<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____________________________TO____________________________________
COMMISSION FILE NUMBER: 0-22631
SYMPLEX COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 38-3338110
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
35 Research Drive, Ann Arbor, MI 48103
(Address of principal executive offices, zip code)
Registrant's telephone number including area code: (734) 995-1555
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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. YES X NO
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained herein, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
The Registrant's operating revenues for its most recent fiscal year was:
$1,545,315.
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing price of the Registrant's Common Stock as of a
specified date within the past 60 days:
$4,810,971 as of February 29, 2000
As of February 29, 2000, 8,397,452 shares of Common Stock and 1,224,490 shares
of Common Stock Equivalents (resulting from potential conversion of Preferred
shares to Common, see Item 7. Note 10 and Item 11), $.01 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format: Yes No X
----- -----
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GLOSSARY
bandwidth A measure of how fast a network can move
information, usually measured in millions or
billions of bits, or units of data, per
second. The greater the bandwidth, the
greater the speed of transmission information
capacity.
Backbone A centralized high-speed network that
connects smaller, independent networks.
Bps Bits per second, the basic unit of data
communications rate measurement. Usually
refers to the rate of information bits
transmitted.
Bridge A device that connects two networks using the
same standards.
client/server In its simplest form, this is an architecture
in which one computer (the server) stores and
manages data and another computer (the
client) sends requests for that data to the
server, and processes it and presents it to
the end user in response to requests. When
implemented over a WAN, client/server
architecture is described as "distributed".
Compression A technique to reduce the overall number of
bits needed to transmit information so as to
permit more signals to use the same channel.
A technique for reducing the bandwidth
necessary to carry information signals.
Digital A form of representation in which objects
(digits) or bits are used to denote something
so that counting and other operations such as
communication technique can be performed
precisely.
distributed computing The process by which data and applications
are distributed to multi-user computers,
workstations and personal computers within a
network rather than maintained on a
centralized computer.
Digital Subscriber Line (DSL) Line interface standard that provides high-
speed digital data transmission over existing
twisted copper pair wiring.
Encryption Any procedure used to convert normal data to
encoded data for the purpose of maintaining
information privacy.
ethernet - fast ethernet Ethernet is a wiring system and network
access protocol originally developed by Xerox
and used for LANs. Ethernet transmits
information between computers at speeds of 10
million bits per second. Fast ethernet, first
developed for backbone networks but now
entering into desktops, accommodates
transmission speeds up to 100 million bits
per second.
Firewall A gateway between two networks that buffers
and screens all information passing between
them.
frame relay An interface standard that defines how
computing devices connect to a data network
that is optimized for the transmission of
data packets. Frame relay shifts
responsibility for the integrity of the data
away from the network and onto the end
computing devices.
2
<PAGE>
Host A computer connected to a network that
provides services to other computers. A host
computer is generally, but not necessarily a
mainframe.
Hub Hubs are boxes that connect and funnel
network wiring, and are among the most widely
used types of networking hardware. Hubs
enable fault-tolerant interconnect of loops
by centralizing the wiring and allowing loop
operations and recovery even if nodes fail.
IP Internet Protocol. A set of rules used by
data communications devices to exchange data
among networks or computer systems. The
Internet Protocol permits dissimilar networks
to communicate.
Integrated Services A switched digital communications network
Digital Network (ISDN) that uses internationally recognized
standards to transmit data, voice and images
over digital lines.
Internet An open global network of interconnected
individual, commercial, educational and
governmental computer networks which utilize
a common communications protocol, TCP/IP.
Internetworking The process of connecting LANs together.
inverse multiplexing A technique for taking multiple low speed
channels and combining them into a channel of
higher speed.
kilobit (Kb) A thousand bits. Kbps refers to kilobits per
second, and describes the speed with which
data is transmitted.
Local Area Network (LAN) A network that is located in a small
geographic area, such as an office, a
building, a complex of buildings, or a
campus, and whose communications technology
provides a high bandwidth, low-cost medium to
which many nodes can be connected. These
networks typically do not use public network
circuits.
Mbps A million (Mega) bits per second.
Multiplexing The division of a channel in time or
frequency so that more than one signal can be
sent simultaneously over one physical
channel. Multiplexing is accomplished by a
device called a multiplexer.
Multiprotocol Multiprotocol devices are devices that can
route or otherwise handle several protocols
simultaneously.
Node A node is a connection point in a network
that can create, receive or repeat a message.
PBX (Private Branch Exchange) A PBX is a telephone switching system that
generally supports more than 100 users.
Packet A block of data sent over a network that
contains the message and the identities of
the sending and receiving devices and
information used.
protocol/standard A formal set of conventions governing the
format and control of inputs and outputs
between two communicating devices. This
includes the rules by which these two devices
communicate.
3
<PAGE>
Router A device that connects LANs. It also chooses
the best route between two networks when
there are multiple paths between them by
dividing networks into segments and
permitting only traffic destined for a
particular segment of a network to be routed
to that segment.
Server Software that allows a computer to offer a
service to another computer. Other computers
contact the server program by means of
matching client software. The term also
refers to the computer on which the server
software runs.
statistical multiplexing The dynamic combination of data from several
channels or inputs according to the amount of
activity on each, resulting in a combined
single data output.
E1 A European standard for a data communications
line capable of transmission speeds of 2.064
Mbps.
T1 A North American standard for a data
communications line capable of transmission
speeds of 1.54 Mbps.
T3 A North American standard for a data
communications line capable of transmission
speeds of 45 Mbps.
TCP/IP Transmission Control Protocol/Internet
Protocol. A compilation of network and
transport level protocols that allows
computers with different architectures and
operating system software to communicate with
other computers on the Internet.
Wide Area Network (WAN) A network covering a large geographical area.
Its nodes can span city, provincial/state or
national boundaries, and it typically uses
circuits provided by common carriers such as
telephone companies.
Corporate History
Symplex Communications Corporation ("Symplex" or "the Company") is a
Delaware corporation based in Ann Arbor, Michigan. It was formed on February 28,
1997 through the merger of a California corporation of the same name that was
incorporated and commenced business in 1982, into Symplex Acquisition
Corporation, a Delaware corporation formed in November 1996 for the sole purpose
of implementing the merger. In connection with the merger, Symplex Acquisition
Corporation changed its name to Symplex Communications Corporation. In this
Report, all references to "Symplex" or "the Company" include references to the
predecessor California corporation. On February 11, 1998, the Company completed
its initial public offering in British Columbia, Canada (the "Canadian IPO"),
selling 3,500,000 shares of Common Stock at a price to public of $1.00.
The Company has experienced annual losses since 1993, and by the last
quarter of 1996 the Company had eroded its accumulated earnings and was fully
extended on its bank line of credit. Being in need of and with a view to a fresh
infusion of capital to enable it to continue in business, the Company undertook
a comprehensive review of its financing, management and organizational
structure, and its product development and marketing and sales strategies. This
resulted early in 1997 in the development of a new financing and operating plan,
and the reconstitution of the board of directors and senior management. The
senior management was either hired or promoted to their current positions after
February 1997. Gary R. Brock, the President and Chief Executive Officer, assumed
his position on May 27, 1997, and Thomas Radigan, the Chief Financial Officer,
has been with the Company since February, 1997.
4
<PAGE>
BUSINESS OF THE COMPANY
Symplex designs, develops, manufactures and markets custom Internet
solutions for remote access communications switching and connectivity devices
with value added features such as data compression that enhance the performance
of existing LANs and WANs and their connectivity to the Internet. The Company's
products facilitate migration to cost effective communications networks such as
frame relay, leased line and ISDN. The Company's switches and compression
platforms are based on a distributed and modular architecture that currently
combines WAN switching, compression and routing in a single product family.
Symplex products support LAN, client server and host-based applications with the
ability to switch and compress data onto the Internet or private networks.
The Company has traditionally offered two internetworking product lines.
"Datamizer", first introduced in 1983, is currently in its sixth generation,
which was released in the first quarter of 1999. Datamizer is principally a
series of network products facilitating high-speed data transmission. Datamizer
units have been installed worldwide, and for the twelve months ended December
31, 1999, Datamizer revenues were approximately $930,000. DirectRoute, first
introduced in October 1994, consists of a wide range of ISDN WAN access
switches. In the twelve months ended December 31, 1999, DirectRoute products
have generated revenues of approximately $615,000. A second generation of
DirectRoute products, RO-2, was released in the first quarter of 1999.
Symplex products have been purchased by a broad variety of enterprises,
including Eastman Kodak Co, Bombardier, Citicorp, Columbia House, DHL, Exxon, GE
Capital, Kimberly-Clark and the US Postal Service. The Company's strategy is to
provide custom network solutions to these Symplex customers to enhance their
current installed networks.
In North America, Symplex markets and sells its products to organizations
with a requirement for internetworking and data compression technology, through
direct sales, distributors and resellers. The Company has entered into non-
exclusive distribution agreements covering a variety of geographic regions in
Asia (including Japan, Malaysia, and Taiwan) and Europe (including the United
Kingdom, Germany, Belgium, and the Netherlands), and in selected marketplaces in
South and Latin America.
The dominant part of the Company's product revenues has traditionally been
generated outside North America. In the two fiscal years ended December 31,
1999 and 1998, foreign sales, as a percentage of total product revenues, were
approximately 55% and 82%, respectively. In late 1998, the Company refocused
its North American direct sales force toward providing a wide range of custom
solutions of Internet access devices. In late 1999, these efforts led to signing
a partner agreement with a leading provider of Network Access Equipment. The
agreement calls for the development of customized DSL versions of the Company's
RO-2 product line to meet the requirements of the rapidly growing DSL
marketplace. The majority of the shipments are expected to begin in the second
half of 2000.
The Company's North American headquarters are located in Ann Arbor,
Michigan.
INDUSTRY BACKGROUND
General
The Symplex family of products is designed to respond to a need that
originates in several major trends over the past decade which have affected the
computer and communications industries generally.
The first trend has been the growth of distributed computing. Traditional
"mainframe" computing systems, based on closed, centralized, expensive,
relatively uniform and proprietary computer hardware and software, have been
displaced by decentralized server and PC based computer systems, with differing
operating systems, and often connected in either or both local area networks
("LANs") and wide area networks ("WANs"). This shift in emphasis to "distributed
computing" created a demand for seamless internetworking across geographically
dispersed areas among differing computer operating systems, both within
organizations and in their connections to external networks. Initially, this was
achieved by using dial-up modems through the public telephone lines. These
operated slowly, however, leading to the leasing of dedicated telephone lines
that had to be paid for whether or not used.
5
<PAGE>
The second trend consisted of changes in telecommunications transmission
technology. By the early 1990s, telephone companies in most of the
industrialized countries were able to provide high speed, error-free digital
services and many companies took advantage of this to build private networks
using digital telephone lines leased from the telephone companies, combined with
their own control systems. These networks consist of high-speed digital
circuits, such as 56 Kbps, T1 and T3, as well as specialized networking
equipment, such as bridges, routers, channel service units ("CSUs"), digital
service units ("DSUs"), private branch exchanges ("PBXs") and T1 multiplexers,
and typically transmit large quantities of voice, video and data traffic.
Because of their expense and the high cost of managing them, however, private
digital networks have traditionally interconnected only larger corporate sites.
The growing availability of faster and less expensive personal computers,
workstations and portable PCs, has increased the number of remote offices,
telecommuters and mobile computer users. This has placed new demands on
networks, since smaller sites require connectivity to corporate backbone
networks. Satisfying these demands, given the high cost and inflexibility of
dedicated digital circuits and low speed of modems, is costly for many remote
offices and users and for the applications for which such offices and users
require connectivity.
The third trend has been the dramatic growth in the Internet, an open
global network of interconnected individual, commercial, educational and
governmental computer networks using TCP/IP as a common communications protocol.
Internet access providers can now provide reliable, high quality and relatively
low-cost access to the Internet across a range of bandwidths. Router-based
networks, however, lacked the ability to switch communications vehicles. This
made it necessary to divide networks into separate and relatively inflexible
segments, and this in turn limited flexible and cost-efficient access to
Internet and Intranet information. In addition, as is evident from the recent
Internet failures resulting from demand overload, there is a need for routed
networks to implement automatic failure recovery systems and to cost-
effectively compress data so as to utilize network bandwidth more efficiently
and cost effectively. There is also a demand for remote access intelligent
switching systems to retrieve and collect data throughout an enterprise and to
support branch offices, power users and mobile users.
