<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, 2000
------------------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 5(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.)
11060 Hi Tech Drive, Whitmore Lake, MI 48189
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (734) 449-9370
--------------
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 14 is 8,998,409
------------------------
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, 2000 (unaudited) and December 31, 1999 3
Statements of Operations for the Three Months Ended September 30, 2000 (unaudited) and
1999 (unaudited) and for the Nine Months Ended September 30, 2000 (unaudited)
and 1999 (unaudited) 4
Statement of Stockholders' Equity for the Nine Months Ended
September 30, 2000 (unaudited) and Year Ended December 31, 1999 5
Statements of Cash Flows for the Nine Months Ended September 30, 2000 (unaudited)
and 1999 (unaudited) 6
Notes to Unaudited Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations.
PART II - OTHER INFORMATION 19
SIGNATURES 19
INDEX TO EXHIBITS 20
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Information
SYMPLEX COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
Balance Sheets
--------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Assets (Note 3) 2000 1999
(unaudited)
--------------- -------------
<S> <C> <C>
Currents assets
Cash and cash equivalents $ 48,956 $ 37,735
Trade receivables, less allowance for doubtful accounts of $17,370 in 2000 and
$36,464 in 1999, respectively 34,928 339,869
Inventories (Note 2) 206,656 441,112
Prepaid expenses and other current assets 35,283 51,786
--------------- -------------
Total current assets 325,823 870,502
Property and equipment
Machinery and equipment 744,334 1,709,694
Office equipment 128,900 609,999
Leasehold improvements 9,336 19,590
--------------- -------------
Total 882,570 2,339,283
Less accumulated depreciation (794,660) (2,188,783)
--------------- -------------
Net property and equipment 87,910 150,500
--------------- -------------
Total assets $413,733 $ 1,021,002
=============== =============
Liabilities and stockholders' equity
Current liabilities
Trade payables $ 261,847 $ 465,540
Customer deposit 84,830 41,502
Accrued bonuses and commissions 61,390 104,523
Accrued expenses for European operations (Note 11) 147,325 187,488
Accrued contingent liability (Note 11) - 125,000
Accrued expenses 157,664 175,221
Unearned revenue 85,114 111,432
Notes payable - line of credit (Note 3) - 400,000
Notes payable - current portion (Note 3) - 120,000
Notes payable - officer (Note 3) - 50,000
--------------- -------------
Total current liabilities 798,170 1,780,706
Total liabilities 798,170 1,780,706
--------------- -------------
Common stock issued subject to redemption (Note 14) 500,000 500,000
Stockholders' equity (Notes 7, 8, 10 and 14)
Common stock, $.01 par value; 24,000,000 shares authorized and 8,998,409
shares issued and outstanding at September 30, 2000 and 8,397,452 shares
issued and outstanding at December 31, 1999 83,732 77,723
Preferred stock, $.01 par value; 6,000,000 shares authorized and 1,224,490
shares issued and outstanding at September 30, 2000 12,245 12,245
Additional paid-in capital 7,060,800 6,721,287
Additional paid-in capital - warrants 131,616 131,616
Notes receivable - recourse 0 (22,351)
Notes receivable - non-recourse 0 (82,245)
Retained earnings (accumulated deficit) (8,172,830) (8,097,979)
--------------- -------------
Total stockholders' equity (deficit) (884,437) (1,259,704)
--------------- -------------
Total liabilities and stockholders' equity $ 413,733 $ 1,021,002
=============== =============
</TABLE>
See notes to financial statements.
