<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
---------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the Transition period from _____________________ to ______________________
Commission file number 000-22631
------------------------------------------
SYMPLEX COMMUNICATIONS CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 38-3338110
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Research Drive, Ann Arbor, MI 48103
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (313) 995-1555
----------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
The number of shares of common stock, $.01 par value, at October 31, 1997 is
- ----------------------------------------------------------------------------
6,772,059
- ---------
Transitional Small Business Disclosure Form (check one): [ ] Yes [X] No
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS.
<S> <C>
Balance Sheets at September 30, 1997 (unaudited) and December 31, 1996 3
Statements of Operations for the Three and Nine Months 4
Ended September 30, 1997 (unaudited) and 1996 (unaudited)
Statements of Stockholders' Equity for the Nine Months Ended 5
September 30, 1997 (unaudited) and Year Ended December 31, 1996
Statements of Cash Flows for the Nine Months 6
Ended September 30, 1997 (unaudited) and 1996 (unaudited)
Notes to Unaudited Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 16
AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 20
SIGNATURES 21
EXHIBIT INDEX 22
</TABLE>
2
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYMPLEX COMMUNICATIONS CORPORATION
BALANCE SHEETS
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<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 427,305 $ 320,290
Trade receivables, less allowance for doubtful accounts of $30,000 560,603 529,180
Inventories 1,214,658 1,312,734
Prepaid expenses and other current assets 55,725 48,710
----------- -----------
Total current assets 2,258,291 2,210,914
PROPERTY AND EQUIPMENT:
Machinery and equipment 2,736,764 2,692,465
Office equipment 1,029,904 1,017,118
Leasehold improvements 188,853 188,853
----------- -----------
Total 3,955,521 3,898,436
Less accumulated depreciation 3,643,474 3,535,910
----------- -----------
Net property and equipment 312,047 362,526
----------- -----------
DEFERRED OFFERING & FINANCING COSTS 455,300 49,464
----------- -----------
TOTAL ASSETS $ 3,025,638 $ 2,622,904
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Trade payables $ 871,031 $ 782,749
Accrued expenses 216,085 575,763
Notes payable - revolving 500,000 500,000
Notes payable - current portion 490,000 20,000
Notes payable - subordinated debt 1,164,000 510,000
Current portion of capital lease obligations 1,637
----------- -----------
Total current liabilities 3,241,116 2,390,149
NOTES PAYABLE - LESS CURRENT PORTION 480,000
----------- -----------
Total liabilities 3,241,116 2,870,149
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS):
Common stock, $.01 par value; 20,000,000 shares authorized and 6,924,641
shares issued and outstanding, including 904,769 shares held in escrow at
September 30, 1997 and 913,129 shares issued and outstanding at December 31,
1996 and 1995 69,246 39,150
Additional paid-in capital 3,417,983
Unearned compensation expense (146,008)
Additional paid-in capital - warrants 76,000 40,000
Notes receivable - recourse (84,451)
Notes receivable - non-recourse (222,878)
Retained earnings (accumulated deficit) (3,325,370) (326,395)
----------- -----------
Total stockholders' equity (deficiency in assets) (215,478) (247,245)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,025,638 $ 2,622,904
=========== ===========
</TABLE>
See notes to unaudited financial statements.
3
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET SALES AND REVENUES:
Manufactured products $ 738,625 $1,715,892 $ 2,780,903 $ 4,928,946
Maintenance contracts and service 44,573 54,706 147,368 160,174
---------- ---------- ----------- -----------
Total net sales and revenues 783,198 1,770,598 2,928,271 5,089,120
COSTS AND EXPENSES:
Cost of products sold 379,082 792,034 1,400,869 2,022,781
Selling and marketing 634,119 626,273 1,824,739 2,021,995
General and administrative 313,977 429,286 1,266,140 1,356,658
Research and development 285,925 271,070 872,164 1,047,446
Engineering 64,324 103,756 200,629 296,498
Service 72,642 94,160 240,581 289,613
---------- ---------- ----------- -----------
Total costs and expenses 1,750,069 2,316,579 5,765,122 7,034,871
---------- ---------- ----------- -----------
OPERATING INCOME (LOSS) (966,871) (545,981) (2,836,851) (1,945,871)
OTHER INCOME (EXPENSE):
Interest expense (32,185) (40,067) (135,886) (78,683)
Amortization of discount on notes payable (40,000)
Other income 3,319 6,799 13,762 7,755
---------- ---------- ----------- -----------
Total other income and expenses (28,866) (33,268) (162,124) (70,928)
---------- ---------- ----------- -----------
NET LOSS $ (995,737) $ (579,249) $(2,998,975) $(2,016,799)
---------- ---------- ----------- -----------
LOSS PER COMMON SHARE $ (0.11) $ (0.06) $ (0.34) $ (0.23)
---------- ---------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 8,941,501 8,941,501 8,941,501 8,941,501
========== ========== =========== ===========
</TABLE>
See notes to unaudited financial statements.
