<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 March 31, 1998
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the Transition period from _______________________________________ to
Commission file number 000-22631
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SYMPLEX COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 38-3338110
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 Research Drive, Ann Arbor, MI 48103
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (734) 995-1555
----------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[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 May 1, 1998 is
- -----------------------------------------------------------------------
7,998,131
- ---------
Transitional Small Business Disclosure Form (check one): [ ] Yes [X] No
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS.
Balance Sheets at March 31, 1998 (unaudited) and December 31, 1997 3
Statements of Operations for the Three Months 4
Ended March 31, 1998 (unaudited) and 1997 (unaudited)
Statements of Stockholders' Equity for the Three Months Ended 5
March 31, 1998 (unaudited) and Year Ended December 31, 1997
Statements of Cash Flows for the Three Months 6
Ended March 31, 1998 (unaudited) and 1997 (unaudited)
Notes to Unaudited Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 14
AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION 18
SIGNATURES 19
INDEX TO EXHIBITS 20
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL INFORMATION
SYMPLEX COMMUNICATIONS CORPORATION
BALANCE SHEETS
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MARCH 31, DECEMBER 31,
1998 1997
ASSETS (UNAUDITED)
--------------- -------------
Current Assets
Cash and cash equivalents $ 539,315 $ 24,554
Trade receivables, less allowance for
doubtful accounts of $19,740 436,176 988,133
Inventories (Note 2) 1,243,931 979,232
Prepaid expenses and other current assets 89,895 40,043
--------------- -------------
Total current assets 2,309,317 2,031,962
Property and equipment
Machinery and equipment 1,654,253 1,640,121
Office equipment 638,847 640,382
Leasehold improvements 19,590 19,590
--------------- -------------
Total 2,312,690 2,300,093
Less accumulated depreciation (2,001,152) (1,964,753)
--------------- -------------
Net property and equipment 311,538 335,340
--------------- -------------
Deferred offering and financing costs - 571,984
--------------- -------------
Total assets $ 2,620,855 $ 2,939,286
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities
Trade payables $ 538,886 $ 1,293,449
Accrued expenses 159,441 328,814
Notes payable - revolving (Note 3) 457,500 500,000
Notes payable - current portion (Note 3) 240,000 250,000
Notes payable - subordinated debt (Note 3) - 1,163,984
Notes payable - other (Note 3) 131,450 -
--------------- -------------
Total current liabilities 1,527,277 3,536,247
Notes payable - less current portion (Note 3) 180,000 240,000
--------------- -------------
Total liabilities 1,707,277 3,776,247
--------------- -------------
Stockholders' equity (deficiency in assets)
Common stock, $.01 par value, 20,000,000 shares
authorized and 7,998,131 shares issued and
outstanding (including 479,168 shares held in
escrow) at March 31, 1998 and 4,475,982 shares
issued and outstanding at December 31, 1997
(Notes 4, 8, 9, 11, 12, 14 and 15) 79,979 44,757
Additional paid-in capital 5,780,124 3,326,600
Unearned compensation expense (9,485) (25,933)
Additional paid-in capital- warrants 76,000 76,000
Notes receivable - recourse (55,818) (55,818)
Notes receivable - non-recourse (159,809) (188,308)
Retained earnings (accumulated deficit) (4,797,413) (4,014,259)
--------------- -------------
Total stockholders' equity (deficiency
in assets) 913,578 (836,961)
--------------- -------------
Total liabilities and stockholders' equity $ 2,620,855 $ 2,939,286
=============== =============
See notes to financial statements.
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 31,
1998 1997
----------------------------
(UNAUDITED)
----------------------------
Net sales and revenues (Note 10)
Manufactured products $ 78,637 $ 1,125,603
Maintenance contracts and service 29,262 43,842
---------- -----------
Total net sales and revenues 107,899 1,169,445
Costs and expenses
Cost of products sold 41,727 553,163
Selling and marketing 284,789 593,192
General and administrative 288,282 395,093
Research and development 164,858 284,945
Engineering 22,074 62,266
Service 57,746 91,231
---------- -----------
Total costs and expenses 859,476 1,979,890
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Operating (loss) (751,577) (810,445)
Other (expense) income
Interest expense (42,935) (78,045)
Amortization of discount on notes payable - (40,000)
Other income 11,358 2,967
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Total other income and expenses (31,577) (115,078)
---------- -----------
Net loss $ (783,154) $ (925,523)
========== ===========
Loss per basic and diluted common share $ (0.13) $ (0.14)
========== ===========
Weighted average common share outstanding 6,229,081 6,699,747
========== ===========
See notes to financial statements.
