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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Symplex Communications Corporation
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
OF SYMPLEX COMMUNICATIONS CORPORATION
TO BE HELD DECEMBER 2, 1998
To the Stockholders of Symplex Communications Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Symplex
Communications Corporation, a Delaware corporation (the "Company"), will be held
on December 2, 1998 at 10:00 a.m., at the Ann Arbor Crowne Plaza, 610 Hilton
Boulevard, Ann Arbor, Michigan for the following purposes:
1. To vote upon a proposal to amend the Company's Certificate of
Incorporation to (i) increase the Company's authorized capital from
20,000,000 shares to 30,000,000 shares; (ii) as a part of such increase
in total authorized capital, increase the number of authorized shares of
Common Stock from 20,000,000 to 24,000,000; and (iii) authorize a class
of 6,000,000 shares of preferred stock.
2. To transact any other business as may properly come before the Special
Meeting or any adjournment thereof.
The close of business on October 28, 1998, has been fixed as the record date for
the determination of holders of Symplex Communications Corporation Common Stock
entitled to notice of, and to vote at, the Special Meeting, and only
shareholders of record at such time will be so entitled to vote.
In order for the proposals listed above to be approved, each proposal must be
approved by the affirmative vote of holders of a majority of shares, voting as a
group.
Whether or not you expect to attend the Special Meeting, holders of Symplex
Communications Corporation Common Stock should complete, date, and sign the
enclosed form of proxy card and mail it promptly in the enclosed envelope.
By Order of the Board of Directors
Thomas Radigan
Secretary of the Corporation
Date: November 3, 1998
PLEASE SIGN AND RETURN THE ENCLOSED FORM OF PROXY PROMPTLY WHETHER OR NOT YOU
INTEND TO BE PRESENT AT THE SPECIAL MEETING. THE GIVING OF A PROXY WILL NOT
AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING.
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SYMPLEX COMMUNICATIONS CORPORATION
35 Research Drive
Ann Arbor, MI 48103
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 2, 1998
SOLICITATION OF PROXIES
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Symplex Communications Corporation, a
Delaware corporation ("Symplex" or the "Company"), for use at a Special Meeting
of Stockholders of the Company to be held on December 2, 1998 at 10:00 a.m. at
the Ann Arbor Crowne Plaza, 610 Hilton Boulevard, Ann Arbor, Michigan and at any
and all adjournments of such meeting.
If the enclosed Proxy Card is properly executed and returned in time to be
voted at the meeting, the shares of Common Stock represented will be voted in
accordance with the instructions contained therein. Executed proxies that
contain no instructions will be voted FOR each of the proposals described
herein. Abstentions (proxies not returned) and broker non-votes will be treated
as stockholders absent from the Special Meeting. The proxies will be tabulated
and votes counted by Pacific Corporate Trust Company. It is anticipated that
this Proxy Statement and the accompanying Proxy Card will be mailed to the
Company's stockholders on or about November 3, 1998.
STOCKHOLDERS WHO EXECUTE PROXIES FOR THE SPECIAL MEETING MAY REVOKE THEIR
PROXIES AT ANY TIME PRIOR TO THEIR EXERCISE BY DELIVERING WRITTEN NOTICE OF
REVOCATION TO THE COMPANY, BY DELIVERING A DULY EXECUTED PROXY CARD BEARING A
LATER DATE, OR BY ATTENDING THE MEETING AND VOTING IN PERSON.
The costs of the meeting, including the costs of preparing and mailing the
Proxy Statement and Proxy, will be borne by the Company. Additionally, the
Company may use the services of its Directors, officers and employees to solicit
proxies, personally or by telephone, but at no additional salary or
compensation. The Company will also request banks, brokers, and others who hold
shares of Common Stock of the Company in nominee names to distribute proxy
soliciting materials to beneficial owners, and will reimburse such banks and
brokers for reasonable out-of-pocket expenses which they may incur in so doing.
OUTSTANDING CAPITAL STOCK
The record date for stockholders entitled to vote at the Special Meeting is
October 28, 1998. At the close of business on that day, there were 7,839,653
shares of $0.01 par value common stock (the "Common Stock") of the Company
outstanding and entitled to vote at the meeting.
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QUORUM AND VOTING
The presence, in person or by proxy, of the holders of a majority of the
outstanding Common Stock is necessary to constitute a quorum for each matter
voted upon at the Special Meeting. In deciding all questions, a holder of
Common Stock is entitled to one vote, in person or by proxy, for each share held
in his or her name on the record date. Abstentions, if any, will be treated as
shares present at the meeting and, as such, will have the effect of a "no" vote
on any proposal. Broker non-votes, if any, will be treated as shares not
present at the meeting and will not be included in vote totals.
ACTION TO BE TAKEN AT THE MEETING
The accompanying proxy, unless the shareholder otherwise specifies in the
proxy, will be voted (A) FOR the proposal to amend the Company's Certificate of
Incorporation to (i) increase the Company's authorized capital from 20,000,000
shares to 30,000,000 shares; (ii) as a part of such increase in total authorized
capital, increase the number of authorized shares of Common Stock from
20,000,000 to 24,000,000; and (iii) authorize a class of 6,000,000 shares of
preferred stock; and (B) at the discretion of the proxy holders, on any other
matter that may properly come before the meeting or any adjournment thereof.
Where shareholders appropriately specify how their proxies are to be voted,
they will be voted accordingly. If any other matter of business is brought
before the meeting or any adjournment thereof, the proxy holders may vote the
proxies at their discretion. The directors do not know of any such other matter
or business.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock, as of October 28, 1998, by
each person known by the Company to own beneficially more than five percent (5%)
of the outstanding Common Stock, the Company's Chief Executive Officer and each
other executive officer whose total compensation for the year ended December 31,
1997 exceeded $100,000, each director of the Company, and all directors and
executive officers as a group. The Company believes that each of such persons
has the sole voting and dispositive power over the shares held by him except as
otherwise indicated in the footnotes and subject to applicable community
property laws.
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS COMMON SHARES PERCENT OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING SHARES
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<S> <C> <C>
Opus Capital, LLP/(1)/ 1,409,999/(2)/ 16.6%
1113 Spruce Street, Ste. 400
Boulder, CO 80302
Opus Capital Fund, LLC/(3)/ 905,000/(4)/ 11.4%
1113 Spruce Street, Ste. 400
Boulder, CO 80302
Gary R. Brock 571,852/(5)/ 7.2%
35 Research Drive
Ann Arbor, MI 48103
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Thomas Radigan 192,773/(6)/ 2.4%
35 Research Drive
Ann Arbor, MI 48103
Thomas R. Mayer 158,833/(7)/ 2.0%
35 Research Drive
Ann Arbor, MI 48103
Patricia Kalmbach 35,000/(8)/ *
35 Research Drive
Ann Arbor, MI 48103
All directors and executive officers as a group 1,007,162/(9)/ 12.2%
(5 persons )
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</TABLE>
*Less than one percent.
(1) The general partners of Opus Capital, LLP are Dieter Heidrich and Daryl
Yurek, 1113 Spruce Street, Boulder, CO 80302.
(2) Includes warrants to purchase 504,999 shares which are currently exercisable
or become exercisable within 60 days. Opus Capital, LLP is the manager of
Opus Capital Fund, LLC (the "Fund"). Includes 771,667 shares owned by the
Fund and warrants held by the Fund to purchase 133,333 shares which are
currently exercisable or become exercisable within 60 days.
(3) The manager of Opus Capital Fund, LLC is Opus Capital LLP.
(4) Includes warrants to purchase 133,333 shares which are currently exercisable
or become exercisable within 60 days.
(5) Includes options to purchase 78,519 shares which are currently exercisable
or become exercisable within 60 days.
(6) Includes options to purchase 78,940 shares which are currently exercisable
or become exercisable within 60 days. Includes warrants to purchase 63,000
shares which are currently exercisable or become exercisable within 60 days.
(7) Includes options to purchase 32,000 shares which are currently exercisable
or become exercisable within 60 days. Includes warrants to purchase 94,333
shares which are currently exercisable or become exercisable within 60 days.
(8) Includes options to purchase 35,000 shares which are currently exercisable
or become exercisable within 60 days.
(9) Includes options and warrants to purchase 430,496 shares which are currently
exercisable or become exercisable within 60 days.
