<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1998, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-26952
------------------------
SYNC RESEARCH, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0676350
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
40 PARKER
IRVINE, CA 92618
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 588-2070
------------------------
Indicate by check mark 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 preceding 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 ___
As of October 31, 1998, 17,416,847 shares of the Registrant's Common Stock
were issued and outstanding.
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<PAGE>
SYNC RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Part I. Financial Information......................................................................... 3
Item 1. a) Condensed consolidated balance sheets at September 30, 1998 (unaudited) and December 31,
1997...................................................................................... 3
b) Condensed consolidated statements of operations (unaudited) for the three and nine months
ended September 30, 1998 and 1997......................................................... 4
c) Condensed consolidated statements of cash flows (unaudited) for the nine months ended
September 30, 1998 and 1997............................................................... 5
d) Notes to condensed consolidated financial statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
Part II. Other Information............................................................................. 21
Item 1. Legal Proceedings............................................................................. 21
Item 2. Changes in Securities and Use of Proceeds..................................................... 21
Item 3. Defaults upon Senior Securities............................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders........................................... 22
Item 5. Other Information............................................................................. 22
Item 6. Exhibits and Reports on Form 8-K.............................................................. 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
SEPTEMBER 30, ------------
1998
-------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 16,068 $ 21,734
Accounts and other receivables, net............................................... 2,764 4,657
Inventories....................................................................... 6,384 7,371
Prepaid expenses and other current assets......................................... 769 522
------------- ------------
Total current assets................................................................ 25,985 34,284
Furniture, fixtures and equipment, net.............................................. 4,008 4,167
Other assets........................................................................ 44 44
------------- ------------
Total assets........................................................................ $ 30,037 $ 38,495
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 3,877 $ 3,135
Accrued compensation and related costs............................................ 987 949
Deferred revenue.................................................................. 850 1,432
Current maturities of capitalized lease obligations............................... 52 50
------------- ------------
Total current liabilities........................................................... 5,766 5,566
Capitalized lease obligations, less current maturities.............................. 66 111
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares--50,000
Issued and outstanding shares--17,396 at September 30, 1998 and 17,288 at
December 31, 1997............................................................. 17 17
Additional paid-in capital........................................................ 71,964 71,786
Deferred compensation............................................................. (13) (34)
Accumulated deficit............................................................... (47,763) (38,951)
------------- ------------
Total stockholders' equity.......................................................... 24,205 32,818
------------- ------------
Total liabilities and stockholders' equity.......................................... $ 30,037 $ 38,495
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
3
<PAGE>
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
--------- --------- --------- ----------
Net revenues......................................................... $ 7,541 $ 5,675 $ 20,227 $ 17,048
Cost of sales........................................................ 4,612 3,623 12,870 10,918
--------- --------- --------- ----------
Gross profit....................................................... 2,929 2,052 7,357 6,130
Operating expenses:
Research and development........................................... 1,869 1,761 5,428 5,514
Selling and marketing.............................................. 3,018 3,697 8,962 11,323
General and administrative......................................... 889 791 2,207 2,930
Non-recurring charges.............................................. -- 735 267 1,241
--------- --------- --------- ----------
Total operating expenses........................................... 5,776 6,984 16,864 21,008
--------- --------- --------- ----------
Operating loss....................................................... (2,847) (4,932) (9,507) (14,878)
Interest income, net................................................. 223 345 697 1,129
--------- --------- --------- ----------
Loss before income taxes............................................. (2,624) (4,587) (8,810) (13,749)
Provision for income taxes........................................... -- -- 2 --
--------- --------- --------- ----------
Net loss............................................................. $ (2,624) $ (4,587) $ (8,812) $ (13,749)
--------- --------- --------- ----------
--------- --------- --------- ----------
Basic and diluted net loss per share................................. $ (.15) $ (.27) $ (.51) $ (.80)
--------- --------- --------- ----------
--------- --------- --------- ----------
Shares used in computing net loss per share.......................... 17,395 17,251 17,370 17,137
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
See accompanying notes.
4
<PAGE>
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
<S> <C> <C>
1998 1997
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................................. $ (8,812) $ (13,749)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................................... 1,381 1,267
Provision for losses on accounts receivable............................................ 17 81
Deferred compensation expense.......................................................... 21 74
Changes in operating assets and liabilities, net:
Accounts and other receivables......................................................... 1,876 2,720
Inventories............................................................................ 987 (866)
Accounts payable and accrued liabilities............................................... 742 (510)
Accrued compensation and related costs................................................. 38 651
Deferred revenue....................................................................... (582) (31)
Other.................................................................................. (247) (167)
--------- ----------
Net cash used in operating activities...................................................... (4,579) (10,530)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment, net...................................... (1,222) (1,183)
--------- ----------
Net cash used in investing activities...................................................... (1,222) (1,183)
CASH FLOWS FROM FINANCING ACTIVITIES
Net bank repayments...................................................................... -- (802)
Payments on capitalized lease obligations................................................ (43) (21)
Proceeds from common stock options exercised and employee stock purchase plan............ 178 439
--------- ----------
Net cash provided by (used in) financing activities........................................ 135 (384)
--------- ----------
Net decrease in cash and cash equivalents.................................................. (5,666) (12,097)
Cash and cash equivalents at beginning of period........................................... 21,734 35,874
--------- ----------
Cash and cash equivalents at end of period................................................. $ 16,068 $ 23,777
--------- ----------
--------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................................ $ 39 $ 30
--------- ----------
--------- ----------
Income taxes paid........................................................................ $ 16 $ 8
--------- ----------
--------- ----------
</TABLE>
See accompanying notes.
5
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1998, the
condensed consolidated statements of operations for the three and nine months
ended September 30, 1998 and 1997 and the condensed consolidated statements of
cash flows for the nine months ended September 30, 1998 and 1997 have been
prepared without audit. In the opinion of management, the unaudited financial
statements include all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's financial position at September 30,
1998, the results of its operations for the three and nine months ended
September 30, 1998 and 1997 and its cash flows for the nine months ended
September 30, 1998 and 1997. The consolidated financial statements should be
read in conjunction with the audited financial statements of Sync Research, Inc.
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. The results of operations for the three and nine
months ended September 30, 1998 are not necessarily indicative of the operating
results to be expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying financial
statements. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. CASH AND CASH EQUIVALENTS
The Company invests its excess cash in money market funds and short-term
debt instruments of U.S. corporations with strong credit ratings. The Company
has established guidelines with respect to the diversification and maturities
that maintain safety and liquidity. The Company considers all highly liquid
investments with an original maturity of three months or less and money market
funds to be cash equivalents.
