<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 June 30, 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
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(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.)
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
-------------------
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 August 10, 1998 is
- ---------------------------------------------------------------------------
7,989,909
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Transitional Small Business Disclosure Form (check one): [_] Yes [X] No
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
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ITEM 1. FINANCIAL STATEMENTS.
<S> <C>
Balance Sheets at June 30, 1998 (unaudited) and December 31, 1997 3
Statements of Operations for the Three Months Ended June 30, 1998 (unaudited) 4
and 1997 (unaudited) and for the Six Months Ended June 30, 1998 (unaudited)
and 1997 (unaudited)
Statements of Stockholders' Equity for the Six Months Ended 5
June 30, 1998 (unaudited) and Year Ended December 31, 1997
Statements of Cash Flows for the Six Months Ended June 30, 1998 (unaudited) 6
and for the Six Months Ended June 30, 1998 (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 20
SIGNATURES 21
INDEX TO EXHIBITS 22
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Information
SYMPLEX COMMUNICATIONS CORPORATION
BALANCE SHEETS
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<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
(UNAUDITED)
----------- ---------------
<S> <C> <C>
Currents assets
Cash and cash equivalents $ 509,932 $ 24,554
Trade receivables, less allowance for doubtful accounts of $19,740 717,461 988,133
Inventories (Note 2) 811,461 979,232
Prepaid expenses and other current assets 62,266 40,043
----------- -----------
Total current assets 2,101,120 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 (2,039,369) (1,964,753)
----------- -----------
Net property and equipment 273,321 335,340
----------- -----------
Deferred offering and financing costs - 571,984
----------- -----------
Total assets $ 2,374,441 $ 2,939,286
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities
Trade payables $ 384,537 $ 1,293,449
Accrued expenses 296,919 328,814
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) 108,950 -
----------- -----------
Total current liabilities 1,487,906 3,536,247
Notes payable - less current portion (Note 3) 564,384 240,000
----------- -----------
Total liabilities 2,052,290 3,776,247
----------- -----------
Stockholders' equity (deficiency in assets)
Common stock, $.01 par value; 20,000,000 shares authorized and 7,989,909
Shares issued and outstanding (including 470,945 shares held in escrow) at
June 30, 1998 and 4,475,982 shares issued and outstanding at
December 31, 1997 (Notes 4,8,9,11,12,14, and 15) 79,897 44,757
Additional paid-in capital 5,773,755 3,326,600
Unearned compensation expense (2,357) (25,933)
Additional paid-in capital - warrants 131,616 76,000
Notes receivable - recourse (55,818) (55,818)
Notes receivable - non-recourse (156,108) (188,308)
Retained earnings (accumulated deficit) (5,448,834) (4,014,259)
----------- -----------
Total stockholders' equity (deficiency in assets) 322,151 (836,961)
----------- -----------
Total liabilities and stockholders' equity $ 2,374,441 $ 2,939,286
=========== ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
----------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenue (Note 10)
Manufactured products $ 929,997 $ 916,675 $ 1,008,634 $ 2,042,278
Maintenance contracts and service 33,724 58,954 62,986 102,795
---------- ----------- ----------- -----------
Total net sales and revenues 963,721 975,629 1,071,620 2,145,073
Costs and expenses
Cost of products sold 688,509 468,623 730,026 1,021,787
Selling and marketing 327,319 757,381 612,108 1,190,620
General and administrative 297,618 357,166 585,900 912,163
Research and development 109,287 301,295 274,145 586,239
Engineering 93,519 74,039 115,593 136,305
Service 56,119 76,706 114,075 167,939
---------- ----------- ----------- -----------
Total costs and expenses 1,572,371 2,035,210 2,431,847 4,015,053
---------- ----------- ----------- -----------
Operating (loss) (608,650) (1,059,581) (1,360,227) (1,869,980)
Other (expense) income
Interest expense (39,788) (25,657) (82,723) (103,701)
Amortization of discount on notes payable (36,000) - (36,000) (40,000)
Other income 33,017 7,531 44,375 10,443
---------- ----------- ----------- -----------
Total other income and
expenses (42,771) (18,126) (74,348) (133,258)
---------- ----------- ----------- -----------
Net loss $ (651,421) $(1,077,707) $(1,434,575) $(2,003,238)
========== =========== =========== ===========
Loss per basic and diluted common share $ (0.09) $ $(0.25) $ (0.19) $ (0.46)
========== =========== =========== ===========
Weighted average common shares outstanding 7,542,715 4,350,557 7,536,520 4,350,557
========== =========== =========== ===========
</TABLE>
See notes to financial statements.
