing, selling, leasing,
renting, or sublicensing the Products in the same manner as it may
then market, sell, lease, rent, or sublicense its other Products.
Unisys and subsidiaries, Affiliates and third parties may disclose
Seller's confidential information to end users for the purposes of
training, operation, maintenance and marketing of the Products;
provided, however, that they shall require such end users to keep
confidential any Seller confidential information so transferred to
the same extent Unisys requires confidentiality with regard to its
own confidential information under similar circumstances.
B. DISCLAIMER
EXCEPT AS EXPRESSLY STATED HEREIN, NEITHER PARTY HAS MADE ANY WARRANTIES OR
REPRESENTATIONS, EXPRESS OR IMPLIED BY OPERATION OF LAW OR OTHERWISE, CONCERNING
THE PRODUCTS TO BE PROVIDED HEREUNDER, THE SCOPE OR DURATION OF ANY MARKETING
EFFORT WHICH Unisys MAY UNDERTAKE, OR THE SUCCESS OF ANY SUCH MARKETING EFFORT.
NEITHER PARTY HAS RELIED ON ANY EXPRESS OR IMPLIED REPRESENTATION OF THE OTHER
PARTY, WRITTEN OR ORAL, AS AN INDUCEMENT TO ENTERING INTO THIS AGREEMENT.
C. LIMITATION OF LIABILITY
EXCEPT AS PROVIDED IN SECTION V.D. HEREOF, NEITHER PARTY SHALL BE LIABLE FOR ANY
INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, INCLUDING, BUT NOT
LIMITED TO, LOST PROFITS, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES.
D. INFRINGEMENT/INDEMNITY
Seller agrees to indemnify and hold harmless Unisys, its subsidiaries,
Affiliates and subcontractors, and third party reseller customers, and end user
customers of any of the aforesaid (the "Indemnified Parties") from any claim,
liability, damage or expense including but not limited to legal expenses, of
whatever kind for or on account of patent infringement, copyright infringement,
misappropriation of trade secrets or violation of other proprietary rights in
connection with or relating to the use, copying, reproduction, distribution,
selling, licensing or other disposition of the Products. Seller agrees to defend
or settle all suits and proceedings arising out of any of the foregoing
provided, however, that Unisys shall give Seller prompt
<PAGE> 11
written notice of all suits or threats of suit and other such claims concerning
patent or copyright infringement or misappropriation of trade secrets or other
intellectual property against any of the Indemnified Parties. Unisys, at its own
expense, shall have the right to participate in Seller's defense of any such
action through Unisys' own counsel. In the event that Seller fails, after
notice, to adequately defend or settle any action which it is obligated to
defend or settle under this Section V.D., Unisys shall have the right of
prosecuting and defending such action or actions and to collect such costs and
expenses (including attorney's fees) from Seller and further shall have the
right to charge Seller with any and all awards, damages, and court costs in such
action or actions and to collect such awards, damages, and court costs from
Seller. If any Product is held to be an infringement or misappropriation for
which indemnification is to be provided by Seller, and its use is enjoined,
Seller shall, at Seller's option and expense, either:
1. Procure for the Indemnified parties the right to continue
to utilize the Product pursuant to the license granted
herein, or
2. Replace or modify the Product in such a way that they
shall not continue to constitute such infringement or
misappropriation.
Seller shall not be liable under this Section V.D. if the Product has been
modified by any of the Indemnified Parties and such modification is solely the
cause of any such infringement or misappropriation, unless such modifications
were made in accordance with Seller's instructions or with Seller's approval.
E. TRADEMARKS AND TRADE NAMES
Nothing contained in this Agreement shall be construed as licensing either party
to use any trademark or trade name owned or used by the other party without the
prior written consent of the other party. However, Unisys, its subsidiaries,
Affiliates and third parties shall have the unrestricted use of the terms stated
in this Agreement (and any other or subsequent term used by Seller to identify
the Products) in connection with the use, marketing, copying, distribution,
sale, rental, lease, licensing, and sublicensing of the Products. When marketing
the Products, Unisys, its subsidiaries and Affiliates shall have the right to
use their own trademarks or trade names when referring to the Products.