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and consist of the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Equipment acquired under capital leases......................... $ 275 $ 275
Furniture and fixtures.......................................... 859 795
Computer equipment and software................................. 7,462 6,326
Leasehold improvements.......................................... 1,106 1,084
------------- ------------
9,702 8,480
Accumulated depreciation and amortization....................... (5,694) (4,313)
------------- ------------
$ 4,008 $ 4,167
------------- ------------
------------- ------------
</TABLE>
6
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. INVENTORIES
Inventories consist primarily of computer hardware and components and are
stated at the lower of cost (first-in, first-out) or market, as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Raw materials................................................... $ 3,189 $ 3,636
Work in process................................................. 508 862
Finished goods.................................................. 2,687 2,873
------ ------
$ 6,384 $ 7,371
------ ------
------ ------
</TABLE>
5. PER SHARE INFORMATION
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform with Statement No. 128.
Net loss per common share is computed using the weighted average number of
common shares and common share equivalents outstanding during the periods
presented. Common share equivalents result from the dilutive effect, if any, of
outstanding options and warrants to purchase common stock.
6. CREDIT AGREEMENT
Under the Company's unsecured credit agreement with a bank in effect as of
September 30, 1998, the Company was entitled to borrow an amount not to exceed
$5,000,000 at the bank's prime rate. The agreement expired on October 5, 1998
and the Company is negotiating the renewal of the agreement. There were no
amounts outstanding under this agreement as of September 30, 1998.
7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME
(Statement No. 130), which is effective for years beginning after December 15,
1997. Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components with the same prominence as other
financial statement information. The implementation of this statement did not
have a significant effect on the Company's reported results of operations or
financial position.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (Statement No. 131), which is effective for
years beginning after December 15, 1997. Statement No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The Company operates in one
business
7
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
segment. Accordingly, the adoption of this statement did not have a significant
effect on the Company's financial statements.
8. LITIGATION
On November 5, 1997, an action entitled Dalarne Partners, Ltd. v. Sync
Research, Inc., et al., No SACV97-877 AHS(Eex) was filed against the Company and
certain of its directors and officers. The action was filed in the U.S. District
Court for the Central District of California, Southern Division. The action
purports to be a class action lawsuit brought on behalf of purchasers of the
Company's common stock during the period from November 18, 1996 through March
20, 1997. The complaint asserts claims for violation of the Securities Exchange
Act of 1934. The complaint seeks to recover damages in an unspecified amount. No
trial date or other deadline has been established. The Company intends to defend
this lawsuit vigorously.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Part
I--Item 1 of this Quarterly Report. In addition, except for the historical
statements contained herein, the following discussion contains forward-looking
statements. The Company wishes to alert readers that the factors set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997,
and in the section of this Item 2 titled "Additional Factors That May Affect
Future Results," as well as other factors, could in the future affect, and in
the past have affected, the Company's results. The Company's actual results for
future periods could differ materially from those expressed in any
forward-looking statements, made by or on behalf of the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements which
reflect management's analysis only as of the date hereof. The Company assumes no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.
OVERVIEW
Sync commenced operations in 1981 and funded operations through 1988 with
revenue from communications software consulting and custom product development
for equipment vendors and large end-users. The Company shipped its first
commercial WAN product in 1989. In 1991, Sync released its first conversion node
and frame relay access products. The Company has historically emphasized its
relationship with channel partners and other resellers and supporting sales
efforts of these resellers in connection with the Company's direct sales
efforts. The Company currently maintains OEM, marketing and sales arrangements
with communications and networking companies such as IBM, as well as carriers
such as Sprint, MCI, and Intermedia Communications, and systems integrators such
as Electronic Data Systems and Diebold.
In 1997 and 1998, the Company implemented expense reduction initiatives, and
the Company may in the future implement additional expense reduction
initiatives, with the goal of enabling the Company to achieve profitability at
lower revenue levels. There can be no assurance that Sync's products will
achieve significant market penetration, either through its channel partners and
other resellers or its direct sales force, or that the Company will successfully
introduce new and enhanced products or compete effectively in its market, or
that its efforts to implement expense reductions will enable it to become
profitable at lower revenue levels, if at all.
RESULTS OF OPERATIONS
NET REVENUES
The Company derives its revenues primarily from sales of advanced wide-area
networking products. Product revenues are recognized upon shipment and the
Company generally does not have any significant remaining obligations upon
shipment of its products. Product returns and sales allowances are provided for
at the date of sale. Service revenues from customer maintenance fees for ongoing
customer support and product updates are recognized ratably over the term of the
maintenance period, which is typically 12 months.
Net revenues for the third quarter of 1998 were $7.5 million, compared to
net revenues of $5.7 million for the quarter ended September 30, 1997. Net
revenues for the nine months ended September 30, 1998 were $20.2 million,
compared to $17.0 million for the comparable period in 1997. The increase in net
revenues in the third quarter of 1998 compared to the third quarter of 1997 was
due primarily to increased sales of frame relay access products and circuit
management products, partially offset by a reduction in sales of transmission
products. Sales to IBM and one large end user customer accounted for 13.4% and
15.2% of the Company's total revenues for the three months ended September 30,
1998, and 16.4% and 21.0% of the Company's total revenues for the nine months
ended September 30, 1998, respectively.
9
<PAGE>
Net revenues by product group for the three months ended September 30, 1998
and 1997 were as follows ($ in thousands):
<TABLE>
<CAPTION>
1998 PERCENTAGE 1997 PERCENTAGE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Frame relay access products....................... $ 3,288 44% $ 2,187 39%
Circuit management products....................... 2,252 30 1,543 27
Transmission products............................. 571 8 1,007 18
Other............................................. 1,430 18 938 16
--------- --- --------- ---
$ 7,541 100% $ 5,675 100%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
Net revenues by product group for the nine months ended September 30, 1998
and 1997 were as follows ($ in thousands):
<TABLE>
<CAPTION>
1998 PERCENTAGE 1997 PERCENTAGE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Frame relay access products.................... $ 10,894 54% $ 6,973 41%
Circuit management products.................... 4,207 21 3,655 21
Transmission products.......................... 1,432 7 3,198 19
Other.......................................... 3,694 18 3,222 19
--------- --- --------- ---
$ 20,227 100% $ 17,048 100%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
The increase in revenues from sales of frame relay access products in 1998
compared to the 1997 periods was due primarily to continued acceptance of the
Company's 3600 frame relay access device product line that was released in the
first quarter of 1997. The decline in revenues from sales of transmission
products as compared to the prior year periods was due primarily to lower sales
in the Pacific Rim as a result of the continued Asian economic crisis.
The percentage of net revenues represented by sales through channel partners
and other resellers declined to 45.6% and 50.1% for the three and nine months
ended September 30, 1998, respectively, from 70.9% and 72.3% for the
corresponding periods of 1997, respectively, primarily due to a few large end
user sales during the first three quarters of 1998. The Company expects that
sales to IBM will decline as a result of the completion of one large project in
the third quarter of 1998. The Company believes that sales through channel
partners and other resellers will continue to account for a significant portion
of net revenues. However, the mix of sales to channel partners and other
resellers may change from period to period.