These developments have led to an increase in demand for both switched LAN
and WAN networking components. In response, network carriers in the United
States, such as AT&T Corporation ("AT&T"), MCI WorldCom Inc., Sprint
Communications Company and the regional Bell operating companies ("RBOCs"), and
numerous international carriers, have introduced digital network services which
allow users to access end-to-end digital circuits on an as-needed basis. These
services typically have data rates of 56 Kbps to T1 (1.5 Mbps) and higher.
In addition to the introduction of these switched digital services, cost
effective digital access lines that provide access to these services from a
customer's location have become increasingly available from the network
carriers, permitting the creation of switched public networks. These access
lines take the form of T1 (1.5 Mbps), E1 (2 Mbps), switched 56 (56 Kbps), ISDN
Basic Rate Interface (two 64 Kbps channels) and ISDN Primary Rate Interface
(twenty-three 64 Kbps channels), digital subscriber line (DSL) and frame relay
services.
In addition, the Internet has given rise to an important way to reach
consumers, business partners, suppliers, and distribution channels. The rise in
virtual private networks (VPN), business-to-business (B2B), e-commerce and high
speed Internet access has driven the demand for new and emerging technologies.
Each of these markets is projected to grow at significant rates over the next
five years, providing an opportunity for new solutions.
A VPN is a secure private data network that uses the Internet or Intranet
for establishing a communication channel between two locations. A VPN can
connect telecommuters, mobile workers, remote offices and branch offices to each
other and to a corporate network. It also can be used to connect customers,
suppliers and businesses. Once connected, the VPN opens up a secure tunnel in
which data is encrypted and users are authenticated. Such technology allows safe
and direct passage of a company's data over the Internet. Infonetics Research
projects the VPN services market to reach $8.9 billion in 2001.
There has been a significant rise in Internet online businesses. This has
resulted in a steady growth in consumer purchases on the Internet. While the
business-to-consumer (B2C) market has high growth potential, the B2B market
offers greater potential. The Gartner Group projects worldwide revenues for the
B2B market to reach $7 trillion by 2004. Each B2C transaction is the result of
many B2B transactions. E-commerce provides new or revised ways of doing
business with efficiency improvements and cost-cutting opportunities.
The VPN and e-commerce markets have introduced new applications for the
Internet. These Internet applications, as well as others, have a direct impact
on the overall performance of the Internet. The existing infrastructure of the
Internet was not designed to carry such a load. As the infrastructure is being
altered with higher performance devices, the demand for faster Internet access
solutions is essential. Many companies are now looking beyond modems and ISDN
to meet bandwidth requirements.
6
<PAGE>
Cable, variations of digital subscriber line (DSL), and wireless Internet access
solutions are becoming the preferred choice. Symplex's RO-2 is well positioned
to migrate to these new technologies.
In 1992, the Company anticipated that the multiplexer market in which the
Datamizer IV was sold would contract, and accordingly developed the DirectRoute
product family to address the remote access, frame relay and multiprotocol
gateway markets. Additionally, the scheduled release of Datamizer 6
specifically addresses the increased use of frame relay and multi-national
connections using routers. Moreover, the Company expects to leverage and
address its installed base of Datamizer customers who are moving from
traditional leased-line point-to-point networks to multipoint frame relay
networks using both the public and private networks.
Symplex, consistent with most industry experts, expects decreasing gross
margins in both the multiplexer and low-end access markets to which the low-end
DirectRoute product is addressed. The Company's strategy is to continue to
emphasize the development of high end DirectRoute products for the frame relay,
remote access and routing markets which generate margins of approximately 46%,
and Datamizer products for the frame relay and multiplexer markets which
currently offer margins greater than 60%. See "Management's Discussion and
Analysis."
Evolving Applications Requirements
The growing availability of distributed client-server applications known as
Enterprise Resource Planning (ERP) have had a dramatic effect on the data
communications infrastructure of companies. These applications, supplied by
companies such as BAAN Company N.V., are heavily reliant upon large file
transfers that transcend a company's entire infrastructure. This has led to
dramatic increases in the costs associated with the frame relay services used by
these companies, or the necessity to add additional bandwidth. Moreover,
traditional host-based applications have migrated to client server based
applications to support the growing need of enterprises for communications links
among all functional business divisions.
Examples of such applications include remote LAN access and telecommuting
applications, integrated access, and dedicated network back-up. Backbone
networks are being extended beyond the dedicated digital circuit boundaries to
include remote offices, telecommuters, vendors and customers. Cost effective
remote LAN access requires solutions whose duration, database operations,
ability to reach multiple destinations, capacity for file transfers and other
applications are flexible enough to meet the application needs of a diversity of
users. Many large organizations now use dedicated digital circuits for their
private networks. Integrated access technologies can be combined to result in an
overall reduction in the cost of these networks. Switched digital networks can
also provide a complementary service to existing dedicated networks.
Communications equipment that provides not only bandwidth-on-demand but also
high performance, secures interoperability with existing routers and hub
networks, permits established networks to increase capacity during periods of
peak load, and provides back-up and disaster coverage of the corporate network
to areas previously proven uneconomical when served by a dedicated private line.
The Company's Focus: Switched Network Access and Bandwidth Enhancement
The Company's business is focused on both dedicated links and the "switched
network access" segment of the internetworking industry. Symplex products are
utilized for large enterprise networks and remote LAN access, integrated access
and digital network extensions. The technologies involved are designed to
enhance current infrastructures such as frame relay networks and point-to-point
links, utilizing switched public networks such as ISDN by providing higher
throughput and reliable and secure network access for both the enterprise
customer and individual users. In addition, the Company's earlier success in
marketing earlier generations of the Datamizer product has created an installed
base of satisfied customers and channel partners. Symplex intends to focus on
this installed base and seek to penetrate these customers with Datamizer V & 6.
To encourage sales of Datamizer V & 6 the Company has made available to its
existing Datamizer customers an upgrade and trade-in option. Datamizer IV units
taken in exchange for Datamizer V & 6 units are being refurbished and resold to
customers with a need for the narrower bandwidth application, principally in
South and Latin America. The Company is developing a series of custom features
and products designed specifically to address existing customer infrastructures
and Internet applications.
PRODUCTS AND TECHNOLOGY
Symplex designs, manufactures and sells two core technology platforms. The
DirectRoute product line addresses Internet access, routing and switching access
systems; and the current Datamizer product line provides statistical and inverse
multiplexing and compression technology connected to private and/or public
networks to enable customers to utilize leased line networks more
7
<PAGE>
effectively. The Company's product development staff consists of a Director of
Engineering, two software engineers, one hardware engineer and two test and
support engineers.
DirectRoute
DirectRoute products are stand-alone hardware and software units, which
enable a Local Area Network ("LAN") to efficiently route and switch data and
communications to enterprise-wide, networks ("WANs") and the Internet. The
DirectRoute product line, on which Symplex's development expenditures to date
aggregate approximately $11,500,000, offers a platform for WAN switching and
routing functionality, and combines dynamic scalable bandwidth and connection-
oriented internetworking with switched digital telecommunications services such
as ISDN. The DirectRoute product family ranges from entry level, branch office
installed solutions to flexible, robust solutions for the corporate backbone.
While certain versions of DirectRoute can be used for telecommuting and Internet
access, the product line has been positioned initially as a flexible WAN access
switch giving high performance LAN-to-LAN connectivity. Currently, the platform
incorporates ethernet connectivity via frame relay, dedicated ISDN, and
traditional leased line WAN services. Through the utilization of digital
services, DirectRoute allows LANs to communicate with one another quickly,
efficiently and cost effectively. The product architecture allows LAN users to
access remote sites easily.
DirectRoute products combine a number of performance enhancing features
embodying Symplex's proprietary technologies. They allow remote office users to
connect via DirectRoute using a single IP address; minimize the amount of
needless "chatter" in the WAN thus eliminating lines which are left connected
but are not actually transmitting data; and automatically open and close lines
to ensure maximum utilization and minimum cost of each open line. DirectRoute
also uses bandwidth management to optimize the connections that are open to meet
customers' specific networking goals, whether by reducing cost through optimal
line usage or increasing performance through maximum throughput, and has built
in, easy to control network security functions and network management software.
DirectRoute products also feature Symplex's most advanced data compression
techniques. Data compression reduces or compresses the amount of data
characters sent over a communications link in a given time, thus enabling the
use of lower-speed and less costly links for the same amount of traffic. By
reducing the overall number of bits needed to transmit data, compression reduces
the bandwidth required, thus increasing efficiency and reducing cost.
DirectRoute optimizes compression on a destination-by-destination basis using a
variety of compression schemes, permitting the products to select the most
efficient technique automatically, based on the specifics of the traffic
patterns encountered. The Symplex compression scheme features ongoing
diagnostics to ensure real time optimization.
In addition, DirectRoute products combine essential features for secure
communication over the Internet. These include network address translation
(NAT), integrated firewall and an industry standard tunneling protocol that
establishes virtual private networks (VPN) over the Internet.
DirectRoute products can be used with existing networking software and
equipment. They can therefore be incorporated into existing leased line router-
based networks to add functionality, flexibility and an alternative transmission
mode. New locations unable to cost effectively connect to an existing network
backbone can be linked through a DirectRoute unit. DirectRoute can also be added
to sites which are running out of bandwidth on an existing leased line to reduce
overall transmission costs and increase the performance of the entire network,
obviating the need to add additional leased lines.
Large complex internetworking on-line services have from time to time
experienced severe outages due to an inability to provide instantaneous, high-
speed recovery systems. Currently, manufacturers offer DSU/CSU recovery at
56Kbps for networks that are using speeds up to 1.5 Mbps. DirectRoute provides
a lower cost, high performance alternative through a proprietary network
recovery technology, with recovery speeds from 128 Kbps to 2.048 Mbps. This
technology permits DirectRoute to transparently monitor the health of network
connections via the ethernet and backup the network.
The DirectRoute RO-2 products have suggested end-user prices ranging from
$649 to $995 depending on the model.
8
<PAGE>
Datamizer
Datamizer was developed by Symplex in 1983 to respond to user requirements
for higher performance over existing transmission links. Datamizer products are
bandwidth enhancers that can increase the throughput of existing WAN links or be
used to maintain throughput of an existing link with a more efficient
configuration. They achieve high-speed transmission by taking advantage of
proven data communications technologies, including inverse multiplexing,
statistical multiplexing, data compression and automatic link restoration. The
fifth generation Datamizer, Datamizer V, which includes the functionality,
feature set and performance of DirectRoute and the functionality and data
compression capability of Datamizer, was commercially released at the end of the
third quarter of 1997. The sixth generation Datamizer, Datamizer 6, includes the
same features as Datamizer V plus additional ports and a hardware bypass feature
that eliminate the Datamizer 6 as a single point of failure. Datamizer 6 was
commercially released in the first quarter 1999. Datamizer units have been
installed worldwide, many in Fortune 1000 environments. Total development
expenditures on the Datamizer product family to date aggregate approximately
$8.2 million.
Inverse multiplexing enables multiple lower-speed links to be combined for
transmission to the same location. Statistical multiplexing enables multiple
data inputs to be sent over the same link, thus reducing the need for more
circuits. Link restoration software enables a link failure or decrease in link
performance to automatically force the creation of a second or backup link.
Datamizer V and Datamizer 6 extends the WAN access capabilities to full
T1/E1 speeds (up to 2 Mb), and provides data compression. It will also be
compatible with the most recent advances in frame relay technology. While frame
relay networks allow companies to use the public infrastructure to access
information rather than building costly point to point leased line routed
networks, the Datamizer is designed to avoid the cost of higher speed
connections, providing significant cost savings while enhancing overall network
reliability. Symplex considers that the biggest potential market for Datamizer V
is multinational corporations using international public networks. The Company
also expects to be able to leverage market access with its large installed base
of Datamizer II, III and IV customers who are moving to frame relay networks.