PROPOSAL ONE
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED CAPITAL AND TO AUTHORIZE PREFERRED STOCK
On October 22, 1998, the Company's Board of Directors approved an amendment
to the Company's Certificate of Incorporation (the "Amendment") that would (i)
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increase the Company's authorized capital from 20,000,000 shares to 30,000,000
shares; (ii) as a part of such increase in total authorized capital, increase
the number of authorized shares of Common Stock from 20,000,000 to 24,000,000;
and (iii) authorize a class of 6,000,000 shares of preferred stock ("Preferred
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Stock"). The Amendment, which would replace existing Article IV of the
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Certificate of Incorporation, is included as Exhibit A hereto. To become
effective the Amendment must be approved by holders of a majority of the shares
of Common Stock. The following description of the Amendment is qualified in its
entirety by reference to the Amendment included as Exhibit A hereto.
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The Company's current authorized capital is 20,000,000 shares, all of which
is Common Stock. The Amendment would increase the total authorized capital to
30,000,000 shares, and 24,000,000 of such shares will be Common Stock. The
Certificate of Incorporation does not currently authorize any preferred stock.
The Amendment authorizes a total of 6,000,000 shares of Preferred Stock,
which shares will be without designation. If the Amendment is approved, the
Board of Directors would be empowered, without the necessity of further action
or authorization by the Company's stockholders (unless such action or
authorization is required in a specific case by applicable laws or regulations
or stock exchange rules), to authorize the issuance of the 6,000,000 shares of
undesignated Preferred Stock from time to time in one or more series or classes,
and to fix by resolution the designations, preferences, limitations, and
relative rights of each such shares.
The Company may issue the Preferred Stock for any proper corporate purpose.
Promptly after the Special Meeting, the Company intends to designate up to
3,000,000 shares of Preferred Stock as Series A Preferred Stock ("Series A
Preferred"). The Company has announced its intention to sell 3,000,000 shares
of Series A Preferred at an offering price of $1.00 per share in a private
placement to institutional investors. The Board of Directors expects the Series
A Preferred to be offered with the following rights and preferences:
. Liquidation Rights: The Series A Preferred will have a liquidation
preference per share equal to its purchase price and will rank senior to
shares of Common Stock.
. Conversion Rights of Series A Holders: Holders of Series A Preferred may
convert their shares into shares of Common Stock at any time, with each share
of Series A Preferred convertible into one (1) share of Common Stock. The
election of holders of a majority of the Series A Preferred to convert to
Common Stock will cause all shares of Series A Preferred to be converted to
Common Stock.
. Voting Rights: Each holder of Series A Preferred will be entitled to one
vote for each share of Common Stock into which such Series A Preferred could
be converted on the record date.
. The Series A Preferred will have no dividend preference over the Common
Stock.
When issued, the Preferred Stock (including the Series A Preferred) may
contain anti-dilution provisions that protect the holders of Preferred Stock in
the event the Company later issues securities at prices lower than the purchase
price of the Preferred Stock. If the Preferred Stock contains anti-dilution
protection and the Company sells securities at a price less than that paid for
the Preferred Stock, the anti-dilution provisions would have the effect of
increasing the number of shares of Common Stock into which the Preferred Stock
could be converted. The operation of such provision would increase the
ownership and voting power of the holders of Preferred Stock and would result in
a corresponding decrease in the ownership and voting power of existing
stockholders. The extent of such changes in ownership and voting power , if
they are to occur, cannot be estimated until such time as an anti-dilution
provision, if any, is triggered by an issuance of securities below the purchase
price paid for Preferred Stock. The presence of an anti-dilution provision
could make it more difficult for the Company to sell securities at a time when
the market price for the Common Stock is less than the purchase price paid for
Preferred Stock that contains such anti-dilution protection.
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If the proposed offering is fully subscribed, net proceeds to the Company
will be approximately $2,750,000, which the Company proposes to use for the
following principal purposes:
<TABLE>
<CAPTION>
<S> <C>
Accelerate Completion of New Product Development $ 400,000
New Product Rollout and Incremental Inventory 200,000
Develop Relationships with Manufacturers 50,000
Expand and Strengthen Sales and Marketing Worldwide 850,000
Retire Line of Credit 400,000
Enhance Distributor Relationships 50,000
Working Capital 800,000
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2,750,000
</TABLE>
To the extent the Preferred Stock is eventually issued, the authorization of
the Preferred Stock will have some impact upon the rights of the holders of the
Company's Common Stock, including: (1) dilution of the voting power of the
Common Stock to the extent of the Preferred Stock voting rights; and (2) the
holders of Common Stock not being entitled to share in the Company's assets upon
liquidation until satisfaction of the liquidation preference granted to holders
of the Preferred Stock.
The voting and conversion rights of the Preferred Stock could make future
equity financing, a merger, or an acquisition of the Company more difficult or
more costly. Such an issuance could deter the types of transactions which may be
proposed or could discourage or limit the shareholders' participation in certain
types of transactions that might be proposed (such as a tender offer), whether
or not such transactions were favored by the majority of the shareholders.
The number of shares of authorized Common Stock is being increased to allow
for the eventual conversion of the Preferred Stock and so that there are a
sufficient number of authorized shares available for issuance in future
financings or corporate transactions. Except for the sale of the Series A
Preferred discussed above, the Company does not currently have any specific
plans for such financings or corporate transactions.
VOTE REQUIRED AND BOARD RECOMMENDATION
The affirmative vote of holders of a majority of the Common Stock entitled to
vote at the meeting is required to approve the proposed amendment. If the
amendment is not approved by the shareholders, the Company's Certificate of
Incorporation, which does not authorize the issuance of any Preferred Stock,
will continue in effect.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
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FINANCIAL INFORMATION
TABLE OF CONTENTS
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Page
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Management's Discussion and Analysis........................................ 7
INTERIM FINANCIAL STATEMENTS
Balance Sheet at September 30, 1998 (Unaudited)............................ 12
Statements of Operations for the
Nine Months Ended September 30, 1998 (Unaudited) and 1997 (Unaudited)...... 13
Statement of Stockholders' Equity for the
Nine Months Ended September 30, 1998 (Unaudited).......................... 14
Statements of Cash Flows for the
Nine Months Ended September 30, 1998 (Unaudited) and 1997 (Unaudited)..... 15
Notes to Financial Statements (Unaudited).................................. 16
ANNUAL FINANCIAL STATEMENTS
Independent Auditors' Report of Ehrhardt Keefe Steiner & Hottman PC........ 23
Independent Auditors' Report of Deloitte & Touche LLP...................... 24
Balance Sheets at December 31, 1997 and 1996............................... 25
Statements of Operations for the
Years Ended December 31, 1997 and 1996.................................... 26
Statement of Stockholders' Equity for the
Years Ended December 31, 1997 and 1996.................................... 27
Statements of Cash Flows for the
Years Ended December 31, 1997 and 1996.................................... 28
Notes to Consolidated Financial Statements................................. 29
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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 proxy statement, 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 installed 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
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
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1997
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Net Sales: Net sales for the nine months ended September 30, 1998 totaled
$2,552,000 as compared to $2,928,000for the nine months ended September 30,
1997. The decline of $376,000 or 13% can be attributed to (i) the cash
constraints experienced by the Company during the fourth quarter of 1997 and
first quarter of 1998, contributing to a significant reduction in sales and
marketing activity in these quarters (ii) product returns of $304,000 resulting
from a special trade-up program with selected distributors initiated in the
first quarter of 1998 and (iii) the disruption associated with changing sales
personnel in late 1997. Datamizer product sales, after accounting for returns,
increased to $2,243,000 from $1,692,000. DirectRoute product sales, after
accounting for returns, decreased to $309,000 from $1,236,000. The Company
expects DirectRoute sales to continue to decline until the next generation
product is released, which is expected to occur in the first quarter of 1999.
The Company's more focused marketing and sales activities are expected to
continue to result in revenue growth in the second half of 1998.
Gross margins at September 30, 1998 were $1,276,000 or 50.0% as compared to
$1,527,000 or 52.2% at September 30, 1997. Margins were favorably impacted by a
higher percentage of healthy margin Datamizer products in the reduced revenue
volume for the first nine 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 $300,000 reserve for slow moving inventory. Before this inventory
reserve, gross margins at September 30, 1998 were 1,576,000 or 61.8%, up 9.6%
from the comparable period in 1997.