F. FORCE MAJEURE
Neither Unisys nor Seller shall be liable to the other for delays in the
performance of or completion of this Agreement if such delay is caused by
strikes, riots, wars, government regulations, acts of God, fire, flood or other
similar causes beyond its control; provided, however, if such delay exceeds
sixty (60) days, the other party shall have the option, exercisable by written
notice, to terminate this Agreement by notice in accordance with Section III.M
hereof.
G. ASSIGNMENT AND BENEFITS
All the terms and conditions of this Agreement shall be binding upon, inure of
the benefit of, and is enforceable by the respective successors and permitted
assigns of the parties hereto. Except as specifically stated in this Agreement,
neither this Agreement nor any of the rights, interests or obligations of any
party hereunder shall be assigned or delegated by either party hereto without
the prior written consent of the other. Such consent shall not be withheld
unreasonably. Any unauthorized assignment or delegation shall be null and void.
Notwithstanding the foregoing, either party may assign or otherwise transfer its
rights and obligations to successors in interest (whether by purchase of stock
or assets, merger, operation of law, or otherwise) of that portion of its
business related to the subject matter hereof.
<PAGE> 12
H. DISPUTE RESOLUTION
1) This Section H shall govern any dispute between the parties arising
from or related to the subject matter of this Agreement that is not
resolved by agreement between the Contract Administrators.
2) The parties shall make a good-faith effort to amicably settle by
mutual agreement any dispute that may arise between them under this
Agreement. The parties agree to settle all disputes, controversies or
claims which relate in any way to this Agreement finally and
conclusively by arbitration. The arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association ("AAA") then in effect. Any such arbitration
shall be conducted in Virginia by one arbitrator selected from a
panel of persons having experience with and knowledge of electronic
computers and the computing business. The arbitrator selected will be
an attorney. The arbitrator shall be chosen by both parties; if the
parties are unable to agree, the arbitrator shall be selected by the
AAA. Judgment upon the award may be entered in any court having
jurisdiction thereof or having jurisdiction over the applicable party
or its assets. Either party will be free to apply at any time to a
court of competent jurisdiction for interim or conservatory relief
and will not be deemed to have breached this agreement to arbitrate
or to have infringed the powers of the arbitrator in doing so.
I. GENERAL PROVISIONS
1) Governing Law
This Agreement shall be construed, governed and interpreted in
accordance with the laws, but not the rules relating to the choice of
law, of the Commonwealth of Virginia.
2) Captions/Headings
The captions and headings of the Articles, sections, and paragraphs
contained herein have been inserted for the convenience of the
parties and shall not be construed as a part of or modifying any
provision of this Agreement.
3) Waiver
The failure of either party to insist, in any one or more instances,
upon the performance of any of the terms, covenants or conditions of
this Agreement or to exercise any right hereunder shall not be
construed as a waiver of the future performance of any such term,
covenant or condition or the future exercise of such right.
4) Severability
If any court should find any particular provision of this Agreement
void, illegal, or unenforceable, then that provision shall be
regarded as stricken from this Agreement and the remainder of this
Agreement shall remain in full force and effect.
5) Independent Contractors
It is agreed that the relationship between the parties is that of
independent contractors, and nothing contained in this Agreement
shall be construed or implied to create the relationship of partners,
joint venturers, agent and principal, employer and employees, or any
relationship other than that of independent contractors. At no time
shall either party make any commitments or incur any charges or
expenses for or in the name of the other party.
<PAGE> 13
6) Conflict of Interest
Seller agrees that it shall not engage directly or indirectly, either
for itself, or with or for any other person or corporation, in any
work or undertaking which shall conflict with or create any legal
impediment against Seller's performance of its obligations under this
Agreement and the rights and licenses granted to Unisys hereunder.
Seller represents that there is no such present conflict of interest
or any such legal impediment.