3
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
Statements of Operations
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited)
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenue (Note 9)
Manufactured products $ 24,040 $ 257,888 $ 426,575 $ 909,224
Licensing - - 1,000,000 -
Development fees 22,400 - 229,723 -
Maintenance contracts and service 35,239 51,915 103,274 134,240
----------------- ----------------- ----------------- -----------------
Total net sales and revenues 81,679 309,803 1,759,572 1,043,464
Costs and expenses
Cost of products sold 104,522 447,277 500,216 962,418
Selling and marketing 42,630 271,456 181,971 797,028
General and administrative 97,520 153,609 624,641 758,824
Research and development 12,849 138,881 227,166 614,103
Engineering - 36,242 63,900 235,491
Service 15,782 31,271 57,136 158,440
----------------- ----------------- ----------------- -----------------
Total costs and expenses 273,303 1,078,736 1,655,030 3,526,304
----------------- ----------------- ----------------- -----------------
Operating income (loss) (191,624) (768,933) 104,542 (2,482,840)
----------------- ----------------- ----------------- -----------------
Other income (expense)
Interest expense (1,068) (13,932) (89,975) (57,924)
Amortization of discount on notes payable - (6,951) - (20,853)
Other income (expense) (17,225) (16,495) (89,418) (7,869)
----------------- ----------------- ----------------- -----------------
Total other income and Expenses (18,293) (37,378) (179,393) (86,646)
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (209,917) $ (806,311) $ (74,851) $ (2,569,486)
================= ================= ================= =================
================= ================= ================= =================
Income (loss) per basic common share $ (0.02) $ (0.08) $ (0.01) $ (0.27)
================= ================= ================= =================
Weighted average common shares outstanding 8,998,409 9,689,125 8,744,089 9,448,404
================= ================= ================= =================
</TABLE>
See notes to financial statements.
4
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
Statements of stockholders' equity
Nine months ended September 30, 2000 (unaudited)
---------------------------------------------------------------------------------------------------------------------------------
Additional
Paid-in
Common Preferred Capital
---------------------------- --------------------------
Shares Amount Shares Amount Warrants
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1999 8,397,452 $ 77,723 1,224,490 $ 12,245 $ 131,616
Issuance of common stock, net of $1,478 in costs, -
conversion of debt to equity (Note 3) 279,291 2,793
Issuance of common stock, net of $42 in costs, - 350,000 3,500
warrants exercised (Note 8)
Employee stock purchase plan (Note 10) - Notes
excercised
Employee stock purchase plan (Note 10) (28,334) (284)
Net Income (loss)
----------- ---------- ----------- ---------- -----------
Balance - September 30, 2000 8,998,409 $ 83,732 1,224,490 $ 12,245 $ 131,616
=========== ========== =========== ========== ===========
<CAPTION>
--------------------------------------------------------------------------
Retained
Additional Notes Notes Earnings
Paid-in Receivable Receivable (Accumulated
Capital Recourse Non-recourse Deficit) Total
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1999 $ 6,721,287 $ (22,351) $ (82,245) $ (8,097,979) $ (1,259,704)
Issuance of common stock, net of $1,478 in costs, -
conversion of debt to equity (Note 3) 275,021 277,814
Issuance of common stock, net of $42 in costs, -
warrants exercised (Note 8) 76,958 80,458
Employee stock purchase plan (Note 10) - Notes
excercised 9,601 82,245 91,846
Employee stock purchase plan (Note 10) (12,466) 12,750 -
Net Income (loss) (74,851) (74,851)
------------- ------------ ------------- ------------ -------------
Balance - September 30, 2000 $ 7,060,800 $ 0 $ 0 $ (8,172,830) $ (884,437)
============= ============ ============= ============ =============
</TABLE>
See notes to financial statements.