4
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
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<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PAID-IN UNEARNED ADDITIONAL NOTE NOTE EARNINGS
NUMBER COMMON CAPITAL COMPENSATION PAID-IN RECEIVABLE RECEIVABLE (ACCUMULATED
OF SHARES STOCK WARRANTS EXPENSE CAPITAL RECOURSE NON-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 $1,040,501 in
offering costs -
initial public
offering (Note 14) 3,500,000 35,000 2,424,499 2,459,499
Employee stock purchase
plan-surrendered shares
(Note 12) (56,073) (560) 3,489 (46,644) 32,200 (11,515)
Compensation expense
recognized on stock
issued with stock
options (Note 12) 20,087 20,087
Underwriter's fee
related to initial
public offering 70,000 700 69,300 70,000
Issuance of detachable
warrants (Note 3 and 9) 55,616 55,616
Net loss (1,434,575) (1,434,575)
-------------------------------------------------------------------------------------------------------
Balance - June 30, 1998 7,989,909 $79,897 $131,616 (2,357) $5,773,755 $(55,818) $(156,108) $(5,448,834)$ 322,151
=======================================================================================================
</TABLE>
See notes to financial statements.
5
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
--------------------------------
(UNAUDITED)
--------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,434,575) $(2,003,238)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 76,151 84,620
Amortization of discount on notes payable 36,000 40,000
Compensation for termination of SAR plan - 47,779
Compensation recognized for stock options 8,582 20,933
Changes in assets and liabilities that provided (used) cash:
Trade receivables 270,672 (141,986)
Inventories 167,771 50,234
Prepaid expenses and other current assets (58,223) 7,350
Deferred offering and financing costs 571,984 (222,016)
Trade payables (908,912) 186,527
Accrued expenses (31,895) (2,314)
----------- -----------
Total adjustments 132,130 71,127
----------- -----------
Net cash used in operating activities (1,302,445) (1,932,111)
CASH FLOWS USED IN INVESTING ACTIVITIES -
Purchases of property and equipment (14,132) (94,095)
----------- -----------
Net cash used in investing activities (14,132) (94,095)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on line of credit (42,500) -
Borrowings of notes payable 478,950 100,000
Proceeds (payments) from bridge financing (1,163,984) -
Proceeds from issuance of common stock 2,529,489 1,779,296
Payments on capital lease obligations - (1,637)
----------- -----------
Net cash provided by (used in) financing activities 1,801,955 1,877,659
----------- -----------
(DECREASE) INCREASE IN CASH 485,378 (148,547)
CASH AT BEGINNING OF PERIOD 24,554 320,290
----------- -----------
CASH AT END OF PERIOD $ 509,932 $ 171,743
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the period for interest $ 82,723 $ 103,651
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of detachable warrant $ 55,616 $ -
=========== ============
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) $ 382,779
=========== ===========
</TABLE>
See notes to financial statements.
6
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 registrant's annual Form
10-KSB filing. These financial statements should be read in conjunction with
the financial statements and notes thereto included Symplex Communications
Corporation's latest annual report on Form 10-KSB.
SIGNIFICANT ACCOUNTING POLICIES Inventories are stated at the lower of cost
(determined on the first-in, first-out method) or market (net realizable
value). Inventory reserves are established and recorded periodically as such
requirements can be identified and quantified based on such factors as new
product releases obsoleting existing products, focused marketing activities
relieving effectively excess inventories, trends of ongoing specific product
sales activities and, where possible, alternative uses for slow moving
inventory components.
INTERIM UNAUDITED FINANCIAL STATEMENTS - Information with respect to June 30,
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 six months ended June 30, 1998 and 1997 are not
necessarily indicative of the results of the entire year.
2. INVENTORIES
Inventories as of June 30, 1998 and December 31, 1997 consist of the
following:
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
----------------- -----------------
Raw materials $ 348,343 $ 304,884
Work-in-process 388,508 266,252
Finished goods 636,396 648,291
1,373,247 1,219,427
Less reserve for obsolescence (561,786) (240,195)
Total $ 811,461 $ 979,232
========== ==========
7
<PAGE>
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 June 30,
1998), secured by all assets of the Company. The Company had borrowings
against this line-of-credit of $457,500 at June 30, 1998 and $500,000 at
December 31, 1997.