4
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
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<TABLE>
<CAPTION>
ADD- UN- NOTE
ITIONAL EARNED RECEIV- RETAINED
PAID-IN COMPEN- ADDITIONAL NOTE ABLE EARNINGS
NUMBER COMMON CAPITAL SATION PAID-IN RECEIVABLE NON- (ACCUMULATED)
OF SHARES STOCK WARRANTS EXPENSE CAPITAL RECOURSE RECOURSE DEFICIT TOTAL
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 4,475,982 44,757 76,000 (25,933) 3,326,600 (55,818) (188,308) (4,014,259) (836,961)
Issuance of common stock net of
$1,040,617 in offering costs 3,500,000 35,000 2,424,383 2,459,383
-initial public offering
(Note 14)
Employee stock purchase plan
-surrendered shares (Note 12) (47,851) (478) 3,413 (40,159) 28,499 (8,725)
Compensation expense recognized
on stock issued with stock
options (Note 12) 13,035 13,035
Underwriter's fee related to
initial public offering 70,000 700 69,300 70,000
Net loss (783,154) (783,154)
-------------------------------------------------------------------------------------------------
Balance - March 31, 1998 7,998,131 $79,979 $76,000 $(9,485) $5,780,124 $(55,818) $(159,809) $(4,797,413) $ 913,578
=================================================================================================
</TABLE>
See notes to financial statements.
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
---------- ----------
(UNAUDITED)
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (783,154) $ (925,523)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 37,934 41,846
Amortization of discount on notes payable - 40,000
Compensation for termination of SAR plan - 47,779
Compensation recognized for stock options 4,310 -
Changes in assets and liabilities that provided (used) cash:
Trade receivables 551,957 (277,562)
Inventories (264,699) 91,405
Prepaid expenses and other current assets (49,852) 59,062
Deferred offering and financing costs 571,984 -
Trade payables (754,563) (114,851)
Accrued expenses (169,373) 85,776
----------- -----------
Total adjustments (72,302) (26,545)
----------- -----------
Net cash used in operating activities (855,456) (952,068)
CASH FLOWS USED IN INVESTING ACTIVITIES -
Purchases of property and equipment (14,132) (2,181)
----------- -----------
Net cash used in investing activities (14,132) (2,181)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on line of credit (42,500) -
Borrowings of notes payable 61,450 100,000
Proceeds (payments) from bridge financing (1,163,984) -
Proceeds from issuance of common stock 2,529,383 1,746,045
Payments on capital lease obligations - (1,637)
----------- -----------
Net cash provided by (used in) financing activities 1,384,349 1,844,408
----------- -----------
(DECREASE) INCREASE IN CASH 514,761 890,159
CASH AT BEGINNING OF PERIOD 24,554 320,290
----------- -----------
CASH AT END OF PERIOD $ 539,315 $ 1,210,449
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the period for interest $ 42,936 $ 65,390
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of amortized balance of notes payable to common stock $ $ 650,000
=========== ===========
Conversion of accrued liabilities to common stock $ $ 341,500
=========== ===========
Issuance of common stock for SAR plan termination $ $ 47,779
=========== ===========
Notes receivable retired in exchange for common stock $ (16,888) $
=========== ===========
</TABLE>
See notes to financial statements.
6
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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1. DESCRIPTION OF BUSINESS AND SUMMARY OF 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 financial statements have been prepared on a basis consistent with
accounting principles generally accepted in the United States.
The consolidated financial statements included herein are presented in
accordance with the requirements of Form 10-QSB and consequently do not
include all of the disclosures normally made in the registrants's annual
Form 10-KSB filing. These financial statements should be read in conjunction
with the financial statements and notes thereto included Symplex
Communications Corporations's latest annual report on Form 10-KSB.
INTERIM UNAUDITED FINANCIAL STATEMENTS - Information with respect to March
--------------------------------------
31, 1998 and 1997, and the periods then ended, have not been audited by the
Company's independent auditors, but in the opinion of management, reflect
all adjustments (which include only normal recurring adjustments) necessary
for the fair presentation of the operations of the Company. The results of
operations for the three months ended March 31, 1998 and 1997 are not
necessarily indicative of the results of the entire year.
