<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 1998
------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the Transition period from ___________________________ to
Commission file number 000-22631
---------
SYMPLEX COMMUNICATIONS CORPORATION
----------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 38-3338110
-------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 Research Drive, Ann Arbor, MI 48103
-----------------------------------------------------
(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 October 28, 1998 is
- ----------------------------------------------------------------------------
7,839,653
- ---------
Transitional Small Business Disclosure Form (check one): [_] Yes [X]No
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
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<S> <C>
ITEM 1. FINANCIAL STATEMENTS.
Balance Sheets at September 30, 1998 (unaudited) and December 31, 1997 3
Statements of Operations for the Three Months Ended September 30, 1998 (unaudited) 4
and 1997 (unaudited) and for the Nine Months Ended September 30, 1998 (unaudited)
and 1997 (unaudited)
Statement of Stockholders' Equity for the Nine Months Ended 5
September 30, 1998 (unaudited)
Statements of Cash Flows for the Nine Months Ended September 30, 1998 (unaudited) 6
and for the Nine Months Ended September 30, 1998 (unaudited)
Notes to Unaudited Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 15
AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION 19
SIGNATURES 19
INDEX TO EXHIBITS 20
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Information
SYMPLEX COMMUNICATIONS CORPORATION
BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Assets 1998 1997
(UNAUDITED)
---------------- ------------
<S> <C> <C>
Currents assets
Cash and cash equivalents $ 179,287 $ 24,554
Trade receivables, less allowance for doubtful accounts of $19,740 1,255,691 988,133
Inventories (Note 2) 693,787 979,232
Prepaid expenses and other current assets 77,475 40,043
----------- -----------
Total current assets 2,206,240 2,031,962
Property and equipment
Machinery and equipment 1,655,616 1,640,121
Office equipment 639,642 640,382
Leasehold improvements 19,590 19,590
----------- -----------
Total 2,314,848 2,300,093
Less accumulated depreciation (2,077,692) (1,964,753)
----------- -----------
Net property and equipment 237,156 335,340
----------- -----------
Deferred offering and financing costs 10,000 571,984
----------- -----------
Total assets $ 2,453,396 $ 2,939,286
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities
Trade payables $ 498,595 $ 1,293,449
Accrued expenses 343,318 328,814
Unearned maintenance revenue 12,429 -
Notes payable - revolving (Note 3) 438,767 500,000
Notes payable - current portion (Note 3) 240,000 250,000
Notes payable - subordinated debt(Note 3) - 1,163,984
Notes payable - other (Note 3) 86,450 -
----------- -----------
Total current liabilities 1,619,559 3,536,247
Notes payable - less current portion (Note 3) 513,653 240,000
----------- -----------
Total liabilities 2,133,212 3,776,247
----------- -----------
Stockholders' equity (deficiency in assets)
Common stock, $.01 par value; 20,000,000 shares authorized and 7,839,653
Shares issued and outstanding (including 318,524 shares held in escrow) at
September 30, 1998 and 4,475,982 shares issued and outstanding at
December 31, 1997 (Notes 4,8,9,11,12,14, and 15) 78,395 44,757
Additional paid-in capital 5,711,604 3,326,600
Unearned compensation expense (472) (25,933)
Additional paid-in capital - warrants 131,616 76,000
Notes receivable - recourse (31,051) (55,818)
Notes receivable - non-recourse (112,285) (188,308)
Retained earnings (accumulated deficit) (5,457,623) (4,014,259)
----------- -----------
Total stockholders' equity (deficiency in assets) 320,184 (836,961)
----------- -----------
Total liabilities and stockholders' equity $ 2,453,396 $ 2,939,286
=========== ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
SYMPLEX COMMUNICATIONS
CORPORATION
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
----------------- ------------------ ------------------- ------------------
(UNAUDITED) (UNAUDITED)
------------------------------------ --------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenue (Note 10)
Manufactured products $1,455,463 $ 738,625 $ 2,464,097 $ 2,780,903
Maintenance contracts and service 25,399 44,573 88,385 147,368
---------- ---------- ----------- -----------
Total net sales and revenues 1,480,862 783,198 2,552,482 2,928,271
Costs and expenses
Cost of products sold 546,943 379,082 1,276,969 1,400,869
Selling and marketing 299,719 634,119 911,827 1,824,739
General and administrative 276,213 313,977 862,113 1,226,140
Research and development 173,146 285,925 447,291 872,164
Engineering 79,310 64,324 194,903 200,629
Service 57,055 72,642 171,130 240,581
---------- ---------- ----------- -----------
Total costs and expenses 1,432,386 1,750,069 3,864,233 5,765,122
---------- ---------- ----------- -----------
Operating income (loss) 48,476 (966,871) (1,311,751) (2,836,851)
Other (expense) income
Interest expense (44,664) (32,185) (127,387) (135,886)
Amortization of discount on notes payable (9,269) - (45,269) (40,000)
Other income (3,332) 3,319 41,043 13,762
---------- ---------- ----------- -----------
Total other income and
expenses (57,265) (28,866) (131,613) (162,124)
---------- ---------- ----------- -----------
Net loss $ (8,789) $ (995,737) $(1,443,364) $(2,998,975)
========== ========== =========== ===========
Loss per basic and diluted common share $ 0.0 $ (0.21) $ (0.20) $ (0.82)
========== ========== =========== ===========
Weighted average common shares outstanding 7,940,803 4,660,007 7,391,223 3,653,312
========== ========== =========== ===========
</TABLE>
See notes to financial statements.