4
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND FOR THE YEAR ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
PAID-IN UNEARNED ADDITIONAL
NUMBER COMMON CAPITAL COMPENSATION PAID-IN
OF SHARES STOCK WARRANTS EXPENSE CAPITAL
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 913,129 39,150
Issuance of detachable warrants $ 40,000
Net loss
--------- -------- ---------
BALANCE AT DECEMBER 31, 1996 913,129 39,150 40,000
--------- -------- ---------
Statutory merger with wholly owned subsidiary (30,019) $ 30,019
Issuance of common stock, net - private placement 3,395,700 33,957 1,712,088
Conversion of notes payable to common stock 1,181,818 11,818 638,182
Conversion of accrued liabilities to common stock 170,750 1,708 339,792
Issuance of common stock - SAR plan termination 86,871 869 46,910
Issuance of common stock - key employee plan 116,945 1,169 63,151
Issuance of common stock - employee stock
purchase plan 1,108,200 11,082 $ (277,050) 598,428
Amounts paid on notes receivable issued under key
employee stock option plan
Compensation expense recognized on stock issued with
stock options 110,099
Warrants issued with bridge financing 36,000
Financing fee shares 35,000 350 34,650
Employee stock purchase plan-surrendered shares (83,772) (838) 20,943 (45,237)
Net loss
--------- -------- --------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1997 (Unaudited) 6,924,641 $ 69,246 $ 76,000 $ (146,008) $3,417,983
========= ======= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
RETAINED
NOTE NOTE EARNINGS
RECEIVABLE RECEIVABLE (ACCUMULATED
RECOURSE NON-RECOURSE DEFICIT)
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 3,318,242
Issuance of detachable warrants
Net loss (3,644,637)
-----------
BALANCE AT DECEMBER 31, 1996 (326,395)
-----------
Statutory merger with wholly owned subsidiary
Issuance of common stock, net - private placement
Conversion of notes payable to common stock
Conversion of accrued liabilities to common stock
Issuance of common stock - SAR plan termination
Issuance of common stock - key employee plan $(62,319)
Issuance of common stock - employee stock
purchase plan (84,450) $(248,009)
Amounts paid on notes receivable issued under key
employee stock option plan 62,318
Compensation expense recognized on stock issued with
stock options
Warrants issued with bridge financing
Financing fee shares
Employee stock purchase plan-surrendered shares 25,131
Net loss $(2,998,975)
-------- ---------
BALANCE AT SEPTEMBER 30, 1997 (Unaudited) $(84,451) $(222,878) $(3,325,370)
======== ========= ===========
</TABLE>
5
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,998,975) $(2,016,799)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 128,677 174,296
Amortization of discount on notes payable 40,000
Compensation for termination of SAR plan 47,779
Compensation recognized for stock options 110,099
Changes in assets and liabilities that
provided (used) cash:
Trade receivables (31,423) 537,407
Inventories 98,076 84,610
Prepaid expenses and other current asseets (7,015) 6,389
Deferred offering and financing costs (370,836)
Trade payables 88,282 61,827
Accrued expenses (18,178) 94,864
----------- -----------
Total adjustments 85,461 959,393
----------- -----------
Net cash used in operating activities (2,913,514) (1,057,406)
CASH FLOWS USED IN INVESTING ACTIVITIES -
Purchase of Property and equipment (78,198) (31,104)
----------- -----------
Net cash used in investing activities (78,198) (31,104)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit 1,000,000
Borrrowings of notes payable 100,000
Proceeds from bridge financing 1,164,000
Issuance of detachable warrants 36,000
Distribution to stockholders
Proceeds from issuances of common stock 1,800,364
Common stock redemption
Payments of capital lease obligations (1,637) (4,911)
----------- -----------
Net cash provided by (used in)
financing activities 3,098,727 995,089
----------- -----------
(DECREASE) INCREASE IN CASH $ 107,015 $ (93,421)
CASH AT BEGINNING OF PERIOD 320,290 93,421
----------- -----------
CASH AT END OF PERIOD $ 427,305 $
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the
period for interest $ 103,651 $ 81,857
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of amortized balance of notes
payable to common stock $ 650,000
===========
Conversion of accounts liabilities to common stock $ 341,500
===========
Issuance of common stock for SAR plan termination $ 47,779
===========
Notes receivable issued for purchase
of common stock $ 394,778
===========
Issuance of common stock as a financing fee $ 35,000
===========
</TABLE>
See notes to unaudited financial statements.
6
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Symplex Communications Corporation (the "Company")
designs, manufactures and sells specialized data communications equipment
primarily used to create computer networks and send information
electronically. The Company's primary markets are North America and Europe.
The financial statements have been prepared by management on a basis
consistent with accounting principles generally accepted in the United
States. The interim financial statements for the nine months ended September
30, 1997 and 1996 reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of reporting for such periods.
REORGANIZATION - On February 28, 1997, the Company merged with a wholly owned
subsidiary which had no assets. The transaction was accounted for as a
pooling of interest.
SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
INVENTORIES are stated at the lower of cost (determined on the first-in,
first-out method) or market (net realizable value).
PROPERTY AND EQUIPMENT are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful life of the asset. The
costs of major remodeling and improvements on leased property are capitalized
as leasehold improvements. Capital leases are recorded at fair market value
of the assets. The estimated service lives used to compute depreciation are
five years for equipment and the shorter of the useful life or the lease term
for leasehold improvements.
RESEARCH AND DEVELOPMENT costs related to new data communications products
are expensed as incurred. Total research and development costs of
approximately $872,000 and $1,047,000 for the nine months ended September 30,
1997 (unaudited) and 1996 (unaudited), respectively.
DEFERRED OFFERING COSTS relate to equity offerings and are capitalized until
completion of the transaction. Once the transactions are complete, the costs
are netted against any proceeds and reclassified to additional paid-in
capital.