2. INVENTORIES
Inventories as of March 31, 1998 and December 31, 1997 consist of the
following:
MARCH 31, DECEMBER 31,
1998 1997
Raw materials $ 272,479 $ 304,884
Work-in-process 496,218 266,252
Finished goods 715,429 648,291
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1,484,126 1,219,427
Less reserve for obsolescence (240,195) (240,195)
---------- -----------
Total $1,243,931 $ 979,232
========== ===========
7
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3. NOTES PAYABLE
The Company has a line-of-credit agreement which provides for borrowings up
to $500,000 at 2% above the bank's prime rate (prime was 8.5% at March 31,
1998), secured by all assets of the Company. The Company had borrowings
against this line-of-credit of $457,500 and $500,000 at March 31, 1998 and
December 31, 1997 respectively.
The agreement for the line-of-credit contains 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. Effective
November 4, 1997, the bank reset the current ratio and net worth covenants to
be effective March 31, 1998. There can be no assurances that these covenants
will be attainable on an ongoing basis.
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 1, 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
payments at a variable rate of 2% above the bank's prime rate. Both
agreements are secured by all assets of the Company and contain restrictive
covenants.
8
<PAGE>
NOTES PAYABLE - CONTINUED
Notes payable consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Convertible subordinated notes payable. Interest at the prime rate plus
2% (prime was 8.5% at March 31, 1998 and December 31, 1997,
respectively); due August 29, 1998; paid in connection with the
Company's initial public offering (Note 14). $ - $ 699,984
Subordinated note payabe with detachable warrants. Interest at the
prime rate plus 2% (prime was 8.5% at March 31, 1998 and at
December 31, 1997, respectivley); the warrants allow the
noteholders to purchase up to 166,667 shares of common stock
for $1.00 per share at any time prior to August 27, 1998 (Notes
9 and 15); paid in connection with the Company's initial public
offering (Note 14). - 500,000
Term notes payable. Payments of $60,000 quarterly including interest
at prime rate plus 2% (prime was 8.5% at March 31, 1998 and
December 31, 1997, respectively). Secured by all assets of the
Company. 420,000 490,000
Unsecured notes payable. Principal payments of $7,500 per month
plus accrued interest at the rate of 9% per annum. 131,450 -
-------------- -------------
Total 551,450 1,689,984
Unamortized discount - (36,000)
Less current maturities (371,450) (1,413,984)
-------------- -------------
Long term portion $ 180,000 $ 240,000
============== =============
</TABLE>
9
<PAGE>
4. 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 a private placement, the SAR plan was
terminated. The selected employees received 57,916 shares of common stock
valued at $0.83 per share
5. LEASES
The Company leases building space under an operating lease. Total rent
expense was approximately $34,000 and $81,000 for the three months ended
March 31, 1998 and 1997, 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 $0
(zero) and $11,000 for the three months ended March 31, 1998 and 1997,
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 was $1,798 and $13,087 for the
three months ended March 31, 1998 and 1997, respectively.
8. COMMON STOCK
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.
In December 1997, the Board approved a 2 for 3 reverse stock split. All
periods presented and related footnote disclosures have been adjusted to
reflect the reverse split.
10
<PAGE>
9. WARRANTS
In connection with the issuance of various convertible subordinated notes
the Company issued warrants allowing the holders to purchase 216,666 shares
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 $0.83 and $0.95 per share and
expire September 8, 1999.
In February 1997, the Board granted warrants to purchase 466,667 shares of
common stock to a private investment group who facilitated the completion of
the March private placement (Note 11). The holders may fund the purchase of
shares through the delivery of a recourse or 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 $.83 per share
in the first year following the Canadian public offering and $0.95 in the
second year.
In February 1997, The Company entered into an agreement with the same
private placement group to assist the Company with a Canadian initial public
offering. In consideration for the assistance, the Company granted warrants
to purchase 233,333 shares of common stock. The warrants vested upon
completion of the initial public offering on February 11, 1998 (Note 14).
These warrants 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 166,667 shares of
common stock at $1.00 per share (Note 3).
10. SALES
Three Months Ended March 31,
1998 1997
U.S. $ 91,911 $ 500,738
Germany (191,889) 33,881
Japan 27,099 122,435
Netherlands 56,149 153,151
Other 124,629 359,240
--------- ----------
Total sales $ 107,899 $1,169,445
========= ==========
11. PRIVATE PLACEMENT
In March 1997, the Company completed a private placement offering of
2,263,802 shares of 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.