Research and development costs: Research and development were $447,000 for the
first nine months of 1998 as compared to $872,000 for the comparable nine month
period in 1997. This $425,000 decline reflected reductions primarily in payroll
and related benefit expenses due to cash constraints in the first half of 1998.
Sales and marketing expense: Sales and marketing expenses for the nine months
ended September 30, 1998 were $912,000 as compared to $1,825,000 for same period
in 1997. This $913,000 decline primarily reflects
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decreased commissions of $27,000 from declining sales, a decline in advertising
and other expenses of $301,000, a decline in payroll and benefits of $465,000
and a decline in international activities of $120,000. Cash constraints were an
issue for the Company in the first half of 1998.
General and administrative, engineering and service expenses: General and
administrative expenses for the first nine months of 1998 were $862,000 as
compared to $1,226,000 in the corresponding period in the prior year. This net
$364,000 decrease resulted primarily from decreases in stock option compensation
of $145,000, rent of $97,000 and other general expenses of $122,000. Engineering
expenses declined $6,000 to $195,000 through September 30, 1998 from $201,000
for the comparable period in 1997. The decline was due mostly to payroll expense
reductions mandated by cash constraints. Service expenses declined $70,000 to
$171,000 through September 30, 1998 from $241,000 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 $1,443,000 for the nine months
ended September 30, 1998 as compared to a net loss of $2,999,000 for the
comparable period in 1997. During the first nine months of 1998, the Company
experienced revenue declines before consideration of $304,000 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.
If the proposed private placement is completed as planned and certain revenue
expectations are met, the Company expects that operating activities and related
expenditure levels should return to levels similar to those in 1997.
Fiscal years ended December 31, 1997 and 1996
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For the year ended December 31, 1997, Symplex incurred a loss from operations of
$3,457,000, and, after other income of $18,000, amortization expense of discount
on notes payable of $40,000 and interest expense of $209,000, a net loss of
$3,688,000 as compared to the year ended December 31, 1996 loss from operations
of $3,504,000, and, after other income of $8,000 and interest expense of
$149,000, a net loss of $3,645,000.
Sales: Symplex recorded total sales in the year ended December 31, 1997 of
$3,938,000, of which $2,495,000 was generated by Datamizer and $1,443,000 by
DirectRoute. The comparable amounts in the year ended December 31, 1996 were
$6,081,000, $4,022,000 and $2,059,000. 63% and 61% of total sales in the years
ended December 31, 1997 and 1996, respectively, were generated outside the
United States with Japanese sales representing approximately $311,000 in the
1997 period and $905,000 in 1996. European product sales were approximately
$1,650,000 in the year ended December 31, 1997 and $1,851,000 in comparable
period of 1996. Datamizer revenue includes sales of maintenance contracts and
service generated.
Gross margins at December 31, 1997 were approximately $2,037,000 or 51.7%
compared to approximately $2,953,000 or 48.6% at December 31, 1996. Margins in
1997 were adversely impacted by cost overruns resulting from declining volumes
and higher component costs and from competitive price pressure in selected
markets. Additionally, in the last three months of 1997, sales volume included
a significantly higher percentage of higher-margin Datamizer products. In the
fourth quarter of 1997, higher margins were achieved from shipments of Datamizer
V, resulting in overall improvement in 1997 annual margins over comparables for
1996. The Company's sales emphasis on data compression products should continue
to improve overall margin performance.
Research and development costs: Research and development expenses were
approximately $1,086,000 in the year ended December 31, 1997 as compared to
$1,322,000 in the year ended December 31, 1996. This reflected a declining
investment in both payroll expenses of $146,000, depreciation and other expenses
of
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$23,000 and in new product development of $90,000, offset by an increase in
outside research expenses of $23,000 due to cash constraints.
Sales and marketing expenses: Sales and marketing costs in the year ended
December 31, 1997 were approximately $2,250,000, compared to $2,522,000 in 1996,
reflecting decreased commissions of $270,000 and payroll and benefits of
$88,000, offset by an increase in advertising and other expenses of $26,000 and
in international activities of $60,000 resulting from severe cash constraints.
General and administrative, engineering and service expenses: General and
administrative expenses for the year ended December 31, 1997 were $1,604,000 as
compared to approximately $1,834,000 in the corresponding period in the prior
year. This decrease resulted primarily from a reduction in payroll and related
expenses of $272,000, depreciation expense of $6,000 and outside services of
$35,000, offset by a net increase in general expenses of $83,000, mostly
attributable to the $225,000 cost of terminating the Stock Appreciation Rights
Plan and amortizing the compensation expense related to an Employee Share
Purchase Option Plan which has since been terminated. During 1997 the Company
consolidated its space requirements resulting in a reduction of its leased space
by 17,000 square feet and a corresponding reduction in its monthly rental
expense of approximately $17,000. It is expected that long-term leasing
arrangements will be settled in the first half of 1998. Engineering expenses
declined to approximately $246,000, and service costs to $308,000 in the year
ended December 31, 1997 compared to $394,000 and $385,000, respectively, in
1996. In both instances the decline was due to operating and payroll expense
reductions mandated by cash constraints.
Other Income/Expense: Interest expense in the year ended December 31, 1997
increased to approximately $209,000 from approximately $149,000 in the year
ended December 31, 1996 due to the full utilization by the end of the third
quarter of 1996 of the $1,000,000 bank line of credit and the incremental costs
associated with the restructuring of this debt.
Liquidity and Capital Resources
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Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1997
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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
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<PAGE>
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 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 modest 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 shareholders 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.
Fiscal Years Ended December 31, 1997 and 1996
- ---------------------------------------------
The Company financed its 1997 operating losses principally through the proceeds
of $1,867,635 (before expenses) of a private placement, a second cash infusion
of $100,000 from a private investment group and $1,200,000 in bridge loan
financing (before expenses) from insiders and unrelated parties. The proceeds
of the bridge loan financing were used to finance operating losses generated in
the third and fourth quarters of 1997. In addition, liabilities aggregating
$991,500 were converted into equity.
-10-
<PAGE>
In the four years ended December 31, 1997 Symplex incurred losses and financed
its operations principally through accumulated retained earnings not distributed
to its stockholders, an advance from an outside lender and a bank line of
credit.
Cash utilized in operating activities in the year ended December 31, 1997
amounted to $3,300,000 compared to $1,279,000 in 1996.
Cash utilized by investing activities in the year ended December 31, 1997 was
$95,000 as compared to $38,000 in 1996. Cash generated by financing activities
in the year ended December 31, 1997 amounted to $3,099,000 compared to
$1,543,000 in 1996. As discussed in the opening paragraph in this Liquidity and
Capital Resources section, 1997 operations were financed by a private placement,
short-term borrowing and a bridge loan financing. In 1996 the Company's major
borrowings included notes payable to a stockholder and an investor totaling
$550,000 and a fully utilized $1,000,000 secured bank line of credit. In 1995,
Symplex had no bank debt and was principally funded from accumulated retained
earnings previously undistributed to stockholders.
At December 31, 1997 the Company's principal sources of liquidity were cash of
$25,000 and trade receivables of $988,000. The deficit in assets at that date
amounted to $837,000. As of December 31, 1996, Symplex's principal sources of
liquidity represented cash of $320,000 and trade receivables of $529,000. The
deficit in assets at that date was $247,000. At December 31, 1997 Symplex had a
working capital deficit of $1,504,000.
In 1997, the Company continued to experience significant sales declines and
operating losses. The Company expects to seek a significant capital infusion in
1998, likely in the second or third quarter, in order to fund its ongoing
operations. There can be no assurance that the Company will successfully obtain
additional debt or equity financing, or that such financing would not result in
substantial dilution of current shareholders. If the Company is not able to
raise sufficient additional capital in 1998, it will not be able to continue in
its current form and will be required to undergo significant downsizing or
restructuring. Such a downsizing or restructuring could have a material adverse
effect on the Company's revenue, operating results and stock price.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of certain computer programs being written
using two digits rather than four to indicate the applicable year. As a result,
computer programs with date-sensitive software may incorrectly recognize a date
using "00" as the year 1900 rather than the year 2000. Such an error could
result in a system failure or miscalculations resulting in disruptions of
operations, including a temporary inability to process normal business
transactions.
The Company has recently examined its 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.
The Company continues to assess the year 2000 compliance of its 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.