5
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2000 1999
------------------ ------------------
(unaudited)
--------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (74,851) $ (2,569,486)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Allowance for inventory obsolescence (65,722) 157,434
Depreciation 39,267 77,896
Loss (gain) on disposal of assets 33,331 (1,560)
Amortization of discount on notes payable - 20,853
Compensation recognized for stock options 91,846 -
Loss (gain) on forgiveness of debt - (14,685)
Loss on stock issued for extension of repurchase option 80,500 -
Changes in assets and liabilities:
Trade receivables 304,941 1,162,865
Inventories 300,178 (20,846)
Prepaid expenses and other current assets 16,503 29,789
Trade payables (203,693) 54,221
Unearned maintenance revenue (26,318) 22,024
Accrued expenses (182,525) 75,861
------------------ ------------------
Total adjustments 388,308 1,563,852
------------------ ------------------
Net cash provided (used) in operating activities 313,457 (1,005,634)
Cash flows from investing activities:
Purchases of property and equipment (11,878) (43,410)
Proceeds from sales of equipment 1,870 1,560
------------------ ------------------
Net cash used in investing activities (10,008) (41,850)
Cash flows from financing activities:
Payments on line of credit (120,708) (38,767)
Borrowings (payments) of notes payable (120,000) (169,265)
Payments of notes - officers (50,000) -
Payment of fees related to conversion of equity (1,520) (2,363)
Deferred offering and financing costs - 44,819
Proceeds (net) from issuance of preferred stock - 1,085,759
------------------ ------------------
Net cash provided (used) by financing activities (292,228) 920,183
------------------ ------------------
Net increase (decrease) in cash 11,221 (127,301)
Cash - beginning of period 37,735 154,058
------------------ ------------------
Cash - end of period $ 48,956 $ 26,757
================== ==================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 116,788 $ 44,665
================== ==================
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of short-term debt to common stock $ 279,291 $ (500,000)
================== ==================
Issuance of common stock as a financing fee $ - $ 19,600
================== ==================
Cancelled notes receivable and stock held in escrow returned to treasury $ 12,750 $ 9,770
================== ==================
</TABLE>
See notes to financial statements.
6
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Unaudited 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, 2000 and 1999, 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,
2000 and 1999 are not necessarily indicative of the results of the entire
year.
2. INVENTORIES
Inventories as of September 30, 2000 and December 31, 1999 consist of the
following:
September 30, December 31,
2000 1999
(unaudited)
--------------- ----------------
Raw materials $ 81,841 $ 97,276
Work-in-process 394,168 581,922
Finished goods 108,930 213,282
--------------- ---------------
584,939 892,480
Less reserve for obsolescence (378,283) (451,368)
--------------- ---------------
Total $ 206,656 $ 441,112
=============== ================
7
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Unaudited Financial Statements
--------------------------------------------------------------------------------
3. NOTES PAYABLE
The Company had a line-of-credit agreement, which provided for borrowings
up to $500,000 at 2% above the bank's prime rate (prime was 8.5% at March
31, 2000), secured by all assets of the Company. The Company had
borrowings against this line-of-credit of $400,000 at December 31, 1999.
The line-of-credit agreement matured June 30, 1999 and the bank indicated
its unwillingness to renew the line.
The Company had a term note, which matured December 1, 1999 and required
quarterly principal payments, beginning September 1, 1997, of $10,000 for
the first two payments, and $60,000 for the remaining eight. The term note
required quarterly interest payments at a variable rate of 2% above the
bank's prime rate. All assets of the Company secure the note. At December
31, 1999, the term note balance was $120,000.
The agreement for the line-of-credit and the term note contain restrictive
covenants, the most significant of which require the Company to 1)
maintain certain levels of net worth, as defined; 2) maintain certain
levels of working capital; and 3) maintain a certain level of total
liabilities to net worth. The Company was not in compliance with the
covenants at December 31, 1999. 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 March 2000, the Company executed an agreement with the bank to
eliminate the outstanding indebtedness on the line of credit and the term
note, totaling $520,000. The terms of the agreement included a cash
payment of $240,708 plus interest of $38,583 and the issuance of 279,291
common shares of equity with the option for the Company to repurchase all
or part of these shares on or before March 31, 2002 at $1.00 per share.
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. With the conversion of the note
to equity, the related unamortized discount was reclassed to paid-in-
capital. As part of the agreement, 500,000 shares are subject to
redemption (Note 14).
In October 1999, the Company executed a demand promissory note for $50,000
payable to the President of the Company. The principal balance bears
interest at 15%. The note was paid in January 2000.
8
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Unaudited Financial Statements
--------------------------------------------------------------------------------
3. NOTES PAYABLE- continued
Notes payable consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
-------------- -------------
<S> <C> <C>
Term note payable. Payments of $60,000 quarterly including
interest at prime rate plus 2% (prime was 8.5% at December
31, 1999) with final payment due on December 15, 1999.