International sales represented 6.5% and 6.6% of the Company's total sales
during the three and nine months ended September 30, 1998, as compared to 20.6%
and 19.9% during the three and nine months ended September 30, 1997. The decline
was due primarily to continued sluggishness in the Company's sales to the
Pacific Rim as a result of the current Asian economic crisis. The near-term
outlook on the Company's sales to the Pacific Rim remains uncertain.
GROSS PROFIT
Cost of sales primarily consists of purchased materials used in the assembly
of the Company's products, fees paid to third party subcontractors for
installation and maintenance services, and compensation paid to employees in the
Company's manufacturing and service organizations.
Gross profit increased to $2.9 and $7.4 million for the three and nine
months ended September 30, 1998, respectively, from $2.1 and $6.1 million in the
corresponding prior year periods. Gross profit as a percentage of net revenues
increased to 38.8% and 36.4% for the three and nine months ended September 30,
1998, respectively, as compared to 36.2% and 36.0% for the three and nine months
ended September 30, 1997. The increase in margins during 1998 compared to the
prior year periods was primarily due to the higher revenue levels in 1998.
10
<PAGE>
OPERATING EXPENSES
Research and development expenses primarily consist of compensation paid to
personnel, including consultants, engaged in research and development, amounts
paid for outside development services and costs of materials utilized in the
development of hardware products, including prototype units and the depreciation
and amortization of equipment and tools utilized in the development process. It
is the Company's policy to expense all research and development costs as
incurred and to capitalize certain software development costs subsequent to the
establishment of technological feasibility. To date, $455,000 of externally
acquired software has been capitalized. Research and development expenses
increased slightly to $1.9 million for the third quarter of 1998, as compared to
$1.8 million for the third quarter of the prior year. The increase in research
and development expenses in the third quarter of 1998 was primarily due to the
development of new products and the continued enhancement of existing products.
For the nine months ended September 30, 1998, expenses were slightly lower at
$5.4 million compared to $5.5 million for the nine months ended September 30,
1997.
Selling and marketing expenses consist primarily of base and incentive
compensation paid to sales and marketing personnel, travel and related expenses,
and costs associated with promotional and trade show activities. Selling and
marketing expenses decreased to $3.0 million for the quarter ended September 30,
1998, as compared to $3.7 million in the quarter ended September 30, 1997, and
decreased to $9.0 million for the nine months ended September 30, 1998 compared
to $11.3 million in the prior year period. The decrease in selling and marketing
expenses resulted primarily from sales and marketing headcount reductions,
partially offset by higher incentive based compensation.
General and administrative expenses consist primarily of compensation paid
to administrative personnel, payments to consultants, professional services and
costs related to public company activities. General and administrative
expenditures increased to $889,000 for the quarter ended September 30, 1998, as
compared to $791,000 for the quarter ended September 30, 1997 primarily as a
result of higher legal fees incurred in connection with the Company's pending
class action lawsuit. General and administrative expenditures decreased to $2.2
million for the nine months ended September 30, 1998 from $2.9 million for the
nine months ended September 30, 1997. These expenses decreased due to the
Company's 1997 cost reduction programs.
Non-recurring charges consist primarily of expenses related to changes in
the Company's executive management in the second quarter of 1998 and costs
related to the reduction in employees and the elimination or reduction of
certain remote office lease obligations undertaken in March and September 1997.
Net interest income was $223,000 and $697,000 for the three and nine months
ended September 30, 1998, respectively, as compared to $345,000 and $1.1 million
for the three and nine months ended September 30, 1997, respectively. The
decrease in net interest income was primarily due to the Company's lower cash
balances resulting from the utilization of cash to fund the Company's operating
activities.
INCOME TAXES
There was no provision for income tax in 1997. The provision for income
taxes in 1998 represents minimum state taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's principal sources of liquidity
consisted of $16.1 million of cash and cash equivalents and a $5 million
unsecured bank line of credit which expired in October 1998. The Company is
currently attempting to negotiate an extension of this credit agreement. During
the nine months ended September 30, 1998, cash utilized by operating activities
was $4.6 million, compared to $10.5 million for the nine months ended September
30, 1997. The lower cash utilization resulted primarily from the decrease in the
net loss in 1998 as compared to 1997. Capital expenditures during the first nine
months of 1998, consisting primarily of computer hardware and software
purchases, were $1.2 million, the same as the corresponding 1997 period.
11
<PAGE>
The Company believes that its available cash and cash equivalents will be
sufficient to meet its working capital requirements at least through 1998.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that, except for the historical information contained
therein, the previous discussion under "Results of Operations" and "Liquidity
and Capital Resources" constitutes forward-looking statements that are dependent
on certain risks and uncertainties which may cause actual results to differ
materially from those expressed in any forward-looking statements made by or on
behalf of the Company. The following is a description of certain of the major
risks and uncertainties.
HISTORY OF LOSSES; SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS; UNCERTAIN
PROFITABILITY
The Company has experienced operating losses since inception, with, in
recent years, operating losses of $2.4 million in 1995, $11.7 million in 1996,
$18.0 million in 1997 and $8.8 million for the nine months ended September 30,
1998. As of September 30, 1998, the Company had an accumulated deficit of
approximately $47.8 million. The Company has experienced, and may in the future
experience, significant fluctuations in revenues and operating results from
quarter to quarter and from year to year due to a combination of factors.
Factors that have in the past caused, or may in the future cause, the Company's
revenues and operating results to vary significantly from period to period
include: the timing of significant orders; the timing of customer implementation
plans; the relatively long length of the sales cycles for certain of the
Company's products; the market conditions in the networking industry; the timing
of capital expenditures by Sync's target market customers; competition and
pricing in the industry; the Company's success in developing, introducing and
shipping new products; new product introductions by the Company's competitors;
announcements by IBM relating to products, services or pricing relevant to the
Company; the rate of migration of large IBM customers to frame relay; production
or quality problems; changes in material costs; disruption in sources of supply;
changes in foreign currency exchange rates; and general economic conditions. In
addition, revenues and gross margins may fluctuate due to the mix of
distribution channels employed and the mix of products or services sold. For
example, the Company generally realizes a higher gross margin on direct sales
than on sales through its channel partners and other resellers. Accordingly, as
channel partners and other resellers continue to account for a significant
portion of the Company's net revenues, gross profit as a percentage of net
revenues may decline.
The Company's future revenues are difficult to predict. Revenues and
operating results in any quarter depend on the volume and timing of, and the
ability to fulfill, orders received within the quarter. Sales of the Company's
products typically involve a sales cycle of several months or over a year from
the point of initial customer contact until receipt of the first system order,
and, in addition, the Company has in the past encountered, and may in the future
encounter, subsequent delays between initial orders and network-wide deployment.