PRODUCT WARRANTY COSTS - Sales agreements provide for necessary warranty
service for one year on new installations. The estimated future costs of
warranty service for products sold as of September 30, 1997 (unaudited) and
as of December 31, 1996 is $30,000 which is included in accrued expenses.
COST OF PRODUCTS SOLD excludes manufacturing overhead, comprised primarily of
indirect labor, depreciation and occupancy costs, which are included in
general and administrative expenses.
STOCK-BASED COMPENSATION - The Company has elected to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for
7
<PAGE>
Stock Issued to Employees", and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the company's stock at the date of the grant over the
amount the employee must pay to acquire the stock in the accompanying
statements of operations.
INCOME TAXES - The Company accounts for income taxes in accordance with SFAS
109, "Accounting For Income Taxes," which utilizes an asset/liability
approach in accounting for future deductible/taxable amounts.
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 asset and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
EARNINGS (LOSS) PER COMMON SHARE - According to Securities and Exchange
Commission Staff Accounting Bulletin 83, common stock and common stock
equivalents issued during the twelve months immediately preceding an initial
public offering are included in this calculation as if they were outstanding
for all periods presented. Under this guidance, earnings (loss) per share is
calculated without regard to antidilution. The following common stock and
common stock equivalents have been included in the number of common shares
outstanding as if issued for all periods presented:
COMMON
STOCK
EQUIVALENT
Common stock issued under private placement 3,395,700
Conversion of notes payable 1,181,818
Common stock exchanged for SAR Plan termination 86,871
Conversion of stockholders' liability 170,750
Common stock issued under key employee plan 116,945
Common stock issued under employee purchase plan 871,846
Warrants issued with convertible debt 325,000
Warrants issued to private investment group 700,000
Common stock issued to underwriter 35,000
Issuance of options under employee share purchase plan 544,442
Warrants issued in connection with bridge loan financing 600,000
---------
Total common stock equivalents 8,028,372
=========
8
<PAGE>
2. INVENTORIES
Inventories as of September 30, 1997 (unaudited) and December 31, 1996
consist of the following:
SEPTEMBER 30, DECEMBER 31,
---------------- ----------------
1997 1996
(UNAUDITED)
Raw materials $ 133,300 $ 104,955
Work-in-process 287,759 386,735
Finished goods 793,599 821,044
----------- -----------
Total $ 1,214,658 $ 1,312,734
=========== ===========
3. NOTES PAYABLE
NOTES PAYABLE - At December 31, 1996, the Company had a line of credit
agreement which provided for borrowings up to $1,000,000 at 2% above the
bank's prime rate, secured by all assets of the Company. The Company had
borrowings against this line of credit of $1,000,000 and $0 at December 31,
1996 and 1995, respectively.
The agreements for the line of credit contain restrictive covenants, the most
significant of which require the Company to 1) maintain certain levels of net
worth, as defined; 2) maintain certain levels of working capital; and 3)
maintain a certain level of total liabilities to net worth.
In March 1997, the Company restructured its bank line of credit agreement.
Under the new agreement, $500,000 of the December 31, 1996 balance was
converted to a term note payable, with $500,000 remaining as the amount
available under the line of credit. The term note matures December 31, 1999
and requires quarterly principal payments, beginning September 1, 1997, of
$10,000 for the first two payments, and $60,000 for the remaining eight. Both
the new term agreement and the line of credit require monthly interest
payment at a variable rate of 2% above the bank's prime. Both agreement are
secured by all assets of the Company and contain restrictive covenants.
The Company was not in compliance with certain of its debt covenants at
September 30, 1997 and received a waiver of such covenants from the bank.
Effective March 31, 1998 the bank also reset the current ratio and net worth
covenants from that point forward. The Company has reflected the entire note
balance as current as of September 30, 1997 since it is uncertain whether it
will be able to meet the reset debt covenants at March 31, 1998 and at future
measurement dates.
9
<PAGE>
4. NOTES PAYABLE
Notes payable consisted of the following at September 30, 1997 and December
31, 1996:
SEPTEMBER 30, DECEMBER 30,
1997 1996
(UNAUDITED)
Convertible subordinated notes payable.
Interest at prime rate plus 2%, due
August 29, 1998; convertible within
seven days of the filing of a final
prospectus into 700,000 shares of
common stock and warrants to purchase
350,000 shares at $1.00 per share. If
the Canadian public offering has not
closed by August 29, 1998, the
noteholders will be entitled to receive
additional warrants to purchase up
30 350,000 shares at $1.00 per share. $ 700,000
Subordinated notes payable with detachable
warrants. Interest at the prime rate plus
2%; due within 15 dyas of the completion of
a Canadian public offering but no later
that August 27, 1998. The warrants allow
the noteholders to purchase up to
250,000 shares of common stock for $1.00
per share at any time prior to August
27, 1998. 500,000
Convertible subordinated note payable with
detachable warrants to a private investment
group. Bears interest at the prime rate
(8.25% effective rate at December 31, 1996),
and was due on March 15, 1997. Secured by
all asets and subordinate to the security
interest previously granted to the bank. $ 300,000
Convertible subordinated note payable with
detachable warrants to a stockholder. Bears
interest a the prime rate (8.25% effective
rate at December 31, 1996), and was due on
March 31, 1997. The note is subordinate to
the security interest previously granted
to the bank. 250,000
------------ -----------
Total 1,200,000 550,000
Unamortized discount 36,000 40,000
Less current maturities 1,164,000 510,000
------------ -----------
Long term portion None None
In February 1997, the Company received an additional $100,000 from a private
investment group in exchange for a convertible subordinated note payable with
detachable warrants. The associated warrants allow the purchase of 50,000
shares of voting, $.01 par value common stock. The warrants are exercisable
at $0.55 per share in year one and $0.63 per share thereafter and expire
September 8, 1999.