Secured by all assets of the Company. On March 2000, a
cash payment and the issuance of stock eliminated the
note payable. - 120,000
Term notes payable. Payable upon demand plus interest at 15%.
Paid in January 2000. 50,000
-------------- -------------
Total - 170,000
Unamortized discount - -
Less current maturities - (170,000)
-------------- -------------
Long term portion $ - $ -
============== =============
</TABLE>
4. LEASES
In an effort to improve efficiencies and the bottom line, the Company
relocated its operations to two smaller offices in the Ann Arbor area on
June 1, 2000. The Company signed new leases that will expire in April and
June of 2002. Total rent expense was approximately $59,000 and $86,000 for
the nine months ended September 30, 2000 and 1999, respectively.
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 $1,100 and
$1,500 for the nine months ended September 30, 2000 and 1999,
respectively.
9
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Unaudited Financial Statements
--------------------------------------------------------------------------------
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 February 1997, the Company entered into an agreement with a private
investment group to assist the Company with a Canadian initial public
offering. In consideration for the assistance, the Company granted
warrants to purchase 233,333 shares of common stock. The warrants vested
upon completion of the initial public offering on February 11, 1998. These
warrants expired on February 10, 2000, two years from the effective date
of the initial public offering. The warrants were exercisable at $1.00 per
share for the first twelve months and $1.15 per share thereafter.
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. In May 2000, the Company exercised the
warrants on behalf of the private investor and issued 350,000 shares of
common stock at $0.23 per share in exchange for an extension of the
repurchase of common stock (Note 14). The Company incurred $80,541.51 in
interest and fees related to this transaction. $80,500 was incurred by the
issuance of 350,000 common stock at $0.23 per share and $41.51 was paid
for professional fees.
10
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Unaudited Financial Statements
--------------------------------------------------------------------------------
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, 2000 and 1999, respectively, were as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
(unaudited) (unaudited)
----------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
U.S. $ 48,000 $ 109,000 $ 1,498,000 $ 335,000
Germany 21,000 22,000 33,000 152,000
Japan 6,000 3,000 32,000 11,000
Netherlands 7,000 103,000 81,000 305,000
Other - 73,000 116,000 240,000
---------- ---------- ----------- -----------
Total sales $ 82,000 $ 310,000 $ 1,760,000 $ 1,043,000
========== ========== =========== ===========
</TABLE>
10. 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, 494,940 were forfeited as of September
30, 2000. 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 614,761 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 2000, no
shares remain vested.
11
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Unaudited Financial Statements
--------------------------------------------------------------------------------
10. STOCK OPTIONS - continued
In September 1997, the February 1997 Plan expired and there are no
remaining options to be issued under this plan.
In February 2000, Symplex's Board of Directors authorized the forgiveness
of the Promissory Notes (and accrued interest) dated April 1, 1997, which
was executed as consideration for the purchase of certain shares of stock
of the Company. In addition, the Company agreed to pay all related taxes
associated with this transaction on the employee behalf.
In April 2000, the Company processed the forgiveness of the Promissory
Notes for 204,100 shares of common stock and incurred $154,155 in expenses
related to this transaction of which $91,846 for the recourse and
non-recourse notes, $45,784 was for taxes and the $16,525 for interest.
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, 215,325 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, 2000 under the April 1997 Plan amounted to 948,833 shares. None of the
options have been exercised and 455,325 remain outstanding as of September
30, 2000 after taking into effect the cancellation of 1,777,609. In August
1998, the Company re-priced the exercise price to $0.31 per common share
for the majority of these options.
11. 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.
In March 2000, the Company was named as the defendant in a lawsuit filed
by a former third party manufacturer. The claim for approximately $200,000
is for unpaid inventory components purchased on Symplex's behalf. Although
the Company no longer utilizes this third party manufacturer, it had
sparingly purchased these components for its current third party
manufacturer. Symplex believes it has an obligation to consume these
components. The Company is in active discussions to resolve this matter
out of court and believes it has adequately reserved for any exposure. The
complaint was filed in Washtenaw County Circuit Court in the State of
Michigan. On May 23, 2000, a settlement agreement was signed for $120,000.