In March 1997, the Company restructured its original $1,000,000 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. At June 30, 1998, the term note balance was $360,000.
The agreement for the line-of-credit and the term note 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. The Company was not in compliance with certain of the debt and net
worth covenants at June 30, 1998. There can be no assurances that these
covenants will be attainable on an ongoing basis. Such noncompliance gives
the bank the right to exercise its remedies under the loan agreements,
including but not limited to acceleration of repayment and repossession of
collateral.
In May 1998, the Company secured $500,000 in term note borrowings from a
private investor. The principal balance on the two-year note bears interest
at 15% payable quarterly with the entire principal balance due in May 2000.
In consideration of the borrowing, the Company issued to the lender a warrant
to purchase 350,000 shares of common stock at an exercise price of $.20 per
share in year one and $.23 per share in year two. This note is secured by all
assets of the Company in a subordinated position to both agreements with the
Company's bank.
8
<PAGE>
NOTES PAYABLE continued
Notes payable consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited)
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<S> <C> <C>
Convertible subordinated notes payable. Interest at the prime rate plus
2% (prime was 8.5% at June 30, 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 payable with detachable warrants. Interest at the
prime rate plus 2% (prime was 8.5% at June 30, 1998 and at
December 31, 1997, respectively); 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
Subordinated note payable with detachable warrants. Interest at the
rate of 15%; the warrants allow the noteholders to purchase up
to 350,000 shares of common stock until May 18, 2000 at a price
of $0.20 in the first year and $0.23 in the second year. (Note 9). 500,000 -
Term notes payable. Payments of $60,000 quarterly including interest
at prime rate plus 2% (prime was 8.5% at June 30, 1998 and
December 31, 1997, respectively). Secured by all assets of the
Company. 360,000 490,000
Unsecured notes payable. Principal payments of $7,500 per month
plus accrued interest at the rate of 9% per annum. 108,950 -
------------ ------------
Total 968,950 1,689,984
Unamortized discount (55,616) (36,000)
Less current maturities (348,950) (1,413,984)
------------ ------------
Long term portion $ 564,384 $ 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 $64,000 and $168,000 for the six months ended June
30, 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 six months ended June 30, 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 $8,111 and $24,482 for the
six months ended June 30, 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 of
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 and consulting group who facilitated the
completion of the March private placement (Note 11) and provided consulting
services to the Company. 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
investment 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 issued warrants to purchase 166,667 shares of common
stock at $1.00 per share (Note 15).
In February 1998, in connection with completion of the IPO, the Company
issued warrants to purchase 187,500 shares of common stock at $1.00 per share
(Note 15).
In May 1998, in connection with the issuance of certain subordinated notes
payable, the Company issued a warrant to purchase 350,000 shares of common
stock at $0.20 per share if exercised by May 18, 1999 and $0.23 per share if
exercised by May 18, 2000 (Note 3).
10.SALES
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
(unaudited) (unaudited)
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
U.S. $220,024 $343,625 $ 311,935 $ 836,695
Germany 258,033 15,683 64,844 45,724
Japan 46,236 71,925 71,606 189,775
Netherlands 262,490 84,644 298,649 218,740
Other 176,938 459,752 324,586 854,139
-------- -------- ---------- ----------
Total sales $963,721 $975,629 $1,071,620 $2,145,073
======== ======== ========== ==========
</TABLE>
11
<PAGE>
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.
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, 252,372 were forfeited as of June 30, 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 June 30, 1998,
403,186 shares were vested and the balance on the notes receivable was
$211,925. Total stock based compensation expense for the six months ended
June 30, 1998 included in general and administrative expense was $8,582.
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 six 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.
12
<PAGE>
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.
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, 741,621 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 1,033,015 remain outstanding as of June 30, 1998 after
taking into effect the cancellation of 251,086.
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 was 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.
13
<PAGE>
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. The remaining notes totaling $325,000 were retired upon
completion of the IPO.
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
166,667 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.