10
<PAGE>
On March 5, 1997, in conjunction with the private placement, this debt and
the previously issued $300,000 note were converted to 727,273 shares of $.01
par value common stock.
On March 5, 1997, in conjunction with the private placement, the $250,000
debt to a shareholder was converted to 454,545 shares of $.01 par value
common stock.
In connection with the issuance of the convertible subordinated notes in
August 1997, the company issued 35,000 shares of common stock as a financing
fee.
5. LEASES
The Company leases building space under an operating lease. Total rent
expense was $221,309 and $188,864 for the nine months ended September 30,
1997 (unaudited) and 1996 (unaudited), respectively. The lease expired on
December 31, 1996, and the Company is currently leasing the space on a month-
to-month basis.
6. EMPLOYEE SAVINGS AND RETIREMENT PLAN
The Company has a 40l(k) Employee Savings and Retirement Plan (the "Plan"), a
defined contribution plan, covering substantially all employees under which
the Company matches 50% per dollar of employee contributions up to 4% of the
employees' eligible compensation. The Plan also allows for additional
discretionary employer contributions. Total expense for this Plan was
$11,000 and $43,600 for the nine months ended September 30, 1997 (unaudited)
and 1996 (unaudited), respectively.
The Company discontinued employer matching in April 1997.
7. RELATED PARTY TRANSACTIONS
The Company has an agreement with a stockholder under which it annually pays
royalties in the amount of 2% of qualified sales or $150,000, whichever is
the lesser amount. The total royalty expense for the nine months ended
September 30, 1997 (unaudited) and 1996 (unaudited) was $31,695 and $64,647,
respectively.
A subordinated note payable to a stockholder was converted to common stock in
March 1997.
In March 1997, certain stockholders converted $341,500 in accrued expenses to
equity as approved by the Board in November 1996. The stockholders received
one share of no-par, common stock for every $2 of indebtedness or 170,750
shares.
8. STOCK APPRECIATION RIGHTS
The company had previously adopted a stock appreciation right ("SAR") plan
granting certain selected employees incentive bonuses based on the
performance of the Company's stock and as determined according to the Plan.
In general, such rights were not exercisable except in the event of an
initial public offering, a merger, or a sale of 50% or more of the Company's
voting stock.
In March 1997, in conjunction with the private placement, the SAR plan was
terminated. The selected employees received 86,871 shares of $.01 par value
common stock valued at $0.55 per share. Compensation expense of $47,779 has
been recognized for the nine months ended September 30, 1997 (unaudited).
11
<PAGE>
9. COMMON STOCK
On November 18, 1996, the Board amended the articles of incorporation
authorizing an additional 2,970,000 shares of no-par common stock. In
conjunction with the amendment, a stock split was also approved by the Board,
providing for the issuance of approximately 31 shares of new, no-par common
stock for one share of the previously outstanding, no-par common stock. All
periods presented have been restated to reflect the stock split.
On November 28, 1996, the Company formed a wholly owned subsidiary in the
State of Delaware, "Symplex Acquisition Corporation," with no assets and
authorized capital of 10,000,000 shares of $.01 par value common stock. On
February 28, 1997, the Company statutorily merged with its wholly owned
subsidiary, forming one Delaware based C-corporation. Concurrent with the
merger, the articles of incorporation were amended to increase the authorized
shares of $.01 par value common stock from 10,000,000 to 20,000,000 shares.
Each outstanding share of the former company was converted into one share of
the new company's common stock.
10. WARRANTS
In connection with the issuance of various convertible subordinated notes,
the Company issued warrants allowing the holders to purchase 325,000 shares
of voting, no-par common stock. The holders may fund the purchase of shares
through the delivery of a recourse or non-recourse promissory note, bearing
interest at the Applicable Federal Rate ("AFR"). The AFR is the minimum
allowable interest rate that can be used before imputed interest is required
by the Internal Revenue Service. Under the non-recourse note, the Company's
sole recourse shall be to cancel any shares that are being held in escrow.
The warrants are currently exercisable at between $0.55 and $0.63 per share
and expire on September 8, 1999.
In February 1997, the Board granted warrants to purchase 700,000 shares of
$.01 par value common stock to a private investment group in consideration
for services performed in conjunction with the private placement. The
holders may fund the purchase of shares through the delivery of a recourse of
non-recourse promissory note, bearing interest at the AFR. Under the non-
recourse note, the Company's sole recourse shall be to cancel any shares that
are being held in escrow. These warrants expire on September 8, 1999 and are
exercisable at $0.55 per share in the first year following the Canadian
public offering and $0.63 in the second year.
In February 1997, the Company entered into an agreement with the same private
investment group to assist the Company with a Canadian initial public
offering. In consideration for the assistance, the Company granted warrants
to purchase 350,000 shares of $.01 par value common stock. The warrants vest
upon completion of an initial public offering raising at least $3 million and
expire two years from the effective date of the initial public offering. The
warrants are exercisable at $1.00 per share for the first twelve months and
$1.15 per share thereafter.
In August 1997 in connection with the issuance of certain subordinated notes
payable, the Company has issued warrants to purchase 250,000 shares of common
stock at $1.00 per share.