4
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Additional
PAID-IN UNEARNED
NUMBER COMMON CAPITAL COMPENSATION
OF SHARES STOCK WARRANTS EXPENSE
----------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Balance - December 31, 1997 4,475,982 44,757 76,000 (25,933)
Issuance of common stock net of $1,038,225 in offering costs -
initial public offering (Note 14) 3,500,000 35,000
Employee stock purchase plan (Note 12) (206,329) (2,062) 25,461
Underwriter's fee related to initial public offering 70,000 700
Issuance of detachable warrants (Note 3 and 9) 55,616
Net loss
----------- ------------ -------------- -----------------
Balance - September 30, 1998 7,839,653 $78,395 $131,616 (472)
=========== ============ ============== =================
<CAPTION>
ADDITIONAL NOTE NOTE
PAID-IN RECEIVABLE RECEIVABLE
CAPITAL RECOURSE NON-RECOURSE
-------------- --------------- ----------------
<S> <C> <C> <C>
Balance - December 31, 1997 3,326,600 (55,818) (188,308)
Issuance of common stock net of $1,038,225 in offering costs -
initial public offering (Note 14) 2,426,775
Employee stock purchase plan (Note 12) (111,071) 24,767 76,023
Underwriter's fee related to initial public offering 69,300
Issuance of detachable warrants (Note 3 and 9)
Net loss
-------------- --------------- ----------------
Balance - September 30, 1998 $5,711,604 $(31,051) $(112,285)
============== =============== ================
<CAPTION>
RETAINED
EARNINGS
(ACCUMULATED
<S> DEFICIT) TOTAL
Balance - December 31, 1997 --------------- -----------------
<C> <C>
Issuance of common stock net of $1,038,225 in offering costs - (4,014,259) (836,961)
initial public offering (Note 14)
Employee stock purchase plan (Note 12)
Underwriter's fee related to initial public offering 2,461,775
Issuance of detachable warrants (Note 3 and 9) 13,118
Net loss 70,000
55,616
Balance - September 30, 1998 (1,443,364) (1,443,364)
--------------- -----------------
$(5,457,623) $ 320,184
=============== =================
</TABLE>
See notices to financial statements.