7) Divestiture
Notwithstanding other provisions of this Agreement to the contrary,
subsidiaries, Affiliates, and other business units of Unisys which
are, in whole or in part, divested by Unisys during the term of this
Agreement shall, nevertheless, retain all rights pursuant to this
Agreement which such divested entity had in the Products prior to
such divestiture. The rights and obligations of such divested
entities regarding the Products shall be the same as, but limited to,
Unisys rights and obligations directly applicable to the use,
payments and Seller support of the Products, and such divested
entities shall have no other rights or obligations pursuant to this
Agreement. All sales by such divested entities shall be contributory
toward the achievement of any quantity and volume pricing discounts,
and payments shall be at the then applicable net prices for the
Products. Unisys shall notify Seller of such divested entities.
8) Counterparts
This Agreement may be executed in any number of counterparts, each of
which together shall constitute one and the same instrument.
9) Publicity
Seller shall not, except as may be required by law or federal
regulation, or except with the prior written permission of Unisys,
publicly advertise this Agreement or disclose its contents.
10) Risk of Loss
Until such time as the deliverable items have been delivered to the
Unisys designated ship to address or the applicable end user
location, all risk of loss shall be Seller's.
11) Entire Compensation
Except as may be specifically provided otherwise in this Agreement,
Seller's performance and fulfillment of its other obligations under
this Agreement, and the granting of licenses and rights to Unisys
shall be at no additional cost or charge to Unisys.
12) Personal Injury/Property Damage
Each party (the "Indemnifying Party") shall hold harmless and defend
the other party (the "Indemnified Party") from any claim of personal
injury or property damage arising from any act or omission of the
Indemnifying Party. The obligations of the Indemnifying Party under
this Indemnification provision are conditional upon: (a) the
Indemnified Party providing prompt written notice to the Indemnifying
Party of any claim referred to above and any related action, suit, or
other proceeding; (b) the Indemnified Party's permitting the
Indemnifying Party to defend or settle such claim, action, suit, or
proceeding (provided the Indemnified Party must approve in its sole
discretion any settlement terms that obligate the Indemnified Party);
and (c) the Indemnified Party provided the Indemnifying Party (at the
Indemnifying Party's expense) all reasonable assistance in
<PAGE> 14
defending or settling the claim, action, suit, or proceeding. Upon
request by Unisys, Seller shall furnish evidence of insurance
coverage for such injury and damage.
13) Notice of Delay
Whenever any occurrence (e.g., an event of Force Majeure or a filling
under a bankruptcy law) is delaying or threatens to delay Seller's
timely performance under this Agreement, Seller shall promptly give
notice thereof, including all relevant information with respect
thereto, to Unisys.
14) Compliance with Law
In the performance of this Agreement, the parties shall comply with
all applicable laws, executive orders, regulations, ordinances,
rules, proclamations, demands and requisitions of national
governments or of any state, local or other governmental authority
which may now or hereafter govern performance hereunder including all
laws, executive orders, regulations, ordinances, rules and
proclamations regarding Equal Employment Opportunity, the exporting
of technology, and withholding for income taxes.
15) Foreign Offset Credits
If any foreign government offset credits result from the performance
of this Agreement, it is agreed that they shall be the sole property
of Unisys.
16) Survival of Provisions
In addition to the rights and obligations which survive as expressly
provided for elsewhere in this Agreement, the Articles and Addenda
which by their nature should survive, shall survive and continue
after any termination or cancellation of this Agreement.
17) Entire Agreement
This Agreement states the entire agreement between the parties with
respect to the subject matter hereof and shall supersede all previous
proposals, negotiations, representations, commitments, writings,
agreements and other communications, both oral and written, between
the parties. This Agreement may not be released, discharged, changed
or modified, except by an instrument in writing signed by a duly
authorized representative of each of the parties.
This Agreement has been duly signed by the parties hereto as of the
Effective Date.