12
<PAGE>
11. INCOME TAXES
The Company's provision for income taxes for the nine months ended September
30, 1997 consists of the following:
Federal:
Deferred provision $ (1,100,000)
Increase in valuation allowance 1,100,000
-------------
Total None
=============
The net deferred income tax assets in the accompanying balance sheet include
the following:
Deferred tax assets $ 1,100,000
Valuation allowance (1,100,000)
-------------
Total None
=============
Deferred tax assets result primarily from timing in the recognition of
certain allowances and accrued expenses for tax and financial statement
purposes, and net operating loss carryforwards.
A valuation allowance has been provided for the deferred tax assets because
of the uncertainty surrounding their realization.
Prior to March 1, 1997, the Company was taxed as an S corporation under the
U.S. Internal Revenue Code which provides that, in lieu of corporate income
taxes, the stockholders are taxed on their proportional share of the
Company's net income. Accordingly, the financial statements for all periods
presented prior to the nine months ended September 30, 1997 do not include a
provision for corporate income taxes. Had the S election not been in place,
the provision (tax benefit) for corporate income taxes would have been as
follows based upon the statutory rate of 34 percent:
Year Ended December 31:
1992 $(251,000)
1993 134,000
1994 (135,000)
1995 (289,000)
1996 0
13
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12. EXPORT SALES
Export sales for the nine months ended September 30, 1997 (unaudited) and
1996 (unaudited):
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------------------
(UNAUDITED) (UNAUDITED)
U.S. $ 1,168,621 $ 1,900,202
Germany 148,431 139,002
Belgium 190,729 439,950
Japan 258,870 742,261
Netherlands 334,077 341,117
Other 827,543 1,526,588
------------ -----------
Total sales $ 2,928,271 $ 5,089,120
------------ -----------
13. PRIVATE PLACEMENT
In March 1997, the Company completed a private placement offering of
3,397,700 shares of no-par common stock for a total of $1,746,045, net of
offering costs of approximately $121,000. These shares were offered pursuant
to the exemption from registration under the Federal Securities Act of 1933
afforded by Regulation D, Rule 505 and Regulation S of the United States
Securities and Exchange Commission and pursuant to applicable exemptions in
Canada.
14. STOCK OPTIONS
Employee Share Purchase Stock Option Plan - In February 1997, the Board
approved an employee share purchase stock option plan. This plan grants
certain employees the right to purchase common stock of the Company for $.30
per share. The employees may fund the purchase of shares through the
delivery of a recourse or non-recourse promissory note, bearing interest at
the Applicable Federal Rate. Under the non-recourse note, the Company's sole
recourse shall be to cancel any shares that are being held in escrow.
Options granted under this plan expire prior to the submission of a
prospectus for an initial public offering. Certain restrictions on the stock
exist for a three-year period.
During 1997, the Company awarded options, which were exercised, to purchase
1,108,200 shares of $.01 par value, common stock pursuant to this plan.
According to the terms of the employee share purchase stock option
agreement, the stock vests incrementally over three years and is held in
escrow until vested and the attributable portion of any outstanding note is
paid. Of the total shares purchased under this plan, 83,772 were forfeited
as of September 30, 1997 and 152,582 after September 30 due to the vesting
provisions. A total of approximately $70,400 will be charged to compensation
expense over the three-year vesting period for the 281,500 shares issued
with recourse notes based upon the purchase price of $.30 per share, a
market price of $.55 per share. The options exercised with non-recourse
notes are treated as a variable plan. Compensation expense will be recorded
over the three year vesting period for the 742, 928 outstanding shares
issued with non-recourse notes, computed as the difference between the $.30
per share purchase price plus accrued interest, and the current market price
which at the time of issuance was $.55 per share. As of September 30, 1997,
163,431 shares were vested and the balance on the notes receivable
14
<PAGE>
was $307,329. Total stock based compensation expense for the nine months
ended September 30, 1997 (unaudited) included in general and administrative
expense was $110,099.
In September 1997, the employee share purchase stock option plan expired and
there are no remaining options to be issued under this plan.
Key Employee Option Plan - In April 1997, the Company adopted the key
employee option plan ("the April 1997 plan") which provided for grants to
executives and other key employees including officers who may be members of
the board of directors. The plan is administered by a committee which
determines the optionees and the terms of the options granted including the
exercise price, number of shares and the exercisibility thereof. The
exercise price cannot be less than the fair market value of the underlying
shares on the date of the grant.
During the second quarter of 1997, the Company issued 116,945 shares of $.01
par value, common stock pursuant to the exercise of stock options under the
key employee option plan. These options were granted to employees during the
second quarter of 1997 and allowed the employees to purchase $.01 par value,
common stock at a purchase price of $.55 per share with a recourse note.
During the third quarter of 1997, the Company granted options to purchase
673,814 shares of common stock at $1 per share under the April 1997 Plan.
None of the options have been exercised, and 544,442 remain outstanding at
October 23, 1997.
15. COMMITMENTS
The Company filed a final prospectus dated November 5, 1997 in connection
with a Canadian public offering of 3,500,000 shares of common stock at a
price of $1.00 per share. The net proceeds of the offering to the Company,
after deducting the underwriters' fee and the estimated expenses of the
offering of approximately $763,000 are expected to be $2,737,000.