-11-
<PAGE>
<TABLE>
<CAPTION>
SYMPLEX COMMUNICATIONS CORPORATION
BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------
September 30,
1998
ASSETS (UNAUDITED)
-------------
<S> <C>
Currents assets
Cash and cash equivalents $ 179,287
Trade receivables, less allowance for doubtful accounts of $19,740 1,255,691
Inventories (Note 2) 693,787
Prepaid expenses and other current assets 77,475
-----------
Total current assets 2,206,240
Property and equipment
Machinery and equipment 1,655,616
Office equipment 639,642
Leasehold improvements 19,590
-----------
Total 2,314,848
Less accumulated depreciation (2,077,692)
-----------
Net property and equipment 237,156
-----------
Deferred offering and financing costs 10,000
-----------
Total assets $ 2,453,396
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade payables $ 498,595
Accrued expenses 343,318
Unearned maintenance revenue 12,429
Notes payable - revolving (Note 3) 438,767
Notes payable - current portion (Note 3) 240,000
Notes payable - subordinated debt (Note 3) -
Notes payable - other (Note 3) 86,450
-----------
Total current liabilities 1,619,559
Notes payable - less current portion (Note 3) 513,653
-----------
Total liabilities 2,133,212
-----------
Stockholders' equity
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 (Notes 4,8,9,11,12,14 and 15) 78,395
Additional paid-in capital 5,711,604
Unearned compensation expense (472)
Additional paid-in capital - warrants 131,616
Notes receivable - recourse (31,051)
Notes receivable - non-recourse (112,285)
Retained earnings (accumulated deficit) (5,457,623)
-----------
Total stockholders' equity 320,184
-----------
Total liabilities and stockholders' equity $ 2,453,396
===========
</TABLE>
See notes to financial statements.
-12-
<PAGE>
<TABLE>
<CAPTION>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
1998 1997
=========== ===========
(unaudited)
------------------------------------
<S> <C> <C>
Net sales and revenue (Note 10)
Manufactured products $ 2,464,097 $ 2,780,903
Maintenance contracts and service 88,385 147,368
----------- -----------
Total net sales and revenues 2,552,482 2,928,271
Costs and expenses
Cost of products sold 1,276,969 1,400,869
Selling and marketing 911,827 1,824,739
General and administrative 862,113 1,226,140
Research and development 447,291 872,164
Engineering 194,903 200,629
Service 171,130 240,581
----------- -----------
Total costs and expenses 3,864,233 5,765,122
----------- -----------
Operating (loss) (1,311,751) (2,836,851)
Other (expense) income
Interest expense (127,387) (135,886)
Amortization of discount on notes payable (45,269) (40,000)
Other income 41,043 13,762
----------- -----------
Total other income and expenses (131,613) (162,124)
----------- -----------
Net loss $(1,443,364) $(2,998,975)
=========== ===========
Loss per basic and diluted common share $ (0.20) $ (0.82)
=========== ===========
Weighted average common shares outstanding 7,391,223 3,653,312
=========== ===========
</TABLE>
See notes to financial statements.
-13-
<PAGE>
<TABLE>
<CAPTION>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
PAID-IN UNEARNED ADDITIONAL
NUMBER COMMON CAPITAL COMPENSATION PAID-IN
OF SHARES STOCK WARRANTS EXPENSE CAPITAL
---------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1997 4,475,982 44,757 76,000 (25,933) 3,326,600
Issuance of common stock net of
$1,038,225 in offering costs -
initial public offering (Note 14) 3,500,000 35,000 2,426,775
Employee stock purchase plan (Note 12) (206,329) (2,062) 25,461 (111,071)
Underwriter's fee related to initial public offering 70,000 700 69,300
Issuance of detachable warrants (Note 3 and 9) 55,616
Net loss
---------- -------- ---------- ------------ -----------
Balance - September 30, 1998 7,839,653 $ 78,395 $ 131,616 (472) $ 5,711,604
========== ======== ========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
RETAINED
NOTE NOTE EARNINGS
RECEIVABLE RECEIVABLE (ACCUMULATED
RECOURSE NON-RECOURSE DEFICIT) TOTAL
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1997 (55,818) (188,308) (4,014,259) (836,961)
Issuance of common stock net of
$1,038,225 in offering costs -
initial public offering (Note 14) 2,461,775
Employee stock purchase plan (Note 12) 24,767 76,023 13,118
Underwriter's fee related to initial public offering 70,000
Issuance of detachable warrants (Note 3 and 9) 55,616
Net loss (1,443,364) (1,443,364)
----------- ------------ ------------ -----------
Balance - September 30, 1998 $ (31,051) $ (112,285) $ (5,457,623) $ 320,184
=========== ============ ============ ===========
</TABLE>
See notes to financial statements.
-14-
<PAGE>
<TABLE>
<CAPTION>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 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 (1,199,984) 1,164,000
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.
-15-
<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 consist of the following:
SEPTEMBER 30,
1998
(UNAUDITED)
----------
Raw materials $ 266,213
Work-in-process 561,626
Finished goods 433,434
----------
1,261,273
Less reserve for obsolescence (567,486)
----------
Total $ 693,787
----------
-16-
<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.
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.
-17-
<PAGE>
NOTES PAYABLE - CONTINUED
Notes payable consisted of the following:
<TABLE>
<CAPTION>
September 30,
1998
(unaudited)
------------
<S> <C>
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). Secured by all assets of the Company 300,000
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
Unamortized discount (46,347)
Less current maturities (326,450)
---------
Long term portion $ 513,653
---------
</TABLE>
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.
-18-
<PAGE>
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.
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 1997 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.
-19-
<PAGE>
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
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
(UNAUDITED)
-----------
------------------------------
U.S. $ 627,000 $1,226,000
Germany 911,000 155,000
Japan 107,000 135,000
Netherlands 400,000 412,000
Other 507,000 1,000,000
---------- ----------
Total sales $2,552,000 $2,928,000
========== ==========
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.
-20-
<PAGE>
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, 420,276 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,
252,432 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.
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, 700,694 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.
-21-
<PAGE>
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.
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.
******
-22-
<PAGE>
Ehrhardt
EKS&H Keefe
----- Steiner &
Hottman PC
Certified Public Accountants
and Consultants
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Symplex Communications Corporation
Ann Arbor, Michigan
We have audited the accompanying balance sheet of Symplex Communications
Corporation as of December 31, 1997, and the related statement of operations,
stockholders' equity (deficiency in assets), and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly, in
all material respects, the financial position of Symplex Communications
Corporation as of December31, 1997 and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has a deficit in stockholders' equity of
$836,961 at December 31, 1997 and a net loss of $3,687,864 for the year then
ended. These conditions raise substantial doubt about its ability to continue
as a going concern. Management's plans regarding those matters also are
described in Note 14. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As disclosed in Note 1 to the financial statements, the Company changed its
method of computing earnings per share.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
March 25, 1998
Denver, Colorado
-23-
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Symplex Communications Corporation
Ann Arbor, Michigan
We have audited the accompanying balance sheet of Symplex Communications
Corporation (the "Company") as of December 31, 1996, and the related statements
of operations, stockholders' equity (deficiency in assets) and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
We have not audited any financial statements of the Company for any period
subsequent to December 31,1996. However, as discussed in Note 14, the Company
has continued to incur substantial losses in 1997 and had a working capital
deficiency of approximately $983,000 as of September 30, 1997. This matter
raises substantial doubt about its ability to continue as a going concern.
Management plans in regard to these matters are also described in Note 14. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
May 1, 1997 (December 19, 1997 as to Note 1, Earnings (Loss) Per Common Share,
paragraph 2, Note 3, paragraphs 4, 5 and 8; Note 7, paragraph 3, Note 8,
paragraph 4, Note 12, paragraphs 2 and 6, Note 14.)