<TABLE>
<S> <C>
OBJECTIVE COMMUNICATIONS, INC. UNISYS CORPORATION
By: /s/ Robert H. Emery By: /s/ Beverly G. Hayes
---------------------------------------------- --------------------------
Title: Vice President, Administration and Finance Title: Director, Contracts
------------------------------------------- -----------------------
Date: October 22, 1998 Date: November 5, 1998
-------------------------------------------- ------------------------
</TABLE>
<PAGE> 15
WORLDWIDE MASTER RESELLER AGREEMENT
ADDENDUM A
UNISYS PRICES/DISCOUNTS
<TABLE>
<S> <C>
The Unisys discount percentage on * * . products shall be based on the *
* * * * Schedule listed below ** * * * * * *
* * * * * * Discounts will be based on * * *
* * * . * * * * * * * *
* * * * * * * * *
* * *. * * * *. The September 1998 Objective Price
List is attached * * * * to Addendum A.
</TABLE>
<TABLE>
<S> <C> <C> <C>
* * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * *
</TABLE>
* * * * ** * * * ** * * * *
* * * * ** * * * ** * * * *
*Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934, as amended, and filed separately
with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 10.15
January 12, 1999
Sanmina Corporation
355 East Trimble Road
San Jose, CA 95131
Attention: Mr. Bern Whitney
RE: LETTER AGREEMENT REGARDING OUTSTANDING ACCOUNTS PAYABLE
Dear Mr. Whitney:
This letter agreement is to set form our mutual agreement and
understanding with respect to the outstanding amounts owed by Objective
Communications, Inc., a Delaware corporation ("Objective") to Sanmina
Corporation and Golden Eagle Systems, Inc. (collectively with Sanmina
Corporation. "Sanmina").
Objective acknowledges and agrees that, as of the date hereof, Objective
owes Sanmina $4.3 million (the "Obligations"), consisting of $3.2 million in
outstanding accounts payables, and $l.1 million representing the value of
materials (piece parts), various stages of work in process and finished goods
inventory all currently located at Sanmina along avid other noncancellable
purchase commitments made by Sanmina in behalf of Objective (collectively. the
"Materials").
In consideration of the mutual covenants and obligations set forth in
this letter agreement and in the other documents and agreements evidencing the
Obligations, Objective and Sanmina agree as follows:
1. The Obligations will be evidenced by an initial three-year term
senior note (the "Note") made by Objective in favor of Sanmina.
The principal amount of the Note will mature and be payable in
full on the date that is three years from the date of the Note.
The principal amount of the Note outstanding from time to time
will bear interest at the rate of 7% per annum. During the first
year that the Note is outstanding, Objective will make
interest-only payments, in arrears semi-annually beginning on six
months from the date of the Note. Thereafter Objective will
amortize the remaining principal amount of the Note and any
accrued but unpaid interest thereon on a monthly basis over the
remaining term of the Note. Any payments that Objective makes to
Sanmina after the date of the Note to pay for the Materials will
constitute prepayments of a portion of the principal amount of the
Note and will reduce the principal amount owed under the Note when
made.
2. In the event that Objective completes a public offering of
securities or a private placement of securities with aggregate
gross proceeds to the Company in excess of $8 million prior to the
maturity date of the Note, then Objective will prepay a portion of
the principal amount of the Note in an amount equal to $1.1
million, payable on the day the financing closes. In the event the
aggregate gross proceeds to
<PAGE> 2
the Company is less than $8 million but more than $5 million. the
Company will prepay a portion of the principal amount of the Note
equal to $500 thousand if the amount raised is $5 million
increasing on a pro rata basis to a maximum of $1.1 million if the
amount raised is $8M. In exchange for the prepayment, Sanmina will
transfer to Objective good and marketable title to the prepayment
equivalent amount of Materials, free and clear of all liens and
encumbrances, per the email from Paul Johnson at Sanmina to Robert
Emery at Objective on December 23, 1998, including but not limited
to the materials listed in printouts provided to Objective by
Sanmina via facsimile from Paul Harkins to Robert Emery on January
6, 1999. Objective will accept these materials in "as-is"
condition with no related warranties or return rights.
3. Objective will issue to Sanmina warrants to purchase 275,000
shares of its common stock, with an exercise price equal to the
closing price of the common stock on the date on which this letter
is executed by Sanmina.
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: 603334-2212). If you have any questions, you
can reach me at (603) 334-6741.