******
14
<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 June 30, 1998 Compared to Three Months Ended June 30, 1997
- -----------------------------------------------------------------------------
Net Sales: Net sales from operations for the three months ended June 30, 1998
totaled $963,721 compared to $975,629 for the three months ended June 30, 1997.
The decline of $11,908 or 1.2 % can be attributable to (i) product returns of
$44,387 resulting from a special trade-up program with selected distributors
(ii) an 18.3% increase in Datamizer product sales after accounting for returns
and (iii) a 31.8% decline in DirectRoute product sales after accounting for
returns. The Company's more focused marketing and sales activities are expected
to continue to result in improved revenue growth throughout the remainder of
1998.
The gross margins at June 30, 1998 were $275,212 or 28.6% compared to $507,006
or 52.0% at June 30, 1997. Margins before inventory reserve of $300,000 were
favorably impacted by a higher percentage of healthy margin Datamizer products
for the second quarter of 1998 as compared to the same period of the previous
year. Before this inventory reserve, gross margins at June 30, 1998 were
$575,212 or 59.7%, up 7.7% from the comparable period in 1997.
In spite of its ongoing aggressive sales and marketing program initiated at the
end of quarter one 1998 to reduce selected trade-in inventory, the Company's
trade-in program caused imbalances in selected product inventory levels when
compared to the revenue results for quarter two 1998. At the end of the second
quarter of 1998, the results of the ongoing sales program were uncertain.
Accordingly, the Company conservatively established an incremental reserve for
slow moving inventory of $300,000 at June 30, 1998. The Company will monitor
quarterly the effectiveness of the ongoing sales programs designed to reduce
selected product inventory and record the necessary reserve adjustments.
Research and development costs: Research and development expenses were $109,287
for the second quarter of 1998 as compared to $301,295 for the comparable
quarter in 1997. This $192,008 decline reflected reductions primarily in
payroll and related benefits.
Sales and marketing expense: Sales and marketing expenses for the three months
ended June 30, 1998 were $327,319 as compared to $757,381 for the same period
in 1997. This $430,062 decline primarily reflects a reduction in payroll and
benefits of $268,467 and a reduction in advertising and other expenses of
$149,087. Severe cash constraints were an issue for the Company.
General and administrative, engineering and service expenses: General and
administrative expenses for the second quarter of 1998 were $297,618 as compared
to $357,166 in the corresponding period in the prior year. This $59,548 decrease
resulted primarily from a decrease in depreciation of $129,073 offset by an
increase in outside services of $68,825. Engineering expenses increased
15
<PAGE>
$19,480 to $93,519 for the second quarter of 1998 from $74,039 for the
comparable period in 1997. The increase was due mostly to payroll expenses.
Service expenses declined $20,587 to $56,119 for the second quarter of 1998 from
$76,706 for the comparable period in 1997. This decline was attributable mostly
to payroll and related expense reductions.
Net Loss: The Company reported a net loss of $651,421 for the second quarter of
1998 as compared to a net loss of $1,077,707 for the comparable period in 1997.
This declining loss reflects a one time reserve of $300,000 for slow moving
inventory, the transition to compression technology products demonstrated by an
18.3% revenue increase in Datamizer sales offset by a 31.8% decline in
DirectRoute product sales and the favorable impact of significant reductions in
overall operating expenses. Before the inventory reserve, the net loss at June
30, 1998 was $351,421
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
- -------------------------------------------------------------------------
Net Sales: Net sales from operations for the six months ended June 30, 1998
totaled $1,071,620 compared to $2,145,073 for the six months ended June 30,
1997. The decline of $1,073,453 or 50% can be attributable to (i) product
returns of $303,776 resulting from a special trade-up program with selected
distributors (ii) the cash constraints experienced by the Company during the
fourth and first quarters of 1997 and 1998, respectively, contributing to a
significant reduction in sales and marketing activity and (iii) the disruption
associated with changing sales personnel. These issues resulted in the continued
decline in Datamizer product sales after accounting for returns to $937,963 from
$1,288,119 and the decline in DirectRoute product sales after accounting for
returns to $133,657 from $856,954. The Company's more focused marketing and
sales activities are expected to continue to result in improved revenue growth
throughout the remainder of 1998.
