<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 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 August 13
- ------------------------------------------------------------------------------
is 9,692,013
- ------------
Transitional Small Business Disclosure Form (check one): [_] Yes [X] No
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements.
Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998 3
Statements of Operations for the Three Months Ended June 30, 1999 (unaudited) and
1998 (unaudited) and for the Six Months Ended June 30, 1999 (unaudited)
and 1998 (unaudited) 4
Statement of Stockholders' Equity for the Six Months Ended
June 30, 1999 (unaudited) and Year Ended December 31, 1998 5
Statements of Cash Flows for the Six Months Ended June 30, 1999 (unaudited)
and 1998 (unaudited) 6
Notes to Unaudited Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations.
PART II - OTHER INFORMATION 18
SIGNATURES 18
INDEX TO EXHIBITS 19
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Information
SYMPLEX COMMUNICATIONS CORPORATION
Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
Assets (Note 3) 1999 1998
(unaudited)
--------------- -------------
<S> <C> <C>
Currents assets
Cash and cash equivalents $ 108,607 $ 154,058
Trade receivables, less allowance for doubtful accounts of $78,763 289,066 1,326,166
Inventories (Note 2) 799,980 601,641
Prepaid expenses and other current assets 63,113 114,284
----------- ------------
Total current assets 1,260,766 2,196,149
Property and equipment
Machinery and equipment 1,702,231 1,668,919
Office equipment 646,681 639,642
Leasehold improvements 19,590 19,590
----------- ------------
Total 2,368,502 2,328,151
Less accumulated depreciation (2,166,984) (2,116,892)
----------- ------------
Net property and equipment 201,518 211,259
----------- ------------
Other Assets 36,993 -
Deferred offering and financing costs - 44,819
----------- ------------
Total assets $ 1,499,277 $ 2,452,227
=========== ============
Liabilities and stockholders' equity
Current liabilities
Trade payables $ 403,986 $ 406,222
Accrued expenses 280,994 376,830
Unearned maintenance revenue 21,167 12,945
Notes payable - revolving (Note 3) 400,000 438,767
Notes payable - current portion (Note 3) 120,000 240,000
Notes payable - other (Note 3) - 63,950
----------- ------------
Total current liabilities 1,226,147 1,538,714
Notes payable - less current portion (Note 3) - 460,604
----------- ------------
Total liabilities 1,226,147 1,999,318
----------- ------------
Stockholders' equity (Notes 7, 8,10 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
June 30, 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 June 30, 1999 and zero shares issued and
outstanding at 1998 12,245 -
Additional paid-in capital 7,280,879 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)
Retained earnings (accumulated deficit) (7,100,156) (5,336,981)
----------- ------------
Total stockholders' equity 273,130 452,909
----------- ------------
Total liabilities and stockholders' equity $ 1,499,277 $ 2,452,227
=========== ============
</TABLE>
See notes to financial statements.
3
<PAGE>
SYMPLEX COMMUNICATIONS
CORPORATION
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------------ ----------------- ----------------- -----------------
(unaudited) (unaudited)
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenue (Note 9)
Manufactured products $ 311,277 $ 929,997 $ 651,339 1,008,634
Maintenance contracts and service 45,972 33,724 82,325 62,986
--------------- ------------- --------------- ---------------
Total net sales and revenues 357,249 963,721 733,664 1,071,620
Costs and expenses
Cost of products sold 289,138 688,509 515,141 730,236
Selling and marketing 254,877 327,319 525,572 612,108
General and administrative (Note 11) 254,293 297,618 605,218 585,900
Research and development 211,694 144,330 475,222 275,329
Engineering 95,813 58,476 199,249 114,409
Service 66,992 56,119 127,169 113,865
--------------- ------------- --------------- ---------------
Total costs and expenses 1,172,807 1,572,371 2,447,571 2,431,847
--------------- ------------- --------------- ---------------
Operating income (loss) (815,558) (608,650) (1,713,907) (1,360,227)
Other (expense) income
Interest expense (14,963) (39,788) (43,992) (82,723)
Amortization of discount on notes payable (6,951) (36,000) (13,902) (36,000)
Other income (869) 33,017 8,626 44,375
--------------- ------------- --------------- ---------------
Total other income and
Expenses (22,783) (42,771) (49,268) (74,348)
--------------- ------------- --------------- ---------------
Net loss $ (838,341) $ (651,421) $ (1,763,175) $ (1,434,575)
=============== ============= =============== ===============
Loss per basic and diluted common share $ (0.09) $ (0.09) $ (0.19) $ (0.19)
=============== ============= =============== ===============
Weighted average common shares outstanding 9,692,013 7,542,715 9,448,460 7,536,520
=============== ============= =============== ===============
</TABLE>
See notes to financial statements.