The terms of the settlement required an initial payment of $50,000 upon
execution and four monthly payments of $17,500. In September 2000, the
Company executed the agreement as specified in the settlement and the
Company was discharged from the claim.
12
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Unaudited Financial Statements
================================================================================
11. LITIGATION- continued
In July 2000, the Company was informed of a judgement dated March 22, 2000
as the defendant in a lawsuit filed by the landlord's in The Hague. The
judgement was filed in The Hague. The claim is for arrears of rent in
approximately Dfl 82,000.00 or approximately $36,000. Symplex believes it
has an obligation for the rent and is adequately reserved for the
exposure.
12. SERVICE AGREEMENT
On June 15, 2000, the Company signed a software development and service
agreement with a local engineering firm, LeapPoint Technologies Inc.
("LeapPoint") and transferred its engineering team. The Company will
outsource ongoing support of current product lines as well as future
development efforts.
On August 23, 2000, the agreement was terminated for breach of contract.
In September 2000, the Company and LeapPoint were in renegotiations for a
new contract and during the interim LeapPoint is continuing to support our
product lines on an as needed basis. If a new contract with LeapPoint is
not established the ongoing support of current product lines and current
development partnerships will be in jeopardy.
13. DEVELOPMENT CONTRACT
In November 1999, the Company entered into a partnership agreement with a
provider of network access equipment to develop customized DSL (Digital
Subscriber Line) versions of Symplex's RO-2. The completion date of the
development work was the second quarter of 2000. In 1999, the Company
received $200,000 related to the partial completion of the contract,
recognizing $120,000 in development fee income and deferring the remaining
$80,000. The deferred development fee income of $80,000 was recognized in
the three months ending March 31, 2000. If the Company does not
renegotiate a new contract with LeapPoint to complete the balance of the
contract, the partnership agreement will be in jeopardy and possibly lead
to litigation. (Note 12)
14. COMMON STOCK ISSUED SUBJECT TO REDEMPTION
As an Amendment to the Share for Debt Agreement, in which the Company
entered into an agreement with a private investor to issue 625,000 shares
of common stock in exchange for the settlement of a $500,000 note payable
(Note 3), the private investor granted to the Company the option to
purchase 500,000 common shares of the Company at the option price of $1.00
per share on or before May 18, 2000. As consideration for this option, the
Company is required to pay $18,750 quarterly, which began in February
1999. The foregoing notwithstanding, the Company is obligated to purchase
from the private investor the 500,000 common shares pursuant to the terms
of the option no later than May 18, 2000.
The Company incurred $92,425 in fees related to this transaction. $90,000
was incurred by the issuance of 125,000 common stock at the ten-day
trailing average stock price as quoted on the Canadian Venture Exchange
and $2,425 was paid for professional fees.
13
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SYMPLEX COMMUNICATIONS CORPORATION
Notes to Unaudited Financial Statements
================================================================================
14. COMMON STOCK ISSUED SUBJECT TO REDEMPTION - continued
On April 19, 2000 the parties agreed to extend the terms of the repurchase
to no later than May 18, 2001. In addition, the private investor may sell
the shares to the open market with the proceeds of these sales reducing
the Company's total obligation. Also, the Company will attempt to pay an
amount greater than the quarterly payment to the private investor reducing
the total obligation and the quarterly payments.
