<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the Transition period from _________________ to ______________________
Commission file number 000-22631
Symplex Communications Corporation
----------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 38-3338110
-------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 Research Drive, Ann Arbor, MI 48103
--------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (734) 995-1555
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
The number of shares of common stock equivalents, $.01 par value, at May 7, 1999
- --------------------------------------------------------------------------------
is 9,692,013
- ------------
Transitional Small Business Disclosure Form (check one):
[ ] Yes [X] No
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements.
Balance Sheets at March 31, 1999 (unaudited) and
December 31, 1998 3
Statements of Operations for the Three Months Ended
March 31, 1999 (unaudited) and 1998 (unaudited) 4
Statement of Stockholders' Equity for the Three Months
Ended March 31, 1999 (unaudited) 5
Statements of Cash Flows for the Three Months Ended
March 31, 1999 (unaudited) and 1998 (unaudited) 6
Notes to Unaudited Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14
PART II - OTHER INFORMATION 18
SIGNATURES 18
INDEX TO EXHIBITS 19
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Information
SYMPLEX COMMUNICATIONS CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
March 31 December 31,
Assets (Note 3) 1999 1998
(unaudited)
------------- ------------
<S> <C> <C>
Currents assets
Cash and cash equivalents $ 924,377 $ 154,058
Trade receivables, less allowance for doubtful accounts of $78,763 332,724 1,326,166
Inventories (Note 2) 829,817 601,641
Prepaid expenses and other current assets 70,777 114,284
------------- ------------
2,157,695 2,196,149
Total current assets
Property and equipment
Machinery and equipment 1,697,295 1,668,919
Office equipment 646,681 639,642
Leasehold improvements 19,590 19,590
------------- ------------
2,363,56 2,328,151
Total
Less accumulated depreciation (2,140,839) (2,116,892)
------------- ------------
Net property and equipment 222,727 211,259
Other Assets 44,945 -
Deferred offering and financing costs - 44,819
------------- ------------
Total assets $2,425,367 $ 2,452,227
============= ============
Liabilities and stockholders' equity
Current liabilities
Trade payables 405,959 $ 406,222
Accrued expenses 305,890 376,830
Unearned maintenance revenue 21,814 12,945
Notes payable - revolving (Note 3) 400,000 438,767
Notes payable - current portion (Note 3) 180,000 240,000
Notes payable - other (Note 3) - 63,950
------------- ------------
313,663 1,538,714
Total current liabilities
Notes payable - less current portion (Note 3) - 460,604
------------- ------------
Total liabilities 1,313,663 1,999,318
------------- ------------
Stockholders' equity (Notes 7,10 and 11)
Common stock, $.01 par value; 24,000,000 shares authorized and 8,467,523
shares issued and outstanding (including 302,505 shares held in escrow) at
March 31, 1999 and 7,838,968 shares issued and outstanding at 1998 84,674 78,388
Preferred stock, $.01 par value; 6,000,000 shares authorized and 1,224,490
shares issued and outstanding at March 31, 1999 and zero shares issued and
outstanding at 1998 12,245 -
Additional paid-in capital 7,281,112 5,723,414
Additional paid-in capital - warrants 131,616 131,616
Notes receivable - recourse (32,743) (32,743)
Notes receivable - non-recourse (103,385) (110,785)
(6,261,815) (5,336,981)
------------- ------------
Retained earnings (accumulated deficit)
Total stockholders' equity 1,111,704 452,909
------------- ------------
Total liabilities and stockholders' equity $ 2,425,367 $ 2,452,227
============= ============
</TABLE>
See notes to financial statements.
3
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Three Months Ended March 31,
1999 1998
----------------- -----------------
(unaudited)
------------------------------------
<S> <C> <C>
Net sales and revenue (Note 9)
Manufactured products $ 359,763 $ 78,637
Maintenance contracts and service 16,652 29,262
--------------- -------------
Total net sales and revenues 376,415 107,899
Costs and expenses
Cost of products sold 226,003 41,727
Selling and marketing 270,694 284,789
General and administrative (Note 11) 350,926 288,282
Research and development 263,527 130,999
Engineering 103,436 55,933
Service 60,177 57,746
--------------- -------------
Total costs and expenses 1,274,763 859,476
--------------- -------------
Operating income (loss) (898,348) (751,577)
Other (expense) income
Interest expense (29,029) (42,935)
Amortization of discount on notes payable (6,951) -
Other income 9,494 11,358
--------------- -------------
Total other income and
(26,486) (31,577)
Expenses
--------------- -------------
Net loss $ (924,834) $ (783,154)
=============== =============
Loss per basic and diluted common share $ (0.11) $ (0.13)
=============== =============
Weighted average common shares outstanding 8,694,269 6,229,081
=============== =============
</TABLE>
See notes to financial statements.