The Company entered into an agency agreement with the underwriter under
which the agent is to receive a commission consisting of cash and stock of
the Company. The Company will also pay all expenses of the agent in
connection with the IPO up to a maximum of $30,000. The commission will
consist of 7.5% of the offering price per share sold and 70,000 shares of
common stock of the Company. As part of the agreement, the agent will
guarantee to purchase all shares which are unsubscribed on the offering day.
In compensation for the guarantee, the agent will receive warrants to
purchase up to 400,000 shares of the Company's stock. The agents' warrants
will entitle the holder to purchase one share of stock of the Company at the
IPO price. The warrants expire one year from their issue date. The agent may
terminate its obligations under the agreement by notice in writing to the
Company at any time prior to the opening of the market on the offering day.
Although the Company has filed the final prospectus there are no assurances
that the offering will ultimately be successful and result in the net
proceeds to the Company as described above.
******
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial data and the financial statements and notes thereto filed herewith.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1996
- ----
Net Sales. Net sales from operations for the nine months ended September 30,
1997 totaled $2,928,271 compared to $5,089,120 for the nine months ended
September 30, 1996. The decline of $2,160,849 or 42% can be attributable to (i)
the continued decline in Datamizer product sales by $1,682,000 from $3,417,000
to $1,735,000 (ii) the decline in DirectRoute product sales by $479,000 from
$1,672,000 to $1,193,000 (iii) the cash constraints experienced by the Company
during the first quarter of 1997 reflecting in a significant reduction in sales
and marketing activity and (iv) a significant change in its senior management
and the refocus of the Company's overall business strategies.
Gross margins at September 30, 1997 were $1,527,402 or 52.2% compared to
$3,066,339 or 60.3% at September 30, 1996. Margins in 1997 were adversely
impacted by cost overruns resulting from declining volumes and higher component
costs and from competitive price pressures in selected markets. Additionally,
product sales in 1997 included a higher percentage of lower margin DirectRoute
products and lower percentage of the healthy margin Datamizer products as
compared to 1996.
Research and development costs. Research and development expenses were $872,164
in the first nine months of 1997 as compared to $1,047,446 for the comparable
nine month period in 1996. This $175,000 decline reflected reductions primarily
in payroll and related benefits of $100,000 and new product development of
$75,000 due again to cash constraints.
Sales and marketing expenses. Sales and marketing expenses in the nine months
to September 30, 1997 were $1,824,739 as compared to $2,021,995 for the same
period in 1996. This $197,000 decline reflects decreased commissions of
$213,000 from declining sales and a decline in advertising and other expenses of
$24,000, offset by an increase in payroll and benefits of $10,000 and an
increase in international activities of $30,000. Severe cash constraints
continue to be an issue for the Company .
General and administrative, engineering and service expenses. General and
administrative expenses for the first nine months of 1997 were $1,226,140 as
compared to approximately $1,356,658 in the corresponding period in the prior
year. This $131,000 decrease resulted primarily from a reduction in payroll and
related benefits of $198,000, depreciation of $8,000 and outside services of
$27,000, offset by a net increase in general expenses of $102,000, mostly
attributable to a $48,000 expense for terminating the Stock Appreciation Rights
Plan and $110,000 for amortizing the compensation expense related to an Employee
Share Purchase Option Plan, offset by declines in other items. Engineering
expenses declined $95,869 to $200,629 through September 30, 1997 from $296,498
for the comparable period in 1996. The decline was due mostly to payroll
expense reductions mandated by cash constraints. Service expenses declined
$49,032 to $240,581 through September 30, 1997 from $289,613 for the comparable
period in 1996. This decline was attributable to $23,000 of payroll expense
reductions and declines of $26,000 in other expense.
Net Loss. The Company reported a net loss of $2,998,975 for the nine months
ended September 30, 1997 as compared to a net loss of $2,016,799 for the
comparable period in 1996. The Company continues to experience revenue and
margin shortfalls in both its product lines and to be adversely impacted by
higher interest expense.
16
<PAGE>
Three Months Ended September 30,1997 Compared to Three Months Ended September
- -----------------------------------------------------------------------------
30, 1996
- --------
Net sales. Net sales for the three months ended September 30, 1997 were
$783,198 as compared to $1,770,598 for the same period in 1996. The decline of
$987,000 can be attributed mostly to a continued revenue decline from both
product lines in the domestic and international marketplaces. Additionally, the
DirectRoute products experienced a $293,000 decline in revenue volume. The
gross margin for the three months ended September 30, 1997 was 51.6% as compared
to 55.3% for the comparable period in 1996. This 3.7% margin erosion is
attributable to revenue volume shortfalls, higher component costs and
competitive price pressures in selected markets.
Research and development expenses. Research and development expenses for the
three months ended September 30, 1997 were $285,925 and $271,070 for the
comparable period in 1996, representing a $15,000 increase primarily from
incremental product development expenses.
Sales and marketing expenses. Sales and marketing expenses for the three months
ended September 30, 1997 were $634,119 as compared to $626,273 for the
comparable three month period in 1996. This $8,000 increase is attributable to
renewed direct selling and marketing activities in North America offset by a
significant decline in commission expense.
General and administrative, engineering and service expenses. General and
administrative expenses for the three months ended September 30,1997 were
$313,977 as compared to $429,286 for the comparable period in 1996. The
$115,000 decline resulted from expense reallocations and a reduction in payroll
and related expenses, offset by an increase in the compensation expense related
to the Employee Share Purchase Option Plan. Engineering expenses for the
three months ended September 30, 1997 were $64,324 as compared to $103,756 for
the comparable period in 1996. This $39,000 decline resulted from reduced
payroll and related expenses. Service expenses for the three months ended
September 30, 1997 were $72,642 as compared to $94,160 for the comparable period
in 1996. This $22,000 decline resulted from reduced payroll and related and
other expenses.