The Datamizer V products have suggested end-user prices ranging from $5,495
to $6,995 depending on the model, volume and upgrades. Datamizer 6 products have
a suggested end-user price of $6,995.
BUSINESS STRATEGY
The Company's principal business objective is to establish itself as a
leader in the development, distribution and support of high performance remote
access communications switching systems and data compression devices to enhance
the performance of existing LANs, WANs and Internet connectivity.
There are six broad elements to the Company's product development,
marketing and sales strategies:
1. Continuation of the development of Strategic Partnerships
The cost of technology development is high and market conditions are
constantly changing and evolving. This makes it difficult for organizations
entering this market and existing organizations to keep up with the rapid
changes. Utilizing the existing LAN and WAN products of the Company and the
existing technology of the Company, the Company can customize these existing
hardware and software platforms to provide technology solutions in a timely and
cost effective manner. In addition to customize technology solutions, the
Company intends to aggressively pursue licensing agreements of the Company's
software.
2. Grow the customer base of Direct Route and Datamizer users
During 1999 the Company added new Direct Route and Datamizer customers. A
continuation of this growth is planned in 2000 and beyond.
3. Provide a migration path to the worldwide install base of Datamizers
The Datamizer customer base and distributor network has more than 15 years
of experience with the Datamizer product line. During 1999, the Company released
the Datamizer 6. This sixth generation of Datamizer has been well received in
the marketplace and is marketed as the migration product for the approximately
6,000 Datamizer units installed worldwide.
9
<PAGE>
4. New Product Technology and Research and Development
The Company intends to continue to invest in product development with a
view to enhancing and adding to its current product portfolio. The development
effort consists of (i) establishing broad product requirements and
specifications, (ii) developing specific functional specifications based on
market knowledge and customer feedback (iii) developing design documentation
(iv) performing design review to verify product requirements (v) fabricating and
testing a product prototype and (vi) commencing production, building inventory
and delivery.
Technology the Company is currently integrating into the Direct Route product is
xDSL. In addition, Symplex is investigating the addition of ATM.
5. Enhancing and Improving Relationships with Distributors
To augment the efforts of its direct sales organization, Symplex intends to
enhance its existing relationships with the Symplex distributors and add
additional distributors and third party selling partners.
6. Managing Expenses Effectively
The Company has experienced revenue declines in each year since 1993, with
the exception of 1998. In 1999, revenue decreased as a result of delays in the
commercial release of new products. For fiscal year 2000, Symplex's expects to
increase revenue compared to 1999's level of $1.5 million. Management monitors
operating performance closely and if it appears that the previously defined
strategies will not generate the desired results within a reasonable period,
will adjust expenses accordingly.
PRODUCT MANUFACTURING
Symplex does not operate nor does it own any manufacturing facilities. The
manufacture of the Datamizer and DirectRoute product lines are subcontracted
with manufacturers not under contract. Further, components for the Datamizer
and DirectRoute product lines are occasionally produced by component vendors.
Some product assembly, testing, and software loading are performed by Symplex at
its headquarters location.
The Company's reliance upon third parties for product manufacture and
assembly carries with it a number of risks, including the lack of adequate
capacity, the unavailability of, or interruption in access to, certain process
technologies and reduced control over delivery schedules, manufacturing yields
and costs. The Company has occasionally experienced and may in the future
experience delays in delivery of its products, and this could have a material
adverse effect on its business, financial condition and results of operations.
SALES AND MARKETING
Sales Plans
Symplex sells its products and services in North America with its sales
staff located in Ann Arbor, Michigan. European, Asian and Latin American sales
are made through selected distributors supported by the headquarters.
Symplex has entered into non-exclusive distribution agreements with
distributors in North America, Japan, and a wide variety of other regions
including the United Kingdom, several countries in Europe, Asia, Central, and
South America. Certain of these contracts provide for a good faith commitment on
the part of the distributor to purchase specified minimum quantities of product.
If not performed, this commitment, although not a binding obligation, gives
Symplex the right to adjust the price of products purchased.
The essential structure and terms of all of the Company's distributor
agreements is generally similar (although not all of them include the minimum
purchase commitment referred to above), though there are differences in detail.
All provide for the distributor to have non-exclusive distribution rights in a
defined geographic area, they generally have a term of one year, automatically
renewable for successive one-year terms, generally to a maximum of two renewals.
The agreements generally
10
<PAGE>
provide that the distributor will use its best efforts to promote the sale of
Symplex products. All distributor agreements are terminable without cause by
either party upon 30 days written notice, and they also provide for termination
in the event of a material breach that remains unremedied after 30 days, and in
certain defined events such as bankruptcy, insolvency, or the appointment of a
receiver, and they also provide for arbitration of disputes.
Marketing Plans
The Company intends to sell its products through direct and indirect sales
organizations, worldwide. Through this effort, the Company is exploiting the
credibility it established over the past 15 years with successful Datamizer
installations, and developing and implementing an extensive reseller/system
integrator marketing program, all with a view to introducing Datamizer 6 to the
installed base of Datamizer customers worldwide, re-establishing prior
relationships, and regenerating interest in the Datamizer product family among
value added resellers, distributors and systems integrators.
PRODUCT LIABILITY
The Company's agreements with its distributors typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
There can be no assurance that such provisions will protect the Company from
such claims in the markets in which it sells its products. In addition, while
Symplex maintains product liability insurance under a general liability policy
which limits aggregate coverage to $2,000,000 with a policy limit of $1,000,000
for each occurrence and a separate umbrella liability policy with a general
aggregate limit to $7,000,000, a successful product liability claim brought
against it resulting in liability in excess of its insurance coverage could have
a material adverse effect upon the Company's business, results of operations and
prospects.
COMPETITION AND COMPETITIVE STRATEGY
The market for network switching products is extremely competitive and
subject to frequent product introductions with improved price/performance
characteristics, rapid technological change, and continued emergence of new
industry standards. Many networking companies, including Lucent, Nortel,
Cabletron Systems, Inc., Cisco Systems, Inc., FORE Systems, Inc., and 3Com
Corporation have introduced or have announced their intention to develop
products in the network switching business. Many of Symplex's large competitors
offer customers a broader product line that provides a more comprehensive
solution than the Company currently offers. Symplex expects that other companies
will also enter markets in which the Company competes such as data compression
and multiplexing technology. In general, competition in the market for network
switching products is less a reflection of price considerations than of
functionality.
Additionally, Symplex expects to face competition from other vendors in the
networking market who may incorporate switching, routing, or compression
technology into their products or provide alternative network solutions. Many
of the large competitors have substantially greater financial, technical, sales,
marketing, and other resources, as well as greater name recognition and a larger
customer installed base than Symplex, and as a result may be able to devote
greater resources to the development, promotion, sale, and support of their
products and services. In addition, competitors with a larger customer
installed base may have a competitive advantage when selling similar products or
alternative networking solutions to their customers. Increased competition
could result in downward price pressure, reduced profit margins, or loss of
market share, any of which could have a material adverse effect on the Company's
ability to compete successfully against either current or potential competitors.
Datamizer
Datamizer 6 has been well received in the marketplace, and this has to some
extent stimulated demand for Datamizer products, particularly with the Company's
existing customer base. While there are competing products offering some of the
functions of the Datamizer product line, these functions are handled by
discreetly housed components performing narrowly defined tasks. Competitors in
the data compression market include Cisco Systems, Nortel, and Lucent, all
publicly traded companies with financial resources much greater than the
Company's. While there are several smaller companies which have developed
compression technology, those mentioned are the only competitors known to the
Company who target the wide area access market.
11
<PAGE>
DirectRoute
The market for internetworking products is highly competitive. The
principal competition for DirectRoute consists of products manufactured by ISDN
equipment manufacturers and by internetworking equipment manufacturers.
In the ISDN market, competing products are manufactured by many companies,
including Cisco Systems Inc., Ascend Communications, Inc., 3COM and Motorola.
The products of these manufacturers are currently addressed to the single
telecommuter and small office markets. Typically these products limit the
number of connectable PCs to fewer than four, and have maximum transmission
speeds of 128Kbps. In contrast DirectRoute, depending on the configuration, can
handle 25 to 1000 or more users transmitting simultaneously, and incorporates
the Company's proven data compression algorithms. Both the Company's internal
testing and customer response suggest that the enhanced capabilities of
DirectRoute will make it attractive to small and medium-sized business as well
as telecommuters.
In the high-end internetworking market, the Company's products compete with
bridges, routers, and switches designed by, among others, Cisco Systems, 3Com
Corporation, and Nortel. Testing of the Company's products both internally and
independently by customers and distributors suggests that DirectRoute is
currently more flexible than competing routers, bridges, and switches.
DirectRoute offers the possibility of high-bandwidth applications at a lower
cost, taking advantage of switched digital ISDN connectivity without the need
for a full network support structure. In addition, DirectRoute has the ability
to establish and disable connections, which enables connectivity speeds equal to
a leased line T1 router network at a lower cost, through the use of multiple
ISDN lines. DirectRoute incorporates in one comprehensive platform multiple
carrier services such as ISDN, frame relay, and dedicated leased lines.
DirectRoute's ability to dial up remote locations and disconnect when the file
transfer is completed obviates the need for expensive leased line networks. Due
to limited fixed costs and time-based charging for ISDN by most providers, the
ongoing cost of DirectRoute solutions is expected to be less than the current
cost of comparable traditional leased line router networks.
INTELLECTUAL PROPERTY PROTECTION
The Company's ability to compete may be affected by its ability to protect
its intellectual property. It does not currently hold any patents nor does it
have any patent applications pending, and relies primarily on a combination of
common law copyrights in its software design, trademark and trade secret laws,
confidentiality procedures, contractual provisions, and the complex nature of
the technologies to protect its intellectual property. While the Company
believes that its products and technologies are adequately protected against
infringement, there can be no assurance of effective protection. Monitoring and
identifying unauthorized use of the Company's technology may prove to be
difficult, and the prohibitive cost of litigation may impair the Company's
ability to prosecute any infringement. The commercial success of the Company may
also depend upon its products not infringing any intellectual property rights of
others and upon no claims for infringement being made against the Company. The
Company believes that it is not infringing any intellectual property rights of
third parties, but there can be no assurance that such infringement will not
occur. An infringement claim against the Company by a third party, even if it
were eventually found to be invalid, could have a material adverse effect on the
Company because of the cost of defending against such a claim.
RESEARCH AND DEVELOPMENT
Research and development expense was approximately $736,000 in 1999
compared to approximately $679,000 in 1998 reflecting an increase in new product
development. The amount of research and development spending in 2000 is expected
to remain flat as compared to 1999.
EMPLOYEES
At March 6, 2000 the Company employed 14 persons. Of these, four are engaged in
product development, two in manufacturing, three in sales and marketing, two in
customer support and three in finance and administration. None of the Company's
employees is represented by a labor union nor is the Company a party to any
collective agreement. The Company considers its relations with its employees to
be good. Symplex has not entered into employment agreements with any of its
officers or employees. The Company does not carry key man life insurance on any
of its employees.
12
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's head office and principal place of business is at 35 Research
Drive, Ann Arbor, Michigan 48103, where it leases approximately 10,000 square
feet under a month-to-month lease. The Company's product development, marketing
and sales, and financial and administrative functions are principally carried on
from this location.
ITEM 3. LEGAL PROCEEDINGS.
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 has 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is listed on the Canadian Venture Exchange under the
symbol "SYC.U" and such exchange is the primary market for the Common Stock. The
Common Stock is quoted in and trades in U.S. dollars.
The following table sets forth the range of high and low closing bid prices
of the Company's Common Stock as reported by the Canadian Venture Exchange for
each quarter in 1999 and 1998.
<TABLE>
<CAPTION>
Market Price 1999 1998
- ------------ ---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $1.33 $0.43 $1.11* $0.49
Second Quarter $0.80 $0.27 $0.66 $0.18
Third Quarter $0.30 $0.11 $0.60 $0.25
Fourth Quarter $0.35 $0.08 $0.84 $0.22
</TABLE>
* Stock began trading on February 11, 1998.