5
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Septemer 30,
1998 1997
------------------ -----------------
(UNAUDITED)
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,443,364) $(2,998,975)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Allowance for inventory obsolescence 300,000 -
Depreciation 114,474 128,677
Amortization of discount on notes payable 45,269 40,000
Compensation for termination of SAR plan - 47,779
Compensation recognized for stock options 13,118 110,099
Changes in assets and liabilities that provided (used) cash:
Trade receivables (267,558) (31,423)
Inventories (14,555) 98,076
Prepaid expenses and other current assets (37,432) (7,015)
Deferred offering and financing costs 561,984 (370,836)
Trade payables (794,854) 88,282
Accrued expenses 14,504 (18,178)
Unearned maintenance revenue 12,429 -
----------- -----------
Total adjustments (52,621) 85,461
----------- -----------
Net cash used in operating activities (1,495,985) (2,913,514)
CASH FLOWS USED IN INVESTING ACTIVITIES -
Purchases of property and equipment (16,290) (78,198)
----------- -----------
Net cash used in investing activities (16,290) (78,198)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on line of credit (61,233) -
Borrowings (payments) of notes payable 396,450 100,000
Proceeds (payments) from bridge financing (1,163,984) 1,164,000
Issuance of detachable warrants (36,000) 36,000
Proceeds from issuance of common stock 2,531,775 1,800,364
Payments on capital lease obligations - (1,637)
----------- -----------
Net cash provided by (used in) financing activities 1,667,008 3,098,727
----------- -----------
(DECREASE) INCREASE IN CASH 154,733 $ 107,015
CASH AT BEGINNING OF PERIOD 24,554 320,290
----------- -----------
CASH AT END OF PERIOD $ 179,287 $ 427,305
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the period for interest $ 127,387 $ 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) $ 394,778
=========== ===========
Issuance of common stock as a financing fee $ 70,000 $ 35,000
=========== ===========
</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 with 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
September 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 nine months ended September 30,
1998 and 1997 are not necessarily indicative of the results of the entire
year.
2. INVENTORIES
Inventories as of September 30, 1998 and December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
----------------- -----------------
<S> <C> <C>
Raw materials $ 266,213 $ 304,884
Work-in-process 561,626 266,252
Finished goods 433,434 648,291
---------- ----------
1,261,273 1,219,427
Less reserve for obsolescence (567,486) (240,195)
---------- ----------
Total $ 693,787 $ 979,232
========== ==========
</TABLE>
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 September
30, 1998), secured by all assets of the Company. The Company had borrowings
against this line-of-credit of $438,767 at September 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 quarterly and
monthly interest payments, respectively, 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 September 30, 1998, the term note
balance was $300,000.
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 in compliance with the covenants at September 30,
1998. However, there can be no assurances that these covenants will be
attainable on an ongoing basis. Any 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>
September 30, December 31,
1998 1997
(unaudited)
------------- ------------
<S> <C> <C>
Convertible subordinated notes payable. Interest at the prime rate plus
2% (prime was 8.5% at September 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 September 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 September 30, 1998 and
December 31, 1997, respectively). Secured by all assets of the
Company. 300,000 490,000
Unsecured notes payable. Principal payments of $7,500 per month
plus accrued interest at the rate of 9% per annum. 86,450 -
--------- ----------
Total 886,450 1,689,984
Unamortized discount (46,347) (36,000)
Less current maturities (326,450) (1,413,984)
--------- ----------
Long term portion $ 513,653 $ 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 $93,000 and $221,000 for the nine months ended
September 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 nine months ended September 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 $17,790 and $31,695 for the
nine months ended September 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 September 30, NINE MONTHS ENDED SEPTEMBER30,
1998 1997 1998 1997
(unaudited) (UNAUDITED)
-----------
---------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
U.S. $ 315,000 $ 389,000 $ 627,000 $ 1,226,000
Germany 846,000 90,000 911,000 155,000
Japan 35,000 63,000 107,000 135,000
Netherlands 101,000 113,000 400,000 412,000
Other 184,000 128,000 507,000 1,000,000
----------- ---------- ------------ ------------
Total sales $ 1,481,000 $ 783,000 $ 2,552,000 $ 2,928,000
=========== ========== ============ ============
</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, 380,516 were forfeited as of September 30, 1998
pursuant to the vesting provisions. A total of approximately $46,514 will be
charged to compensation expense over the 18 month vesting period for the
124,039 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 384,316 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 September 30, 1998,
303,709 shares were vested and the balance on the notes receivable was
$143,336. Total stock based compensation expense for the nine months ended
September 30, 1998 included in general and administrative expense was
$12,657.
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 967,111 remain outstanding as of September 30, 1998 after
taking into effect the cancellation of 316,990. In August 1998, the Company
reset the exercise price to $0.31 with regulatory approval for 937,194 of
these options.
During 1998, the Company granted options to purchase 240,833 shares of common
stock at $0.31 per share under the April 1997 Plan. None of these options
have been exercised and remain outstanding as of September 30, 1998.
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
$1,038,000, were approximately $2,462,000. 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 and the
associated warrants expired unexercised as of August 27, 1998.
******
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.