******
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<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 installed base, the appeal of the Company's family
of products, the Company's success at entering into and collaborating with
others to create effective strategic alliances and joint ventures, general
competitive conditions within the telecommunications market and general economic
conditions. Further, any forward looking statements speak only as of the date on
which such statement was made, and the Company undertakes no obligation to
update any forward looking statements to reflect events or circumstances after
the date on which such statements are made or to reflect the occurrence of
unanticipated events. Therefore, forward looking statements should not be relied
upon as a prediction of actual future results.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended September
------------------------------------------------------------------------------
30, 1999
--------
Net Sales: Gross sales for the three months ended September 30, 2000 totaled
$108,320 before returns of $26,641, for net sales of $81,679 as compared to
gross sales of $339,680 before returns of $29,877, for net sales of $309,803 for
the same period in 1999. The decrease in net sales of $228,124, or 74%, is
primarily from declined international revenue associated with the closing of our
sales office in Europe and a decrease in service agreements for the
customization and enhancement of software. In February 2000, the Company entered
into a partnership agreement with a leading provider of network access
equipment. The agreement provides a worldwide, perpetual, irrevocable,
non-exclusive license of the Symplex RO-2 router software and an ongoing service
agreement for the customization and enhancement of the software to meet the
needs and requirements of the marketplace. Upon the termination of the service
contract with LeapPoint, the Company, with the approval of the partnership,
transferred the ongoing service agreement for the customization and enhancement
of the software to LeapPoint.
The gross margin for the three months ended September 30, 2000 was $(22,843), or
(28.0)%, as compared to $(137,474), or (44.4)%, for the comparable period in
1999. The increase in gross margin is attributable primarily to a inventory
obsolescence expense recorded in the three months ended September 30, 1999 of
$210,000 offset by a reduction in revenue for the three months ended September
30, 2000.
15
<PAGE>
Sales and marketing expense: Sales and marketing expenses for the three months
ended September 30, 2000 were $42,630 as compared to $271,456 for the comparable
three-month period in 1999. This $228,826 decrease is attributable primarily to
the decision of the Company to close its Europe office in The Hague, The
Netherlands, in the third quarter of 1999. The cost saving associated with
closing the European operations is $201,824 of which $91,824 is related to
operational expenses and $110,000 to a reserve expensed in the three months
ended September 30, 1999. The balance of $27,002 can be attributed to a
reduction in compensation expense in domestic operations.
Research and development expenses: Research and development expenses for the
three months ended September 30, 2000 were $12,849 compared to $138,881 for the
third quarter of 1999. This $126,032 favorable decline results primarily from
the decrease in compensation expense coinciding with the signing of a software
development and service agreement with LeapPoint and transferring the
engineering team.
General and administrative, Engineering and Service expenses: General and
administrative expenses for the three months-ended September 30, 2000 were
$97,520 as compared to $153,609 for the similar period in 1999. The $56,089
decrease resulted primarily from a decrease in compensation expense. Engineering
expenses for the three months ended September 30, 2000 were $0 as compared to
$36,242 for the comparable period in 1999. This $36,242 decrease resulted
primarily from a decrease in compensation expenses and transferring the
engineers to LeapPoint for outsourcing ongoing technical support. Service
expenses for the three months ended September 30, 2000 were $15,782 as compared
to $31,271 for the similar period in 1999. The $15,489 decrease resulted from a
decrease in compensation expenses.
Net Loss: The Company reported a net loss of $209,917 or $.02 per share for the
three months ended September 30, 2000 as compared to a net loss of $806,311 or
$.08 for the comparable period in 1999. The decrease in the quarterly loss
results from a decrease in international sales and the effort to reduce
operating expenses in anticipation of the Company redirecting its efforts in
pursuit of licensing opportunities and providing custom technology solutions.
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 2000 as compared to the corresponding nine-month
period in 1999, Symplex experienced a significant increase in net income. The
Company's operation and financial activities were met for the first nine months
of 2000 from operating cash flow. The positive cash flow enabled Symplex to
execute an agreement to eliminate the notes payable of $120,000 and line of
credit of $400,000 in the first quarter ending March 31, 2000. In contrast to
the first nine month of 1999 in which the Company financed its operating loss
primarily through a $1.2 million private placement of preferred shares before
expenses and 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.
16
<PAGE>
Operating activities provided cash for the nine months ended September 30, 2000
of $313,457 as compared to cash requirement of $1,005,634 in the corresponding
period of 1999. Cash utilized by financing activities through September 30, 2000
totaled $292,228 as compared to $920,183 generated in the corresponding period
of 1999. The source of these funds in 1999 was a private placement proceeds of
$1.2 million before expenses, offset by payments on borrowings of $208,032.