There are approximately 350 holders of the Common Stock. No dividends have been
paid since 1994. The Company intends for the foreseeable future to retain all
future earnings, if any, for the development of its business. The payment of
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, capital requirements,
the Company's financial condition, and general business conditions. The
Company's loan agreements with its principal lender provide that the Company may
not pay dividends while indebtedness remains outstanding.
On February 29, 2000, the closing price of the Company's Common Stock on
the Canadian Venture Exchange was U.S. $0.50.
13
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
The Company sold the following unregistered securities in 1999:
(1) 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. $0.98. Each
Series A Preferred share is convertible into one common share of the Company. In
addition, the investment group received warrants to purchase 612,245 Series B
Preferred shares at a price of U.S.$.98. Each Series B Preferred share is
convertible into 1.08 common share of the Company. These warrants expired July
30, 1999.
The Company believes this transaction was exempt from the registration
requirements of Section 5 of the Securities Act by virtue of the exemption
provided by Regulation S of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following discussion should be read in conjunction with the financial
statements and accompanying notes included elsewhere in this Report.
BACKGROUND AND OVERVIEW
Symplex was incorporated in California in 1982 and commenced operations
immediately thereafter. On February 28, 1997 it merged with Symplex Acquisition
Corporation, a Delaware corporation that was subsequently renamed Symplex
Communications Corporation. See "Business of the Company: Corporate history".
Initially and through October 1983 when it first generated revenue, the Company
was a development stage entity with activities focused on business planning,
product research and development, organizational infrastructure and hiring.
Symplex is now a two product family company. These two products families are
Datamizer and, since 1994, DirectRoute. Annual revenues from the Datamizer
product family increased from $130,000 in 1983 to a high of $21,700,000 in 1989.
With the exception of 1998, Datamizer revenues have continued to decline since
1989, reaching a low point in 1999 of $930,000, with 1993 being the last year
the Company realized a profit. Historically, Datamizer generated gross margins
exceeding 70%, and DirectRoute product margins have ranged from 30% to 61%.
Although the industry grew significantly during this period, several factors
contributed to the Company's declining revenues. Of particular significance was
the Company's change in focus from WAN products to LAN products and then back to
WAN products, changes in worldwide distribution channels, and significant
management turnover. Such changes, at a time when the Company had minimal cash
resources, adversely affected the Company's sales efforts.
To address the declining Datamizer revenues and moderate the gross margin
erosion that might otherwise occur, the Company in February 1997 adopted an
engineering, marketing and sales plan to combine the Datamizer and DirectRoute
product families under a single platform which includes the functionality,
feature set and performance of DirectRoute and the functionality and data
compression capability of Datamizer with encryption as a future enhancement.
Datamizer V, an example of this, was commercially released at the end of the
third quarter of 1997. It is the strategy of Symplex to market the Datamizer V,
6 and future generations to the Company's installed base of Datamizer customers,
and to re-engage the WAN compression channel partners who have been representing
the Datamizer product worldwide for greater than ten years. In addition, the
Company continues to market the DirectRoute family of routers, with an emphasis
on major account customers with higher volume requirements.
In October 1997 Symplex initiated a corporate-wide reorganization in
response to changing market conditions with a view to positioning the Company
more effectively for future growth opportunities. Twelve employees, principally
in the Engineering group, either left employment voluntarily or were terminated.
In November 1997 the Company implemented a further operational restructuring to
effect significant reductions in annual operating expenses. It was these
operating expense reductions coupled with enhanced 1998 revenue and margin
performance that enabled Symplex to significantly reduce its 1998 losses.
As a result of the restructuring in late 1997, completion of several
development projects was delayed including the RO-2, not released until the
first quarter of 1999. The restructuring enhanced the Company's ability to
manage its 1998 operating resources although it did slow product development.
In 1998, Symplex was able to reengage with its third party distribution network
in Europe through a series of discreet product trade-in programs. These programs
resulted in increased European revenue in fiscal year 1998 to $3,217,000 from
$1,792,000 in fiscal year 1997 and procurement of a significant Datamizer
contract with a German distributor. In 1998, the Company has utilized
consultants and contractors to meet specific sales and marketing
14
<PAGE>
requirements as they arose, and similarly supplemented development requirements
dictated by changing technology, evolving industry standards, and new product
development issues.
In the beginning of 1999, the Company closed on a private placement
offering raising $1.2 million before expenses. However, increased expenditures
related to new product development and delays in their commercial release
resulted in decreased revenue in 1999 to $1,545,000 from $4,352,000 in 1998.
This, among other factors, led to cash constraints which required another, mid-
year restructuring by the Company terminating half of its staff, including the
closing of its office in The Hague, The Netherlands in the third quarter 1999.
In the past, the majority of the Company's product revenues have been
generated outside the United States. However, in the year ended December 31,
1999 United States sales, as a percentage of total product revenues, were
approximately 45% compared to 18% in 1998.
At December 31, 1999, stockholders' deficit was $1,260,000. As of December
31, 1998, Symplex had stockholders' equity of $453,000.
Fiscal years ended December 31, 1999 and 1998
RESULTS OF OPERATIONS
For the year ended December 31, 1999, Symplex incurred a loss from
operations of $2,648,000, and, after other expenses of $31,000, amortization
expense from discount on notes payable of $4,000 and interest expense of
$78,000, for a net loss of $2,761,000 as compared to the year ended December 31,
1998 loss from operations of $1,168,000, and, after other income of $60,000,
amortization expense from discount on notes payable of $52,000 and interest
expense of $162,000, for a net loss of $1,323,000. In fiscal year 1999, Symplex
recorded a reserve for slow-moving inventory totaling $250,000 as compared to a
reserve for slow-moving inventory of $610,000 in fiscal year 1998. In 1999, the
combination of product release delays and cash constraints severally impacted
the performance of the Company. A one-time inventory trade-in program initiated
with European distributors and a new product release obsoleting existing
products adversely impacted the Company in 1998.
Sales
Symplex recorded total sales in the year ended December 31, 1999 of
$1,545,000, of which $930,000 was generated by Datamizer, $495,000 by
DirectRoute and $120,000 by development fees. The comparable amounts in the
year ended December 31, 1998 were $4,352,000, $3,891,000, $461,000 and $0. 55%
and 82% of total sales in the years ended December 31, 1999 and 1998,
respectively, were generated outside the United States. German sales
represented approximately $2,023,000 or 46% in the 1998 period while U.S. sales
represented the highest amount of total sales at approximately $701,000 or 45%
in 1999. European product sales were approximately $795,000 in the year ended
December 31, 1999 and $3,217,000 in comparable period of 1998. Datamizer
revenue includes sales of maintenance contracts and service generated.
Gross margins at December 31, 1999 including the inventory reserves were
approximately $381,000 or 24.7% compared to approximately $2,298,000 or 52.8% at
December 31, 1998. The low sales volume in 1999 distorts the gross margin
analysis because of the fixed, in-direct manufacturing costs and the recognition
of a $250,000 reserve for slow moving inventory. Higher margins were achieved
in 1998 from shipments of Datamizer V, offset by the unfavorable recognition of
a $610,000 reserve for slow moving inventory. Without the reserves for slow
moving inventory, gross margins for 1999 and 1998 would have been $631,000 or
40.8% and $2,908,000 or 66.8%, respectively.
Product development, sales and marketing expenses
Research and development expenses were approximately $736,000 in the year
ended December 31, 1999 as compared to $679,000 in the year ended December 31,
1998. The higher 1999 expenses reflects an increased investment in new
products. Sales and marketing costs in the year ended December 31, 1999 were
approximately $910,000 compared to $1,151,000 in 1998, reflecting decreases in
payroll and benefits of $107,000, commissions of $158,000, travel expense of
$60,000, offset by a reserve of $110,000 to close the European office.
15
<PAGE>
General and administrative, engineering and service expenses
General and administrative expenses for the year ended December 31, 1999
were $929,000 as compared to approximately $1,184,000 in the corresponding
period in the prior year. This decrease resulted primarily from a reduction in
professional fees of $82,000, bad debt expense of $59,000, performance stock
options of $25,000, facilities expense of $35,000, office supplies and equipment
leases of $73,000, repair and maintenance of $21,000 and other expenses of
$85,000, offset by an increase in management compensation of $125,000.
Engineering expenses increased to approximately $269,000 in the year ended
December 31, 1999 compared to $237,000 for the same period in 1998. The
increase was attributable to new product development expenses. Service costs
declined to $186,000 in the year ended December 31, 1999 compared to $ $217,000
in 1998. The decline was due to payroll expense reductions mandated by cash
constraints.
Other Income/Expense
Interest expense in the year ended December 31, 1999 decreased to
approximately $78,000 from approximately $162,000 in the year ended December 31,
1998 due to the reduction in the notes payable (Note 3) in 1999.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999 as compared to the same period in
1998, the Company experienced increased losses on declining sales. The Company
financed its 1999 operating losses principally through the proceeds of a $1.2
million before expenses private placement and partially through operations. In
the first quarter of 1999, the Company executed a non-cash conversion of debt
financing totaling $500,000 into 625,000 common shares.
Cash utilized in operating activities in the year ended December 31, 1999
amounted to $1,043,000 compared to $1,823,000 in 1998.
Cash utilized by investing activities in the year ended December 31, 1999
was $43,000 as compared to $28,000 in 1998. Cash generated by financing
activities in the year ended December 31, 1999 amounted to $970,000 compared to
$1,981,000 in 1998. As discussed in the opening paragraph in this Liquidity and
Capital Resources section, 1999 operations were financed primarily by a private
placement offering. In 1998, the Company's major financing included an initial
public offering.
The Company's operating cash resources in 1999 weakened from 1998 as a
result of declining revenue volume. The accounts receivable turnover calculation
at December 31, 1999 is distorted by the low sales volume. For 1999, the
accounts receivable turnover averaged 1.86 times or 197 days to collect. The
inventory turnover for 1999 was 2.23 times annually or approximately 163 days in
inventory. For the year ended December 31, 1998, accounts receivable turned 3.76
times annually or approximately 97 days to collection while inventory turnover
was 2.60 times annually or approximately 140 days in inventory. The unfavorable
decrease in accounts receivable turnover results from the distortion caused by
the low sales volume in 1999. In 1998, international sales, which generally have
a longer period to collection, contributed to the unusually long collection
period in accounts receivable turnover with 82% of total annual sales being
generated internationally in 1998. The low sales volume impacted the unfavorable
change in the inventory turnover.
At December 31, 1999 the Company's principal sources of liquidity were cash
of $38,000 and trade receivables of $340,000. The shareholders' equity reflected
a deficit of $1,260,000. As of December 31, 1998, Symplex's principal sources of
liquidity represented cash of $154,000 and trade receivables of $1,326,000. The
surplus in shareholders' equity at December 31, 1998 was $453,000. At December
31, 1999 Symplex had a working capital deficit of $910,000 as compared to a
working capital surplus of $657,000 at December 31, 1998.
In fiscal year 1999, the Company experienced a significant sales decline
and increased operating losses. In order to fund its ongoing operations, the
Company is seeking a material capital infusion. There can be no assurance that
the Company will successfully obtain additional debt or equity financing, or
that such financing would not result in substantial dilution of current
shareholders. If the Company is not able to raise sufficient additional capital
in 2000, it may not be able to achieve fully its performance expectations for
2000 and may be required to undergo nominal downsizing or restructuring. Such a
downsizing or restructuring could have an adverse effect on the Company's
revenue expectations, operating performance results and stock price.
16
<PAGE>
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. All analysis and testing was performed by the Company's
staff 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 have 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
* * *
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934 and the Company intends that such forward-looking statements be
subject to the safe harbors for such statements under such sections. The
forward-looking statements herein are based on current expectations that involve
a number of risks and uncertainties. Such forward-looking statements are based
on numerous assumptions, including, but not limited to, the assumption: that the
management team will function effectively; that increases in sales and marketing
personnel and expenditures will result in increased sales; that the new
generation Datamizer product will result in increased sales in the Datamizer
product line; that any new generation of Datamizer and DirectRoute products will
be developed on schedule and will provide the level of performance and
reliability demanded by the marketplace; that focusing sales efforts on
licensing product technology to third parties and on multinational companies in
North America will generate revenue growth internationally; that the Company can
successfully compete with larger, more established competitors; that market
segments targeted by the Company will continue to grow; that the Company will be
successful in emphasizing the mid- and high-range components of the DirectRoute
product line; that pricing and other competitive pressures worldwide will not
cause margins to erode significantly; sufficient cash generated from a
successful private placement will be available to grow the Company; and that
currency fluctuations worldwide will not cause adverse pricing pressures.