4
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Statements of stockholders' equity
Six months ended June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Additional
Paid-in
Number Common Preferred Capital
of Shares Stock Stock Warrants
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance - December 31, 1998 7,838,968 78,388 131,616
Issuance of preferred stock, net of $133,841 in offering costs -
private placement offering (Note 10) 1,224,490 12,245
Issuance of common stock, fee related to private offering 20,000 200
Employee stock purchase plan (Note 11) (16,445) (164)
Issuance of common stock, net of $2,363 in costs, -
conversion of debt to equity (Note 3) 625,000 6,250
Net loss
------------- ----------- ------------ -------------
Balance - June 30, 1999 9,692,013 $ 84,674 $ 12,245 $ 131,616
============= =========== ============ =============
<CAPTION>
Additional Notes Notes
Paid-in Receivable Receivable
Capital Recourse Non-recourse
--------------- ------------- -----------------
<S> <C> <C> <C>
Balance - December 31, 1998 5,723,414 (32,743) (110,785)
Issuance of preferred stock, net of $133,841 in offering costs -
private placement offering (Note 10) 1,053,914
Issuance of common stock, fee related to private offering 19,400
Employee stock purchase plan (Note 11) (7,236) 7,400
Issuance of common stock, net of $2,363 in costs, -
conversion of debt to equity (Note 3) 491,387
Net loss
--------------- ------------- -----------------
Balance - June 30, 1999 $ 7,280,879 $ (32,743) $ (103,385)
=============== ============= =================
<CAPTION>
Retained
Earnings
(Accumulated
Deficit) Total
--------------- --------------
<S> <C> <C>
Balance - December 31, 1998 (5,336,981) 452,909
Issuance of preferred stock, net of $133,841 in offering costs -
private placement offering (Note 10) 1,066,159
Issuance of common stock, fee related to private offering 19,600
Employee stock purchase plan (Note 11) -
Issuance of common stock, net of $2,363 in costs, -
conversion of debt to equity (Note 3) 497,637
Net loss (1,763,175) (1,763,175)
--------------- --------------
Balance - June 30, 1999 $ (7,100,156) $ 273,130
=============== ==============
</TABLE>
See notes to financial statements.
5
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
1999 1998
----------------- -----------------
(unaudited)
---------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,763,175) $ (1,434,575)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Allowance for inventory obsolescence 49,934 300,000
Depreciation 51,652 76,151
Loss (gain) on disposal of assets (1,560) -
Amortization of discount on notes payable 13,902 36,000
Compensation recognized for stock options - 8,582
(Gain) on forgiveness of debt (14,685) -
Changes in assets and liabilities:
Trade receivables 1,037,100 270,672
Inventories (248,273) (132,229)
Prepaid expenses and other current assets 39,672 (58,223)
Trade payables (2,236) (908,912)
Unearned maintenance revenue 8,222 -
Accrued expenses (95,836) (31,895)
------------- ---------------
Total adjustments 837,892 (439,854)
------------- ---------------
Net cash used in operating activities (925,283) (1,874,429)
Cash flows from investing activities:
Purchases of property and equipment (41,911) (14,132)
Proceeds from sales of equipment 1,560 -
------------- ---------------
Net cash used in investing activities (40,351) (14,132)
Cash flows from financing activities:
Payments on line of credit (38,767) (42,500)
Borrowings (payments) of notes payable (169,265) 478,950
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 - 2,529,489
Proceeds (net) from issuance of preferred stock 1,085,759 -
------------- ---------------
Net cash provided by financing activities 920,183 2,373,939
------------- ---------------
Net (decrease) increase in cash (45,451) 485,378
Cash - beginning of period 154,058 24,554
------------- ---------------
Cash - end of period $ 108,607 $ 509,932
============= ===============
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 44,665 $ 82,723
============= ===============
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 $ -
============= ===============
Issuance of detachable warrant $ - $ 55,616
============= ================
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 June
30, 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 six months ended June 30, 1999 and 1998 are not
necessarily indicative of the results of the entire year.
