<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 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
--------------------------------------------------------------------
November 10 is 9,686,746
------------------------
Transitional Small Business Disclosure Form (check one): [ ] Yes [X] No
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements.
Balance Sheets at September 30, 1999 (unaudited) and December 31, 1998 3
Statements of Operations for the Three Months Ended September 30, 1999 (unaudited) and
1998 (unaudited) and for the Nine Months Ended September 30, 1999 (unaudited)
and 1998 (unaudited) 4
Statement of Stockholders' Equity for the Nine Months Ended
September 30, 1999 (unaudited) and Year Ended December 31, 1998 5
Statements of Cash Flows for the Nine Months Ended September 30, 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
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Information
SYMPLEX COMMUNICATIONS CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Assets (Note 3) 1999 1998
(unaudited)
------------- ------------
<S> <C> <C>
Currents assets
Cash and cash equivalents $ 26,757 $ 154,058
Trade receivables, less allowance for doubtful accounts of $37,060
at September 30, 1999 and $78,763 at December 31, 1998 163,301 1,326,166
Inventories (Note 2) 465,053 601,641
Prepaid expenses and other current assets 72,796 114,284
------------ -----------
Total current assets 727,907 2,196,149
Property and equipment
Machinery and equipment 1,703,730 1,668,919
Office equipment 646,681 639,642
Leasehold improvements 19,590 19,590
------------ -----------
Total 2,370,001 2,328,151
Less accumulated depreciation (2,193,228) (2,116,892)
------------ -----------
Net property and equipment 176,773 211,259
------------ -----------
Other Assets 30,242 -
Deferred offering and financing costs - 44,819
------------ -----------
Total assets $ 934,922 $ 2,452,227
============ ===========
Liabilities and stockholders' (deficit) equity
Current liabilities
Trade payables $ 460,443 $ 406,222
Accrued expenses 452,691 376,830
Unearned maintenance revenue 34,969 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 1,468,103 1,538,714
Notes payable - less current portion (Note 3) - 460,604
------------ -----------
Total liabilities 1,468,103 1,999,318
------------ -----------
Stockholders' (deficit) equity (Notes 7, 8,10 and 11)
Common stock, $.01 par value; 24,000,000 shares authorized and 8,462,256
shares issued and outstanding (including 297,238 shares held in escrow) at
September 30, 1999 and 7,838,968 shares issued and outstanding at 1998 84,621 78,388
Preferred stock, $.01 par value; 6,000,000 shares authorized and 1,224,490
shares issued and outstanding at September 30, 1999 and zero shares issued and
outstanding at 1998 12,245 -
Additional paid-in capital 7,278,562 5,723,414
Additional paid-in capital - warrants 131,616 131,616
Notes receivable - recourse (32,743) (32,743)
Notes receivable - non-recourse (101,015) (110,785)
Retained earnings (accumulated deficit) (7,906,467) (5,336,981)
------------ -----------
Total stockholders' (deficit) equity (533,181) 452,909
------------ -----------
Total liabilities and stockholders' equity $ 934,922 $ 2,452,227
============ ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
SYMPLEX COMMUNICATIONS
CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
------------------ ----------------- ----------------- -----------------
(unaudited) (unaudited)
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenue (Note 9)
Manufactured products $ 257,888 $ 1,455,463 $ 909,224 2,464,097
Maintenance contracts and service 51,915 25,399 134,240 88,385
------------ ------------ ----------- -----------
Total net sales and revenues 309,803 1,480,862 1,043,464 2,552,482
Costs and expenses
Cost of products sold 447,277 546,943 962,418 1,276,969
Selling and marketing 271,456 299,719 797,028 911,827
General and administrative (Note 11) 153,609 276,213 758,824 862,113
Research and development 138,881 173,146 614,103 447,291
Engineering 36,242 79,310 235,491 194,903
Service 31,271 57,055 158,440 171,130
------------ ------------ ----------- -----------
Total costs and expenses 1,078,736 1,432,386 3,526,304 3,864,233
------------ ------------ ----------- -----------
Operating income (loss) (768,933) 48,476 (2,482,840) (1,311,751)
Other (expense) income
Interest expense (13,932) (44,664) (57,924) (127,387)
Amortization of discount on notes payable (6,951) (9,269) (20,853) (45,269)
Other income (16,495) (3,332) (7,869) 41,043
------------ ------------ ----------- -----------
Total other income and
Expenses (37,378) (57,265) (86,646) (131,613)
------------ ------------ ----------- -----------
Net loss $ (806,311) $ (8,789) $(2,569,486) $(1,443,364)
============ ============ =========== ===========
Loss per basic and diluted common share $ (0.08) $ (0.00) $ (0.27) $ (0.20)
============ ============ =========== ===========
Weighted average common shares outstanding 9,689,125 7,940,803 9,448,404 7,391,223
============ ============ =========== ===========
</TABLE>
See notes to financial statements.