The Company's cash position has modestly improved but the existing sources of
liquidity and the funds generated from anticipated future operations will not be
sufficient to meet the Company's projected cash requirements for 4/th/ quarter
2000. The accounts receivable turnover at September 30, 2000 was 5.5 times
annually or approximately 67 days to collection while inventory turnover was 4.2
times annually or approximately 88 days in inventory. These ratios represent a
decline over prior periods due to a reduction in revenue in the current quarter
and the Company aggressively emphasizing the collection of account receivables
in prior quarters.
As of September 30, 2000, the Company's principal sources of liquidity were cash
of $48,956 and trade receivables of $34,928. The stockholders' equity (deficit)
at September 30, 2000 totaled $(884,437) as compared to stockholders' equity
(deficit) of $(1,259,704) at December 31, 1999. At September 30, 2000, the
Company had a working capital deficit of $472,347 as compared to a working
capital deficit of $910,204 at December 31, 1999. 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.
In the opinion of management, the existing sources of liquidity and the funds
generated from anticipated future operations will not be sufficient to meet the
Company's 4th quarter 2000 projected working capital and other cash
requirements. As the Company will require additional capital to satisfy its
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 during the 4/th/ quarter 2000, its
ability to maintain operations, continue product development and to generate
revenue growth will be adversely impacted.
On October 13, 2000, the Company announced that immediate action be taken to
explore the sale, in whole or in parts, the assets of the company to raise funds
to meet the Company's cash requirements. Merging with a private company will
also be explored. U.S. telecommunication companies have been targeted, in
addition to international companies operating in China, India, and South
America.
17
<PAGE>
DIRECTORS, EXEUTIVE OFFICES, PROMOTERS AND CONTROL PERSONS
On April 19, 2000, Symplex Communications Corporation announced the retirement
of Gary R. Brock as Symplex's President and Chief Executive Officer. The Board
of Directors appointed Symplex's Director of Marketing, Duane Gardner as Acting
President and Chief Executive Officer.
On September 19, 2000, the Board of Directors appointed Tom Mayer on an interim
basis as President and CEO. Tom Mayer is a long-term member of the board and was
the President and CEO of Symplex in 1997. He has experience with many high tech
companies and has served as Chairman of the Board and CEO of a Nasdaq Company.
The Board also announced the previous election of Mark Wilkie to the Board. Mr.
Wilkie holds a Business degree from the University of Michigan and a Juris
Doctorate degree from Wayne State University. He is the owner of a building
materials company that has grown to a controlling interest in nine companies,
resulting in over $100 million in sales in 1999 and a founding and current Board
member of the Drake Group LLC.
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.
To date, the Company has not experienced any significant problems as a result of
the Year 2000. The Company's staff performed all analysis and testing, and
Symplex did not incur any significant costs to evaluate the Year 2000 issue. In
addition, the Company is not aware that any of its suppliers or customers has
experienced any significant problems as a result of the Year 2000. As the Year
2000 continues, the Company will continue to assess the impact on Symplex's
business, financial condition and results of operations.
18
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Included as exhibits are the items listed on the Exhibit Index.
(b) Reports on Form 8-K.
The Company filed the following report on Form 8-K during the nine
months ended September 30, 2000.
(1) Report on Form 8-K dated September 19, 2000, announced the
appointment of an interim president and a new board
member, that Company would take action to explore the
sale, in whole or in parts, the assets of the Company and
a decrease in revenues and a net loss in comparison to
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 14, 2000 By: /s/ Thomas Mayer
----------------
Thomas Mayer
Acting President, Acting Chief Executive Officer
(Principal Executive Officer)
19
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
--------------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company, as amended by
Agreement of Merger by and between the Company and Symplex
Communications Corporation, a California corporation./(1)/
3.2 Bylaws of the Company./(1)/
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)/
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.
20
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
-----------------------------------------------------------------------------
(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.
21