Sincerely,
/s/ ROBERT H. EMERY
Robert H. Emery
Vice President, Finance and Administration
The undersigned authorized representative of Sanmina hereby acknowledges
and agrees to the terms and conditions of this letter agreement and agrees to be
legally bound by its terms.
Dated: January 12, 1999 Sanmina Corporation
By: /s/ BERNARD WHITNEY
----------------------
Name:
----------------------
Title:
----------------------
2
<PAGE> 1
EXHIBIT 10.16
January 21, 1999
Shaw Pittman Potts & Trowbridge
2300 N Street NW
Washington, DC 20037-1128
Attention: James Leary, Esq.
RE: LETTER AGREEMENT REGARDING FEES AND OUTSTANDING ACCOUNTS PAYABLE
Dear Jim:
This letter agreement (the "Agreement") sets forth our mutual agreement and
understanding with respect to the amounts currently owed by Objective
Communications, Inc., a Delaware corporation, ("Objective") to Shaw Pittman
Potts & Trowbridge (collectively Shaw Pittman) and with respect to those
additional legal fees and expenses that Shaw Pittman will incur in conjunction
with the bridge financing and equity financing currently being negotiated by
Objective.
Objective acknowledges and agrees that, as of the date hereof, Objective owes
Shaw Pittman approximately $375,000 dollars (the "Obligations") as of December
31,1998.
In consideration of the mutual covenants and obligations set forth in this
Agreement and in the other documents and agreements evidencing the Obligations,
Objective and Shaw Pittman agree as follows:
1. The Obligations will be evidenced by an initial two-year note (the
"Note") made by Objective in favor of Shaw Pittman. The principal
amount of the Note will mature and be payable in full on the date
that is two years from the date of the Note which will be the date
on which this Agreement is signed. The principal amount of the
Note outstanding from time to time will bear interest at the rate
of 7% per annum. During the first year that the Note is
outstanding, Objective will make interest-only payments, in
arrears, semi-annually beginning on six months from the date of
the Note. Thereafter, Objective will amortize the remaining
principal amount of the Note and any accrued but unpaid interest
thereon on a monthly basis over the remaining term of the Note.
2. Objective will pay Shaw Pittman for legal fees and expenses
incurred in conjunction with negotiations currently underway for a
bridge financing in the range of $1 million to $3 million at the
final closing of the bridge financing. Objective will pay Shaw
Pittman for legal fees and expenses incurred in conjunction
negotiations currently underway for an equity financing in the
range of $12 million to $15 million at the closing of the equity
financing. Payments at the respective closings for legal fees and
expenses incurred in conjunction with
<PAGE> 2
SHAW PITTMAN - 2 - JANUARY 21, 1999
the bridge financing and in conjunction with the equity financing
will be based on good faith estimates to be provided by Shaw
Pittman. These good faith estimates will be reconciled immediately
upon receipt of final invoices and the balance paid by Objective
to Shaw Pittman or credited by Shaw Pittrnan to the Note as
appropriate.
3. In the event that Objective completes a bridge financing with
aggregate gross proceeds of $3,000,000, the Company will make a
prepayment on the Note to Shaw Pittman of $25,000 within thirty
days of the final closing of the bridge financing.
4. In the event that Objective completes an equity financing in the
range of $12 million to $ 15 million, then Objective will make a
prepayment on the Note to Shaw Pittman of $50,000 within three
days of the closing of the equity financing.
5. Objective will issue to Shaw Pittman warrants to purchase 40,000
shares of its common stock, with an exercise price equal to the
closing price of the common stock on the date on which this letter
is executed by Shaw Pittman.
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,
/s/ ROBERT H. EMERY
Robert H. Emery,
Vice President, Finance and Administration
<PAGE> 3
SHAW PITTMAN - 3 - JANUARY 21, 1999
The undersigned authorized representative of Shaw Pittman Potts & Trowbridge
hereby acknowledges and agrees to the terms and conditions of this Agreement and
agrees to be legally bound by its terms.