There can be no assurance that average sales cycles will not increase in future
periods. Further, due to the Company's focus on its channel partner marketing
strategy, the Company's revenues in any period are highly dependent upon the
sales efforts and success of Sync's channel partners and other resellers, which
are not within the control of the Company. There can be no assurance that the
Company's channel partners and other resellers will give a high priority to the
marketing of the Company's products as compared to competitive products or
alternative networking solutions or that Sync's channel partners and other
resellers will continue to offer the Company's products. Significant portions of
the Company's expenses are relatively fixed in advance, based in large part on
the Company's forecasts of future sales. If sales are below expectations in any
given period, the adverse effect of a shortfall in sales on the Company's
operating results may be magnified by the Company's inability to adjust spending
to compensate for such shortfall. The Company has in the past and may in the
future reduce prices or increase spending to respond to competition or to pursue
new product or market opportunities. Accordingly, there can be no assurance that
the Company will be able to attain or sustain profitability on a quarterly or an
annual basis.
12
<PAGE>
In addition, if the Company's operating results fall below the expectations of
public market analysts and investors, the price of the Company's common stock
would likely be materially and adversely affected.
UNCERTAIN MARKET ACCEPTANCE OF FRAME RELAY FOR MISSION-CRITICAL APPLICATIONS
The market for SNA-over-frame relay and circuit management products is
relatively uncertain and still evolving. The success of the Company and its
channel partners in generating significant sales of frame relay access and
circuit management products will depend in part on their ability to educate end
users about the benefits of the Company's technology and convince end users to
switch their mission-critical applications to frame relay. In addition, broad
acceptance of frame relay services will also depend upon the tariffs for such
services, which are determined by carriers. If the tariff structure for
dedicated leased lines becomes more favorable relative to tariffs for a
comparable network utilizing frame relay, the market for frame relay networking
products could be adversely affected. There can be no assurance that the market
will adopt frame relay for mission-critical applications to any significant
extent. The failure of such adoption to occur could have a material adverse
effect on the Company's business, operating results and financial condition.
UNCERTAIN MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS; PRODUCT CONCENTRATION
The Company currently derives substantially all of its revenues from its
frame relay access, circuit management, transmission and other products and
expects that revenues from these products will continue to account for
substantially all of its revenues for the foreseeable future. Broad market
acceptance of, and continuing demand for, these products, is, therefore,
critical to the Company's future success. Factors that may affect the market
acceptance of the Company's products include the extent to which frame relay is
adopted for mission-critical applications, the availability and price of
competing products and technologies, announcements by IBM relating to products,
services or pricing relevant to the Company, the success of the sales efforts of
the Company and its resellers and tariff rates for carrier services. Moreover,
the Company's operating history in the WAN internetworking market and its
resources are limited relative to those of certain of its current and potential
competitors. The Company's future performance will also depend in part on the
successful development, introduction and market acceptance of new and enhanced
products. Failure of the Company's products to achieve market acceptance could
have a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON CHANNEL PARTNERS AND OTHER RESELLERS
The Company's channel partners and other resellers currently account, and
are expected to continue to account, for a significant part of the Company's net
revenues. Sales through channel partners and other resellers accounted for
50.1%, 67.0%, 85.7%, and 88.1%, of net revenues of the Company in the nine
months ended September 30, 1998, and for the years ended December 31, 1997, 1996
and 1995, respectively. The Company currently maintains OEM, marketing and sales
arrangements with communications and networking companies such as IBM, as well
as carriers such as Sprint, MCI and Intermedia Communications and system
integrators such as Electronic Data Systems and Diebold. Sales through IBM
accounted for 13.4% and 16.4% of the Company's net revenues for the three and
nine months ended September 30, 1998, respectively. The Company expects revenues
to IBM will decline as a result of the completion of one large project in the
third quarter of 1998. The Company's agreements with its channel partners and
other resellers do not restrict the sale of products that compete with those of
the Company. In addition, these agreements generally provide for discounts based
on expected or actual volumes of products purchased or resold by the reseller in
a given period, do not require minimum purchases, and prohibit distribution of
certain products by the Company through certain categories of third parties
under certain conditions. The agreements also specify that the channel partners
and certain other resellers will be provided manufacturing rights and access to
certain of the Company's source code upon the occurrence of specified conditions
or defaults.
13
<PAGE>
Certain of the Company's channel partners offer alternative solutions,
designed by themselves or third parties, for SNA internetworking or have
pre-existing relationships with current or potential competitors of the Company.
Certain of the Company's channel partners have in the past developed competitive
products and terminated their relationships with the Company, and such
developments could occur in the future. Many of the Company's resellers offer
competitive products manufactured either by third parties or by themselves. For
example, NET and Racal, which accounted for 6.6% and 4.4%, respectively, of the
Company's net revenues in 1996, have developed competitive products and product
strategies and accordingly, did not account for a significant portion of 1997 or
1998 revenues. Sales to 3Com accounted for 2.0% of revenues for the nine months
ended September 30, 1998 and 6.5%, 19.2% and 17.9% of net revenues of the
Company in 1997, 1996 and 1995, respectively. The Company believes the amount of
revenues derived from sales to 3Com will likely decline as competitive products
impact the conversion product business.
The Company generally realizes a higher gross margin on direct sales than on
sales through its channel partners and other resellers. Accordingly, as channel
partners and other resellers continue to account for a significant portion of
the Company's net revenues, gross profit as a percentage of net revenues may
decline. Each of the Company's channel partners or other resellers can cease
marketing the Company's products at the reseller's option, under certain
conditions, with limited notice and with little or no penalty. There can be no
assurance that the Company will retain its current channel partners or other
resellers or that it will be able to recruit additional or replacement channel
partners. The loss of one or more of the Company's channel partners or other
resellers could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, there can be no
assurance that the Company's channel partners and other resellers will give
priority to the marketing of the Company's products as compared to competitive
products or alternative networking solutions or that Sync's channel partners and
other resellers will continue to offer the Company's products. Any reduction or
delay in sales of the Company's products by its channel partners could have a
material adverse effect on the Company's business, operating results and
financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer and telecommunications systems and
software products were not designed to consider the impact of moving into the
21st century. As a result, errors or system failures could result if these
systems and applications are not corrected or replaced prior to the year 2000.
The Company is currently in the process of evaluating the impact of the "Year
2000" issue upon its products, support systems and overall business.