-24-
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 24,554 $ 320,290
Trade receivables, less allowance for doubtful accounts of $19,740
(1997) and $30,000 (1996) 988,133 529,180
Inventories 979,232 1,312,734
Prepaid expenses and other current assets 40,043 48,710
------------ ------------
Total current assets 2,031,962 2,210,914
------------ ------------
Property and equipment
Machinery and equipment 1,640,121 2,692,465
Office equipment 640,382 1,017,118
Leasehold improvements 19,590 188,853
------------ ------------
2,300,093 3,898,436
Less accumulated depreciation (1,964,753) (3,535,910)
------------ ------------
Net property and equipment 335,340 362,526
------------ ------------
Deferred offering and financing costs 571,984 49,464
------------ ------------
$2,939,286 $2,622,904
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities
Trade payables $1,293,449 $ 782,749
Accrued expenses (Note 5) 328,814 575,763
Notes payable - revolving (Note 3) 500,000 500,000
Notes payable - current portion (Note 3) 250,000 20,000
Notes payable - subordinated debt (Note 3) 1,163,984 510,000
Current portion of capital lease obligations - 1,637
------------ ------------
Total current liabilities 3,536,247 2,390,149
Notes payable - less current portion (Note 3) 240,000 480,000
------------ ------------
Total liabilities 3,776,247 2,870,149
------------ ------------
Commitments and contingency (Notes 3, 5, 13 and 15)
Stockholders' equity (deficiency in assets)
Common stock, $.01 par value; 20,000,000 shares
authorized and 4,475,982 shares issued, and
outstanding (including 542,501 shares held in escrow) at
(1997) and 608,753 shares issued and outstanding at (1996) 67,841 39,150
Additional paid-in capital 3,303,516 -
Unearned compensation expense (25,933) -
Additional paid-in capital - warrants 76,000 40,000
Notes receivable - recourse (55,818) -
Notes receivable - non recourse (188,308) -
Accumulated deficit (4,014,259) (326,395)
------------ ------------
Total stockholders' equity (deficiency in assets) (836,961) (247,245)
------------ ------------
Total liabilities and stockholders' equity $2,939,286 $ 2,622,904
============ ============
</TABLE>
See notes on financial statements.
-25-
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
Net sales and revenues (Note 10)
Manufactured products $ 3,761,185 $ 5,893,325
Maintenance contracts and service 176,378 187,800
--------------- --------------
Total net sales and revenues 3,937,563 6,081,125
Costs and expenses
Cost of products sold 1,900,625 3,127,809
Selling and marketing 2,250,216 2,522,327
General and administrative (Notes 6 and 12) 1,604,010 1,834,230
Research and development 1,085,973 1,321,709
Engineering 245,713 393,915
Service 308,389 384,684
--------------- --------------
Total costs and expenses 7,394,926 9,584,674
--------------- --------------
Operating (loss) income (3,457,363) (3,503,549)
Other (expense) income
Interest expense (208,682) (148,913)
Amortization of discount on notes payable (40,000) -
Other income 18,181 7,825
--------------- --------------
Total other expense and income (230,501) (141,088)
--------------- --------------
Net loss $(3,687,864) $(3,644,637)
=============== ==============
Loss per basic and diluted common share (Note 1) $ (.55) $ (.54)
=============== ==============
Weighted average common shares outstanding 6,699,747 6,699,747
=============== ==============
</TABLE>
See notes to consolidated financial statements
-26-
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Paid-in Unearned Additional
Number of Common Capital Compensation Paid-in
Shares Stock Warrants Expense Capital
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 608,753 $ 39,150 $ - $ - $ -
Issuance of detachable warrants - - 40,000 - -
Net loss - - - - -
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 608,753 39,150 40,000 - -
Statutory merger with wholly
owned subsidiary (Note 7) - (33,062) - - 33,062
Issuance of common stock, net of
$121,590 costs private placement
(Note 11) 2,263,802 22,638 - - 1,723,407
Conversion of notes payable to
common stock (Note 3) 787,879 7,879 - - 642,121
Conversion of accrued liabilities to
common stock (Note 5) 113,833 1,138 - - 340,362
Issuance of common stock - SAR plan
termination (Note 6) 57,916 576 - - 47,203
Issuance of common stock - key
employee plan (Note 12) 77,965 780 - - 63,540
Issuance of common stock - employee
stock purchase plan - (Note 12) 738,800 7,388 - (277,050) 602,122
Amounts paid on notes receivable
issued under key employee stock plan
(Note 12) - - - - -
Compensation expense recognized on
stock issued with stock option
(Note 12) - - - 177,505 -
Warrants issued with bridge financing
(Note 3) - - 36,000 - -
Financing fee shares (Note 3) 23,333 233 - - 34,767
Employee stock purchase plan -
surrendered shares (Note 12) (196,299) (1,963) - 73,612 (159,984)
Net loss - - - - -
---------- ---------- ---------- ---------- ----------
Balance - December 31, 1997 4,475,982 $ 44,757 $ 76,000 $ (25,933) $3,326,600
========== ========== ========== ========== ==========
<CAPTION>
Retained
Note Note Earnings
Receivable Receivable (Accumulated
Recourse Nonrecourse Deficit) Total
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ - $ - $ 3,318,242 $ 3,357,392
Issuance of detachable warrants - - - 40,000
Net loss - - (3,644,637) (3,644,637)
---------- ---------- ----------- -----------
Balance, December 31, 1996 - - (326,395) (247,245)
Statutory merger with wholly
owned subsidiary (Note 7) - - - -
Issuance of common stock, net of
$121,590 costs - private placement
(Note 11) - - - 1,746,045
Conversion of notes payable to
common stock (Note 3) - - - 650,000
Conversion of accrued liabilities to
common stock (Note 5) - - - 341,500
Issuance of common stock - SAR plan
termination (Note 6) - - - 47,449
Issuance of common stock - key
employee plan (Note 12) (62,319) - - 2,001
Issuance of common stock - employee
stock purchase plan - (Note 12) (84,450) (248,010) - -
Amounts paid on notes receivable
issued under key employee stock plan
(Note 12) 62,318 - - 62,318
Compensation expense recognized on
stock issued with stock option
(Note 12) - - - 177,505
Warrants issued with bridge financing
(Note 3) - - - 36,000
Financing fee shares (Note 3) - - - 35,000
Employee stock purchase plan -
surrendered shares (Note 12) 28,633 59,702 - -
Net loss - - (3,687,864) (3,687,864)
---------- ---------- ----------- -----------
Balance - December 31, 1997 $ (55,818) $ (188,308) $(4,014,259) $ (836,961)
========== ========== =========== ===========
</TABLE>
See notes on financial statements.
-27-
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(3,687,864) $(3,644,637)
--------------- ---------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities -
Allowance for doubtful accounts (10,260) -
Allowance for inventory obsolescence 67,916 641,637
Depreciation 188,033 234,296
Loss of disposal of assets 11,577 -
Amortization of discount on notes payable 40,000 -
Stock related compensation 260,284 -
Changes in assets and liabilities
Trade receivables (448,693) 1,122,805
Inventories 187,809 112,054
Prepaid expenses and other current assets 8,667 (30,177)
Trade payables 510,700 152,810
Accrued expenses 94,551 132,462
--------------- ---------------
910,584 2,365,887
--------------- ---------------
Net cash used in operating activities (2,777,280) (1,278,750)
--------------- ---------------
Cash flows from investing activities
Purchases of property and equipment (102,763) (37,833)
Proceeds from sales of equipment 8,116 -
--------------- ---------------
Net cash used in investing activities (94,647) (37,833)
--------------- ---------------
Cash flows from financing activities
Borrowings on line-of-credit - 1,000,000
Borrowings of notes payable 100,000 510,000
Payments of notes payable (10,000) -
Proceeds from bridge financing 1,163,984 -
Deferred offering and financing costs (522,520) -
Issuance of detachable warrants 36,000 40,000
Proceeds from issuance of common stock 1,810,364 -
Payments on capital lease obligations (1,637) (6,548)
--------------- ---------------
Net cash provided by financing activities 2,576,191 1,543,452
--------------- ---------------
Net (decrease) increase in cash (295,736) 226,869
Cash - beginning of year 320,290 93,421
--------------- ---------------
Cash - end of year $ 24,554 $ 320,290
=============== ===============
</TABLE>
Supplemental disclosure of cash flow information
Cash paid during the period for interest was $142,500 and $139,580 for
December 31, 1997 and 1996, respectively.
Schedule of non-cash financing and investing activities:
For the year ended December 31, 1997, the Company had the following non-
cash financing and investing transactions: conversion of $77,777 of
inventory to equipment; stock issued upon conversion of notes payable of
$650,000; stock issued upon conversion of accrued liabilities of $341,500;
stock issued for notes receivable and unearned compensation of $509,882.
-28-
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
Symplex Communications Corporation (the Company) designs, manufactures and sells
specialized data communications equipment primarily used to create computer
networks and send information electronically. The Company's primary markets are
North America and Europe.