Net loss. The Company reported a net loss of $995,737 for the three months
ended September 30, 1997 as compared to $579,249 for the comparable period in
1996. The Company continues to experience revenue and margin shortfalls in both
its product lines and to be adversely impacted by higher interest expenses.
Liquidity and Capital Resources
Symplex incurred losses during the first nine months of 1997 although it
believes that significant growth potential exists for the Company's
telecommunications products. The Company financed its third quarter 1997
operating losses principally through the proceeds of $1,200,000, before
expenses, of an August 1997 bridge loan financing from insiders and unrelated
parties. Cash utilized in operating activities in the nine months ended
September 30, 1997 approximated $2,914,000 compared to approximately $1,057,000
in the corresponding period in 1996. Cash generated by financing activities
through September 30, 1997 totaled $3,099,000 as compared to $995,000 in the
corresponding period of 1996. The source of these 1997 funds was the previously
mentioned bridge loan financing, a $1,867,635 (before expenses) quarter one
private placement and a cash infusion of $100,000 in quarter one. In addition,
several existing debt holders converted outstanding liabilities aggregating
$991,500 to equity.
The Company has initiated a program to capitalize on its business opportunities.
In the first nine months of 1997, a number of key management and sales
positions have been filled including the President and Chief Executive Office,
Gary R. Brock, Chief Financial Officer, Thomas Radigan, Executive Vice President
of Worldwide Sales, George J. Nagy, several North American sales representatives
and two international sales consultants. Symplex maintains its commitment to
product development with (i) the
17
<PAGE>
third quarter 1997 release of the newest generation of Datamizer, Datamizer
V,(ii) the forecasted release in quarter three 1998 of DirectRoute II, the next
generation of DirectRoute products, and (iii) the continued commitment to
enhance its core product lines. Subsequent to the release of Datamizer V, the
Company initiated a corporate wide restructuring that eliminated certain
engineering and other positions and is pursuing other measures to return the
Company to a healthy financial position. Because Symplex has, in comparison to
some of its major competitors, relatively fewer resources, it plans to seek out
and license third party technology to complement its existing product lines. To
augment the efforts of its newly expanded direct sales organization, Symplex
will enhance relationships with existing distributors and build new
relationships with resellers and system integrators.
As of September 30, 1997, the Company's principal sources of liquidity were cash
of approximately $427,000, trade receivables approximating $561,000 and current
liabilities of approximately $3,241,000. At June 30, 1997, the principal sources
of liquidity represented cash of $172,000, trade receivables of $671,000 and
current and long-term liabilities of $2,201,000.
At December 31, 1996, Symplex was fully borrowed against its $1,000,000 line of
credit agreement accruing interest at 2% above the bank's prime lending rate.
The line is secured by the assets of the Company. In March 1997, Symplex
restructured its fully utilized bank line of credit into $500,000 of long-term
debt and $500,000 remaining as the amount available under the line of credit.
The term note matures December 31, 1999 and requires quarterly payments of
$10,000 for the two quarters commencing September 1, 1997 and $60,000 for the
remaining eight. Both the new term agreement and the line of credit require
monthly interest payments at the variable rate of 2% above the bank's prime
rate. Both agreements are secured by all the assets of the Company and contain
restrictive covenants. The Company has from time to time been in default of
certain financial tests provided for in the bank agreement and the bank on
October 1, 1997 and November 4, 1997 has waived these defaults through March
31, 1998, whereupon the Company will, unless it satisfies the relevant tests, be
in default of the bank agreement.
The Company had a net working capital deficit approximating $983,000 at
September 30, 1997 and a $577,000 net working capital surplus at June 30, 1997.
Symplex will require additional debt or equity financing to implement its long-
term strategies and achieve its objectives. The Company has prepared a Canadian
initial public offering document and is negotiating with the underwriting agent
to establish the terms of this offering currently scheduled for the fourth
quarter of 1997. In the opinion of management, the proceeds from this offering,
the existing sources of liquidity and the funds generated from future operations
will be sufficient to meet the Company's short-term projected working capital
and other cash requirements assuming implementation of the operating objectives
and attainment of certain revenue expectations. Management will monitor
operating performance closely, however, and if it appears that the strategies
implemented will not generate the desired results within a reasonable period,
will reduce expenses accordingly. As the Company will require additional debt or
equity financing to satisfy its longer term working capital and other cash
requirements, however, Symplex will continually evaluate the availability and
appropriateness of various methods of securing additional financing.
18
<PAGE>
* * *
FORWARD-LOOKING STATEMENTS
The statements contained in this report which are not historical in nature
are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934 and the
Company intends that such forward-looking statements be subject to the safe
harbors for such statements under such sections. The forward-looking statements
herein are based on current expectations that involve a number of risks and
uncertainties. Such forward-looking statements are based on numerous
assumptions, including, but not limited to, the assumption: that the new
management team will function effectively; that significant increases in sales
and marketing personnel and expenditures will result in increased sales; that
the new generation Datamizer product will result in increased sales in the
Datamizer product line; that the new generation of Datamizer and DirectRoute
products will be developed on schedule and will provide the level of performance
and reliability demanded by the marketplace; that focusing sales efforts on
multinational companies in North America will generate revenue growth
internationally; that the Company can successfully compete with larger, more
established competitors; that market segments targeted by the Company will
continue to grow; that the Company will be successful in emphasizing the mid-
and high-range components of the DirectRoute product line; that pricing and
other competitive pressures worldwide will not cause margins to erode
significantly; and that currency fluctuations worldwide will not cause adverse
pricing pressures.