4
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Statements of stockholders' equity
Nine months ended September 30, 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 $133,841 in offering costs -
private placement offering (Note 10) 1,224,490 12,245 1,053,914
Issuance of common stock, fee related to private offering 20,000 200 19,400
Employee stock purchase plan (Note 11) (21,712) (217) (9,553)
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 - September 30, 1999 9,686,746 $ 84,621 $ 12,245 $ 131,616 $ 7,278,562
=========== ========= ========= ========= ============
<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 $133,841 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) 9,770 -
Issuance of common stock, net of $2,363 in costs, -
conversion of debt to equity (Note 3) 497,637
Net loss
Balance - September 30, 1999 (2,569,486) (2,569,486)
---------- ------------ ------------ -----------
$ (32,743) $ (101,015) $ (7,906,467) $ (533,181)
========== ============ ============ ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
1999 1998
--------------- --------------
(unaudited)
------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,569,486) $ (1,443,364)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Allowance for inventory obsolescence 157,434 300,000
Depreciation 77,896 114,474
Loss (gain) on disposal of assets (1,560) -
Amortization of discount on notes payable 20,853 45,269
Compensation recognized for stock options - 13,118
(Gain) on forgiveness of debt (14,685) -
Changes in assets and liabilities:
Trade receivables 1,162,865 (267,558)
Inventories (20,846) (14,555)
Prepaid expenses and other current assets 29,789 (37,432)
Trade payables 54,221 (794,854)
Unearned maintenance revenue 22,024 12,429
Accrued expenses 75,861 14,504
--------------- --------------
Total adjustments 1,563,852 (614,605)
--------------- --------------
Net cash used in operating activities (1,005,634) (2,057,969)
Cash flows from investing activities:
Purchases of property and equipment (43,410) (16,290)
Proceeds from sales of equipment 1,560 -
--------------- --------------
Net cash used in investing activities (41,850) (16,290)
Cash flows from financing activities:
Payments on line of credit (38,767) (61,233)
Borrowings (payments) of notes payable (169,265) 396,450
Payments of bridge financing - (1,163,984)
Payment of fees related to conversion of debt to equity (2,363) -
Deferred offering and financing costs 44,819 561,984
Issuance of detachable warrants - (36,000)
Proceeds from issuance of common stock - 2,531,775
Proceeds (net) from issuance of preferred stock 1,085,759 -
--------------- --------------
Net cash provided by financing activities 920,183 2,228,992
--------------- --------------
Net (decrease) increase in cash (127,301) 154,733
Cash - beginning of period 154,058 24,554
--------------- --------------
Cash - end of period $ 26,757 $ 179,287
=============== ==============
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 44,665 $ 127,387
=============== ==============
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 $ 70,000
=============== ==============
Cancelled notes receivable and stock held in escrow returned to treasury $ 9,770 $ -
=============== ==============
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
September 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 nine months ended September 30,
1999 and 1998 are not necessarily indicative of the results of the entire
year.
2. INVENTORIES
Inventories as of September 30, 1999 and December 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
------------- ------------
<S> <C> <C>
Raw materials $ 223,138 $ 273,345
Work-in-process 717,941 536,632
Finished goods 390,768 546,163
------------- ------------
1,331,847 1,356,140
Less reserve for obsolescence (866,794) (754,499)
------------- ------------
Total $ 465,053 $ 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 8.25% at
September 30, 1999), secured by all assets of the Company. The Company had
borrowings against this line-of-credit of $400,000 at September 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
September 30, 1999, the term note balance was $120,000, of which $60,000
was due and unpaid as of September 15, 1999.