Gross margins at June 30, 1998 were $341,594 or 31.9% compared to $1,123,286 or
52.4% at June 30, 1997. Margins were favorably impacted by a higher percentage
of healthy margin Datamizer products in the significantly reduced revenue volume
for the first six months of 1998 as compared to the same period of the previous
year. However, this favorable impact was more than offset by the recognition of
a $300,000 reserve for slow moving inventory. Before this inventory reserve,
gross margins at June 30, 1998 were 641,594 or 59.9%, up 7.5% from the
comparable period in 1997.
Research and development costs: Research and development expenses were $274,145
for the first six months of 1998 as compared to $586,239 for the comparable six
month period in 1997. This $312,094 decline reflected reductions primarily in
payroll and related benefits of $300,288 and new product development of $18,619
due to cash constraints.
Sales and marketing expense: Sales and marketing expenses for the six months to
June 30, 1998 were $612,108 as compared to $1,190,620 for the same period in
1997. This $578,512 decline primarily reflects decreased commissions of $58,176
from declining sales, a decline in advertising and other expenses of $150,181, a
decline in payroll and benefits of $337,103 and a decline in international
activities of $33,052. Severe cash constraints were an issue for the Company.
16
<PAGE>
General and administrative, engineering and service expenses: General and
administrative expenses for the first six months of 1998 were $585,900 as
compared to $912,163 in the corresponding period in the prior year. This net
$326,263 decrease resulted primarily from decreases in depreciation of $131,768
and in general expenses of $280,150, offset by increases in outside services of
$57,784 and payroll and related benefits of $27,871. Engineering expenses
declined $20,712 to $115,593 through June 30, 1998 from $136,305 for the
comparable period in 1997. The decline was due mostly to payroll expense
reductions mandated by cash constraints. Service expenses declined $53,864 to
$114,075 through June 30, 1998 from $167,939 for the comparable period in 1997.
This decline was attributable mostly to payroll and related expense reductions.
Net Loss: The Company reported a net loss of $1,434,575 for the six months ended
June 30, 1998 as compared to a net loss of $2,003,238 for the comparable period
in 1997. During the first six months of 1998, the Company experienced revenue
declines in both its product lines before consideration of $303,776 in returned
products, recorded a one time reserve of $300,000 for slow moving inventories
and was favorably impacted by a significant reduction in its overall operating
expenses.
Liquidity and Capital Resources
- -------------------------------
Symplex incurred losses during the first six months of 1998 although at
considerably lower levels than those experienced during the comparable period in
1997. The Company financed its first six months of 1998 operating losses
principally through the first quarter initial public offering proceeds of
$3,500,000 ($1,295,515 after expenses and repayment of debt at time of
offering), and a second quarter debt financing of $500,000.
Cash utilized in operating activities for the six months ended June 30, 1998 was
$1,302,445 as compared to $1,932,111 in the corresponding period of 1997. Cash
generated by financing activities through June 30, 1998 totaled $1,801,955 as
compared to $1,877,659 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, debt financing of $500,000, offset by reductions in the bank
borrowings of $194,600 and the bridge financing of $1,163,984 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 in quarter one 1998 and
slow accounts receivable collections caused by a high percentage of
international sales with extended terms. The meager quarter one 1998 net
revenue levels make receivable and inventory turnover ratios and variance
analysis calculations relatively meaningless. With a more normal level of
revenue generation in quarter two 1998, the annualized receivable and inventory
turnover ratios are more meaningful. Specifically, the accounts receivable
turnover at quarter two end 1998 was 3.7 times annually or approximately 100
days to collection and the inventory turnover was 1.4 times annually or
approximately 257 days of inventory. Management anticipates that the receivable
and inventory turnover ratios will continue to improve during the second half of
1998.
At June 30, 1998, Symplex had borrowings of $457,500 against its $500,000 line
of credit agreement. In addition, Symplex has outstanding bank debt of $360,000
under a long-term agreement. The term note matures December 31, 1999 and
requires quarterly payments of $10,000
17
<PAGE>
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 two previous occasions waived
these defaults. The Company was not in compliance with certain of the debt and
net worth covenants at June 30, 1998. There can be no assurances that these
covenants will be attainable on an ongoing basis. Such noncompliance gives the
bank the right to exercise its remedies under the loan agreements, including but
not limited to acceleration of repayment and repossession of collateral.