The Company relies on third party suppliers for the management and control
of fabrication, assembly and testing of substantially all of the Company's
products. The Company has, either internally or in collaboration with certain of
its suppliers and customers, evaluated and tested certain of its products and
intends to test all of its current products by the end of 1998. The Company
believes that several of its discontinued conversion and frame relay products
are not Year 2000 compliant and the Company currently does not plan to update
these products. The Company has adopted a Year 2000 compliance definition based
upon certain generally accepted Year 2000 standards, input from customers, and
other available sources. The Company has tested its frame relay access and
circuit management products against this definition. These products have been
updated to be fully compliant against this definition. The Company is in the
process of evaluating its other current products. Some of these products either
do not have internal dating or rely on date information from other devices
resident in the networks in which they operate. Thus, any Year 2000 problems
from third party networking products could cause the Company's products not to
work in accordance with their specifications. In addition, the Company's
products are tested as standard-built, stand-alone units, or at most, in a
standard system configuration. Accordingly, custom built products and special
system configurations may create problems the Company has not or will not
uncover. Upon completion of the testing phase, the Company will assess any
changes to its current products that may be
14
<PAGE>
required to achieve Year 2000 compliance. The Company has given certain of its
customers warranties on Year 2000 compliance and may have to offer updates or
replacement products to these customers. The Company has not incurred
substantial costs to date to address the Year 2000 issue and is unable to
estimate the additional cost, if any, that may arise from actions taken by the
Company, if any, to address the Year 2000 issue or from the interaction of the
Company's products with other companies' networking devices and systems. Any
failure by the Company to make its products Year 2000 compliant could result in
a decrease in revenues of the Company's products and/or possible claims against
the Company by customers as a result of Year 2000 problems caused by the
Company's products and could have a material adverse effect on the Company.
The Company relies on a number of computer systems and applications to
operate and monitor all major aspects of its business. The Company is in the
process of evaluating its internal information and non-information systems
through inquiries with the manufacturers of such systems and anticipates that
most of these systems will be evaluated by the end of 1998. The Company believes
that several manufacturers of the Company's systems have already updated their
products to comply with the Year 2000 issue, or will make updates available by
mid-1999, or relatively low cost alternative solutions may become available.
However, there can be no assurance that any such updates will be completed on a
timely basis, if at all, or at a reasonable cost, or that such updates will work
as anticipated in and after the year 2000.
The Company has not yet established contingency plans for the Year 2000
issue. The Company intends to continue to evaluate its Year 2000 exposure and
develop any necessary contingency plans by mid-1999.
Many of the Company's customers and prospective customers are expected to
devote a substantial portion of their information systems budgets to the Year
2000 problem over the next several years, and, as a result, spending may be
diverted from wide area networking solutions. In addition, the Company relies on
a large variety of business enterprises such as customers, suppliers, creditors,
financial organizations, and domestic and international governmental entities,
for the accurate exchange of data. Any disruption in the computer systems of any
of these third parties could materially and adversely affect the Company. Due to
the Company's focus on the wide area networking market, which is vulnerable to
technological issues involving the Year 2000, substantially all of the Company's
revenues may be at risk.
Year 2000 compliance definitions and risks continue to evolve and the
Company may be impacted by future changes in Year 2000 compliance standards.
Despite the Company's efforts to address the Year 2000 impact on its products,
internal systems and business operations, the Year 2000 issue may result in a
material disruption of its business or have a material adverse effect on the
Company's business, financial condition or results of operations.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The Company's success will depend to a substantial degree upon its ability to
develop and introduce in a timely fashion enhancements to its existing products
and new products that meet changing customer requirements and emerging industry
standards. The development of new, technologically advanced products is a
complex and uncertain process requiring high levels of innovation, as well as
the accurate anticipation of technological and market trends. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new products successfully, that such new products will gain
market acceptance or that the Company will be able to respond effectively to
technological changes, emerging industry standards or product announcements by
competitors. In addition, the Company has on occasion experienced delays in the
introduction of product enhancements and new products. There can be no assurance
that in the future the Company will be able to introduce product enhancements or
new products on a timely basis. Further, from time to time, the Company may
announce new products, capabilities or technologies that have the potential to
replace
15
<PAGE>
or shorten the life cycle of the Company's existing product offerings. There can
be no assurance that announcements of product enhancements or new product
offerings will not cause customers to defer purchasing existing Company products
or cause resellers to return products to the Company. Failure to introduce new
products or product enhancements effectively and on a timely basis, customer
delays in purchasing products in anticipation of new product introductions and
any inability of the Company to respond effectively to technological changes,
emerging industry standards or product announcements by competitors could have a
material adverse effect on the Company's business, operating results and
financial condition.
PRODUCT ERRORS
Products as complex as those offered by the Company may contain undetected
software or hardware errors when first introduced or as new versions are
released. Such errors have occurred in the past, and there can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new or enhanced products after commencement of
commercial shipments. Moreover, there can be no assurance that once detected,
such errors can be corrected in a timely manner, if at all. Software errors may
take several months to correct, if they can be corrected at all, and hardware
errors may take even longer to rectify. The occurrence of such software or
hardware errors, as well as any delay in correcting them, could result in the
delay or loss of market acceptance of the Company's products, additional
warranty expense, diversion of engineering and other resources from the
Company's product development efforts or the loss of credibility with Sync's
channel partners and other resellers, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
INTENSE COMPETITION
The market for communications products is intensely competitive and subject
to rapid technological change and emerging industry standards. The Company's
current competitors include internetworking companies, such as Cisco and Bay
Networks; frame relay access device (FRAD) providers, such as Hypercom, Motorola
ISG and Cabletron; and circuit management and digital transmission providers
such as Visual Networks, Digital Link, Racal, AT&T Paradyne and Adtran, among
others. Potential competitors include other internetworking and WAN access and
transmission companies, network management software companies, frame relay
switch providers, IBM and the Company's other channel partners. Certain of these
companies have recently announced products and intentions to enter the frame
relay access or circuit management market. Many of the Company's current and
potential competitors have longer operating histories and greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than does the Company. As a result, they
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or may be able to devote greater resources to the
development, promotion, sale and support of their products than the Company.
Many also have long-standing customer relationships with large enterprises that
are part of the Company's target market, and these relationships may make it
more difficult to complete sales of the Company's products to these enterprises.
Further, certain of the Company's channel partners have in the past developed
competitive products and terminated their relationships with the Company, and
such developments could occur in the future. As a consequence of all these
factors, the Company expects increased competition, particularly in the frame
relay market. Increased competition could result in significant price
competition, reduced profit margins or loss of market share, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully in the future.
DEPENDENCE ON THE IBM CUSTOMER BASE
The Company's frame relay access products are leveraged towards the large
installed base of IBM customers utilizing SNA networks. Thus, the Company faces
the risks associated with a relatively
16
<PAGE>
concentrated customer base, including the possibility that larger IBM customers
may migrate to frame relay at a slower-than-expected rate, if at all, and the
possibility that IBM customers may purchase IBM-sponsored frame relay products
other than Sync products. There can be no assurance that IBM will continue to
support frame relay, that IBM will not develop or promote SNA-over-frame relay
products competitive with the Company's products, that the relationship between
the Company and IBM will be successful, that IBM will not terminate the
relationship or that IBM will not endorse the products of competitors or
networking solutions not offered by the Company. Any of these events could have
a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company's manufacturing operations consist primarily of materials
planning and procurement, light assembly, system integration, testing and
quality assurance. The Company has arrangements with two contract manufacturers
to out source substantial portions of its procurement, assembly and system
integration operations. There can be no assurance that these independent
contract manufacturers will be able to meet the Company's future requirements
for manufactured products or that such independent contract manufacturers will
not experience quality problems in manufacturing the Company's products. The
inability of the Company's contract manufacturers to provide the Company with
adequate supplies of high quality products could have a material adverse effect
upon the Company's business, operating results and financial condition. The loss
of any of the Company's contract manufacturers could cause a delay in Sync's
ability to fulfill orders while the Company attempts to identify a replacement
manufacturer. Such an event could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's manufacturing procedures may in certain instances create a
risk of excess or inadequate inventory if orders do not match forecasts. The
Company previously increased manufacturing capacity through the expansion of its
relationships with contract manufacturers. Any manufacturing delays, excess
manufacturing capacity or inventories or inability to increase manufacturing
capacity, if required, could have a material adverse effect on the Company's
business, operating results and financial condition.