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
September 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 COMMUNICATIONS CORPORATION
Notes to Financial Statements
NOTES PAYABLE - continued
Notes payable consisted of the following:
<TABLE>
<CAPTION>
September 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
8.25% at September 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 - (39,396)
Less current maturities 120,000 (303,950)
------------ ------------
Long term portion $ - $ 460,604
============ ============
</TABLE>
4. LEASES
The Company leases building space under an operating lease. Total rent
expense was approximately $86,000 and $93,000 for the nine months ended
September 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
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 whom 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 $1,500 and $17,790 for the
nine months ended September 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 exercisable at between $0.83 and $0.95 per share and expired
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. The
warrants are exercisable at $.83 per share in the first year following the
Canadian public offering and $0.95 in the second year. These warrants
expired September 8, 1999.
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 at $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 expired 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 nine
months ended September 30, 1999 and 1998, respectively, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended September 30,
September 30,
1999 1998 1999 1998
(unaudited) (unaudited)
---------------------- -------------------------------
<S> <C> <C> <C> <C>
U.S. $ 109,000 $ 315,000 $ 335,000 $ 627,000
Germany 22,000 846,000 152,000 911,000
Japan 3,000 35,000 11,000 107,000
Netherlands 103,000 101,000 305,000 400,000
Other 73,000 184,000 240,000 507,000
--------- ---------- ----------- -----------
Total sales $ 310,000 $ 1,481,000 $ 1,043,000 $ 2,552,000
========= =========== =========== ===========
</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 expired 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, 401,802 were forfeited as of September
30, 1999. 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 September 30, 1999, 297,238 shares were
vested and the balance on the notes receivable was $133,758. Total stock
based compensation
12
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
STOCK OPTIONS - continued
expense for the nine months ended September 30, 1999 and 1998 included in
general and administrative expense was $0 and $12,657, 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 September 30, 1999
under the April 1997 Plan amounted to 553,833 shares. None of the options
have been exercised and 1,273,873 remain outstanding as of September 30,
1999 after taking into effect the cancellation of 564,061. 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 may 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 September 30, 1999 Compared to Three Months Ended
--------------------------------------------------------------------
September 30, 1998
------------------
Net Sales: Gross sales for the three months ended September 30, 1999
totaled $339,680 before returns of $29,877, for net sales of $309,803 as
compared to gross sales of $1,491,687 before returns of $10,825, for net
sales of $1,480,862 for the same period in 1998. The decrease in net sales
of $1,171,059, or 79%, can be attributed to significant first half of 1999
delays in the release of the Company's next generation of DirectRoute and
Datamizer product lines, which continued to impact market acceptance into
the third quarter. In addition, sales and marketing efforts have been
constrained by the lack of adequate operating capital sufficient to support
normal business activities. The revenue decline came primarily from the
Datamizer product line in the Europe region. Working capital limitations
will continue to adversely impact worldwide sales.
The gross margin for the three months ended September 30, 1999 was
$(137,474), or (44.4)%, as compared to $933,919, or 63.1%, 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. Also, the Company recorded a $210,000 expense
for inventory obsolescence in the three months ended September 30, 1999.
Before the inventory adjustment, gross margin at September 30, 1999 was
$72,526 or 23.4%.
14
<PAGE>
Sales and marketing expense: Sales and marketing expenses for the three
months ended September 30, 1999 were $271,456 as compared to $299,719 for
the comparable three-month period in 1998. This $28,263 decrease is
attributable primarily to reductions in compensation, commissions and
travel expenses, offset by an increase in Europe expenses.
The increase in Europe expenses is the result of the decision by the
Company to close its Europe office in The Hague, The Netherlands. Sales and
Tech Support will be handled by personnel in the United States along with
the assistance of the Company's manufacturing representative in the United
Kingdom. Symplex has reserved $110,000 in the three months ended September
30, 1999 for this closing. Management is uncertain whether this action will
have a significant impact on current levels of European revenue as the
responsibilities of the three sales and tech support individuals in the
Europe office should be manageable by U.S. personnel.
Research and development expenses: Research and development expenses for
the three months ended September 30, 1999 were $138,881 compared to
$173,146 for the third quarter of 1998. This $34,265 favorable decline
results primarily from decreases in outside professional services relating
to product development and in compensation expense.
General and administrative, Engineering and Service expenses: General and
administrative expenses for the three months-ended September 30, 1999 were
$153,609 as compared to $276,213 for the similar period in 1998. The
$122,604 decrease resulted from a decrease in professional fees expenses
and a lesser decrease in compensation. Engineering expenses for the three
months ended September 30, 1999 were $36,242 as compared to $79,310 for the
comparable period in 1998. This $43,068 decrease resulted primarily from a
decrease in compensation. Service expenses for the three months-ended
September 30, 1999 were $31,271 as compared to $57,055 for the similar
period in 1998. The $25,784 decrease resulted from a decrease in
compensation.