As of June 30, 1998, the Company's principal sources of liquidity were cash of
$509,932 and trade receivables of $717,461. The stockholders' equity at June 30,
1998 totaled $322,151 as compared to a stockholders' deficit of $836,961 at
December 31, 1997. At June 30, 1998, the Company had a working capital surplus
of $613,214 as compared to a working capital deficit of $1,504,285 at December
31, 1997.
The Company has generated operating losses through June 30, 1998, although at a
consistently declining quarterly level. In order to expand its operations to
facilitate expected revenue growth, Symplex expects to seek a significant
capital infusion in late 1998. There can be no assurances that the Company will
seek or 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 by year-end 1998,
its ability to expand operations and generate revenue growth may be adversely
impacted.
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 products 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 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
18
<PAGE>
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 the new
generation of 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 AND USE OF PROCEEDS
(c) The Company sold the following unregistered securities in the three-
month period ended June 30, 1998:
(1) On May 19, 1998, the Company borrowed $500,000 from one accredited
investor. In consideration of the borrowing, the Company issued to the lender a
warrant to purchase 350,000 shares of common stock at an exercise price of $.20
per share in year one and $.23 per share in year two. The warrant expires May
19, 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 5. OTHER INFORMATION
The Securities and Exchange Commission has amended the provisions of
Rule 14a-4 under the Securities Exchange Act of 1934 to provide that the
Company's proxies solicited in connection with its annual meeting of
shareholders, including the 1999 annual meeting, may confer discretionary voting
authority on company management with respect to certain types of shareholder
proposals that may be raised at the annual meeting unless the proposing
shareholder notifies the Company at least 45 days prior to the date of mailing
the prior year's proxy that such proposal will be made at the meeting. The
deadline for such notices in connection with the Company's 1999 annual meeting
of shareholders is March 1, 1999.
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 no reports on Form 8-K during the three months ended
June 30, 1998:
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: August 14, 1998 By: /s/ Gary R. Brock
-----------------
Gary R. Brock
President, Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1998 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)/
4.1 Form of Certificate of Common Stock. /(2)/
4.2 Form of warrant granted to holders of convertible promissory notes
("Note Conversion Warrants")./(3)/
4.3 Form of warrant granted to Canaccord Capital Corporation and C.M.
Oliver & Co. ("Underwriter Warrants")./(3)/
4.4 Form of warrant granted to Opus Capital, LLP ("Opus Services
Warrant")./(3)/
4.5 Form of warrant issued to May 1998 private lender.
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)/
22
<PAGE>
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.
_______________________________
(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 Annual Report on Form 10-KSB
for the year ended December 31, 1997.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 11, 1998.
23
<PAGE>
Exhibit 4.5
THIS WARRANT IS NOT TRANSFERABLE AND WILL BE VOID AND OF NO VALUE UNLESS
EXERCISED WITHIN THE LIMITS HEREIN PROVIDED.
THE COMMON SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT ARE SUBJECT TO A
HOLD PERIOD AND MAY NOT BE ASSIGNED, DEALT IN, PLEDGED, SOLD, TRADED OR
TRANSFERRED UNTIL MAY 18, 1999 WITHOUT THE APPROVAL OF THE VANCOUVER STOCK
EXCHANGE.
SYMPLEX COMMUNICATIONS CORPORATION 1998 WARRANT #1
Warrant To Purchase Common Stock
--------------------------------
This warrant ("Warrant") is issued by SYMPLEX COMMUNICATIONS CORPORATION, a
Delaware corporation (the "Company") to ______ ("Holder") whose address
___________ .
This certifies that, for value received, Holder, is entitled to purchase
from the Company, subject to the provisions of this Warrant, three hundred fifty
thousand (350,000) shares (the "Shares") of the voting, no par, common stock of
the Company (the "Common Stock").
1. EXERCISE PRICE. The exercise price (the "Exercise Price") shall be
--------------
$.20 per share until the first anniversary of the date of issuance of this
Warrant, when the Exercise Price shall be $.23 per share, appropriately adjusted
for any stock splits, stock dividends or other recapitalization transactions.