4
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Statements of stockholders' equity
Three months ended March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Additional
Paid-in Additional
Number Common Preferred Capital Paid-in
of Shares Stock Stock Warrants Capital
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1998 7,838,968 78,388 131,616 5,723,414
Issuance of preferred stock,
net of $133,608 in offering costs -
private placement offering (Note 10) 1,224,490 12,245 1,054,147
Issuance of common stock fee related to
private offering 20,000 200 19,400
Employee stock purchase plan (Note 11) (16,445) (164) (7,236)
Issuance of common stock, net of $2,363
in costs, - conversion of debt to
equity (Note 3) 625,000 6,250 491,387
Net loss
----------------------------------------------------------------
Balance - March 31, 1999 9,692,013 $84,674 12,245 $131,616 $7,281,112
================================================================
<CAPTION>
Retained
Notes Notes Earnings
Receivable Receivable (Accumulated
Recourse Non-recourse Deficit) Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - December 31, 1998 (32,743) (110,785) (5,336,981) 452,909
Issuance of preferred stock,
net of $133,608 in offering costs -
private placement offering (Note 10) 1,066,392
Issuance of common stock fee related to
private offering 19,600
Employee stock purchase plan (Note 11) 7,400 -
Issuance of common stock, net of $2,363
in costs, - conversion of debt to
equity (Note 3) 497,637
Net loss (924,834) (924,834)
------------------------------------------------------------------------
Balance - March 31, 1999 $(32,743) $(103,385) $(6,261,815) $1,111,704
========================================================================
</TABLE>
See notes to financial statements.
5
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
1999 1998
----------------- -----------------
(unaudited)
---------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (924,834) $ (783,154)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Allowance for inventory obsolescence 45,634 -
Depreciation 25,507 37,934
Loss (gain) on disposal of assets (1,560) -
Amortization of discount on notes payable 6,951 -
Compensation recognized for stock options - 4,310
(Gain) on forgiveness of debt (14,685) -
Changes in assets and liabilities:
Trade receivables 993,442 551,957
Inventories (273,810) (264,699)
Prepaid expenses and other current assets 31,007 (49,852)
Trade payables (263) (754,563)
Unearned maintenance revenue 8,869
-
Accrued expenses (70,940) (169,373)
--------------------------------------
Total adjustments 750,152 (644,286)
--------------------------------------
Net cash used in operating activities (174,682) (1,427,440)
Cash flows from investing activities:
Purchases of property and equipment (36,975) (14,132)
Proceeds from sales of equipment 1,560 -
--------------------------------------
Net cash used in investing activities (35,415) (14,132)
Cash flows from financing activities:
Payments on line of credit (38,767) (42,500)
Borrowings (payments) of notes payable (109,265) 61,450
Payments of bridge financing - (1,163,984)
Payment of fees related to conversion of debt to equity (2,363) -
Deferred offering and financing costs 44,819 571,984
Proceeds from issuance of common stock - 2,529,383
Proceeds (net) from issuance of preferred stock 1,085,992 -
--------------------------------------
Net cash provided by financing activities 980,416 1,956,333
--------------------------------------
Net (decrease) increase in cash 770,319 514,761
Cash - beginning of period 154,058 24,554
--------------------------------------
Cash - end of period 924,377 539,315
======================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 33,753 $ 42,936
======================================
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of long-term debt to common stock $ (500,000) $ -
======================================
Issuance of common stock as a financing fee $ 19,600 $ -
======================================
Cancelled notes receivable and stock held in escrow returned to
treasury $ 7,400 $ -
======================================
Notes receivable retired in exchange for common stock $ - $ (16,888)
======================================
</TABLE>
See notes to financial statements.