Net Loss: The Company reported a net loss of $806,311 or $.08 per share for
the three months ended September 30, 1999 as compared to a net loss of
$8,789 for the comparable period in 1998. The increase in the quarterly
loss results from the negative sales impact of delayed opportunities,
principally, in new product development and release efforts caused by the
difficulties associated with the final testing and commercial release of RO
2 and Datamizer 6 products, which occurred in the first half of 1999.
Further, the inventory adjustment of $210,000 and the reserve of $110,000
for the Europe office closing negatively impacted the results of operations
for the three months ended September 30, 1999.
Liquidity and Capital Resources
-------------------------------
In the first nine months of 1999 as compared to the corresponding nine-
month period in 1998, Symplex experienced increased losses on declining
sales. The Company financed its operating loss for the nine months of 1999
partially from operating activities 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 nine months ended September
30, 1999 was $1,005,634 as compared to $2,057,969 in the corresponding
period of 1998. Cash generated by financing activities through September
30, 1999 totaled $920,183 as compared to $2,228,992 in the corresponding
period of 1998. The source of these funds in 1999 was the private placement
15
<PAGE>
proceeds of $1,200,000 before expenses, offset by payments on 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
decrease attributable to significant delays in new product developments and
their commercial release. The accounts receivable turnover at September 30,
1999 was 5.9 times annually or approximately 62 days to collection while
inventory turnover was 3.5 times annually or approximately 105 days in
inventory. These ratios represent an improvement over prior periods as the
Company has placed considerable emphasis on accounts receivable and
inventory management.
At September 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, which matures December
31, 1999. 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 on the notes and the bank has demanded full
payment. 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. Without an infusion of
additional capital, the Company will not be able to comply with these
covenants 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 September 30, 1999, the Company's principal sources of liquidity were
cash of $26,757 and trade receivables of $163,301. The stockholders' equity
(deficit) at September 30, 1999 totaled $(533,181) as compared to
stockholders' equity of $452,909 at December 31, 1998. At September 30,
1999, the Company had a working capital deficit of $740,196 as compared to
a working capital surplus of $657,435 at December 31, 1998. The Company has
experienced difficulties in remitting trade payables in a timely manner
causing some of these significantly aged accounts to threaten more
aggressive collection actions, including litigation. Currently, these past
due accounts approximate $100,000.
In addition, the Company's former third party manufacturer has expressed a
claim for approximately $200,000 for unpaid inventory components purchased
on Symplex's behalf. In past years, this manufacturer has maintained up to
$1,000,000 in component inventory based on Symplex's forecasted product
sales. Although the Company no longer utilizes this third party
manufacturer, it continues to sparingly purchase these components for its
current third party manufacturers. Symplex believes it has an obligation to
consume these components in its third party manufacturing activities and is
in active discussions to resolve this matter successfully. The Company
believes it has adequately reserved for any exposure resulting from this
claim.
16
<PAGE>
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 will 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 will be
severally and 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.
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 nine months
ended September 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: November 12, 1999 By: /s/ Gary R. Brock
------------------
Gary R. Brock
President, Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 By: /s/ Thomas Radigan
-------------------
Thomas Radigan
Chief Financial Officer, Treasurer,
Secretary (Principal Financial and
Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company, as amended by Agreement
of Merger by and between the Company and Symplex Communications
Corporation, a California corporation./(1)/
3.2 Bylaws of the Company./(1)/
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)/
19
<PAGE>
10.7 Business Loan Agreement and Addendum to Business Loan Agreement, each
dated March 25, 1997, between the Company and Michigan National
Bank./(1)/
27.1 Financial Data Schedule.
_______________________________
(1) Incorporated by reference from the Company's Registration Statement on
Form 10-SB filed May 30, 1997.
(2) Incorporated by reference from the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 11, 1998.
(4) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1998.
(5) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1999.
20
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 26,757
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<RECEIVABLES> 200,361
<ALLOWANCES> 37,060
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12,245
<COMMON> 84,621
<OTHER-SE> (630,047)
<TOTAL-LIABILITY-AND-EQUITY> 934,922
<SALES> 309,803
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