The foregoing assumptions are based on judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the forward-
looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward-looking statements will be realized. The forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by the forward-looking statements,
including, but not limited to, the risk: associated with the management teams;
that increased sales and marketing personnel and expenditures will not increase
sales sufficiently to cover the associated costs; that any new generation of
Datamizer and DirectRoute products will experience development or product roll-
out problems; that the Company's current product line, the new generation
Datamizer and DirectRoute products, or future products will not keep up with the
rapid technological change in the marketplace or will otherwise not be well-
accepted in the market; that competitive conditions in the internetworking
industry will change adversely or otherwise become more intense; that changes in
technology or consumer preference could cause the growth rate in the markets the
Company serves to slow or halt; that demand for the DirectRoute product line
will slow; that sales of mid- and high-range DirectRoute components are not the
significant portion of DirectRoute sales; that worldwide pricing and other
competitive pressures could adversely affect the Company's margins; that
additional financing will not be raised, or that currency fluctuations could
result in international pricing pressures or could reduce the value in U.S.
dollar terms of the Company's international sales.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report of Ehrhardt Keefe Steiner & Hottman PC.. F - 1
Financial Statements
Balance Sheets.................................................. F - 2
Statements of Operations........................................ F - 3
Statements of Changes in Stockholders' Equity (Deficit)......... F - 4
Statements of Cash Flows........................................ F - 5
Notes to Financial Statements........................................ F - 6
</TABLE>
18
<PAGE>
(EHRHARDT KEEFE STEINER & HOTTMAN PC LETTERHEAD)
------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Symplex Communications Corporation
Ann Arbor, Michigan
We have audited the accompanying balance sheets of Symplex Communications
Corporation as of December 31, 1999 and 1998, and the related statement of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Symplex Communications
Corporation as of December 31, 1999 and 1998 and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company incurred a net loss of $2,760,998 for the year
ended December 31, 1999 and had a stockholders deficit of $1,259,704. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters also are described in Note
14. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
February 4, 2000
(except for Note 15, as to which the date
is March 29, 2000)
Denver, Colorado
F-1
<PAGE>
SIMPLEX COMMUNICATIONS CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
Assets (Note 3)
<S> <C> <C>
Current assets
Cash $ 37,735 $ 154,058
Trade receivables, less allowance for doubtful accounts of $36,464 in
1999 and $78,763 in 1998, respectively 339,869 1,326,166
Inventories (Note 2) 441,112 601,641
Prepaid expenses and other current assets 51,786 114,284
----------- -----------
Total current assets 870,502 2,196,149
----------- -----------
Property and equipment
Machinery and equipment 1,709,694 1,668,919
Office equipment 609,999 639,642
Leasehold improvements 19,590 19,590
----------- -----------
2,339,283 2,328,151
Less accumulated depreciation (2,188,783) (2,116,892)
----------- -----------
Net property and equipment 150,500 211,259
----------- -----------
Other assets - 44,819
----------- -----------
Total Assets $ 1,021,002 $ 2,452,227
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Trade payables $ 465,540 $ 406,222
Customer deposits 41,502 53,540
Accrued bonuses and commissions 104,523 112,780
Accrued expenses for European operations 187,488 16,180
Accrued contingent liability (Note 12) 125,000 -
Accrued expenses (Note 5) 175,221 194,330
Unearned revenue 111,432 12,945
Notes payable - line of credit (Note 3) 400,000 438,767
Notes payable - current portion (Note 3) 120,000 240,000
Notes payable - current portion (Note 3) - 63,950
Notes payable - officer(Note 3) 50,000 -
----------- -----------
Total current liabilities 1,780,706 1,538,714
Notes payable - less current portion (Note 3) - 460,604
----------- -----------
Total liabilities 1,780,706 1,999,318
----------- -----------
Commitments and contingency (Notes 3, 5, 11 and 14)
Common stock issued subject to redemption (Note 13) 500,000 -
Stockholders' equity (deficit) (Notes 6,7,10,11 and 14)
Common stock, $.01 par value; 24,000,000 shares authorized and 8,397,452
shares issued, and outstanding (including 232,434 shares and 318,950 shares
held in escrow at December 31, 1999 and 1998) 77,723 78,388
Preferred stock, $.01 par value; 6,000,000 shares authorized and 1,224,490
shares issued and outstanding 12,245 -
Additional paid-in capital 6,721,287 5,723,414
Additional paid-in capital - warrants 131,616 131,616
Notes receivable - recourse (22,351) (32,743)
Notes receivable - non recourse (82,245) (110,785)
Accumulated deficit (8,097,979) (5,336,981)
----------- -----------
Total stockholders' equity (deficit) (1,259,704) 452,909
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 1,021,002 $ 2,452,227
=========== ===========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
SIMPLEX COMMUNICATIONS CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Net sales and revenues (Note 9)
Manufactured products $ 1,262,241 $ 4,231,202
Development fees 120,000 -
Maintenance contracts and service 163,074 121,200
----------- -----------
Total net sales and revenues 1,545,315 4,352,402
Costs and expenses
Cost of products sold 1,164,068 2,054,400
Selling and marketing 909,691 1,150,623
General and administrative 929,084 1,183,968
Research and development 735,642 678,679
Engineering 268,832 236,510
Service 186,308 216,531
----------- -----------
Total costs and expenses 4,193,625 5,520,711
----------- -----------
Operating loss (2,648,310) (1,168,309)
Other (expense) income
Interest expense (77,903) (162,146)
Amortization of discount on notes payable (4,386) (52,220)
Other (expense) income (30,399) 59,953
----------- -----------
Total other (expense) and income (112,688) (154,413)
----------- -----------
Net loss $(2,760,998) $(1,322,722)
=========== ===========
Loss per basic and diluted common share (Note 1) $(.33) $(.18)
=========== ===========
Weighted average common shares outstanding 8,372,290 7,548,518
=========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
SIMPLEX COMMNICATIONS CORPORATION
Statements of Changes in Stockholders' Equity (Deficit)
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Additional
Common Preferred Paid-in- Additional Note Note
----------------- ----------------- Capital Paid-in Receivable Receivable (Accumulated
Shares Amount Shares Amount Warrants Capital Recourse Nonrecourse Deficit) Total
--------- ------- --------- ------- ---------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 4,475,982 44,757 - - 76,000 3,300,667 (55,818) (188,308) (4,014,259) (836,961)
Issuance of common stock,
Initial public offering
(Note 10) net of
$1,038,225 in offering
costs 3,500,000 35,000 - - - 2,426,775 - - - 2,461,775
Underwriter's fee
related to initial
public offering 70,000 700 - - - 69,300 - - - 70,000
(Note 10)
Employee stock purchase
plan (Note 11) (222,496) (2,224) - - - (84,785) 23,075 77,523 - 13,589
Shares issued for
compensation 15,482 155 - - - 11,457 - - - 11,612
Issuance of detachable
warrants (Note 3 and 7) - - - - 55,616 - - - - 55,616
Net loss - - - - - - - - (1,322,722) (1,322,722)
--------- ------- --------- ------- ---------- ---------- ---------- ----------- ------------ -----------
Balance -
December 31, 1998 7,838,968 78,388 - - 131,616 5,723,414 (32,743) (110,785) (5,336,981) 452,909
Issuance of preferred
stock, private placement
offering (Note 10) net of
$133,780 in offering costs - - 1,224,490 12,245 - 1,053,975 - - - 1,066,220
Fee related to private
placement offering 20,000 200 - - - 19,400 - - - 19,600
Common stock issued
subject to redemption
including net costs of
$2,425 (Note 13) 625,000 - - - - (2,425) - - - (2,425)
Reclassification of
unamortized discount for
warrants related to debt
converted to equity - - - - - (35,010) - - - (35,010)
Employee stock purchase
plan (Note 11) (86,516) (865) - - - (38,067) 10,392 28,540 - -
Net loss - - - - - - - - (2,760,998) (2,760,998)
--------- ------- --------- ------- ---------- ---------- ---------- ----------- ------------ -----------
Balance -
December 31, 1999 8,397,452 $77,723 1,224,490 $12,245 $131,616 $6,721,287 $(22,351) $ (82,245)$( 8,097,979)$(1,259,704)
========= ======= ========= ======= ========== ========== ========== =========== ============ ===========
</TABLE>
See note to financial statements.
F-4
<PAGE>
SIMPLEX COMMUNICATIONS CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,760,998) $(1,322,722)
----------- -----------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities -
Allowance for doubtful accounts - 59,023
Allowance for inventory obsolescence 163,902 609,931
Depreciation 103,401 153,675
Loss (gain) on disposal of assets 663 (1,535)
Gain on forgiveness of debt (14,685) -
Amortization of discount on notes payable 4,386 52,220
Stock related compensation - 24,741
Changes in assets and liabilities
Trade receivables 986,297 (397,056)
Inventories (3,373) (232,340)
Prepaid expenses and other current assets 62,497 (74,241)
Trade payables 59,318 (755,777)
Unearned revenue 98,487 12,945
Accrued expenses 256,904 48,016
----------- -----------
1,717,797 (500,398)
----------- -----------
Net cash used in operating activities (1,043,201) (1,823,120)
----------- -----------
Cash flows from investing activities
Purchases of property and equipment (43,410) (29,593)
Proceeds from sales of equipment 105 1,535
----------- -----------
Net cash used in investing activities (43,305) (28,058)
----------- -----------
Cash flows from financing activities
Payments on line-of-credit (38,767) (61,233)
Issuance of notes payable 50,000 444,384
Issuance of detachable warrants with notes payable - 55,616
Payments on notes payable (169,265) (317,500)
Payments on bridge financing - (1,200,000)
Deferred offering and financing costs 44,819 527,165
Proceeds from issuance of common stock - 2,531,775
Proceeds from note receivable - non-recourse - 475
Payment of fees related to conversion of debt to equity (2,424) -
Proceeds from issuance of preferred stock, net 1,085,820 -
----------- -----------
Net cash provided by financing activities 970,183 1,980,682
----------- -----------
Net (decrease) increase in cash (116,323) 129,504
Cash - beginning of year 154,058 24,554
----------- -----------
Cash - end of year $ 37,735 $ 154,058
=========== ===========
</TABLE>
Supplemental disclosure of cash flow information
Cash paid during the period for interest was $53,693 and $216,288 for
December 31, 1999 and 1998, respectively.
Schedule of non-cash financing and investing activities:
For the year ended December 31, 1999, the Company had the following non-cash
financing and investing transactions: conversion of long-term debt to equity
$500,000; Issuance of common stock as a financing fee $19,600; Cancelled
notes receivable and stock held in escrow returned to treasury $38,932.
See notes to financial statements.
F-5
<PAGE>
SIMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant 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 Company's primary markets are
North America and Europe.
The financial statements have been prepared on a basis consistent with
accounting principles generally accepted in the United States.
Significant Accounting Policies -
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents includes all cash balances and highly liquid
investments with an original maturity of three months or less.
Inventories
- -----------
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
including technological advances, focused marketing activities relieving
effectively excess inventories, trends of ongoing specific product sales
activities and, where possible, alternative uses for slow moving inventory
components.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful life of the asset. The estimated
service lives used to compute depreciation are five years for equipment and the
shorter of the useful life or the lease term for leasehold improvements.
Research and Development
- ------------------------
Research and development costs related to new data communications products are
expensed as incurred. Total research and development costs of approximately
$736,000 and $679,000 for December 31, 1999 and 1998 were expensed to
operations, respectively.
Deferred Offering Costs
- -----------------------
Deferred offering costs relate to equity offerings not yet completed (Note 10)
and are capitalized until completion of the transaction. Once the transactions
are complete, the costs are netted against any proceeds and reclassified to
additional paid-in-capital.