2. EXERCISE OF WARRANT. Subject to the provisions hereof, this Warrant
-------------------
may be exercised, in whole or in part, at any time on or after the date hereof
and on or before May 18, 2000, by presentation and surrender hereof by the
Holder to the Company at the Company's principal office, along with the Notice
of Exercise Form, attached hereto as Exhibit A, duly executed and accompanied by
payment (by check or wire transfer) to the Company of the Exercise Price (or
applicable portion thereof) for the number of shares of the Common Stock
specified in such form. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver to the Holder a new Warrant evidencing the rights of the Holder to
purchase such additional number of shares of the Common Stock that, when
combined with all shares of the Common Stock previously issued upon any exercise
of this Warrant in part, will equal the number of shares created under this
Warrant.
3. STOCK FULLY PAID; RESERVATION OF SHARES. All shares of the Common
---------------------------------------
Stock which may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issuance thereof. The Company
hereby agrees that there shall be reserved for issuance upon exercise of this
Warrant such number of shares of the Common Stock which will from time to time
be issuable upon the exercise of this Warrant.
<PAGE>
4. PRESERVATION OF RIGHTS OF HOLDER. The Company agrees (a) that it will
--------------------------------
not, by amendment of the Articles of Incorporation or by-laws of the Company, or
through reorganization, consolidation, merger, dissolution or sale of assets, or
by any other voluntary act, avoid or seek to avoid the observance or performance
of any of the covenants, stipulations or conditions to be observed or performed
hereunder by the Company and (b) to promptly take all action as may from time to
time be required in order to permit the Holder to exercise this Warrant and the
Company to duly and effectively issue the Shares upon the exercise hereof.
5. RIGHTS OF STOCKHOLDERS. The Holder of this Warrant shall not be
----------------------
entitled to vote or receive dividends or be deemed the holder of Common Stock or
any other securities of the Company which may at any time be issuable on the
exercise hereof for any purpose solely by reason of the ownership of this
Warrant, nor shall anything contained herein be construed to confer upon the
Holder, as the holder of this Warrant, any of the rights of a stockholder of the
Company or any right to vote fore the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action (whether upon any recapitalization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise), or
to receive dividends of subscription rights or otherwise until this Warrant
shall have been exercised and the Shares issuable upon the exercise hereof shall
have become deliverable, as provided herein.
6. MAINTENANCE OF OFFICE. The Company will maintain an office where this
---------------------
Warrant may be presented or surrendered any where notices and demands to or upon
the Company in respect of this Warrant may be served.
7. REPORTS. So long as this Warrant remains outstanding, the Company
-------
shall deliver to the Holder copies of all financial statements and other
documents and reports delivered to the stockholders of the Company promptly upon
their becoming available.
8. NOTICES. Notices under this Warrant to the Company and to Holder,
-------
shall be provided to the following addresses:
(a) If to the Company at:
Symplex Communications Corporation
35 Research Drive
Ann Arbor, Michigan 48103
Attention:
(b) If to Holder, at the address set forth on the face of this Warrant.
9. GOVERNING LAW. This Warrant shall be governed by, and interpreted in
-------------
accordance with, the laws of the State of Michigan.
10. SPLIT, SUBDIVISION OR A COMBINATION OF SHARES. If the Company, at any
---------------------------------------------
time while this Warrant, or any portion thereof, remains outstanding and
unexpired, shall split, subdivide or combine the Shares into a different number
of Shares, the number of Shares to which purchase rights under this Warrant
shall likewise be split, subdivided or combined and the Exercise Price for such
Shares shall be
<PAGE>
proportionally decreased in the case of a split or subdivision or proportionally
increased in the case of a combination.
11. PIGGYBACK REGISTRATION RIGHTS. Each time the Company shall propose
-----------------------------
the registration under the Securities Act of 1933 (the "Act") of its common
stock, the Company shall give written notice of such proposed registration to
the Holder. The Company shall include in any such registration all of the share
of common stock held by the Holder as a result of the exercise of this Warrant
("Registrable Shares") if Holder, within thirty (30) days after mailing of such
notice, shall request inclusion. The foregoing notwithstanding, if the
underwriter for the Company determines that marketing factors require a
limitation in the number of shares of common stock to be underwritten, the
underwriter may exclude, in whole or in part, the Registrable Shares requested
to be registered. The Company shall so advise the Holder of any such cutback.
All registration expenses incurred in connection with any registration,
qualification or compliance pursuant to this Section, including all expenses
incurred in connection with the preparation and filing of any registration or
qualification statement, all registration, qualification or other filing fees,
printing costs, escrow fees, fees and disbursement of Company's counsel, loose
guide fees and audit and accounting expenses incidental to such registration,
qualification or compliance shall be borne by the Company. All underwriting
discounts or selling commissions relating to the Registrable Shares registered
by the Holder shall be borne by the Holder.