The financial statements have been prepared on a basis consistent with
accounting principles generally accepted in the United States.
Reorganization
- --------------
On February 28, 1997, the Company merged with a wholly owned subsidiary which
had no assets (Note 7). The transaction was accounted for as a pooling-of-
interest.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents includes all cash balances and highly liquid
investments with an original maturity of three months or less.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful life of the asset. The estimated
service lives used to compute depreciation are five years for equipment and the
shorter of the useful life or the lease term for leasehold improvements.
Research and Development
- ------------------------
Research and development costs related to new data communications products are
expensed as incurred. Total research and development costs of approximately
$1,086,000 and $1,322,000 for December 31, 1997 and 1996 were expensed to
operations, respectively.
Deferred Offering Costs
- -----------------------
Deferred offering costs relate to equity offerings not yet completed (Note 15)
and are capitalized until completion of the transaction. Once the transactions
are complete, the costs are netted against any proceeds and reclassified to
additional paid-in-capital.
Revenue Recognition
- -------------------
Revenue is recognized as product is shipped or delivered.
-29-
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
(CONTINUED)
- -----------
Advertising
- -----------
The Company expenses advertising costs as incurred.
Product Warranty Costs
- ----------------------
Sales agreements provide for necessary warranty service for one year on new
installations. The estimated future costs of warranty service for products sold
as of December 31, 1997 and 1996 is included in accrued expenses.
Stock-Based Compensation
- ------------------------
The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options in the accompanying statements
of operations is measured as the excess, if any, of the fair market value of the
Company's stock at the measurement date over the amount the employee must pay to
acquire the stock.
Income Taxes
- ------------
The Company recognizes deferred tax liabilities and assets based on differences
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requirements management to make estimates and assumptions
that affect the reported amounts of asset and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain items in the 1996 financial statements have been reclassified to conform
with the 1997 presentation.
-30-
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
(CONTINUED)
Earnings (Loss) Per Common Share
- --------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, ("SFAS 128") which requires the presentation of basic
and diluted earnings per share on the face of the income statement for entities
with a complex capital structure. Basic earnings per share is calculated by
dividing net income attributable to common shareholders by the weighted average
number of common shares outstanding. Dilutive earnings per share is computed
similarly, but also gives effect to the impact dilutive potential common shares,
such as convertible debt, stock options and warrants, if dilutive, would have on
net income and average common shares outstanding if converted at the beginning
of the year. SFAS 128 also requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of diluted earnings per share computation. The Company implemented
SFAS 128 effective with its December 31, 1997, financial statements. The
Company has incurred losses in each of the periods covered in these financial
statements, thereby making the inclusion of dilutive potential common shares in
the 1997 and 1996 dilutive earnings per share computations antidilutive.
Accordingly, all dilutive potential common shares have been excluded from the
fully diluted earnings per share amounts and basic and dilutive earnings per
share are the same for each period presented.
However, according to Securities and Exchange Commission Staff Accounting
Bulletin 83, common stock and common stock equivalents issued during the twelve
months immediately preceding an initial public offering are included in this
calculation as if they were outstanding for all periods presented. Under this
guidance, earnings (loss) per share is calculated without regard to
antidulution. The following common stock and common stock equivalents have been
included in the number of common shares outstanding as if issued for all periods
presented (Note 15).
Common stock issued under private placement (Note 11) 2,263,802
Conversion of notes payable (Note 3) 787,879
Common stock exchanged for SAR Plan termination (Note6) 57,916
Conversion of stockholders' liability (Note 5) 113,833
Common stock issued under key employee plan (Note 12) 77,965
Common stock issued under employee purchase plan (Note12) 542,501
Warrants issued with convertible debt (Note 8) 216,666
Warrants issued to private investment group (Note 8) 466,667
Common stock issued to underwriter (Note 3) 23,333
Issuance of options under employee share purchase plan
(Note 12) 1,140,432
Warrants issued in connection with bridge loan financing
(Notes 3 and 8) 400,000
---------
6,090,994
---------
-31-
<PAGE>
NOTE 2 - INVENTORIES
- --------------------
Inventories consist of the following:
December 31,
---------------------------
1997 1996
----------- ----------
Raw Materials $ 304,884 371,244
Work-in-process 266,252 706,472
Finished goods 648,291 1,010,907
---------- ----------
1,219,427 2,088,623
Less reserve for obsolescense (240,195) (775,889)
---------- ----------
$ 979,232 $1,312,734
---------- ----------
NOTE 3 - NOTES PAYABLE
- ----------------------
The Company has a line-of-credit agreement which provides for borrowings up to
$1,000,000 at 2% above the bank's prime rate (prime was 8.5% at December 31,
1997), secured by all assets of the Company. The Company had borrowings against
this line-of-credit of $500,000 and $1,000,000 at December 31, 1997 and 1996,
respectively.
The agreement for the line-of-credit contains restrictive covenants, the most
significant of which require the Company to 1) maintain certain levels of net
worth, as defined; 2) maintain certain levels of working capital; and 3)
maintain a certain level of total liabilities to net worth.
In March 1997, the Company restructured its bank line-of-credit agreement.
Under the new agreement, $500,000 of the December 31, 1996 balance was converted
to a term note payable, with $500,000 remaining as the amount available under
the line-of-credit. The term note matures December 1, 1999 and requires
quarterly principal payments, beginning September 15, 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 (prime was 8.5% at December 31, 1997). Both
agreements are secured by all assets of the Company and contain restrictive
covenants.
-32-
<PAGE>
NOTE 3 - NOTES PAYABLE (CONTINUED)
- ----------------------------------
Effective November 4, 1997, the bank reset the current ratio and net worth
covenants to be effective March 31, 1998. These can be no assurances that these
covenants will be attainable on an ongoing basis (Note 14).
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ----------
<S> <C> <C>
Convertible subordinated notes payable. Interest at the prime rate plus 2% $ 699,984 $ -
(prime was 8.5% at December 31, 1997); due August 29, 1998; convertible within
seven days of the filing of a final prospectus into 700,000 shares of common
stock and warrants to purchase 350,000 shares at $1.00 per share. If the
Canadian public offering has not closed by August 29, 1998, the noteholders
will be entitled to receive additional warrants to purchase up to 350,000
shares at $1.00 per share (Note 15).
500,000 -
Subordinated notes payable with detachable warrants. Interest at the prime
rate plus 2% (prime was 8.5% at December 31, 1997); due within 15 days of the
completion of a Canadian public offering but no later than August 27, 1998.
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 8 and
15).
Term notes payable. Payments of $60,000 quarterly including interest at prime 490,000 -
rate plus 2% (prime was 8.5% at December 31, 1997). Secured by all assets of
the Company.
Convertible subordinated note payable with detachable warrants to a private - 300,000
investment group. Converted to equity in 1997.
Convertible subordinated note payable with detachable warrants to a
stockholder. Converted to equity in 1997. - 250,000
----------- ----------
1,689,984 550,000
Unamortized discount (36,000) (40,000)
Less current maturities (1,413,984) (510,000)
----------- ----------
$ 240,000 $ -
----------- ----------
</TABLE>
-33-
<PAGE>
NOTE 3 - NOTES PAYABLE (CONTINUED)
- ----------------------------------
In February 1997, the Company received an additional $100,000 from a private
investment group in exchange for a convertible subordinated note payable with
detachable warrants. The associated warrants allow the purchase of 33,333
shares of common stock. The warrants are exercisable at $.83 per share in year
one and $.95 per share thereafter and expire September 8, 1999. On March5,
1997, in conjunction with the private placement, this debt and the previously
issued $300,000 note were converted to 484,849 shares of common stock (Note 11).
On March 5, 1997, in conjunction with the private placement, the $250,000 debt
to a stockholder was converted to 303,030 shares of common stock (Note 11).
In connection with the issuance of the convertible subordinated notes in August
1997, the Company issued 23,333 shares of common stock as a financing fee.
NOTE 4 - EMPLOYEE SAVINGS AND RETIREMENT PLAN
- ---------------------------------------------
The Company has a 401(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 the employee contributions up to 4% of the
employees' eligible compensation. The Plan also allows for additional
discretionary employer contributions. Total expense for the Plan was $11,000
and $54,000 for the years ended December 31, 1997 and 1996, respectively. The
Company discontinued employer matching in April 1997.
NOTE 5 - 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 Company incurred royalty expense of $40,368 and $76,000 for
the years ended December 31, 1997 and 1996, respectively.