DEPENDENCE ON SUPPLIERS
Certain key components used in the manufacture of the Company's products are
currently purchased only from single or limited sources. At present,
single-sourced components include programmable integrated circuits, gate-arrays,
selected other integrated circuits and cables, custom-molded plastics and
custom-tooled sheet metal, and limited-sourced components include flash
memories, DRAMs, printed circuit boards and selected integrated circuits. The
Company generally relies upon contract manufacturers to buy component parts that
are incorporated into board assemblies. The Company buys directly final assembly
parts, such as plastics and metal covers, cables and other parts used in final
configurations. The Company generally does not have long-term agreements with
any of these single or limited sources of supply. Any loss in a supplier,
increase in required lead times, increase in price of component parts,
interruption in the supply of any of these components, or the inability of the
Company to procure these components from alternate sources at acceptable prices
and within a reasonable time, could have a material adverse effect upon the
Company's business, operating results and financial condition. If orders do not
match forecasts, the Company may have excess or inadequate inventory of certain
materials and components, and suppliers may demand longer lead times, higher
prices or termination of contracts. From time to time the Company has
experienced shortages of certain components and has paid above-market prices to
acquire such components on an accelerated basis or has experienced delays in
fulfilling orders while waiting to obtain the necessary components. Such
shortages may occur in the future and could have a material adverse effect on
the Company's business, operating results and financial condition.
17
<PAGE>
DEPENDENCE ON AND RISKS ASSOCIATED WITH INTERNATIONAL SALES
Sales to customers outside of the United States accounted for approximately
6.6%, 19.1%, 12.7% and 10.7% of the Company's net revenues in the nine months
ended September 30, 1998 and in fiscal years 1997, 1996 and 1995, respectively.
However, these percentages may understate sales of the Company's products to
international end users because certain of the Company's U.S.-based channel
partners market the Company's products abroad. The Company currently anticipates
that international sales may continue to account for a significant percentage of
the Company's net revenues in future periods. However, as a result of the recent
Asian economic crisis, the Company experienced project delays and order
cancellations during the fourth quarter of 1997 and has continued to experience
sluggishness in it sales to the Pacific Rim during the first nine months of
1998. Sales to the Pacific Rim during the third quarter of 1998 represented 6.6%
of the Company's net revenue for such period.
The Company markets its products in foreign countries primarily through its
channel partners and independent distributors. Failure of these resellers to
market the Company's products internationally or the loss of any of these
resellers could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company's ability to
increase sales of its products to international end users may be limited if the
carrier services, such as frame relay, or protocols supported by the Company's
products are not widely adopted internationally. A number of additional risks
are inherent in international transactions. The Company's international sales
currently are U.S. dollar-denominated. As a result, an increase in the value of
the U.S. dollar relative to foreign currencies, as has occurred recently in
several Asian markets, could make the Company's products less competitive in
international markets. International sales may also be limited or disrupted by
the imposition of governmental controls, export license requirements,
restrictions on the export of critical technology, currency exchange
fluctuations, political instability, trade restrictions and changes in tariffs.
In addition, sales in Europe and certain other parts of the world typically are
adversely affected in the third quarter of each year as many customers and end
users reduce their business activities during the summer months. These
international factors could have a material adverse effect on future sales of
the Company's products to international end users and, consequently, the
Company's business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's future success depends, in part, upon its proprietary
technology. The Company does not hold any patents and currently relies on a
combination of contractual rights, trade secrets and copyright laws to establish
and protect its proprietary rights in its products. There can be no assurance
that the steps taken by the Company to protect its intellectual property will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. In the event that protective
measures are not successful, the Company's business, operating results and
financial condition could be materially and adversely affected. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States. The Company is also
subject to the risk of adverse claims and litigation alleging infringement of
intellectual property rights of others. There can be no assurance that third
parties will not assert infringement claims in the future with respect to the
Company's current or future products or that any such claims will not require
the Company to enter into license arrangements or result in litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms. Should litigation with respect to any
such claims commence, such litigation could be extremely expensive and
time-consuming and could have a material adverse effect on the Company's
business, operating results and financial condition regardless of the outcome of
such litigation.
18
<PAGE>
TARIFF AND REGULATORY MATTERS
Rates for public telecommunications services, including features and
capacity of such services, are governed by tariffs determined by carriers and
subject to regulatory approval. Future changes in these tariffs could have a
material effect on the Company's business. For example, should tariffs for frame
relay services increase in the future relative to tariffs for dedicated leased
lines, the cost-effectiveness of the Company's products could be reduced, which
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company's products must meet
industry standards and receive certification for connection to certain public
telecommunications networks prior to their sale. In the United States, the
Company's products must comply with various regulations defined by the Federal
Communications Commission and Underwriters Laboratories. Internationally, the
Company's products must comply with standards established by telecommunications
authorities in various countries as well as with recommendations of the
Consultative Committee on International Telegraph and Telephony. In addition,
carriers require that equipment connected to their networks comply with their
own standards, which in part reflect their currently installed equipment. Some
public carriers have installed equipment that does not fully comply with current
industry standards, and this noncompliance must be addressed in the design of
the Company's products. Any future inability to obtain on a timely basis or
retain domestic or foreign regulatory approvals or certifications or to comply
with existing or evolving industry standards could have a material adverse
effect on the Company's business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends, to a significant degree, upon the continued
contributions of its key management, sales, marketing, research and development
and manufacturing personnel. The Company believes its future success will also
depend in large part upon its ability to attract and retain highly skilled
engineering, managerial, sales and marketing personnel, and development
engineers. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. During 1997 and 1998, the Company implemented significant expense
reductions, including reductions in force, with the goal of enabling the Company
to achieve profitability at lower revenues. The loss of the services of these or
any of the Company's other key personnel or the failure to attract or retain
qualified personnel in the future could have a material adverse effect on the
Company's business, operating results or financial condition.