11
<PAGE>
12. STOCK OPTIONS
Employee Incentive Plans - February 1997 Option Plan
----------------------------------------------------
In February 1997, the Board adopted a Nonstatutory Stock Option Plan ("the
February 1997 Plan"). Under this plan, the Board approved a program to grant
certain employees the right to purchase common stock of the Company for $.45
per share ("the employee share purchase program"). Under the employee share
purchase program, 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. Option
grants under this plan expire prior to the submission of a prospectus for an
initial public offering. Certain restrictions on the stock exist for an 18
month period.
During the second quarter of 1997, the Company awarded options, all of which
were exercised, to purchase 738,800 shares pursuant to this plan. According
to the terms of the employee share purchase program, the stock vests
incrementally over 18 months 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, 244,150 were forfeited as of March 31, 1998
pursuant to the vesting provisions. A total of approximately $70,400 will be
charged to compensation expense over the 18 month vesting period for the
187,667 shares issued with recourse notes based upon the purchase price of
$.45 per share and a market price of $.83 per share. The options exercised
with non-recourse notes are treated as a variable plan. Compensation expense
will be recorded over the 18 month vesting period for the 495,285
outstanding shares issued with non-recourse notes, computed as the
difference between the $.45 per share purchase price plus accrued interest,
and the current market price which at the time of issuance was $.83 per
share. As of March 31, 1998, 298,049 shares were vested and the balance on
the notes receivable was $215,627. Total stock based compensation expense
for the three months ended March 31, 1998 included in general and
administrative expense was $4,310.
In April 1997, the Board approved a key employee share program ("the key
employee program"). During the second quarter of 1997, the Company issued
77,965 shares of common stock. These shares were purchased by employees
during the second quarter of 1997 at a purchase price of $.83 per share with
a 6 month recourse note. As of December 31, 1997, there were no outstanding
balances remaining on the notes.
In September 1997, the February 1997 Plan expired and there are no remaining
options to be issued under this plan.
Employee Incentive Plans - April 1997 Option Plan
-------------------------------------------------
In April 1997, the Board adopted a Nonstatutory Stock Option Plan ("the
April 1997 Plan"). This plan provides 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 of Board members which determines
the issuance of options and their terms.
12
<PAGE>
During the year ended December 31, 1997, the Company granted options to
purchase 1,284,101 shares of common stock at $1 per share under the April
1997 Plan. Of these shares, 762,871 vest 50% upon grant of the options and
50% one year thereafter provided that the employee continues in the
employment of the Company, except if the employee is involuntarily
terminated without cause prior to the expiration of the one year vesting
period, in which case the 50% vested upon grant is guaranteed. None of the
options have been exercised and 1,059,932 remain outstanding as of March 31,
1998 after taking into effect the cancellation of 224,169.
13. LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
14. INITIAL PUBLIC OFFERING
Effective February 1998, the Company completed an initial public offering of
3,500,000 shares of common stock at a price of $1.00 per share on the
Vancouver Stock Exchange. The net proceeds of the offering to the Company,
after deducting the underwriters' fee and other expenses of approximately
$1,041,000, were approximately $2,459,000. Approximately $1,164,000 of the
proceeds were used to satisfy debt outstanding as of December 31, 1997 with
the remainder used for working capital purposes.
In connection with the offering, the Company entered into an agency
agreement with an underwriter under which the underwriter received a
commission consisting of cash, stock and warrants of the Company. The
Company paid all expenses of the underwriter in connection with the IPO. The
commission consisted 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
underwriter guaranteed to purchase all shares which were unsubscribed on the
offering day. In compensation for the guarantee, the underwriter received
warrants to purchase up to 400,000 shares of the Company's stock at the IPO
price. The warrants expire one year from their issue date.
15. BRIDGE LOAN FINANCING
In August 1997, the Company obtained bridge financing of $1,164,000 in
subordinated promissory notes. The notes bear interest at prime plus 2% and
are due August 27, 1998 or such earlier date as described below.
Certain of the notes, aggregating $700,000, are convertible within 7 days of
receipt 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. Upon
completion of the IPO, 187,500 warrants were issued on conversion of notes
totaling $375,000.
Other notes aggregating $500,000 were due within 15 days of the completion
of the Canadian public offering. Concurrently with the issuance of these
notes the noteholders received warrants allowing the holders to purchase up
to 250,000 shares of common stock at any time prior to August 27, 1998 at
$1.00 per share. These notes were retired upon completion of the IPO.