Revenue Recognition
- -------------------
Revenue is recognized as product is shipped or delivered.
F-6
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
(continued)
- -----------
Advertising
- -----------
The Company expenses advertising costs as incurred.
Product Warranty Costs
- ----------------------
Sales agreements provide for necessary warranty service for one year on new
installations. The estimated future costs of warranty service for products sold
as of December 31, 1999 and 1998 is included in accrued expenses.
Stock-Based Compensation
- ------------------------
The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options (Note 12) in the accompanying
statements of operations is measured as the excess, if any, of the fair market
value of the Company's stock at the measurement date over the amount the
employee must pay to acquire the stock.
Income Taxes
- ------------
The Company recognizes deferred tax liabilities and assets based on differences
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
Deferred Financing Costs
- ------------------------
Cost associated with obtaining debt financing are deferred and amortized on a
straight-line basis over the term of the debt.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requirements management to make estimates and assumptions
that affect the reported amounts of asset and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain items in the 1998 financial statements have been reclassified to conform
to the 1999 presentation.
F-7
<PAGE>
SYMPLEX COMMUNICATIONS COROPORATION
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
(continued)
- -----------
Earnings (Loss) Per Common Share
- --------------------------------
Basic earnings per share is calculated by dividing net income attributable to
common shareholders by the weighted average number of common shares outstanding.
Dilutive earnings per share is computed similarly, but also gives effect to the
impact dilutive potential common shares, such as convertible debt, stock options
and warrants, if dilutive, would have on net income and average common shares
outstanding if converted at the beginning of the year. The Company has incurred
losses in each of the periods covered in these financial statements, thereby
making the inclusion of dilutive potential common shares in the 1999 and 1998
dilutive earnings per share computations antidilutive. Accordingly, all
dilutive potential common shares have been excluded from the fully diluted
earnings per share amounts and basic and dilutive earnings per share are the
same for each period presented.
Credit risk
- ------------
The Company's trade receivables consist of U.S. and international corporations
in the telecommunications and computer industries. The Company performs credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers.
Note 2 - Inventories
- --------------------
Inventories consist of the following:
December 31,
---------------------
1999 1998
--------- ----------
Raw materials $ 97,276 $ 273,345
Work-in-process 581,922 536,632
Finished goods 213,282 546,163
--------- ----------
892,480 1,356,140
Less reserve for obsolescence (451,368) (754,499)
--------- ----------
$ 441,112 $ 601,641
========= ==========
Note 3 - Notes Payable
- ----------------------
The Company has a line-of-credit agreement, which provides for borrowings up to
$500,000 at 2% above the bank's prime rate (prime was 8.5% at December 31,
1999), secured by all assets of the Company. The Company had borrowings against
this line-of-credit of $400,000 at December 31, 1999 and $438,767 at December
31, 1998. The line of credit agreement matured June 30, 1999 and the bank has
indicated its unwillingness to renew the line. The agreement is secured by all
assets of the Company.
F-8
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 3 - Notes Payable (continued)
- ----------------------------------
The Company has 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. The note is secured by all assets of the Company. At December 31, 1999,
the term note balance was $120,000, all of which was due and unpaid as of
December 15, 1999.
The Company is currently negotiating with the bank for an agreeable resolution
to this outstanding indebtedness on the line of credit and the term note,
totaling $520,000. 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. 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. 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 13).
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.
F-9
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 3 - Notes Payable (continued)
- ----------------------------------
Notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Term notes payable. Payments of $60,000 quarterly including
interest at prime rate plus 2% (prime was 8.5% at December,
1998) with final payment due on December 15, 1999. Secured by
all assets of the Company. 120,000 240,000
Term notes payable. Payments of $7,500 monthly plus interest at
9% with final payment due on September 1, 1999. - 63,950
Term notes payable. Payable upon demand plus interest at 15%.
Paid in January 2000. 50,000 -
Subordinated note payable with detachable warrant (Note 8).
Interest of 15% due quarterly principal due May 18, 2000.
Secured by all tangible and intangible personal property
subordinated to bank term note and line of credit. Converted to
equity in February 1999. - 500,000
--------- ---------
170,000 803,950
Unamortized discount - (39,396)
Less current maturities (170,000) (303,950)
--------- ---------
$ - $ 460,604
========= =========
</TABLE>
Note 4 - Employee Savings and Retirement Plan
- ---------------------------------------------
The Company has a 401(k) Employee Savings and Retirement Plan (the Plan), a
defined contribution plan, covering substantially all employees under which the
Company matches 50% per dollar of the employee contributions up to 4% of the
employees' eligible compensation. The Plan also allows for additional
discretionary employer contributions. The Company discontinued employer matching
in April 1997.
Note 5 - Related Party Transactions
- -----------------------------------
The Company has an agreement with a stockholder under which it annually pays
royalties in the amount of 2% of qualified sales or $150,000, whichever is the
lesser amount. The Company incurred royalty expense of $1,700 and $20,537 for
the years ended December 31, 1999 and 1998, respectively.
F-10
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 6 - Common and Preferred 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.
Note 7 - Warrants
- -----------------
In connection with the issuance of various convertible subordinated notes during
1997 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 were exercisable
at between $.83 and $.95 per share and expired on September 8, 1999.
In February 1997, the Board granted warrants to purchase 466,667 shares of
common stock to a private investment group who facilitated the completion of a
March 1997 private placement. The holders may fund the purchase of shares
through the delivery of a recourse or non-recourse promissory note, bearing
interest at the AFR. Under the non-recourse note, the Company's sole recourse
shall be to cancel any shares that are being held in escrow. These warrants
expired on September 8, 1999 and were exercisable at $.83 per share in the
second year following the Canadian public offering.
In February 1997, the Company entered into an agreement with the same private
investment group to assist the Company with a Canadian initial public offering.
In consideration for the assistance, the Company granted warrants to purchase
233,333 shares of common stock. The warrants vested upon completion of the
initial public offering on February 11, 1998 (Note 10). These warrants expire
on February 10, 2000, two years from the effective date of the initial public
offering. The warrants are exercisable at $1.00 per share for the first twelve
months and $1.15 per share thereafter.
In August 1997, in connection with the issuance of certain subordinated U.S.
notes payable, the Company issued warrants to purchase 166,667 shares of common
stock at $1.00 per share. These warrants expired in August 1998.
In February 1998, in connection with the initial public offering (Note 10), the
Company entered into an agency agreement with an underwriter under which the
underwriter guaranteed to purchase all shares which were unsubscribed on the
offering day. In compensation for the guarantee, the underwriter received
warrants to purchase up to 400,000 shares of the Company's common stock $1.00
per share. The warrants expired in February 1999.
In February 1998, in connection with the issuance of certain subordinated
Canadian notes payable, the Company issued warrants to purchase 187,500 shares
of common stock at $1.00 per share. These warrants expired in February 1999.
F-11
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 7 - Warrants (continued)
- -----------------------------
In May, 1998, in connection with the issuance of certain notes payable (Note 3),
the Company has issued warrants to purchase 350,000 shares of common stock at
$.20 per share for the first year and $.23 per share the second year. The
warrants expire on May 18, 2000.
In February 1999, in connection with a private placement (Note 10), the Company
issued warrants to purchase 612,245 shares of the Company's Series B Preferred
Stock at a price of U.S.$.98. The warrants expired in July 1999.
Note 8 - Income Taxes
- ---------------------
The Company's provision for income taxes for the years ended December 31, 1999
and 1998 consists of the following:
1999 1998
---- ----
Federal
Deferred expense $ 1,672,479 $ 1,232,070
Decrease in valuation allowance (1,672,479) (1,232,070)
----------- -----------
Total $ - $ -
----------- -----------
The net deferred income tax asset as of December 31, 1999 and 1998 in the
accompanying balance sheets include the following:
1999 1998
---- ----
Deferred tax assets $ 175,273 $ 294,536
Valuation allowance (175,273) (294,536)
----------- -----------
Total $ - $ -
----------- -----------
Deferred tax assets result primarily from timing in the recognition of certain
allowance and accrued expenses for tax and financial statement purposes, and net
operating loss carryforwards.
A valuation allowance has been provided for the deferred tax assets because of
the uncertainty surrounding their realization.
F-12
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 9 - Export Sales and Significant Customers
- -----------------------------------------------
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 years ended
December 31, 1999 and 1998 were as follows:
Years Ended
December 31,
--------------------------------
1999 1998
---------- ----------
U.S. $ 700,962 $ 732,375
Germany 157,825 2,023,021
Japan 18,809 158,983
Netherlands 333,143 560,553
Spain 52,157 203,221
United Kingdom 66,364 251,701
France 106,580 158,630
Other 109,475 263,918
---------- ----------
Total sales $1,545,315 $4,352,402
========== ==========
Sales totaling approximately $425,000 or 27.5% were made to two customers and
approximately $2,011,000 or 46.2% were made to one customer in 1999 and 1998,
respectively. No other customers represented more than 10% of sales in either
year. The two customers accounted for $159,967 or 47% and the one customer
accounted for $765,000 or 58% of the accounts receivable balance at December 31,
1999 and 1998, respectively.
Note 10 - Private and Public 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 (becoming the Canadian Venture Exchange in November 1999 after
merging with the Alberta Stock Exchange). The net proceeds of the offering to
the Company, after deducting the underwriters' fee and other expenses of
approximately $1,038,000, were approximately $2,462,000. Approximately
$1,164,000 of the proceeds was used to satisfy debt outstanding as of December
31, 1997 with the remainder used for working capital purposes.
In connection with the offering, the Company entered into an agency agreement
with an underwriter under which the underwriter received a commission consisting
of cash, stock and warrants of the Company. The Company paid all expenses of the
underwriter in connection with the IPO. The commission consisted of 7.5% of the
offering price per share sold and 70,000 shares of common stock of the Company.
As part of the agreement, the underwriter guaranteed to purchase all shares,
which were unsubscribed on the offering day. In compensation for the guarantee,
the underwriter received warrants to purchase up to 400,000 shares of the
Company's stock at the IPO price. The warrants expired one year from their issue
date.
F-13
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 10 - Private and Public Offerings (continued)
- --------------------------------------------------
In February 1999, the Company closed with a private investment group to issue
1,224,490 Series A Preferred shares at a price of U.S.$.98. Each Series A
Preferred share is convertible into one common share of the Company. The net
proceeds of the offering to the Company, after deducting expenses of
approximately $134,000, were approximately $1,066,000. The proceeds were used
for working capital purposes. In addition, the investment group received
warrants (Note 7) to purchase 612,245 Series B Preferred shares at a price of
U.S.$.98. Each Series B Preferred share is convertible into 1.08 common share
of the Company. These warrants expired July 30, 1999.
Note 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 1997, the Company awarded options, all of which were exercised, to
purchase 738,800 shares of common stock pursuant to this plan. According to the
terms of the employee share purchase program, the stock vests incrementally over
18 months and is held in escrow until vested and the attributable portion of any
outstanding note is paid. Of the total shares purchased under this plan,
466,606 were forfeited as of December 31, 1999 pursuant to the vesting
provisions. A total of approximately $46,500 was charged to compensation
expense over the 18 month vesting period for the 124,039 shares issued with
recourse notes based upon the purchase price of $.45 per share and a market
price of $.83 per share. The options exercised with non-recourse notes are
treated as a variable plan. Compensation expense 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 December 31, 1999, 272,194 shares were vested and the balance
on the notes receivable was $104,596. Total stock based compensation expense
for the years ended December 31, 1999 and 1998 included in general and
administrative expense was $0 and $24,741, respectively.
In September 1997, the February 1997 Plan expired and there are no remaining
options to be issued under this plan.
F-14
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 11 - Stock Options (continued)
- -----------------------------------
Employee Incentive Plans - April 1997 Option Plan
- -------------------------------------------------
In April 1997, the Board adopted a Nonstatutory Stock Option Plan ("the April
1997 Plan"). This plan provides for grants to executives and other key
employees including officers who may be members of the Board of Directors. The
plan is administered by a committee of Board members, which determines the
issuance of options and their terms.