2. INVENTORIES
Inventories as of June 30, 1999 and December 31, 1998 consist of the
following:
June 30, December 31,
1999 1998
(unaudited)
----------- ------------
Raw materials $ 228,243 $ 273,345
Work-in-process 877,271 536,632
Finished goods 476,732 546,163
----------- ------------
1,582,246 1,356,140
Less reserve for obsolescence (782,266) (754,499)
----------- -----------
Total $ 799,980 $ 601,641
=========== ===========
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 June 30,
1999), secured by all assets of the Company. The Company had borrowings
against this line-of-credit of $400,000 at June 30, 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
June 30, 1999, the term note balance was $120,000.
The line of credit agreement matured June 30, 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 not in compliance with the covenants at June 30,
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 COMMUNICATION CORPORATION
Notes to Financial Statements
NOTES PAYABLE - continued
Notes payable consisted of the following:
<TABLE>
<CAPTION>
June 30, 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 June 30, 1999 and 8.5% at
December 31, 1998, respectively). Secured by all assets of the Company. 120,000 240,000
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 120,000 803,950
Unamortized discount 0 (39,396)
Less current maturities 120,000 (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 $57,000 and $64,000 for the six months ended June
30, 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
Note 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 $1,200 and
$8,100 for the six months ended June 30, 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 July 30,
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 six
months ended June 30, 1999 and 1998, respectively, were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
(unaudited) (unaudited)
------------------------------ -----------------------------------
<S> <C> <C> <C> <C>
U.S. $ 113,188 $ 220,024 $ 225,626 $ 311,935
Germany 53,656 258,033 129,634 64,844
Japan 1,821 46,236 7,815 71,606
Netherlands 133,914 262,490 202,147 298,649
Other 54,667 176,938 168,442 324,586
-------------- ----------- -------------- -----------
Total sales $ 357,246 $ 963,721 $ 733,664 $ 1,071,620
============= =========== ============== ===========
</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 $1,164,000 of the
proceeds was used to satisfy debt outstanding as of December 31, 1997 with
the remainder used for working capital purposes.
In connection with the offering, the Company entered into an agency
agreement with an underwriter under which the underwriter received a
commission consisting of cash, stock and warrants of the Company. The
Company paid all expenses of the underwriter in connection with the IPO.
The commission consisted of 7.5% of the offering price per share sold and
70,000 shares of common stock of the Company. As part of the agreement, the
underwriter guaranteed to purchase all shares, which were unsubscribed on
the offering day. In compensation for the guarantee, the underwriter
received warrants (Note 8) to purchase up to 400,000 shares of the
Company's stock at the IPO price. The warrants expired in February 1999.
In February 1999, the Company closed with a private investment group to
issue 1,224,490 Series A Preferred shares at a price of U.S.$.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 July 30, 1999.
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 June 30,
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 June 30, 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 six months ended June 30, 1999 and 1998 included in general
and administrative expense was $0 and $8,582, 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, 651,767 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 June 30, 1999 under
the April 1997 Plan amounted to 353,833 shares. None of the options have
been exercised and 1,115,373 remain outstanding as of June 30, 1999 after
taking into effect the cancellation of 522,561. 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 June 30, 1999 Compared to Three Months Ended June 30, 1998
- -----------------------------------------------------------------------------
Net Sales: Gross sales for the three months ended June 30, 1999 totaled $411,040
before returns of $53,791, for net sales of $357,249 as compared to gross sales
of $1,047,355 before returns of $83,634, for net sales of $963,721 for the same
period in 1998. The decrease in net sales of $606,472, or 63%, can be attributed
to significant delays in the release of the Company's next generation of
DirectRoute and Datamizer product lines, specifically the RO-2 and Datamizer 6.
The revenue decline came mostly from the Datamizer product line in the Europe
region.
The gross margin for the three months ended June 30, 1999 was $68,111, or 19.1%,
as compared to $275,212, or 28.6%, for the comparable period in 1998. The
decrease in gross margin is attributable to the sales decrease of Datamizer
products, as noted above, which contribute significant gross margins, offset by
a reduction in inventory reserves. In the three months ended June 30, 1998, the
Company recorded an inventory reserve for obsolescence of $300,000. Before this
inventory reserve, gross margins at June 30, 1998 were $575,212 or 59.7%.
Sales and marketing expense: Sales and marketing expenses for the three months
ended June 30, 1999 were $254,877 as compared to $327,319 for the comparable
three-month period in 1998. This $72,442 decrease is attributable primarily to
reductions in compensation and travel expenses, offset by an increase in
promotional costs.