******
13
<PAGE>
Item 2 - Management's Discussion and
Analysis or Plan of Operation
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
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
- -------------------------------------------------------------------------------
Net Sales: Net sales from operations for the three months ended March 31, 1998
totaled $107,899 compared to $1,169,445 for the three months ended March 31,
1997. The decline of $1,061,546 or 91% can be attributable to (i) product
returns of $259,389 resulting from a special trade-up program with selected
distributors (ii) the continued decline in Datamizer product sales after
accounting for returns to $234,239 from $698,147 (iii) the decline in
DirectRoute product sales after accounting for returns to $(126,340) from
$471,298 (iv) the cash constraints experienced by the Company during the fourth
and first quarters of 1997 and 1998, respectively attributing to a significant
reduction in sales and marketing activity and (v) the disruption associated with
changing sales personnel.
Gross margins at March 31, 1998 were $66,172 or 61.3% compared to $616,282 or
52.7% at March 31, 1997. Margins were favorably impacted by a higher percentage
of healthy margin Datamizer products in the significantly reduced revenue volume
for quarter one 1998 as compared to the same quarter of the previous year.
Research and development costs: Research and development expenses were $164,858
in the first three months of 1998 as compared to $284,945 for the comparable
three month period in 1997. This $120,087 decline reflected reductions
primarily in payroll and related benefits of $107,945 and new product
development of $9,541 due again to cash constraints.
Sales and marketing expense: Sales and marketing expenses in the three months to
March 31, 1998 were $284,789 as compared to $593,192 for the same period in
1997. This $308,403 decline reflects decreased commissions of $71,343 from
declining sales, a decline in advertising and other expenses of $16,444, a
decline in payroll and benefits of $213,239 and a decline in international
activities of $7,377. Severe cash constraints were an issue for the Company .
General and administrative, engineering and service expenses: General and
administrative expenses for the first three months of 1998 were $288,282 as
compared to approximately $395,093 in the corresponding period in the prior
year. This net $106,811 decrease resulted primarily from a increase in payroll
and related benefits of $23,820, offset by decreases in depreciation of $2,695,
outside services of $11,041, and a net decrease in general expenses of $116,895,
partly attributable to a $34,744 decline in the expense for amortizing the
compensation related to an Employee Share Purchase Option Plan. Engineering
expenses declined $40,192 to $22,074 through March 31, 1998 from $62,266 for the
comparable period in 1997. The decline was due mostly to payroll expense
reductions mandated by cash constraints. Service expenses declined $33,485 to
$57,746 through
14
<PAGE>
September 30, 1997 from $91,231 for the comparable period in 1997. This decline
was attributable mostly to $30,986 of payroll and related expense reductions.
Net Loss: The Company reported a net loss of $783,154 for the three months ended
March 31, 1998 as compared to a net loss of $925,523 for the comparable period
in 1997. The Company continues to experience revenue declines in both its
product lines while being favorably impacted by a significant reduction in its
overall operating expenses.
Liquidity and Capital Resources
- -------------------------------
Symplex incurred losses during the first three months of 1998 although it
believes that significant growth potential exists for the Company's
telecommunications products. The Company financed its quarter one 1998 operating
losses principally through the initial public offering proceeds of $3,500,000,
before expenses.
Cash utilized in operating activities in the three months ended March 31, 1998
approximated $855,000 as compared to $952,000 in the corresponding period of
1997. Cash generated by financing activities through March 31, 1998 totaled
$1,384,000 as compared to $1,844,000 in the corresponding period of 1997. The
source of these 1998 funds was the previously mentioned initial public offering,
of $,3,500,000 before expenses, offset by reductions in the bank borrowings of
$113,000 and the bridge financing of $1,164,000 paid out at the time of the
initial public offering.
The Company's cash resources have been hampered by slow inventory turnover due
principally to multiple products and declining revenue, and slow accounts
receivable collections caused by a high percentage of international sales with
extended terms.
At March 31, 1998, Symplex had borrowings of $458,000 against its $500,000 line
of credit agreement. In addition, Symplex has outstanding bank debt of $420,000
under a long-term agreement. 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 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 waived these defaults. As
of March 31, 1998, the Company satisfied the relevant default tests and fully
complied with the bank agreement.
As of March 31, 1998, the Company's principal sources of liquidity were cash of
approximately $539,000 and trade receivables approximating $436,000. The
stockholders' equity at March 31, 1998 totaled $914,000 as compared to a
stockholders' equity of $1,612,548 at March 31, 1997. At March 31, 1998, The
Company had a working capital surplus of $782,000 as compared to a working
capital deficiency of $1,504,000 at December 31, 1997.