During the year ended December 31, 1997, the Company granted options to purchase
1,284,101 shares of common stock at $1 per share under the April 1997 Plan. Of
these options granted, 548,933 options remain outstanding with 536,585 shares
being 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 in 1998 and 1999 under the April 1997 Plan amounted to 265,000 and
288,833. None of the options have been exercised and 883,933 remain outstanding
as of December 31, 1999 after taking into effect the cancellation of 954,001.
On August 14, 1998, the majority of the options granted under the April 1997
Plan were re-priced to $.31 per common share.
<TABLE>
<CAPTION>
The following is a summary of options and warrants Exercise
granted: Price
Options Warrants Per Share
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding December 31, 1997 1,140,432 850,000 $ .31 - 1.00
Options granted 288,833 - .31 - .45
Warrants granted - 1,170,833 .20 - 1.15
Options exercised - - -
Expired (269,475) (166,667) .31- 1.00
------------ ------------ ------------
Outstanding December 31, 1998 1,159,790 1,854,166 $ .20 - 1.15
Options granted 265,000 - .20 - .45
Warrants granted - 612,245 .98
Options exercised - - -
Expired (540,857) (1,883,078) .31- 1.00
------------ ------------ ------------
Outstanding December 31, 1999 883,933 583,333 $ .20 - 1.15
============ ============ ============
</TABLE>
F-15
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 11 - Stock Options (continued)
- -----------------------------------
The Company has the following stock options and warrants outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Exercisable
Options Warrants Exercise Expiration ---------------------------------
Outstanding Outstanding Price Date Options Warrants
- --------------- ---------------- ----------------- --------------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
- 233,333 1.15 February 2000 - 233,333
- 350,000 .20 - .23 May 2000 350,000
362,259 .31 November 2001 362,259
186,674 .31 September 2002 174,326
95,000 .31 - .45 August - November 2003 56,111
50,000 .20 January 2004 15,278
190,000 - .20 September 2004 33,425 -
- --------------- ---------------- --------------- ----------------
883,933 583,333 641,399 583,333
=============== ================ =============== ================
Weighted average information $ 0.40 23 months
================= ===================
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized using the fair value
approach for stock options and warrants granted pursuant to employee plans. Had
compensation cost for the Company's stock options and warrants been determined
based on the fair value at the grant date for awards in 1998 and 1999 consistent
with the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
Years Ended
December 31,
----------------------------------
1999 1998
----------- -----------
Net loss - as reported $(2,760,998) $(1,322,722)
Net loss - pro forma $(2,861,851) $(1,408,570)
Loss per share - as reported $ (.33) $ (.18)
Loss per share - pro forma $ (.34) $ (.19)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield and expected volatility of 216%;
discount rate of 5.5%; and expected lives of 5 years.
Note 12 - Commitments and Contingency
- -------------------------------------
Leases
- ------
The Company leases building space under an operating lease. Total rent expense
was $114,000 and $121,960 for the years ended 1999 and 1998, respectively. The
lease expired December 31, 1996, and the Company is currently leasing the space
on a month-to-month basis. In addition, certain pieces of office equipment are
being leased under operating leases. At year-end, the monthly rent expense for
these items is approximately $3,300. Total rent expense for the office
equipment was $55,211 and $77,771 for the years ended 1999 and 1998,
respectively.
F-16
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
Note 12 - Commitments and Contingency (continued)
- -------------------------------------------------
The following is a schedule of operating lease payments for office equipment.
December 31,
------------
2000 $30,422
2001 16,370
-------
$46,792
=======
Litigation
- ----------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
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 estimated completion date of
the development work is in 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.
Note 13 - 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 not 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.
Note 14 - Continued Existence
- -----------------------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has sustained
substantial operating losses in 1999 and has a stockholders' deficit of
$1,260,000 and working capital deficit of $910,000 at December 31, 1999. These
factors, among others, may indicate that the Company will be unable to continue
as a going concern for a reasonable period of time.
As discussed in Note 10, the Company completed an initial public offering of
3,500,000 shares of common stock at a price of US$1.00 per share in 1998 and a
private placement offering of $1.2
F-17
<PAGE>
SYMPLEX COMMUNICATIONS CORPORATION
Notes to Financial Statements
million in 1999. Additionally, the Company introduced new products and
established a marketing and sales plan to substantially increase revenues.
However, there can be no assurances that the planned revenue increase will occur
or that the Company will be able to return to a profitable position.
Note 15 - Subsequent Event
- --------------------------
In February 2000, the Company executed a partnership agreement with a leading
provider of network access equipment. The agreement provides a worldwide,
perpetual, irrevocable, non-exclusive license to the Symplex RO-2 router
software and an ongoing services agreement for Symplex to customize and enhance
the software to meet the needs and requirements of the marketplace. The
agreements call for immediate deployment of Symplex engineering resources to
work with the partners engineering group. This joint development effort,
combined with the existing routing software, will lead to expediting product
development and accelerating product availability. The seven figure, licensing
agreement represents an initial payment for the licensing of the Symplex
software with the remaining payment after a 30-day software acceptance and
testing period. The service agreement begins immediately and represents
approximately $400,000 in service revenue.
In March 2000, the bank agreed to eliminate the remaining balance of Symplex's
note and line of credit (Note 3). The bank has agreed to accept approximately
$279,000 in cash and 279,000 shares of Symplex common stock in exchange for
outstanding principal and interest of approximately $558,000. The closing date
for the settlement is March 31, 2000, and is subject to the approval of the
Canadian Venture Exchange.
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 has 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.
F-18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Following are the names and ages of the directors, executive officers and
other key employees of the Company:
Directors and Executive Officers
Name Age Position
- ---- --- --------
Surinder Chandok 58 Chairman of the Board
Gary R. Brock 50 Chief Executive Officer, President and Director
Thomas Radigan 55 Chief Financial Officer, Treasurer, Secretary and
Director
Patricia Kalmbach 40 Director
Thomas R. Mayer 64 Director
Surinder Chandok became a Director of the Company in February 1999. Mr.
Chandok served as the Chairman and Chief Executive Officer of Imageware
Corporation from 1994 through 1997. For the past several years he has provided
business expertise and guidance to a number of software development companies
and has served on the boards of directors of a number of such companies.
Gary R. Brock has been Chief Executive Officer, President and a director of
the Company since May 27, 1997. From October 1994 to May 1997 Mr. Brock was
Regional Vice President of General DataComm, Inc., a data communication company.
From 1991 to 1994 Mr. Brock was Vice President of Marketing of Ascom-Timeplex,
Inc., a telecommunications company. He has over 25 years experience in the
computer, telecommunications and data networking industry, with over 14 years of
such experience in senior sales and marketing management positions.
Thomas Radigan was appointed Acting Secretary, Treasurer and Chief
Financial Officer in February 1997 and assumed those positions on a permanent
basis in August 1997. Mr. Radigan has been a director of the Company since
1997. For the past ten years, Mr. Radigan has been an independent financial
consultant providing financial and related services on a contract basis to
several companies, mostly in high technology industries. Such services have
been provided through Business of Finance, Inc., a financial consulting firm
wholly-owned by Mr. Radigan. Mr. Radigan has performed Chief Financial Officer
services on a contract basis to Opus Capital, LLP, a firm that has provided
management and financial consulting services to the Company. Mr. Radigan is a
Certified Public Accountant.
37
<PAGE>
Patricia Kalmbach has been a director of the Company since 1995. For more
than six years, Ms. Kalmbach has been President of Avis Enterprises, Inc., a
holding company that owns or has owned a variety of businesses, including
condominium conversion, land development, construction, auto dealerships, and
distribution and manufacturing companies. Currently, Ms. Kalmbach holds director
and officer positions in several corporations owned by Avis Enterprises, Inc.
Thomas R. Mayer has been a director of the Company since February 1997.
From February 1997 to May 26, 1997, he served as Acting President and Chief
Executive Officer of the Company. Since November 1995, Mr. Mayer has provided
business management consulting services as President of TRM Consultants, Inc.
From April 1992 to October 1995, Mr. Mayer was the Chairman, President and Chief
Executive Officer of Syntellect, Inc., a Phoenix, Arizona company devoted to the
development and sale of voice processing technology.
All executive officers are appointed by the Board of Directors and serve at
the Board's discretion.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and holders of more than ten percent
(10%) of the Company's Common Stock to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock of the Company. Except as stated below in this paragraph, based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to the
Company during the fiscal year ended December 31, 1997 and Form 5 and amendments
thereto furnished to the Company with respect to the fiscal years ended December
31, 1999 and 1998, to the best of the Company's knowledge, the Company's
directors, officers and holders of more than ten percent (10%) of its Common
Stock complied with all Section 16(a) filing requirements.
ITEM 10. EXECUTIVE COMPENSATION
Gary Brock, President and Chief Executive Officer of the Company, has held
the position since May 1997. Thomas Radigan, Chief Financial Officer, was
appointed as permanent Chief Financial Officer in August 1997. He served the
Company in such position, pursuant to an agreement between the Company and Opus
Capital, LLP ("Opus"), which provided consulting services to the Company.
Pursuant to such agreement, Mr. Radigan (prior to his appointment as permanent
Chief Executive Officer) was paid directly by Opus and never received any cash
compensation from the Company. See "Item 12. Certain Relationships and Related
Transactions".
The following table sets forth the compensation paid to the Company's Chief
Executive Officer and its executive officers that were paid more than $100,000
in salary and bonus during the year ended December 31, 1999 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------- ----------------------
Other Annual Securities Underlying
Name and Principal Position Year Salary ($) Bonus($) Compensation($) Options/SARS (#)
- ---------------------------- ---- ---------- -------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
Gary R. Brock (1) 1999 $165,000 75,000 -- --
Chief Executive Officer and
President
</TABLE>
Gary R. Brock, Chief Executive Officer and President, is eligible for a
quarterly cash bonus of $27,500 if the Company meets mutually agreed upon
performance goals, which may include, among other things, revenue, gross margin,
operating profit and revenue growth.
Thomas Radigan, Chief Financial Officer, is compensated at a daily rate of
$600 for each day spent after May 2, 1999 on the affairs of the Company plus
reimbursement of his reasonable expenses. Prior to May, 1999, Mr. Radigan's
daily per diem was $400 per day. Mr. Radigan's appointment may be terminated by
either party on 30 days notice.
38
<PAGE>
The following table presents information concerning individual grants of
options to purchase Common Stock of the Company made during the fiscal year
ended December 31, 1999 to each of the Named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Securities Percent of Total
Underlying Unexercised Options/SARs Granted Exercise or
Options/SARs to Employees Base Price
Name Granted (#) in Fiscal Year ($/Sh.) Expiration Date
- ----- ---------------------- -------------- ------- ---------------
<S> <C> <C> <C> <C>
None - - - -
</TABLE>
The following table sets forth the fiscal year-end value of unexercised options
to purchase Common Stock of the Company for each Named Executive Officer. No
options or SARs were exercised by the Named Executive Officers during the fiscal
year ended December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at FY-End (#) at FY-End ($)(1)
------------------------------ -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary R. Brock 117,408 9,259 - -
</TABLE>
- ----------
(1) The fair market value of Company Common Stock at December 31, 1999, as
determined by the last trade on the Canadian Venture Exchange, was $0.25 per
share. The options' exercise price is $0.31.
DIRECTOR COMPENSATION
Directors of the Company do not receive compensation as such, but are
reimbursed for travel costs and expenses incurred in attending Board and
Committee meetings. In April 1997, the Company granted nonstatutory stock
options under the April 1997 Plan to purchase 35,000 shares of Common Stock each
to non-employee directors Patricia Kalmbach and Thomas Mayer. The options are
exercisable at $0.31 per share and expire five years from the date of grant. As
of December 31, 1999, Ms. Kalmbach and Mr. Mayer's 's options are fully
exercisable.
In September 1999, the Company granted an additional 30,000 shares each to
Ms. Kalmbach and Mr. Mayer and 50,000 shares to Surinder Chandok, Chairman of
the Board, under the April 1997 Plan. The options are exercisable at $0.20 per
share and expire five years from the date of grant. As of February 29, 2000,
the number of these options exercisable for Ms. Kalmbach, Mr. Mayer and Mr.