14
<PAGE>
Research and development expenses: Research and development expenses for the
three months ended June 30, 1999 were $211,694 compared to $144,330 for the
second quarter of 1998. This $67,364 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 and Engineering: General and administrative expenses
for the three months-ended June 30, 1999 were $254,293 as compared to $297,618
for the similar period in 1998. The $43,325 decrease resulted from a decrease in
equipment rental and professional fees expenses, offset by an increase in
compensation. Engineering expenses for the three months ended June 30, 1999 were
$95,813 as compared to $58,476 for the comparable period in 1998. This $37,337
increase resulted primarily from increases in compensation and new product test
expenses.
Net Loss: The Company reported a net loss of $838,341 or $.09 per share for the
three months ended June 30, 1999 as compared to a net loss of $651,421 or $.09
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 the first and second quarters of 1999 without the
benefit of material sales.
Liquidity and Capital Resources
- -------------------------------
In the first six months of 1999 as compared to the corresponding six-month
period in 1998, Symplex experienced increased losses. The Company financed its
operating loss for the six months of 1999 principally through operating cash
flow and a $1.2 million private placement of preferred shares before expenses
completed in the first quarter ended March 31, 1999. The Company executed a
non-cash conversion of face value debt financing of $500,000 to 625,000 common
shares of equity in the first quarter ended March 31, 1999.
Cash utilized in operating activities for the six months ended June 30, 1999 was
$925,283 as compared to $1,874,429 in the corresponding period of 1998. Cash
generated by financing activities through June 30, 1999 totaled $920,183 as
compared to $2,373,939 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 $208,032. 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 sales volume
decrease attributable to significant delays in new product development and
commercial release. The accounts receivable turnover at June 30, 1999 was 4.6
times annually or approximately 80 days to collection while inventory turnover
was 1.5 times annually or approximately 248 days in inventory. Management
anticipates that the receivable and inventory turnover ratios should improve in
the remainder of 1999, and thereafter, as revenues return to more normal
quarterly levels and inventory management is improved.
15
<PAGE>
At June 30, 1999, Symplex had borrowings of $400,000 against its $500,000 line
of credit agreement. In addition, Symplex has outstanding bank debt of $120,000
under a long-term agreement. The term note matures December 31, 1999 and has two
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 June
30, 1999 and the bank has indicated its unwillingness to renew the line. The
Company is currently in default of the notes and the bank has demanded payment
of the notes. However, negotiations with the bank for an agreeable resolution in
this matter are still in progress. The Company was not in compliance with the
covenants for both notes at June 30, 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 June 30, 1999, the Company's principal sources of liquidity were cash of
$108,607 and trade receivables of $289,066. The stockholders' equity at June 30,
1999 totaled $273,130 as compared to stockholders' equity of $452,909 at
December 31, 1998. At June 30, 1999, the Company had a working capital surplus
of $34,619 as compared to a working capital surplus of $657,435 at December 31,
1998.
In the opinion of management, the private placement net proceeds of $1,085,759,
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 maintain
operations, continue product development and 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>
In a review of the Company's risk and uncertainties regarding the Year 2000
issue, three primary areas have been identified that could significantly impact
the operations of Symplex, 1) the Company's products; 2) the reliance on third
party manufacturers; and 3) information technology. 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 six months ended
June 30, 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: August 13, 1999 By: /s/ Gary R. Brock
-----------------
Gary R. Brock
President, Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 By: /s/ Thomas Radigan
------------------
Thomas Radigan
Chief Financial Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
<TABLE>
Exhibit
Number Description Page No.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Company, as amended by Agreement of
Merger by and between the Company and Symplex Communications
Corporation, a California corporation./1/
3.2 Bylaws of the Company. /1/
3.3 Certificate of Amendment to Articles of Incorporation. /5/
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>
19
<PAGE>
<TABLE>
<S> <C>
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.
(5) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1999.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 108,607
<SECURITIES> 0
<RECEIVABLES> 367,829
<ALLOWANCES> 78,763
<INVENTORY> 799,980
<CURRENT-ASSETS> 1,260,766
<PP&E> 2,368,502
<DEPRECIATION> 2,166,984
<TOTAL-ASSETS> 1,499,277
<CURRENT-LIABILITIES> 1,226,147
<BONDS> 0
0
12,245
<COMMON> 84,674
<OTHER-SE> 176,211
<TOTAL-LIABILITY-AND-EQUITY> 1,499,277
<SALES> 357,249
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 289,138
<OTHER-EXPENSES> 891,489
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,963
<INCOME-PRETAX> (838,341)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (838,341)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