The Company continues to experience significant sales declines and operating
losses. Symplex expects to seek a significant capital infusion in 1998, likely
in the second or third quarter, in order to fund its ongoing operations. There
can be no assurances that the Company will successfully obtain additional debt
or equity financing, or that such financing would not result in substantial
dilution to current shareholders. If the Company is unable to raise sufficient
additional capital in
15
<PAGE>
1998, it will be unable to continue in its current form and will be required to
undergo significant downsizing or restructuring. Such a downsizing or
restructuring could have a material adverse effect on the Company's revenue,
operating results and stock price.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of certain computer programs being written
using two digits rather than four to indicate the applicable year. As a result,
computer programs with date-sensitive software may incorrectly recognize a date
using "00" as the year 1900 rather than the year 2000. Such an error could
result in a system failure or miscalculations resulting in disruptions of
operations, including a temporary inability to process normal business
transactions.
The Company has recently examined its production and internal administrative
systems for year 2000 issues. As a result of that review, the Company has
determined that no significant modifications will be required to make their
systems year 2000 compliant and does not expect that any modifications required
will have a material impact on its business, operations or financial condition.
FORWARD-LOOKING STATEMENTS
This report contains certain 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, or future
16
<PAGE>
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.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) The Company sold the following unregistered securities in the three
month period ended March 31, 1998:
(1) On February 11, 1998 , the Company completed its initial public
offering of Common Stock in British Columbia, Canada, selling 3,500,000 shares
of Common Stock for aggregate proceeds of US$3,500,000. The purchasers were all
non-U.S. residents. In connection with such issuance, the Company paid
commissions and underwriters discounts of $262,500 and issued 70,000 shares of
Common Stock and warrants to purchase 400,000 shares of Common Stock exercisable
at US$1.00.
The Company believes this transaction was exempt from the registration
requirements of Section 5 of the Securities Act of 1933 (the "Securities Act")
by virtue of the exemption provided by Regulation S of the Securities Act.
(2) On February 11 , 1998, pursuant to the Company's February 12, 1997
Letter Agreement with Opus Capital, LLP, the Company issued to Opus Capital, LLP
warrants to purchase 233,333 shares of Common Stock exercisable at $1.00 per
share, which warrants expire February 10, 2000.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Included as exhibits are the items listed on the Exhibit Index.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the three
months ended March 31, 1998:
(1) Report on Form 8-K dated February 11, 1998, reporting the
completion of the Company's initial public offering in British
Columbia, Canada.
(2) Report on Form 8-K dated March 16, 1998, reporting a change in the
Company's certifying accountant.
18
<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: May 14, 1998 By: /s/ Gary R. Brock
-----------------
Gary R. Brock
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1998 By: /s/ Thomas Radigan
------------------
Thomas Radigan
Chief Financial Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer)
19
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- ------ -------------------------------------------------------------------------------
<S> <C> <C>
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)/
4.1 Form of Certificate of Common Stock.
4.2 Form of warrant granted to holders of convertible promissory notes
("Note Conversion Warrants")./(2)/
4.3 Form of warrant granted to Canaccord Capital Corporation and C.M.
Oliver & Co. ("Underwriter Warrants")./(2)/
4.4 Form of warrant granted to Opus Capital, LLP ("Opus Services
Warrant")./(2)/
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)/
27.1 Financial Data Schedule.
_______________________________
</TABLE>
(1) Incorporated by reference from the Company's Registration Statement on Form
10-SB filed May 30, 1997.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 11, 1998.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 539,315
<SECURITIES> 0
<RECEIVABLES> 455,916
<ALLOWANCES> 19,740
<INVENTORY> 1,243,931
<CURRENT-ASSETS> 2,309,317
<PP&E> 2,312,690
<DEPRECIATION> 2,001,152
<TOTAL-ASSETS> 2,620,855
<CURRENT-LIABILITIES> 1,527,277
<BONDS> 0
0
0
<COMMON> 79,979
<OTHER-SE> 833,599
<TOTAL-LIABILITY-AND-EQUITY> 2,620,855
<SALES> 78,637
<TOTAL-REVENUES> 107,899
<CGS> 41,727
<TOTAL-COSTS> 859,476
<OTHER-EXPENSES> (11,358)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,935
<INCOME-PRETAX> (783,154)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (783,154)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