6
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to financial statements
- -------------------------------------------------------------------------------
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
effectively relieving 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 March 31,
1999 and 1998, and the periods then ended, have not been audited by the
Company's independent auditors, but in the opinion of management, reflect all
adjustments (which include only normal recurring adjustments) necessary for the
fair presentation of the operations of the Company. The results of operations
for the three months ended March 31, 1999 and 1998 are not necessarily
indicative of the results of the entire year.
2. INVENTORIES
Inventories as of March 31, 1999 and December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
----------------- ------------------
<S> <C> <C>
Raw materials $ 242,930 $ 273,345
Work-in-process 951,445 536,632
Finished goods 423,666 546,163
----------------- ------------------
1,618,041 1,356,140
Less reserve for obsolescence (788,224) (754,499)
----------------- ------------------
Total $ 829,817 $ 601,641
================= ==================
</TABLE>
7
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
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 7.75% at March 31, 1999),
secured by all assets of the Company. The Company had borrowings against this
line-of-credit of $400,000 at March 31, 1999 and $438,767 at December 31, 1998.
In March 1998, 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 31,
1999 and requires quarterly principal payments, beginning September 1, 1997, of
$10,000 for the first two payments, and $60,000 for the remaining eight. Both
the new term agreement and the line of credit require 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 March 31, 1999, the term note balance was $180,000.
The line of credit agreement matured March 31, 1999 and the bank has indicated
its unwillingness to renew the line. The Company is currently negotiating with
the bank for an agreeable resolution to this outstanding indebtedness of
$400,000. However, any settlement agreement with the bank requiring cash
payments in 1999 will divert critical resources away from the operating capital
requirements during a period when the Company's cash flows are expected to be
insufficient to attain its second-half 1999 objectives without an additional
capital infusion.
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 March 31, 1999. Further, 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. In quarter one 1999, the Company
entered into an agreement with the private investor to issue 625,000 shares of
common stock in exchange for the settlement of the $500,000 note payable.
8
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
NOTES PAYABLE - continued
Notes payable consisted of the following:
<TABLE>
<CAPTION>
March 31 December 31,
1999 1998
(unaudited)
--------------- ---------------
<S> <C> <C>
Subordinated note payable with detachable warrants. Interest at
the rate of 15%; the warrants allow the note holders 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 8).
Converted to common stock in February 1999. - 500,000
Term note payable. Payments of $60,000 quarterly including
interest at prime rate plus 2% (prime was 7.75% at March 31,
1999 and 8.5% at December 31, 1998, respectively). Secured by all
assets of the Company. 180,000 240,000
Unsecured note payable. Principal payments of $7,500 per month
plus accrued interest at the rate of 9% per annum. Paid in
full in March 1999. - 63,950
-------- ----------
Total 180,000 803,950
Unamortized discount 0 (39,396)
Less current maturities 180,000 (303,950)
-------- ----------
Long term portion $ 0 $ 460,604
======== ==========
</TABLE>
4. LEASES
The Company leases building space under an operating lease. Total rent expense
was approximately $30,000 and $34,000 for the three months ended March 31, 1999
and 1998, respectively. The lease expired on December 31, 1996, and the Company
is currently leasing the space on a month-to-month basis.
9
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
5. 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 The Plan allows
for additional discretionary employer contributions. The Company discontinued
employer matching in April 1997.
6. 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 $900 and $1,800 for the three
months ended March 31, 1999 and 1998, respectively.
7. COMMON AND PREFERRED 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.
On December 2, 1998, the Company amended the articles of incorporation
increasing the authorized capital from 20,000,000 shares to 30,000,000 shares;
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 authorize a
class of 6,000,000 shares of preferred stock.
8. 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 a private placement in 1997 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
10
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
WARRANTS - continued
completion of the initial public offering on February 11, 1998 (Note 10). 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 February 1998, in connection with the initial public offering (Note 10), the
Company entered into an agency agreement with an underwriter under which 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 common stock $1.00
per share. The warrants expired in February 1999.
In February 1998, in connection with completion of the IPO (Note 10), the
Company issued warrants to purchase 187,500 shares of common stock at $1.00 per
share. These warrants expired in February 1999.