The foregoing assumptions are based on judgments with respect to, among other
things, future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the Company's control. Accordingly, although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any such assumption could prove to be inaccurate and therefore
there can be no assurance that the results contemplated in forward-looking
statements will be realized. The forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth in or implied by the forward-looking statements, including,
but not limited to, the risk: associated with new management teams; that
increased sales and marketing personnel and expenditures will not increase sales
sufficiently to cover the associated costs; that the new generation of Datamizer
and DirectRoute products will experience development or product roll-out
problems; that the Company's current product line, the new generation Datamizer
and DirectRoute products, or future products will not keep up with the rapid
technological change in the marketplace or will otherwise not be well-accepted
in the market; that competitive conditions in the internetworking industry will
change adversely or otherwise become more intense; that changes in technology or
consumer preference could cause the growth rate in the markets the Company
serves to slow or halt; that demand for the DirectRoute product line will slow;
that sales of mid- and high-range DirectRoute components are not the significant
portion of DirectRoute sales; that worldwide pricing and other competitive
pressures could adversely affect the Company's margins; or that currency
fluctuations could result in international pricing pressures or could reduce the
value in U.S. dollar terms of the Company's international sales.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) The Company sold the following unregistered securities during the
quarter ended September 30, 1997:
(1) On August 29, 1997, the Company sold $700,000 of convertible
promissory notes to 5 accredited Canadian investors. The notes bear
interest at the prime rate plus 2% and mature August 29, 1998. The
notes are convertible into 700,000 shares of Common Stock within seven
days of the filing by the Company of a final prospectus with the
British Columbia Securities Commission (the "Canadian Offering"). Upon
conversion of the outstanding principal, purchasers will receive
warrants to purchase an aggregate of 350,000 shares of Common Stock at
$1.00 per share, which expire one year from the conversion date. If
the Canadian Offering does not close by August 29, 1998, the Company
must issue to the purchasers warrants to purchase an additional
350,000 shares of Common Stock at $1.00 per share. In connection with
the issuance of the convertible promissory notes, the Company issued
35,000 shares of common stock as a financing fee.
The Company believes this sale was private in nature and was exempt
from the registration requirements of Section 5 of the Securities Act
by virtue of the exemption provided by Regulation S under the
Securities Act.
(2) On August 27, 1997, the Company sold $500,000 of subordinated
promissory notes to 4 accredited investors. The notes bear interest at
the prime rate plus 2% and mature fifteen days after completion of the
Canadian Offering, but no later than August 27, 1998. In connection
with the sale of the notes, purchasers received warrants to purchase
an aggregate of 250,000 shares of Common Stock at $1.00 per share,
which expire in August 27, 1998.
The Company believes this sale was private in nature and was exempt
from the registration requirements of Section 5 of the Securities Act
by virtue of the exemption provided by Section 4(2) of the Securities
Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Index to Exhibits.
(b) Reports on Form 8-K during the nine months ended September 30,
1997 - none.
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYMPLEX COMMUNICATIONS CORPORATION
Date: November 14, 1997 By: /s/ Gary R. Brock
----------------------------------
Gary R. Brock
President, Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1997 By: /s/ Thomas Radigan
----------------------------------
Thomas Radigan
Chief Financial Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer)
21
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
- -------------------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company, as
amended by Agreement of Merger by and between the
Company and Symplex Communications Corporation,
a California corporation./(1)/
3.2 Bylaws of the Company./(1)/
10.1 Symplex Communications Corporation Amended and Restated
Nonstatutory Stock Option Plan./(1)/
10.2 Symplex Communications Corporation IPO Stock Option Plan./(1)/
10.3 Letter Agreement dated March 6, 1997 between the Company and
George Brostoff./(1)/
10.4 Letter Agreement dated February 12, 1997 between the
Company and Opus Capital, LLP./(1)/
10.5 Manufacturing Services Agreement dated July 5, 1995
between the Company and IEC Electronics Corp./(1)/
10.6 Restructure Agreement dated March 25, 1997 between
the Company and Michigan National Bank./(1)/
10.7 Business Loan Agreement and Addendum to Business
Loan Agreement, each dated March 25, 1997, between
the Company and Michigan National Bank./(1)/
_______________________________
/(1)/ Incorporated by reference from the Company's Registration Statement on
Form 10-SB filed May 30, 1997.
22
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 427,305
<SECURITIES> 0
<RECEIVABLES> 590,603
<ALLOWANCES> 30,000
<INVENTORY> 1,214,658
<CURRENT-ASSETS> 2,258,291
<PP&E> 3,955,521
<DEPRECIATION> 3,643,474
<TOTAL-ASSETS> 3,025,638
<CURRENT-LIABILITIES> 3,241,116
<BONDS> 1,654,000
0
0
<COMMON> 69,246
<OTHER-SE> (284,724)
<TOTAL-LIABILITY-AND-EQUITY> 3,025,638
<SALES> 2,780,903
<TOTAL-REVENUES> 2,928,271
<CGS> 1,400,869
<TOTAL-COSTS> 5,765,122
<OTHER-EXPENSES> 26,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,886
<INCOME-PRETAX> (2,998,975)
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