Dated: January 22, l999 Shaw Pittman Potts & Trowbridge
By: /s/ JAMES LEARY
-------------------------
Name:
-------------------------
Title:
-------------------------
<PAGE> 1
EXHIBIT 10.17
January 13, 1999
RE: OBJECTIVE COMMUNICATIONS, INC. - SERIES B 5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK AND RELATED WARRANTS TO PURCHASE COMMON STOCK
Dear
Objective Communications, Inc. ("Objective" or the "Company") is
negotiating an immediate bridge financing in the range of $1 million to $3
million, and a subsequent equity financing in an amount up to $15 million. As a
condition to proceeding with the bridge and equity financings, the proposed
underwriter of these financings is requiring that the holders of the Company's
outstanding Series B 5% Cumulative Convertible Preferred Stock, par value $.01
per share (the "Series B Preferred Stock"), and related warrants (the "Series B
Warrants") to purchase shares of common stock, par value $.01 per share, of the
Company (the "Common Stock"), agree to certain changes in their rights with
respect to the Series B Preferred Stock and Series B Warrants. This letter
agreement is to set forth the Company's proposal to modify the terms of the
outstanding Series B Preferred Stock and Series B Warrants. The investors
(collectively, the "Investors" and individually, an "Investor") currently hold
$1.15 million aggregate stated value 209,091 shares of the Series B Preferred
Stock and Series B Warrants to purchase 52,273 shares of Common Stock. Each
individual signing this letter agreement on behalf of an entity that holds
Series B Preferred Stock and Series B Warrants represents and warrants to
Objective that he is authorized and has full authority to execute, deliver and
enter into this agreement on behalf of, and to bind, such investor.
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 each of the Investors agree as follows:
1. Each Investor agrees that it will not exercise its right to
convert the Series B Preferred Stock or exercise the Series B
Warrants until the date on which a
<PAGE> 2
January 13, 1999
Page 2
public or private equity financing with gross proceeds to
Objective of not less than $8 million (a "Qualified Financing") is
consummated.
2. Upon the closing of a Qualified Financing, the Series B Preferred
Stock will automatically and without any further action on the
part of the holder convert into shares of Common Stock at a
"Conversion Price" (as defined in the Certificate of Designations,
Preferences and Rights of Series B 5% Cumulative Convertible
Preferred Stock of Objective Communications (the "Certificate of
Designations")) equal to the closing price per share of the Common
Stock on January 12,1999, on the Nasdaq National Market. Each
Investor further agrees that, notwithstanding anything to the
contrary in the Certificate of Designations or the Subscription
Agreement by and between the Company and the undersigned dated
August 26, 1998 (the "Subscription Agreement"), there shall be no
adjustment in the Conversion Price by reason of any securities
issued in the bridge financing or subsequent equity offering
referred to above (including without limitation any warrants
issued in either such financing), or upon conversion of the Series
B Preferred Stock, conversion of the outstanding $3.125 original
principal amount of 5% Convertible Debentures of the Company due
2003, or exercise of the Series B Warrants.
3. The undersigned Investor agrees that the exercise price of the
Series B Warrants is hereby amended to be equal to the closing
price per share of the Common Stock on January 12,1999, on the
Nasdaq National Market. Each Investor further agrees that,
notwithstanding anything to the contrary in the Subscription
Agreement or the Series B Warrants, there shall be no adjustment
in the exercise price of such Series B Warrants by reason of any
securities issued in the bridge financing or subsequent equity
offering referred to above (including without limitation any
warrants issued in either such financing), or upon conversion of
the Series B Preferred Stock, conversion of the outstanding $3.125
original principal amount of 5% Convertible Debentures of the
Company due 2003, or exercise of the Series B Warrants.
4. The undersigned Investor hereby expressly waives any right that it
may have to include the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock or Series B Warrants in
any registration statement that the Company may file with the
Securities and Exchange Commission with respect to the
above-referenced bridge financing or Qualified Financing. The
undersigned Investor also agrees that, for a period of six months
following the date on which the shares of Common Stock issuable
upon conversion of the Series B Preferred Stock are issued, it
will not sell, pledge, or otherwise transfer such shares of
<PAGE> 3
January 13, 1999
Page 3
Common Stock and will enter into an agreement with the Company or
the underwriter of such offering to that effect.