GENERAL ECONOMIC CONDITIONS
Demand for the Company's products depends in large part on the overall
demand for communications and networking products, which has in the past and may
in the future fluctuate significantly based on numerous factors, including
capital spending levels and general economic conditions. There can be no
assurance that the Company will not experience a decline in demand for its
products due to general economic conditions. Any such decline could have a
material adverse effect on the Company's business, operating results and
financial condition.
VOLATILITY OF STOCK PRICE
Any negative announcements by the Company regarding its products, markets or
financial performance, or announcements of technological innovations or the
introduction of new products by its competitors, as well as market conditions in
the technology sector, may have a significant effect on the market price of the
Company's common stock. Further, the stock market has experienced volatility
which has particularly affected the market prices of equity securities of many
high technology companies and which often has been unrelated to the operating
performance of such companies. These market fluctuations may have an adverse
effect on the price of the Company's common stock.
19
<PAGE>
ANTI-TAKEOVER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In addition, certain provisions
of the Company's charter documents, including provisions eliminating cumulative
voting, eliminating the ability of stockholders to call meetings or to take
actions by written consent and limiting the ability of stockholders to raise
matters at a meeting of stockholders without giving advance notice, may have the
effect of delaying or preventing a change in control or management of the
Company, which could have an adverse effect on the market price of the Company's
common stock. Certain of the Company's stock option and purchase plans and
agreements provide for assumption of such plans, or, alternatively, immediate
vesting upon a change of control or similar event. In addition, the Company has
entered into severance agreements with its officers, pursuant to which they are
entitled to specified severance payments if they are actually or constructively
terminated within specified time periods following a change of control of the
Company. The Board of Directors has authority to issue up to 2,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of these shares without any further vote or action by
the stockholders. The rights of the holders of the common stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such preferred stock may have other rights, including
economic rights senior to the common stock, and as a result, the issuance of
such preferred stock could have a material adverse effect on the market value of
the common stock. The Company has no present plan to issue shares of preferred
stock.
20
<PAGE>
SYNC RESEARCH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 5, 1997, an action entitled Dalarne Partners, Ltd. v. Sync
Research, Inc., et al., No. SACV97-877 AHS(EEx) was filed against the Company
and certain of its directors and officers. The action was filed in the U.S.
District Court for the Central District of California, Southern Division. The
action purports to be a class action lawsuit brought on behalf of purchasers of
the Company's common stock during the period from November 18, 1996 through
March 20, 1997. The complaint asserts claims for violation of the Securities
Exchange Act of 1934. The complaint seeks to recover damages in an unspecified
amount. No trial date or other deadline has been established. The Company
intends to defend this lawsuit vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) USE OF PROCEEDS
In connection with its initial public offering in 1995, the Company filed a
Registration Statement on Form S-1, SEC File No. 33-96910 (the "REGISTRATION
STATEMENT"), which was declared effective by the Commission on November 8, 1995.
Pursuant to the Registration Statement, the Company registered and sold
2,585,000 shares of its Common Stock, $0.001 par value per share, for its own
account. The offering was completed on November 9, 1995. The aggregate offering
price of the registered shares was $51,700,000. The managing underwriters of the
offering were BancAmerica Robertson, Stephens (formerly Robertson, Stephens &
Company), BT Alex. Brown (formerly Alex. Brown & Sons Incorporated) and Dain
Rauscher Wessels (formerly Wessels, Arnold & Henderson). From November 9, 1995
to September 30, 1998, the Company incurred the following expenses in connection
with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions.......................... $3,619,000
Other expenses.................................................. 912,471
---------
Total Expenses.............................................. $4,531,471
---------
---------
</TABLE>
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total expenses
above were $47,168,529. From November 9, 1995 to September 30, 1998, the Company
used such net offering proceeds, in direct or indirect payments to others, as
follows:
<TABLE>
<S> <C>
Construction of plant, building and facilities................ $ 850,638
Purchase and installment of machinery and equipment........... 4,003,331
Acquisition of other business(es)............................. 5,338,000
Working capital............................................... 1,495,283
Operating losses.............................................. 31,509,790
------------
Total..................................................... $ 43,197,042(1)
------------
------------
</TABLE>
- ------------------------
(1) Excludes operating losses, capital expenditures and working capital changes
of Tylink Corporation ("Tylink") prior to the Company's acquisition of
Tylink in August 1996.
In addition, the Company used aggregate proceeds of $611,125 to make
departing payments to departing officers. This use of proceeds does not
represent a material change in the use of proceeds described in the prospectus
of the Registration Statement.
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<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.27 Amended and Restated 1996 Non-Executive Stock Option Plan (amended
as of August 21, 1998)
10.34 Settlement Agreement and Mutual Release with John Rademaker dated
September 28, 1998.
27.1 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended September 30,
1998.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SYNC RESEARCH, INC.
By: /s/ WILLIAM K. GUERRY
-----------------------------------------
William K. Guerry
VICE PRESIDENT OF FINANCE AND
ADMINISTRATION
AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED SIGNATORY AND PRINCIPAL
Date: November 16, 1998 FINANCIAL AND ACCOUNTING OFFICER)
23
<PAGE>
SYNC RESEARCH, INC.
1996 NON-EXECUTIVE STOCK OPTION PLAN
AMENDED: AUGUST 21, 1998
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business. Options
granted hereunder shall be Nonstatutory Stock Options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" shall mean the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "AFFILIATE" shall mean an entity other than a Subsidiary (as
defined below) in which the Company owns an equity interest.
(c) "APPLICABLE LAWS" shall have the meaning set forth in Section
4(a) below.
(d) "BOARD" shall mean the Board of Directors of the Company.
(e) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(f) "COMMITTEE" shall mean the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan, if one is appointed.
(g) "COMMON STOCK" shall mean the Common Stock of the Company.
(h) "COMPANY" shall mean Sync Research, Inc., a Delaware corporation.
(i) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, provided that the term Consultant shall not
include Directors or Officers.
(j) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Administrator; PROVIDED that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute. For purposes of this Plan, a change
in status from an Employee to a Consultant or from a Consultant to an Employee
will not constitute a termination of employment.
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(k) "DIRECTOR" shall mean a member of the Board.
(l) "EMPLOYEE" shall mean any person (excluding any Officer or
Director) employed by the Company or any Parent, Subsidiary or Affiliate of the
Company. Notwithstanding the foregoing, an Officer who was not previously
employed by the Company and for whom an Option grant is an inducement essential
to the Officer's entering into an employment relationship or contract with the
Company shall be treated as an Employee for purposes of the Option grant made to
the Officer in connection with commencement of the Officer's employment with the
Company.
(m) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock as quoted on such system on the date of determination (if
for a given day no sales were reported, the closing bid on that day shall be
used), as such price is reported in The Wall Street Journal or such other source
as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the bid and asked prices for the Common Stock or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "NONSTATUTORY STOCK OPTION" shall mean an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(p) "OFFICER" shall mean a person who is appointed or elected by the
Board of Directors as an officer of the Company, including but not limited to a
person who is an officer of the Company within the meaning of Section 16 of the
Exchange Act and the rules and regulations promulgated thereunder.