A subordinated note payable to a stockholder was converted to common stock in
March 1997 (Note3).
In March 1997, certain stockholders converted $341,500 in accrued expenses to
equity as approved by the Board in November 1996. The stockholders received one
share of common stock for every $3 of indebtedness for 113,833 shares.
-34-
<PAGE>
NOTE 6 - 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. Compensation expense of $47,779 has been recognized
for the year ended December 31, 1997.
NOTE 7 - COMMON STOCK
- ---------------------
On November 18, 1996, the Board amended the articles of incorporation
authorizing an additional 2,970,000 shares of no-par common stock. In
conjunction with the amendment, a stock split was also approved by the Board,
providing for the issuance of approximately 31 shares of new, no-par common
stock for one share of the previously outstanding, no-par 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.
NOTE 8 - WARRANTS
- -----------------
In connection with the issuance of various convertible subordinated notes (Note
3), 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 on September 8,
1999.
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<PAGE>
NOTE 8 - WARRANTS (CONTINUED)
- -----------------------------
In February 1997, the Board granted warrants to purchase 466,667 shares of
common stock to a private investment group who facilitated the completion of the
March private placement (Note 11). The holders may fund the purchase of shares
through the delivery of a recourse or non-recourse promissory note, bearing
interest at the AFR. Under the non-recourse note, the Company's sole recourse
shall be to cancel any shares that are being held in escrow. These warrants
expire on September 8, 1999 and are exercisable at $.83 per share in the first
year following the Canadian public offering and $0.95 in the second year.
In February 1997, the Company entered into an agreement with the same private
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 15). These warrants expire
two years from the effective date of the initial public offering. The warrants
are exercisable at $1.00 per share for the first twelve months and $1.15 per
share thereafter.
In August 1997, in connection with the issuance of certain subordinated notes
payable, the Company has issued warrants to purchase 166,667 shares of common
stock at $1.00 per share (Note 3).
NOTE 9 - INCOME TAXES
- ---------------------
The Company's provision for income taxes for the year ended December 31, 1997
consists of the following:
Federal
Deferred benefit $(1,526,606)
Valuation allowance 1,526,606
-----------
Total $ -
===========
The net deferred income tax asset as of December 31, 1997 in the accompanying
balance sheet include the following:
Deferred tax assets $ 1,526,606
Valuation allowance (1,526,606)
-----------
Total $ -
===========
Deferred tax assets result primarily from timing in the recognition of certain
allowance and accrued expenses for tax and financial statement purposes, and net
operating loss carryforwards.
-36-
<PAGE>
NOTE 9 - INCOME TAXES (CONTINUED)
- ---------------------------------
A valuation allowance has been provided for the deferred tax assets because of
the uncertainty surrounding their realization.
Prior to March 1, 1997, the Company was taxed as an S corporation under the U.S.
Internal Revenue Code which provides that, in lieu of corporate income taxes,
the stockholders are taxed on their proportional share of the Company's net
income. Accordingly, the financial statements for all periods presented prior
to 1997 do not include a provision for corporate income taxes. Had the S
election not been in place, the provision (tax benefit) for corporate income
taxes would have been $0 for the year ended December 31, 1996 based upon the
statutory rate of 34 percent.
NOTE 10 - EXPORT SALES
- ----------------------
Export sales for the years ended December 31, 1997 and 1996 were as follows:
Years Ended
December 31,
--------------------------
1997 1996
---------- ----------
U.S. $1,411,348 $2,368,729
Germany 390,117 145,866
Belgium 198,928 338,710
Japan 311,204 905,035
Netherlands 373,464 405,923
Other 1,252,502 1,916,862
---------- ----------
Total sales $3,937,563 $6,081,125
========== ==========
NOTE 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.
-37-
<PAGE>
NOTE 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 1997, the Company awarded options, all of which were exercised, to
purchase 738,800 shares of common stock 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,
196,299 were forfeited as of December 31, 1997 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 December 31, 1997, 354,888 shares were vested and the
balance on the notes receivable was $244,126. Total stock based compensation
expense for the year ended December 31, 1997 included in general and
administrative expense was $177,505.
In April 1997, the Board approved a key employee share program ("the key
employee program"). During the second quarter of 1997, the Company issued
77,965 shares of common stock. These shares were purchased by employees during
the second quarter of 1997 at a purchase price of $.83 per share with a 6 month
recourse note. As of December 31, 1997, there were no outstanding balances
remaining on the notes.
In September 1997, the February 1997 Plan expired and there are no remaining
options to be issued under this plan.
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<PAGE>
NOTE 12 - STOCK OPTIONS (CONTINUED)
- -----------------------------------
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.
These shares 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 1,140,432 remain
outstanding as of December 31, 1997 after taking into effect the cancellation of
143,669.
The following is a summary of options and warrants granted:
Exercise
Price
Options Warrants Per Share
--------- --------- ----------
Outstanding December 31, 1996 - - -
Options granted 2,100,866 - .43 - 1.00
Warrants granted - 1,083,333 .83 - 1.00
Options exercised (826,765) - .43 - .83
Options expired (143,669) - 1.00
--------- --------- ----------
Outstanding December 31, 1997 1,140,432 1,083,333 .83 - 1.00
========= ========= ==========
The Company has the following stock options and warrants outstanding at December
31, 1997:
Currently Exercisable
Options Warrants Exercise Expiration ---------------------
Outstanding Outstanding Price Date Options Warrants
- --------- --------- ---- -------------- ------- -------
- 683,333 .83 September 1999 - 683,333
- 233,333 1.00 February 2000 - -
- 166,667 1.00 August 1998 - 166,666
1,140,432 - 1.00 November 2002 570,216 -
- --------- --------- ---- ------- -------
1,140,432 1,083,333 .95 570,216 850,000
========= ========= ==== ======= =======
-39-
<PAGE>
NOTE 12 - STOCK OPTIONS (CONTINUED)
- -----------------------------------
Employee Incentive Plans - April 1997 Option Plan (continued)
- -------------------------------------------------------------
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized using the fair value
approach for stock options and warrants granted pursuant to employee plans. Had
compensation cost for the Company's stock options and warrants been determined
based on the fair value at the grant date for awards in 1996 and 1997 consistent
with the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
Years Ended
December 31,
-----------------------
1997 1996
---------- ----------
Net loss - as reported (3,687,864) (3,644,637)
Net loss - pro forma (3,732,145) (3,644,637)
Loss per share - as reported (.55) (.54)
Loss per share - pro forma (.56) (.54)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield and expected volatility of 0%;
discount rate of 6.0%; and expected lives of 5 years.
NOTE 13 - COMMITMENTS AND CONTINGENCY
- -------------------------------------
Leases
- ------
The Company leases building space under an operating lease. Total rent expense
was $298,136 and $323,541 for the years ended 1997 and 1996, respectively. The
lease expired December 31, 1996, and the Company is currently leasing the space
on a month-to-month basis. In addition, certain pieces of office equipment are
being leased under operating leases. The monthly rent expense for these items
is $5,212. Total rent expense for the office equipment was $81,142 and $68,532
for the years ended 1997 and 1996, respectively.
The following is a schedule of operating lease payments for office equipment.
December 31,
- ------------
1998 $ 52,990
1999 36,748
2000 24,042
--------
$113,780
========
-40-
<PAGE>
NOTE 13 - COMMITMENTS AND CONTINGENCY
- -------------------------------------
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.
NOTE 14 - CONTINUED EXISTENCE
- -----------------------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has sustained
substantial operating losses in 1997 contributing to a deficit in stockholders'
equity of $836,961 and a working capital deficiency of approximately $1,504,285
at December 31, 1997. Additionally, the Company is experiencing declining sales
and a cash flow shortage. These factors, among others, may indicate that the
Company will be unable to continue as a going concern for a reasonable period of
time.
As discussed in Note 15, the Company completed an initial public offering of
3,500,000 shares of common stock at a price of US$1.00 per share. After
deducting fees and expenses, the Company received net proceeds of approximately
$2,737,000. Additionally, the Company has established a marketing and sales plan
to substantially increase revenues over the revenues recognized in 1996 and
1997. In the fourth quarter of 1997, in connection with cost cutting efforts,
the Company eliminated certain engineering and other positions and is pursuing
other measures to return the Company to a profitable position. However, there
can be no assurances that the planned revenue increase will occur or that the
Company will be able to return to a profitable position.