THIS WARRANT IS NOT TRANSFERRABLE AND HAS BEEN EXECUTED AND DELIVERED
PURSUANT TO EXEMPTIONS PROVIDED BY SECTION 4 (2) OF THE SECURITIES ACT OF 1933,
AS AMENDED, AND RULES AND REGULATIONS PROMULGATED THEREUNDER AND EXEMPTIONS FROM
REGISTRATION PROVIDED UNDER STATE LAWS. THE HOLDER OF THE WARRANT MAY NOT SELL,
ASSIGN, DONATE OR TRANSFER TO ANY PERSON ANY COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT UNLESS THE HOLDER FIRST OBTAINS AN OPINION LETTER FROM
LEGAL COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER WILL NOT
VIOLATE THE SECURITIES ACT OF 1933, AS AMENDED, THE RULES AND REGULATIONS
PROMULGATED THEREUNDER, OR ANY APPLICABLE STATE SECURITIES LAWS, OR UNLESS THIS
WARRANT HAS BEEN REGISTERED IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS
AMENDED, ANY APPLICABLE STATE SECURITIES LAWS.
IN WITNESS WHEREOF, this Warrant has been duly executed and delivered as of
this 19th day of May, 1998.
SYMPLEX COMMUNICATIONS CORPORATION
By:_______________________________________________
Its:______________________________________________
3
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
Symplex Communications Corporation
35 Research Drive
Ann Arbor, Michigan 48103
Attention:
1. The undersigned hereby elects to purchase __________ shares of Common
Stock of SYMPLEX COMMUNICATIONS CORPORATION pursuant to the terms of the
attached Warrant, and tenders herewith payment of the Exercise Price with
respect to said shares, together with all applicable transfer taxes, if any.
2. Please issue a stock certificate or certificates representing said
shares in the name of the undersigned or in such other names as is specified
below (and, in the event the attached Warrant is being exercised in part, issue
a new Warrant in the name of the undersigned evidencing the right to purchase
the remaining shares):
-------------------------
(Name)
-------------------------
-------------------------
(Address)
3. The undersigned hereby represents as follows:
(a) Experience. He or she is experienced in evaluating and investing
----------
in companies such as the Company and has the financial resources to bear
the economic risks associated with its investment.
(b) Investment. He or she is acquiring the Shares for investment for
----------
his or her own account, not as a nominee or agent, and not with a view to,
or for resale in connection with, any distribution thereof. The
undersigned understands that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or under any
state or provincial laws by reason of specific exemptions therefrom which
depend upon, among other things, the bona fide nature of the investment
intent and the accordance of such Holder's representations as expressed
herein.
4
<PAGE>
(c) Rule 144. The undersigned acknowledges that the Shares must be
--------
held indefinitely unless subsequently registered under the Securities Act
or applicable state or provincial laws or an exemption from such
registration is available. The undersigned is aware of the provisions of
Rule 144 promulgated under the Securities Act which permits limited resale
of securities purchased in a private placement subject to the satisfaction
of certain conditions.
(d) No Public Market. The undersigned understands that no public
----------------
market now exists for any of the securities issued by the Company and that
a public market may not exist in the future.
(e) Access to Data. The undersigned has had an opportunity to
--------------
discuss the Company's business, management and financial affairs with its
management.
By:___________________________________
______________________________________
(Date)
5
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 509,932
<SECURITIES> 0
<RECEIVABLES> 737,201
<ALLOWANCES> 19,740
<INVENTORY> 811,461
<CURRENT-ASSETS> 2,101,120
<PP&E> 2,312,690
<DEPRECIATION> 2,039,369
<TOTAL-ASSETS> 2,374,441
<CURRENT-LIABILITIES> 1,487,906
<BONDS> 0
0
0
<COMMON> 79,897
<OTHER-SE> 242,254
<TOTAL-LIABILITY-AND-EQUITY> 2,374,441
<SALES> 929,997
<TOTAL-REVENUES> 963,721
<CGS> 688,509
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<INTEREST-EXPENSE> 39,788
<INCOME-PRETAX> (651,421)
<INCOME-TAX> 0
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (651,421)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