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 $0.23 per share if exercised
by May 18, 2000 (Note 3).
In February 1999, in connection with a private placement (Note 10), the Company
issued warrants to purchase 612,245 shares of the Company's Series B Preferred
Stock at a price of U.S.$.98. The warrants expire in August 1999.
9. SALES
All of the Company's business is transacted in U.S. dollars and the Company has
no foreign currency translation adjustments. Export sales for the three months
ended March 31, 1999 and 1998, respectively, were as follows:
<TABLE>
<CAPTION>
Three Months Ended
1999 1998
(unaudited)
---------------------------------
<S> <C> <C>
U.S. $ 112,438 $ 91,911
Germany 75,978 (191,889)
Japan 5,994 27,099
Netherlands 68,233 56,149
Other 113,772 124,629
---------------------------------
Total sales $ 376,415 $ 107,899
=================================
</TABLE>
11
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
10. PUBLIC AND PRIVATE OFFERINGS
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 $1,164,000 of the proceeds was used to
satisfy debt outstanding as of December 31, 1997 with the remainder used for
working capital purposes.
In connection with the offering, the Company entered into an agency agreement
with an underwriter under which the underwriter received a commission consisting
of cash, stock and warrants of the Company. The Company paid all expenses of the
underwriter in connection with the IPO. The commission consisted of 7.5% of the
offering price per share sold and 70,000 shares of common stock of the Company.
As part of the agreement, the underwriter guaranteed to purchase all shares,
which were unsubscribed on the offering day. In compensation for the guarantee,
the underwriter received warrants (N ote 8) to purchase up to 400,000 shares of
the Company's stock at the IPO price. The warrants expired in February 1999.
In February 1999, the Company closed with a private investment group to issue
1,224,490 Series A Preferred shares at a price of U.S.$.98. Each Series A
Preferred share is convertible into one common share of the Company. In
addition, the investment group will receive warrants (Note 8) to purchase
612,245 Series B Preferred shares at a price of U.S.$.98. Each Series B
Preferred share is convertible into 1.08 common share of the Company. These
warrants expire six months from date of issue.
11. STOCK OPTIONS
Employee Incentive Plans - February 1997 Option Plan
- ----------------------------------------------------
In February 1997, the Board adopted a Nonstatutory Stock Option Plan ("the
February 1997 Plan"). Under this plan, the Board approved a program to grant
certain employees the right to purchase common stock of the Company for $.45 per
share ("the employee share purchase program"). Under the employee share purchase
program, the employees may fund the purchase of shares through the delivery of a
recourse or non-recourse promissory note, bearing interest at the Applicable
Federal Rate. Under the non-recourse note, the Company's sole recourse shall be
to cancel any shares that are being held in escrow. Option grants under this
plan expire prior to the submission of a prospectus for an initial public
offering. Certain restrictions on the stock exist for an 18 month period.
During the second quarter of 1997, the Company awarded options, all of which
were exercised, to purchase 738,800 shares pursuant to this plan. According to
the terms of the employee share purchase program, the stock vested 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,
396,535 were forfeited as of March 31, 1999 pursuant to the vesting provisions.
A total of approximately $46,500 was 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 was 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 March 31,
1999, 302,505 shares were vested and the balance on the notes receivable was
$136,128. Total stock based compensation
12
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
STOCK OPTIONS - continued
expense for the three months ended March 31, 1999 and 1998 included in general
and administrative expense was $0 and $4,310, respectively.
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, 673,017 are fully vested. The remaining options vest over thirty-
six months, however, no vesting shall occur prior to six months from the date of
grant. Additional grants as of March 31, 1999 under the April 1997 Plan amounted
to 353,833 shares. None of the options have been exercised and 1,224,790 remain
outstanding as of March 31, 1999 after taking into effect the cancellation of
413,144. In August 1998, the Company re-priced the exercise price to $0.31 per
common share for the majority of these options.
12. 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.
13. 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 were
due August 27, 1998 or such earlier date as described below.
Certain of the notes, aggregating $700,000, were 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 (Note 8) were issued on conversion of notes totaling
$375,000 and the warrants expired in quarter one 1999. The remaining notes
totaling $325,000 were retired upon completion of the IPO (Note 10).