5. 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 and time at
which the Company consummates a bridge financing and receives gross proceeds
from a bridge financing in an amount of not less than $1 million. 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
The undersigned authorized representative of the Investor 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: January ____, 1999
By:
------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.18
OBJECTIVE COMMUNICATIONS, INC.
50 INTERNATIONAL DRIVE
PORTSMOUTH, NEW HAMPSHIRE 03801
February 2, 1999
RE: AGREEMENT REGARDING $3.125 MILLION AGGREGATE PRINCIPAL AMOUNT
OF 5% CUMULATIVE CONVERTIBLE DEBENTURES DUE 2003
Dear :
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 investors (collectively, the
"Investors" and individually, an "Investor") currently hold $2.5 million
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. This agreement shall supercede our letter agreement
dated January 13,1999.
As you are aware, Objective is negotiating an immediate bridge financing
and a subsequent equity financing, and the investors in that financing have
requested the Investors to agree to certain changes in their rights with respect
to the Convertible Debentures.
In consideration of the mutual covenants and obligations set forth in
this letter agreement, and in the other documents and agreements among
Objective, the Investors, and the other management investors who purchased
Convertible Debentures, Objective and each of the Investors, agree as follows:
1. Each Investor agrees that 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
<PAGE> 2
- 2 -
with gross proceeds to Objective of not less than $8 million (a
"Qualified Financing") is consummated.
2. Upon 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 the type(s) of securities issued in the
Qualified Financing at the conversion price set forth below. By
way of example, if Objective issues and sells shares of Common
Stock in the Qualified Financing, then the Convertible Debentures
will be converted into Common Stock, and if Objective issues and
sells units consisting of Common Stock and warrants to purchase
shares of Common Stock in the Qualified Financing, then the
Convertible Debentures will be converted into such units.
3. If the Qualified Financing is a public offering ("Qualified Public
Financing"), the number of securities 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" where the conversion price will be
equal to the lesser of (i) $2.50 per share, or (ii) 75% of the
price at which the securities were sold in the Qualified
Financing.
4. If the Qualified Financing is a private financing ("Qualified
Private Financing"), the number of securities 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" where the conversion price will be
equal to the price at which securities were sold in the Qualified
Financing. In addition, upon the closing of a Qualified Private
Financing, Objective will issue to the former holders of the
Convertible Debentures the number of warrants to purchase shares
of Common Stock equal to 20% of the shares of Common Stock
issuable upon conversion of the Convertible Debentures. Such
warrants shall have a five-year exercise period and an exercise
price per share equal to the market price per share of Common
Stock on the date on which the warrants are issued.
5. In the event of a 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 of a
Qualified Private Financing, the shares of Common Stock issuable
upon conversion of the Convertible Debentures will be registered
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 the 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.
<PAGE> 3
- 3 -
6. The holders of the Convertible Debentures also hereby waive 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 holders of the Convertible
Debentures hereby waive 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 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.
7. The undersigned 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 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.
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 and time at
which the Company consummates a bridge financing and receives gross proceeds
from a bridge financing in an amount of not less than $1 million. 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 -
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: February 2, 1999
By:
Its:
By:
------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 11
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 this Form 10-KSB.
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
None
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Objective Communications, Inc. (a development stage enterprise) on Form S-3
(File No. 333-20625), Form S-8 (File No. 333-49763) and Form S-8 (File No.
333-49765) of our report, which includes an explanatory paragraph on the
Company's ability to continue as a going concern, dated February 26, 1999, on
our audits of the financial statements of Objective Communications, Inc. as of
December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and
1996 and for the period October 5, 1993 (date of inception) to December 31,
1998, which report is included in Objective Communications, Inc. Annual Report
on Form 10-KSB.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 31, 1999
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<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,532
<SECURITIES> 0
<RECEIVABLES> 206,916
<ALLOWANCES> 22,246
<INVENTORY> 5,793,801
<CURRENT-ASSETS> 6,237,712
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0
1,173,958
<COMMON> 57,411
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<TOTAL-LIABILITY-AND-EQUITY> 9,622,989
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<CGS> 544,853
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<OTHER-EXPENSES> 22,744,577
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