The statements contained in this report, if not historical, are forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, and involve risks and uncertainties that could cause actual results to
differ materially from the financial results described in such forward looking
statements. These risks and uncertainties include, among others, the level and
rate of growth in the Company's operations, the capital requirements of Symplex
and the ability of the Company to achieve earnings per share growth through
internal investment, strategic alliances, joint ventures and other methods. The
success of the Company's business operations is in part dependent on factors
such as the effectiveness of the Company's sales and marketing strategies to
reengage with its Datamizer install base, the appeal of the Company's family of
products, the Company's success at entering into and collaborating with others
to create effective strategic alliances and joint ventures, general competitive
conditions within the telecommunications market and general economic conditions.
Further, any forward looking statements speak only as of the date on which such
statement was made, and the Company undertakes no obligation to update any
forward looking statements to reflect events or circumstances after the date on
which such statements are made or to reflect the occurrence of unanticipated
events. Therefore, forward looking statements should not be relied upon as a
prediction of actual future results.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
- ------------------------------------------------------------------------------
30, 1997
- --------
Net Sales: Net sales for the three months ended September 30, 1998 totaled
$1,480,862 as compared to $783,198 for the same period in 1997. The increase of
$697,664, or 89%, can be attributed to (i) a renewed emphasis on compression
technology products worldwide with Datamizer sales up $894,304, or 221%, (ii) a
decline in worldwide DirectRoute product sales of $196,640, or 52%, (iii) an
increase in European revenue of 261% while North America and the Pacific Rim
experienced revenue declines of 19% and 46%, respectively, and (iv) negligible
sales returns for quarter three 1998.
The gross margins for the three months ended September 30, 1998 were $933,919,
or 63.1%, as compared to $404,116, or 51.6%, for the comparable period in 1997.
This 11.5% increase is attributable to revenue volume increase, healthy margins
on Datamizer products that represented a higher percentage of total quarterly
revenue and negligible sales returns.
Research and development expenses: Research and development expenses for the
three months ended September 30, 1998 were $173,146 compared to $285,925 for the
third quarter of 1997. This $112,779 favorable decline results primarily from
reduced payroll and related benefit expenses.
15
<PAGE>
Sales and marketing expense: Sales and marketing expenses for the three months
ended September 30, 1998 were $299,719 as compared to $634,119 for the
comparable three-month period in 1997. This $334,400 decrease is attributable
primarily to a reduction in payroll and related benefits and marketing costs,
offset by an increase in commission expenses.
General and administrative, engineering and service expenses: General and
administrative expenses for the three months-ended September 30, 1998 were
$276,213 as compared to $313,977 for the similar period in 1997. The $37,764
decline resulted from decreases in the stock option compensation expense, rent
and payroll, offset by an increase in professional fees. Engineering expenses
for the three months ended September 30, 1998 were $79,310 as compared to
$64,324 for the comparable period in 1997. This $14,986 increase resulted
primarily from incremental prototype development expenses. Service expenses for
the three months ended September 30, 1998 were $57,055 as compared to $72,642
for the comparable period in 1997. This $15,587 decline resulted from reduced
payroll and related benefit expenses.
Net Loss: The Company reported a net loss of $8,789 for the three months ended
September 30, 1998 as compared to a net loss of $995,737 for the comparable
period in 1997. The continued decline in the quarterly loss results from double-
digit revenue growth, negligible sales returns, improved product margins from an
increased revenue mix of higher margin Datamizer products and significant
reductions in operating expenses.
Liquidity and Capital Resources
- -------------------------------
From quarter to quarter in 1998 and as compared to the corresponding nine-month
period in 1997, Symplex has experienced a significant decline in losses during
the first nine months of 1998. The Company financed its nine months of 1998
operating losses principally through the first quarter 1998 initial public
offering proceeds of $3,500,000 ($1,295,515 after expenses and repayment of
debt) and a second quarter debt financing of $500,000.
Cash utilized in operating activities for the nine months ended September 30,
1998 was $1,495,985 as compared to $2,913,514 in the corresponding period of
1997. Cash generated by financing activities through September 30, 1998 totaled
$1,667,008 as compared to $3,098,727 in the corresponding period of 1997. The
source of these funds in 1998 was the previously mentioned initial public
offering proceeds of $3,500,000 before expenses, debt financing of $500,000,
offset by payments of bank borrowings of $61,233 and the reduction in bridge
financing of $1,199,984 repaid at the time of the initial public offering.