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 (Note 8) 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 as of August 27, 1998.
******
13
<PAGE>
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the selected
financial data and the financial statements and notes thereto filed herewith.
The statements contained in this report, if not historical, are forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, and involve risks and uncertainties that could cause actual results to
differ materially from the financial results described in such forward looking
statements. These risks and uncertainties include, among others, the level and
rate of growth in the Company's operations, the capital requirements of Symplex
and the ability of the Company to achieve earnings per share growth through
internal investment, strategic alliances, joint ventures and other methods. The
success of the Company's business operations is in part dependent on factors
such as the effectiveness of the Company's sales and marketing strategies to
reengage with its Datamizer install base, the appeal of the Company's family of
products, the Company's success at entering into and collaborating with others
to create effective strategic alliances and joint ventures, general competitive
conditions within the telecommunications market and general economic conditions.
Further, any forward looking statements speak only as of the date on which such
statement was made, and the Company undertakes no obligation to update any
forward looking statements to reflect events or circumstances after the date on
which such statements are made or to reflect the occurrence of unanticipated
events. Therefore, forward looking statements should not be relied upon as a
prediction of actual future results.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- -------------------------------------------------------------------------------
Net Sales: Gross sales for the three months ended March 31, 1999 totaled
$432,659 before returns of $56,244, for net sales of $376,415 as compared to
gross sales of $368,665 before returns of $260,766, for net sales of $107,899
for the same period in 1998. The increase in net sales of $268,516, or 249%, can
be attributed to (i) a modest increase in North American sales mostly from
Datamizer products, (ii) a significant decline in sales returns of $204,522
mostly in Europe, and (iii) an increase in European sales of mostly DirectRoute
products offset partially by a decline in Pacific Rim sales of Datamizer
products.
The gross margin for the three months ended March 31, 1999 was $150,412, or
40.0%, as compared to $66,172, or 61.3%, for the comparable period in 1998. This
21.3% decrease is attributable to (i) a significant amount of sales returns in
quarter one 1998 artificially overstating the margin, (ii) a 9.3% margin loss
from additional inventory obsolescence reserve and (iii) a 6.6% margin loss from
quarter two 1999 inventory disposal adjustments and offset somewhat by healthy
margins on Datamizer products, including Datamizer 6, that represented a higher
percentage of total quarterly revenue.
Sales and marketing expense: Sales and marketing expenses for the three months
ended March 31, 1999 were $270,694 as compared to $284,789 for the comparable
three-month period in 1998.
14
<PAGE>
This $14,095 decrease is attributable primarily to reductions in compensation
and promotional costs, offset by an increase in travel expenses.
Research and development expenses: Research and development expenses for the
three months ended March 31, 1999 were $263,527 compared to $130,999 for the
first quarter of 1998. This $132,528 unfavorable impact results primarily from a
significant increase in outside professional services relating to product
development and a lesser increase in compensation expense.
General and administrative, engineering and service expenses: General and
administrative expenses for the three months-ended March 31, 1999 were $350,926
as compared to $288,282 for the similar period in 1998. The $62,644 increase
resulted from an increase in compensation, offset by a decrease in equipment
rental expenses. Engineering expenses for the three months ended March 31, 1999
were $103,436 as compared to $55,933 for the comparable period in 1998. This
$47,503 increase resulted primarily from increases in compensation and new
product test expenses. Service expenses for the three months ended March 31,
1999 were $60,177 as compared to $57,746 for the comparable period in 1998. This
$2,431 increase resulted from compensation.
Net Loss: The Company reported a net loss of $924,834 or $.11 per share for the
three months ended March 31, 1999 as compared to a net loss of $783,154 or $.13
per share for the comparable period in 1998. The increase in the quarterly loss
amount results from delayed opportunities, principally, in new product
development and release efforts caused by the delays associated with the final
testing and commercial release of RO 2 and Datamizer 6 products. The incremental
costs related to the development and comprehensive beta-site testing of these
products were incurred in quarter one 1999 without the benefit of material sales
activity until March 1999.