Chandok's are 9,000, 9,000 and 11,000, respectively. The remainder vest at the
rate of 1,000 per board meeting for Ms. Kalmbach and Mr. Mayer and 1,500 for Mr.
Chandok.
The Board of Directors meets monthly.
39
<PAGE>
Stock Option Plans
February 1997 Option Plan
The Company's Nonstatutory Stock Option Plan (the "February 1997 Option
Plan") was adopted by the Board of Directors of the Company in February 1997,
and was amended on April 11, 1997. The February 1997 Option Plan permits the
granting of non-statutory stock options only. The February 1997 Option Plan
is administered by a committee appointed by the Board which determines optionees
and the terms of options granted, including the exercise price, number of shares
subject to the option, and the exercisability thereof.
The Board of Directors capped the number of shares of the Company's Common
Stock reserved for issuance pursuant to options granted under the February 1997
Option Plan at 819,023. During 1997 the Company granted an aggregate of 738,800
options to purchase Common Stock under the February 1997 Option Plan. All
options were granted at the exercise price of $.45 per share. Holders of an
aggregate of 738,800 options under the February 1997 Option Plan exercised their
options. The purchase price for all such option exercises was paid by recourse
or non-recourse promissory notes from the optionees to the Company, secured by
the underlying shares. As of February 29, 2000, 272,194 of such shares are
subject to vesting and repurchase by the Company under the terms described in
the following paragraph. 77,965 of such shares were purchased by delivery of
six-month interest-free recourse promissory notes and were subject to repurchase
by the Company in the event of termination of employment prior to September 15,
1997. No further options will be granted pursuant to the February 1997 Option
Plan.
272,194 outstanding shares of Common Stock purchased with promissory notes under
the February 1997 Option Plan vested in equal monthly installments over 18
months. Payment for such shares was by delivery to the Company of recourse or
non-recourse promissory notes, due in three years and bearing interest at 6.5%,
and the shares issued pursuant to such exercise are held in escrow pending
payment in full of the principal amount of the note and accrued interest. The
employee has the right to prepay monthly 1/36th of the amount due under the note
and to obtain release from escrow of the appropriate number of shares. If prior
to the due date under the note the participant's employment or other service to
the Company is terminated for any reason other than death and there is a balance
due under the note, the Company has the right to repurchase the shares held in
escrow to the extent not vested, at the exercise price per share plus interest,
to be paid and satisfied by set-off against the balance due under the Note. The
Company's repurchase right does not apply in the event of a sale of all or
substantially all of the assets of the Company, or in the event of the death of
the employee while in employment, in which event the note will become
immediately due and payable and the employee's estate will have the right to
prepay the note at any time and obtain release of the shares from escrow.
Stock options under the February 1997 Option Plan were granted to and
exercised by the Named Executive Officers as follows: 133,333 shares were
granted to and exercised by Gary Brock at $.45 per share. In addition, 20,833
shares under the February 1997 Option Plan were granted to and exercised by
Thomas Radigan at $.45 per share. Shares purchased by Mr. Radigan are subject
to vesting and repurchase as follows: one-twelfth of the shares vest for each
full month of employment after January 1, 1997; provided, however, that if the
holder's employment is involuntarily terminated for any reason prior to July 31,
1997, the holder will be vested as to seven-twelfths of such shares. All other
terms are as described in the prior paragraph.
April 1997 Option Plan
The Company's IPO Stock Option Plan (the "April 1997 Plan") was adopted by
the Board of Directors of the Company on April 29, 1997. The April 1997 Plan
provides that the aggregate number of shares reserved for issuance under the
April 1997 Plan, when added to shares reserved for issuance under any other
stock compensation arrangement, including other stock option plans and options
not granted under an option plan, may not exceed in the aggregate 1,500,000.
The April 1997 Plan provides for grants of non-statutory stock options only to
executive and other key employees (including officers who may be members of the
Board of Directors) of the Company, or any subsidiary or parent corporations of
the Company. The April 1997 Plan is administered by a committee appointed by
the Board, which determines optionees and the terms of options granted,
including the exercise price, number of shares subject to the option, and the
exercisability thereof. The terms of options granted under the April 1997 Plan
generally may not exceed five years and the exercise price of stock options
granted under the April 1997 Plan must be at least equal to the fair market
value of the underlying shares on the date of grant. An option may not be
granted under the April 1997 Plan to any person if, as the result of such
grant, such person would at the time of such grant hold options, under the April
1997 Plan and any other stock option plan, to acquire in the aggregate more than
five percent (5%) of the issued and outstanding shares of Common Stock of the
Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial ownership
of shares of Common Stock and of Common Stock Equivalents (resulting from
potential conversion of Preferred shares to Common, see Item 7. Note 10) of the
Company for each director and director nominee of the Company, for the Chief
Executive Officer, for others who served as Chief Executive Officer during any
part of 1999, for its executive officers who were paid more than $100,000 in
1999, for all directors and executive officers of the Company as a
40
<PAGE>
group, and for each shareholder who is known by the Company to own more than 5%
of the Company's Stock as of February 29, 2000.
<TABLE>
<CAPTION>
Number of
Name and Address Common Shares Percent of
Of Beneficial Owner Beneficially Owned Outstanding Shares
- ------------------- ------------------ ------------------
<S> <C> <C>
Surinder S. Chandok(1) 1,233,990 (2) 12.8%
35 Research Drive
Ann Arbor, MI 48103
H&W Land Co. 975,000 (3) 10.1%
33900 Concord
Livonia, MI 48150
Opus Capital, LLP(4) 771,667 (5) 8.0%
1113 Spruce Street, Ste. 400
Boulder, CO 80302
Opus Capital Fund, LLC(6) 771,667 8.0%
1113 Spruce Street, Ste. 400
Boulder, CO 80302
Gary R. Brock 686,667 (7) 7.1%
35 Research Drive
Ann Arbor, MI 48103
Thomas Radigan 119,773 (8) 1.2%
35 Research Drive
Ann Arbor, MI 48103
Thomas R. Mayer. 107,000 (9) 1.1%
35 Research Drive
Ann Arbor, MI 48103
Patricia Kalmbach 47,000 (9) *
35 Research Drive
Ann Arbor, MI 48103
All directors and executive officers as a 2,194,430 (10) 22.8%
group (five persons )
- ---------------------------------------------
</TABLE>
*Less than one percent.
(1) Became beneficial owner of shares of Common Stock and director in February
1999 after completion of a private
placement by the Company.
(2) Includes 1,224,490 preferred shares convertible on demand into an
equivalent amount of common shares. Includes options to purchase 9,500
common shares, which are currently exercisable or become exercisable within
60 days.
(3) Includes warrants to purchase 350,000 common shares, which are currently
exercisable or become exercisable within 60 days.
(4) The general partners of Opus Capital, LLP are Dieter Heidrich and Daryl
Yurek, 1113 Spruce Street, Boulder, CO 80302.
(5) Opus Capital, LLP is the manager of Opus Capital Fund, LLC (the "Fund").
Includes 771,667 common shares owned by the Fund.
(6) The manager of Opus Capital Fund, LLC is Opus Capital LLP.
(7) Includes options to purchase 126,667 common shares, which are currently
exercisable or become exercisable within 60 days.
(8) Includes options to purchase 78,940 common shares, which are currently
exercisable or become exercisable within 60 days.
(9) Includes option to purchase 47,000 common shares, which are currently
exercisable or become exercisable within 60 days.
(10) Includes options to purchase 309,107 common shares, which are currently
exercisable or become exercisable within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
By a letter agreement dated February 12, 1997 (the "Opus Capital Agreement"),
Opus Capital, LLP ("Opus") agreed to provide a variety of consulting and
related services for the Company. These services included (i) the
preparation of an operating plan, (ii) making recommendations on executive
staffing and board composition, (iii) making available to the Company,
pending the filling of these positions on a permanent basis, the services
of certain executives associated with Opus, to serve as President and Chief
Executive Officer of the Company, and as its Chief Financial Officer, (iv)
assisting in the completion of a private placement, (v) introducing the
Company to potential underwriters with a view to their acting as its agents
in connection with a public offering in Canada, (vi) providing analytical
coverage and investor introductions following completion of such public
offering, and (vii) arranging interim loan financing on certain terms and
conditions.
41
<PAGE>
Pursuant to the Opus Capital Agreement, Opus made available to Symplex the
services of Thomas A. Mayer as Acting President and Chief Executive Officer,
and of Thomas Radigan as Acting Chief Financial Officer. Pursuant to such
agreement, neither Mr. Mayer nor Mr. Radigan received any cash compensation
from Symplex. Both of them were compensated directly by Opus.
In addition, as contemplated by the Opus Capital Agreement, Opus (a) caused
Opus Capital Fund, LLC to advance an aggregate of $400,000 to the Company as
bridge financing (the "Bridge Loan") which loan was subsequently converted
into 484,849 shares of Common Stock at $0.825 per share, (b) assisted the
Company in March 1997 in completing a private placement of 2,263,800 shares
of Common Stock (of which Opus Capital Fund, LLC purchased 135,818 shares)
at a price of $0.825 per share, and (c) introduced the Company to the agent
for the Canadian IPO. In consideration for the Bridge Loan, the Company
issued to Opus Capital Fund, LLC a warrant (the "Opus Debt Consideration
Warrant") to purchase 133,333 shares of Common Stock at a price of $0.825
per share. The warrant expired September, 1999.
Pursuant to the Opus Capital Agreement the Company (i) agreed to reimburse
Opus for its out of pocket expenses, including reasonable living and travel
expenses for Messrs. Mayer and Radigan, and to pay Opus a per diem fee of
$800 in respect of their services, (ii) granted Opus options to purchase
466,667 shares of Common Stock at a price of $0.825 per share, expiring
March 5, 1999 (the "Opus Services Options"), and (iii) issued to Opus at the
closing of the Canadian IPO a warrant (the "Opus Services Warrant") to
purchase 233,333 shares of Common Stock at $1.00 per share, expiring
February 10, 2000.
42
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Index to Exhibits.
(b) Reports on Form 8-K for the quarter ended December 31, 1999:
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SYMPLEX COMMUNICATIONS CORPORATION
By: /s/ Gary R. Brock
Gary R. Brock
Chief Executive Officer
Date: March 29, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Surinder Chandok Chairman of the Board March 29, 2000
- -----------------------
Surinder Chandok
/s/ Gary R. Brock Chief Executive Officer March 29, 2000
- ----------------------- President and Director
Gary R. Brock
/s/ Thomas Radigan Chief Financial Officer March 29, 2000
- ----------------------- Treasurer, Secretary and Director
Thomas Radigan
/s/ Patricia Kalmbach Director March 29, 2000
- -----------------------
Patricia Kalmbach
/s/ Thomas R. Mayer Director March 29, 2000
- -----------------------
Thomas R. Mayer
43
<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. (2)
4.1 Form of Certificate of Common Stock. (3)
4.2 Form of warrant granted to holders of convertible promissory
notes ("Note Conversion Warrants"). (4)
4.3 Form of warrant granted to Canaccord Capital Corporation and
C.M. Oliver & Co. ("Underwriter Warrants"). (4)
4.4 Form of warrant granted to Opus Capital, LLP ("Opus Services
Warrant"). (4)
4.5 Form of warrant issued to May 1998 private lender. (5)
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)
10.6 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.
_______________________________
(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 Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1999.
(3) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997.
(4) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 11, 1998.
(5) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 37,735
<SECURITIES> 0
<RECEIVABLES> 376,333
<ALLOWANCES> 36,464
<INVENTORY> 441,112
<CURRENT-ASSETS> 870,502
<PP&E> 2,339,283
<DEPRECIATION> 2,188,783
<TOTAL-ASSETS> 1,021,002
<CURRENT-LIABILITIES> 1,780,706
<BONDS> 0
0
12,245
<COMMON> 77,723
<OTHER-SE> (1,349,672)
<TOTAL-LIABILITY-AND-EQUITY> 1,021,002
<SALES> 1,545,315
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,164,068
<OTHER-EXPENSES> 3,064,342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,903
<INCOME-PRETAX> (2,760,998)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,760,098)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
</TABLE>