The Company's cash resources have been adversely impacted by the first quarter
1998 revenue decline but have improved in quarter two and three 1998 as a result
of double-digit revenue growth, operating expense reductions and product margin
improvements. The accounts receivable turnover at September 30, 1998 was 4.2
times annually or approximately 87 days to collection while inventory turnover
was 1.9 times annually or approximately 196 days in inventory. Management
anticipates that the receivable and inventory turnover ratios will continue to
improve in the fourth quarter of 1998.
At September 30, 1998, Symplex had borrowings of $438,767 against its $500,000
line of credit agreement. In addition, Symplex has outstanding bank debt of
$300,000 under a long-term agreement. The term note matures December 31, 1999
and has five remaining quarterly payments
16
<PAGE>
of $60,000 each. Both the term agreement and the line of credit require 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 at least two previous
occasions waived these defaults. The Company has re-negotiated the covenants and
was in compliance as of September 30, 1998. There can be no assurance that
compliance with these covenants will be attainable on an ongoing basis. Any
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 September 30, 1998, the Company's principal sources of liquidity were cash
of $179,287 and trade receivables of $1,255,691. The stockholders' equity at
September 30, 1998 totaled $320,184 as compared to a stockholders' deficit of
$836,961 at December 31, 1997. At September 30, 1998, the Company had a working
capital surplus of $586,681 as compared to a working capital deficit of
$1,504,285 at December 31, 1997.
The Company has generated operating losses through September 30, 1998 at a
consistently declining rate and anticipates that the second-half of 1998 will
generate nominal net income. In order to meet its operational objectives and
performance expectations in 1999, Symplex has entered into an agreement with an
investment banker to undertake a U.S. private placement of 3,000,000 newly
created preferred shares of the Company at a purchase price of U.S. $1.00 per
share. The private placement and the alteration of the Company's current
authorized share capital by creating a class of preferred shares is subject to
existing shareholder and regulatory approvals. A shareholders meeting for that
purpose has been scheduled for early December 1998. The private placement is
expected to be completed by December 31, 1998. In the opinion of management, if
the offering generates net proceeds of at least $2,750,000, the proceeds from
the offering, the existing sources of liquidity and the funds generated from
future operations will be sufficient to meet the Company's short-term projected
working capital and other cash requirements assuming implementation of the
operating objectives and attainment of certain revenue expectations. As the
Company will require additional debt or equity financing to satisfy its long-
term working capital and other cash requirements, Symplex will continually
evaluate the availability and appropriateness of various methods of securing
additional financing. There can be no assurances that the Company will seek or
successfully obtain additional debt or equity financing including the private
placement previously mentioned, 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, accelerate product development and continue to 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
17
<PAGE>
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. The Company continues to assess
the year 2000 compliance of its principal vendors and contractors, and expects
to complete such review by the end of 1998. Of the parties contacted thus far,
all have indicated they are year 2000 compliant. There can be no assurance that
the systems of other companies that interact with the Company will be
sufficiently year 2000 compliant so as to avoid an adverse impact on the
Company's operations, financial condition and results of operations.
18
<PAGE>
PART II - OTHER INFORMATION
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
September 30, 1998.
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: October 28, 1998 By: /s/ Gary R. Brock
-----------------
Gary R. Brock
President, Chief Executive Officer
(Principal Executive Officer)
Date: October 28, 1998 By: /s/ Thomas Radigan
------------------
Thomas Radigan
Chief Financial Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer)
19
<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.(4)
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)
<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.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-
QSB for the quarter ended June 30, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 179,287
<SECURITIES> 0
<RECEIVABLES> 1,275,431
<ALLOWANCES> 19,740
<INVENTORY> 693,787
<CURRENT-ASSETS> 2,206,240
<PP&E> 2,314,848
<DEPRECIATION> 2,077,892
<TOTAL-ASSETS> 2,453,398
<CURRENT-LIABILITIES> 1,619,559
<BONDS> 0
0
0
<COMMON> 78,395
<OTHER-SE> 241,789
<TOTAL-LIABILITY-AND-EQUITY> 2,453,396
<SALES> 1,455,463
<TOTAL-REVENUES> 1,480,862
<CGS> 546,943
<TOTAL-COSTS> 1,432,386
<OTHER-EXPENSES> 12,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,664
<INCOME-PRETAX> (8,789)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,789)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