Liquidity and Capital Resources
- -------------------------------
In quarter one 1999 as compared to the corresponding three-month period in 1998,
Symplex has experienced a moderate increase in losses. The Company financed its
operating loss for the three months of 1999 principally through operating cash
flow and a $1.2 million private placement of preferred shares before expenses.
The Company executed a non-cash conversion of face value debt financing of
$500,000 to 625,000 common shares of equity.
Cash utilized in operating activities for the three months ended March 31, 1999
was $174,682 as compared to $1,427,440 in the corresponding period of 1998. Cash
generated by financing activities through March 31, 1999 totaled $980,416 as
compared to $1,956,333 in the corresponding period of 1998. The source of these
funds in 1999 was the private placement proceeds of $1,200,000 before expenses,
offset by payments of borrowings of $148,032. In a non-cash transaction, the
Company issued equity valued at $497,637 and concurrently retired a long-term
notes payable with a principal balance outstanding of $500,000 in a non-cash
transaction.
The Company's cash resources have been adversely impacted by the first quarter
1999 expenditure increases related to new product development and a overall
margin erosion from one time accounting adjustments. The accounts receivable
turnover at March 31, 1999 was 1.8 times annually or approximately 204 days to
collection while inventory turnover was 1.3 times annually or approximately 289
days in inventory. Management anticipates that the receivable and inventory
turnover ratios will improve in the second quarter of 1999, and thereafter, as
revenues return to more normal quarterly levels.
15
<PAGE>
At March 31, 1999, Symplex had borrowings of $400,000 against its $500,000 line
of credit agreement. In addition, Symplex has outstanding bank debt of $180,000
under a long-term agreement. The term note matures December 31, 1999 and has
three 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 line of credit agreement matured
on March 31, 1999 and the bank has indicated its unwillingness to renew the
line. The Company is currently negotiating with the bank for an agreeable
resolution in this matter. The Company had previously re-negotiated the
covenants and was in compliance as of March 31, 1999. There can be no assurance
that compliance with these covenants will be attainable on an ongoing basis.
However, any settlement agreement with the bank requiring cash payments in 1999
will divert critical resources away from the operating capital requirements
during a period when the Company's cash flows are expected to be insufficient to
attain its second-half 1999 objectives without an additional capital infusion.
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 March 31, 1999, the Company's principal sources of liquidity were cash of
$924,377 and trade receivables of $332,724. The stockholders' equity at March
31, 1999 totaled $1,111,704 as compared to stockholders' equity of $452,909 at
December 31, 1998. At March 31, 1999, the Company had a working capital surplus
of $844,032 as compared to a working capital surplus of $657,435 at December 31,
1998.
While the Company has generated an operating loss in quarter one 1999, it does
anticipate that the second half of 1999 will generate nominal net income. In the
opinion of management, the private placement net proceeds of $1,085,992, the
existing sources of liquidity and the funds generated from future anticipated
operations may not be sufficient to meet the Company's second-half 1999
projected working capital and other cash requirements assuming implementation of
the operating objectives and attainment of certain revenue expectations without
an additional capital infusion. As the Company will require additional debt or
equity financing to satisfy its second-half 1999 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 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 1999, its ability to expand operations,
accelerate product development and continue to generate revenue growth may be
adversely impacted.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of certain computer programs being written
using two digits rather than four to indicate the applicable year. As a result,
computer programs with date-sensitive software may incorrectly recognize a date
using "00" as the year 1900 rather than the year 2000. Such an error could
result in a system failure or miscalculations resulting in disruptions of
operations, including a temporary inability to process normal business
transactions.
16
<PAGE>
An internal analysis and review of the Company's products determined that they
are not date-sensitive and the reliance on Symplex's products by a customer
would not lead to any adverse effect due to the Year 2000 issue. The Company
performed tests simulating a customer's application to support this conclusion
and based on this, determined there isn't any additional testing that is
required on their products. Regarding third party manufacturers, Symplex has
addressed the issue with their two principal contractors who manufacturer the
Company's products. Both contractors have assured the Company that they have
performed adequate test of their systems to ensure they will be compliant with
the Year 2000 issue. Symplex is in the process of obtaining written
documentation supporting their claims and the Company has determined no
additional information is required. The third significant area, the Company's
internal information technology, has also been addressed for Year 2000 problem.