NOTE 15 - SUBSEQUENT EVENT
- --------------------------
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 $763,000,
were $2,737,000. Approximately $1,200,000 of the proceeds were used to satisfy
debt outstanding as of December 31, 1997 with the remainder used for working
capital purpose.
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.
-41-
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
On March 16, 1998, the Company engaged the accounting firm of Ehrhardt Keefe
Steiner & Hottman P.C. ("EKSH") as its principal independent accountants to
audit the Company's financial statements for its fiscal year ending December 31,
1997. The appointment of new independent accountants was approved by the Audit
Committee and Board of Directors of the Company. The Company dismissed its
former independent accountants, Deloitte & Touche LLP, effective with the
appointment of EKSH.
Prior to the appointment of EKSH, management of the Company had not consulted
with EKSH.
During the two most recent fiscal years ended December 31, 1997 and 1996, and
the interim period subsequent to December 31, 1997, there were no disagreements
with the former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which would have
caused the former accountants to make reference in their report to such
disagreements if not resolved to their satisfaction.
Deloitte & Touche LLP's reports on the financial statements for the past two
years have contained no adverse opinion or disclaimer of opinion and were not
modified as to uncertainty, audit scope or accounting principles except for an
explanatory paragraph in their report dated May 1, 1997 (December 19, 1997 with
respect to certain notes to the financial statements) regarding substantial
doubt about the Registrants ability to continue as a going concern contained in
the financial statements for the year ended December 31, 1996.
SHAREHOLDER PROPOSALS
Any proposals from shareholders to be presented for consideration for
inclusion in the proxy material in connection with the 1999 Annual Meeting of
shareholders of the Company must be submitted in accordance with the rules of
the Securities and Exchange Commission and received by the Secretary of the
Company at the Company's principal executive offices no later than the close of
business on December 16, 1998. In connection with shareholder proposals that
are not presented for inclusion in the proxy materials, proxies solicited in
connection with the 1999 annual meeting may confer discretionary voting
authority on Company management with respect to certain types of shareholder
proposals 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.
OTHER MATTERS
The Company's independent public accountants for the fiscal years 1997 and
1998 are Ehrhardt Keefe Steiner & Hottman P.C. Representatives of such firm are
expected to be present at the special meeting, will have the opportunity to make
a statement if they desire to do so and are expected to be available to respond
to appropriate questions.
All information relating to any beneficial owner of more than five percent
(5%) of the Company's Common Stock is based upon information contained in
reports filed by such owner with the Securities and Exchange Commission.
THE COMPANY WILL FURNISH WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT ON FORM
10-KSB, INCLUDING THE FINANCIAL STATEMENTS, FOR THE FISCAL YEAR ENDED DECEMBER
31, 1997, FILED WITH THE SECURITIES AND
-42-
<PAGE>
EXCHANGE COMMISSION PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 TO ANY SHAREHOLDER (INCLUDING ANY BENEFICIAL OWNER) UPON WRITTEN
REQUEST TO THOMAS RADIGAN, CHIEF FINANCIAL OFFICER, 35 RESEARCH DRIVE, ANN
ARBOR, MICHIGAN 48103. A COPY OF THE EXHIBITS TO SUCH REPORT WILL BE FURNISHED
TO ANY SHAREHOLDER UPON WRITTEN REQUEST THEREFOR AND PAYMENT OF A NOMINAL FEE.
-43-
<PAGE>
EXHIBIT A
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
SYMPLEX COMMUNICATIONS CORPORATION
SYMPLEX COMMUNICATIONS CORPORATION, a corporation organized and existing
under and by virtue of the laws of the State of Delaware (the "CORPORATION")
DOES HEREBY CERTIFY:
FIRST: That the amendments to the Certificate of Incorporation of the
Corporation set forth in the following resolutions, adopted by the Corporation's
Board of Directors and stockholders, have been duly declared to be advisable by
the Board of Directors of the Corporation and duly proposed by such Board of
Directors to the stockholders of the Corporation and have been duly adopted by
the written consent of the holders of a majority of all outstanding shares of
capital stock of each class entitled to vote thereon as a class, in accordance
with the provisions of Sections 228 and 242 of the General Corporation Law of
the State of Delaware:
RESOLVED: that the Certificate of Incorporation of the Corporation be
amended by replacing Article IV in its entirety to read as follows:
ARTICLE IV
A. The Corporation is authorized to issue two classes of capital stock to
be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK." The total
number of shares which the Corporation is authorized to issue is 30,000,000
shares, $.01 par value per share, of which 24,000,000 shares shall be designated
as Common Stock and 6,000,000 shares shall be designated as Preferred Stock.
The Board of Directors is authorized to provide for the issuance of Preferred
Stock in series, and to establish from time to time the number of shares to be
included in such series, and to fix the rights, powers, preferences and
privileges, and the qualifications, limitations or restrictions of any series of
Preferred Stock, including but not limited to dividend rights, dividend rates,
conversion rights, voting rights, and liquidation preferences, and to fix the
number of shares constituting any such series. Cumulative voting shall not be
allowed in the election of directors.
B. No holder of any shares of capital stock of the Corporation shall
have any preemptive rights to subscribe for or to purchase any shares of any
series or class of capital stock of the Corporation, whether now or hereafter
authorized.
C. All of the authorized shares of Common Stock will be of the same class
and have equal voting powers and each share shall be entitled to one vote.
<PAGE>
IN WITNESS WHEREOF, said Symplex Communications Corporation has caused its
corporate seal to be hereunto affixed and this certificate to be signed by Gary
R. Brock, its President and Thomas Radigan, its Secretary, this ____ day of
_______________, 1998.
SYMPLEX COMMUNICATIONS CORPORATION
By:_______________________________
Gary R. Brock, President
By:_______________________________
Thomas Radigan, Secretary
2
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION PROXY
SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING OF SHAREHOLDERS TO BE HELD DECEMBER 2, 1998
The undersigned hereby constitutes, appoints, and authorizes Gary Brock and
Thomas Radigan, and each of them, as the true and lawful attorney and Proxy of
the undersigned, with full power of substitution and appointment, for and in the
name, place and stead of the undersigned to act for and vote as designated
below, all of the undersigned's shares of the $0.01 par value Common Stock of
Symplex Communications Corporation, a Delaware corporation, at a Special Meeting
of the Shareholders to be held December 2, 1998, at The Holiday Inn, 3600
Plymouth Road, Ann Arbor, Michigan, at 10:00 a.m. E.S.T., and at any and all
adjournments thereof, with respect to the matters set forth below and described
in the Notice of Special Meeting dated November 3, 1998, receipt of which is
hereby acknowledged.
1. A proposal to amend the Company's Certificate of Incorporation to (i)
increase the Company's authorized capital from 20,000,000 shares to
30,000,000 shares; (ii) as part of such increase in total authorized capital,
increase the number of authorized shares of Common Stock from 20,000,000 to
24,000,000; and (iii) authorize a class of 6,000,000 shares of preferred
stock.
[_] FOR [_] AGAINST [_]ABSTAIN
2. The Proxy is authorized to vote upon any other business as may properly come
before the Special Meeting or any adjournments thereof.
- --------------------------------------------------------
The undersigned hereby revokes any Proxies as to said shares heretofore given by
the undersigned, and ratifies and confirms all that said attorney and Proxy may
lawfully do by virtue hereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. THIS PROXY CONFERS DISCRETIONARY AUTHORITY IN RESPECT TO
MATTERS NOT KNOWN OR DETERMINED AT THE TIME OF THE MAILING OF THE NOTICE OF THE
SPECIAL MEETING OF SHAREHOLDERS TO THE UNDERSIGNED.
DATED: ________________________, 1998
- --------------------------------------------
Signature(s) of Shareholder(s)
- --------------------------------------------
Signature(s) of Shareholder(s)
Signature(s) should agree with the name(s) shown hereon. Executors,
administrators, trustees, guardians and attorneys should indicate their capacity
when signing. Attorneys should submit powers of attorney. When shares are held
by joint tenants, both should sign. If a corporation, please sign in full
corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SYMPLEX
COMMUNICATIONS CORPORATION. PLEASE SIGN AND RETURN THIS PROXY USING THE
ENCLOSED PRE-PAID ENVELOPE.
THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON
IF YOU ATTEND THE MEETING.