Symplex's accounting program has been Year 2000 certified and Symplex has
performed tests to verify this. In addition, Symplex has verified and/or
upgraded their personal computers to ensure readiness for the Year 2000.
As a result of the analysis, review and testing, the Company has determined that
no significant modifications and or additional testing will be required to limit
the Company's vulnerability and does not anticipate any adverse effect will
result from the Year 2000 issue. All analysis and testing has been performed by
the Company's staff and Symplex does not anticipate any additional costs to
evaluate the Year 2000 issue. As new information is presented regarding the Year
2000 issue, the Company will continue to assess the impact on its business,
financial condition and results of operations. However, there can be no
assurances that the various factors relating to the Year 2000 issue will not
have a material adverse effect on Symplex or the systems of other companies that
interact with the Company.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Included as exhibits are the items listed on the Exhibit Index.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the three months
ended March 31, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Symplex Communications Corporation
Date: May 7, 1999 By: /s/ Gary R. Brock
------------------------------
Gary R. Brock
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 7 1999 By: /s/ Thomas Radigan
-------------------------------
Thomas Radigan
Chief Financial Officer, Treasurer,
Secretary (Principal Financial and
Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
<C> <S> <C>
3.1 Certificate of Incorporation of the Company, as amended by Agreement of
Merger by and between the Company and Symplex Communications
Corporation, a California corporation.(1)
3.2 Bylaws of the Company. (1)
3.3 Certificate of Amendment to Articles of Incorporation.
4.1 Form of Certificate of Common Stock.(2)
4.2 Form of warrant granted to holders of convertible promissory notes ("Note
Conversion Warrants").(3)
4.3 Form of warrant granted to Canaccord Capital Corporation and C.M. Oliver &
Co. ("Underwriter Warrants").(3)
4.4 Form of warrant granted to Opus Capital, LLP ("Opus Services Warrant").(3)
4.5 Form of warrant issued to May 1998 private lender.(4)
10.1 Symplex Communications Corporation Amended and Restated Nonstatutory
Stock Option Plan.(1)
10.2 Symplex Communications Corporation IPO Stock Option Plan.(1)
10.3 Letter Agreement dated March 6, 1997 between the Company and George
Brostoff.(1)
10.4 Letter Agreement dated February 12, 1997 between the Company and Opus
Capital, LLP.(1)
10.5 Manufacturing Services Agreement dated July 5, 1995 between the Company
and IEC Electronics Corp.(1)
10.6 Restructure Agreement dated March 25, 1997 between the Company and
Michigan National Bank.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.7 Business Loan Agreement and Addendum to Business Loan Agreement, each
dated March 25, 1997, between the Company and Michigan National Bank.(1)
27.1 Financial Data Schedule.
</TABLE>
_______________________________
(1) Incorporated by reference from the Company's Registration Statement on
Form 10-SB filed May 30, 1997.
(2) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 11, 1998.
(4) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1998.
<PAGE>
EXHIBIT 3.3
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 resolution, 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. Thereafter, at a special
meeting of stockholders duly called and held, upon notice in accordance with
Section 222 of the General Corporation Law, a majority of all outstanding shares
of capital stock of each class entitled to vote thereon as a class were voted in
favor of the amendments and such amendments were adopted in accordance with the
provisions of Section 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 2nd day of
December, 1998.
SYMPLEX COMMUNICATIONS CORPORATION
By: /s/ Gary R. Brock
-----------------------------
Gary R. Brock, President
By: /s/ Thomas Radigan
-----------------------------
Thomas Radigan, Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 924,377
<SECURITIES> 0
<RECEIVABLES> 411,487
<ALLOWANCES> 78,763
<INVENTORY> 829,817
<CURRENT-ASSETS> 2,157,695
<PP&E> 2,363,566
<DEPRECIATION> 2,140,839
<TOTAL-ASSETS> 2,425,367
<CURRENT-LIABILITIES> 1,313,663
<BONDS> 0
0
12,245
<COMMON> 84,674
<OTHER-SE> 1,014,785
<TOTAL-LIABILITY-AND-EQUITY> 2,425,367
<SALES> 376,415
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 226,003
<OTHER-EXPENSES> 1,046,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,029
<INCOME-PRETAX> (924,834)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (924,834)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