(q) "OPTION" shall mean a stock option granted pursuant to the Plan.
(r) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(s) "OPTIONEE" shall mean an Employee or Consultant who receives an
Option.
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(t) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(u) "PLAN" shall mean this 1996 Non-Executive Stock Option Plan.
(v) "RULE 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
Act as the same may be amended from time to time, or any successor provision.
(w) "SHARE" shall mean a share of the Common Stock, as adjusted in
accordance with Section 14 of the Plan.
(x) "SUBSIDIARY" shall mean a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14 of
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 2,107,758 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares that were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. Notwithstanding any other provision of the Plan, shares
issued under the Plan and later repurchased by the Company shall not become
available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) COMPOSITION OF ADMINISTRATOR. With respect to grants of Options
to Employees or Consultants, the Plan shall be administered by (A) the Board or
(B) a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws. If a Committee has been
appointed pursuant to this Section 4(a), such Committee shall continue to serve
in its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of any Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies (however caused) and remove all members
of a Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(m) of the Plan;
(ii) to select the Employees and Consultants to whom Options
may from time to time be granted hereunder;
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(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding any Option and/or
the shares of Common Stock relating thereto, based in each case on such factors
as the Administrator shall determine, in its sole discretion);
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options may be granted
to Employees and Consultants. An Employee or Consultant who has been granted an
Option may, if he or she is otherwise eligible, be granted an additional Option
or Options.
(b) TYPE OF OPTION. Each Option shall be designated in the written
option agreement as a Nonstatutory Stock Option.
(c) NO EMPLOYMENT RIGHTS. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 20 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 16 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement. However, in the case of an Option granted to an Optionee
who, at the time the Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Option shall be
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five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided
in this Plan, the maximum number of Shares which may be subject to options
granted to any one Employee under this Plan for any fiscal year of the Company
shall be 500,000.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per Share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be such price as is determined
by the Administrator, provided, however, that the per Share exercise price shall
be no less than 85% of the Fair Market Value per Share on the date of grant.
Notwithstanding anything to the contrary in the immediately preceding sentence,
in the case of an Option granted on or after the effective date of registration
of any class of equity security of the Company pursuant to Section 12 of the
Exchange Act and prior to six months after the termination of such registration,
the per Share exercise price shall be no less than 100% of the Fair Market Value
per Share on the date of grant.
(b) PERMISSIBLE CONSIDERATION. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator and may consist entirely of (1) cash,
(2) check, (3) other Shares that (x) in the case of Shares acquired upon
exercise of an Option either have been owned by the Optionee for more than six
months on the date of surrender or were not acquired, directly or indirectly,
from the Company, and (y) have a Fair Market Value on the date of surrender
equal to the aggregate exercise price of the Shares as to which said Option
shall be exercised, (4) authorization from the Company to retain from the total
number of Shares as to which the Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise price
for the total number of Shares as to which the Option is exercised, (5) delivery
of a properly executed exercise notice together with irrevocable instructions to
a broker to deliver promptly to the Company the amount of sale or loan proceeds
required to pay the exercise price, (7) a combination of any of the foregoing
methods of payment, (8) a combination of any of the foregoing methods of payment
at least equal in value to the stated capital represented by the Shares to be
issued, plus a promissory note for the balance of the exercise price, or
(9) such other consideration and method of payment for the issuance of Shares to
the extent permitted under Applicable Laws. In making its determination as to
the type of consideration to accept, the Administrator shall consider if
acceptance of such consideration may be reasonably expected to benefit the
Company.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
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An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the event
of termination of an Optionee's Continuous Status as an Employee or Consultant,
such Optionee may, but only within thirty (30) days or such other period of
time, not exceeding six (6) months in the case of a Nonstatutory Stock Option,
as is determined by the Administrator, after the date of such termination (but
in no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), exercise his or her Option to the extent that he
or she was entitled to exercise it at the date of such termination. To the
extent that the Optionee was not entitled to exercise the Option at the date of
such termination, or if the Optionee does not exercise such Option (which he or
she was entitled to exercise) within the time specified herein, the Option shall
terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 10(b) above, in
the event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within six (6) months
(or such other period of time not exceeding twelve (12) months as is determined
by the Administrator, from the date of such termination (but in no event later
than the date of expiration of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent he or she was
entitled to exercise it at the date of such termination. To the extent that he
or she was not entitled to exercise the Option at the date of termination, or if
he does not exercise such Option (which he was entitled to exercise) within the
time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his
death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months (or such
other period of time, not exceeding twelve (12) months,
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as is determined by the Administrator) following the date of death (but in no
event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance but only
to the extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status as an Employee or
Consultant three (3) months (or such other period of time as is determined by
the Administrator as provided above) after the date of death, subject to the
limitation set forth in Section 5(b); or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Administrator) after the
termination of Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
(e) EXTENSION OF EXERCISE PERIOD. The Administrator shall have full
power and authority to extend the period of time for which the Option is to
remain exercisable following termination of an Optionee's Continuous Status as
an Employee or Consultant from the periods set forth in Sections 10(b), 10(c)
and 10(d) above or in the Option Agreement to such greater time as the Board
shall deem appropriate, provided that in no event shall such option be
exercisable later than the date of expiration of the term of such Option as set
forth in the Option Agreement."
11. WITHHOLDING TAXES. As a condition to the exercise of Options granted
hereunder, the Optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such Option. The Company shall not be required to issue any Shares
under the Plan until such obligations are satisfied.
12. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, or (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a fair market value equal to the amount required to be withheld. For this
purpose, the fair market value of the Shares to be withheld shall
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be determined on the date that the amount of tax to be withheld is to be
determined (the "TAX DATE").
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
13. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution; PROVIDED that the Administrator
may in its discretion grant transferable Nonstatutory Stock Options pursuant to
option agreements specifying (i) the manner in which such Nonstatutory Stock
Options are transferable and (ii) that any such transfer shall be subject to the
Applicable Laws. The designation of a beneficiary by an Optionee will not
constitute a transfer. An Option may be exercised, during the lifetime of the
Optionee, only by the Optionee or a transferee permitted by this Section 13.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the stockholders
of the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of shares of Common Stock that have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, the maximum number of shares of Common Stock for which Options may be
granted to any employee under Section 8 of the Plan, and the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Administrator, whose determination in that respect shall be final, binding and
conclusive.
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Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
(b) CORPORATE TRANSACTIONS. In the event of the proposed dissolution
or liquidation of the Company, the Option will terminate immediately prior to
the consummation of such proposed action, unless otherwise provided by the
Administrator. The Administrator may, in the exercise of its sole discretion in
such instances, declare that any Option shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise his or her Option
as to all or any part of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Administrator
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to some or all of the Optioned Stock, including Shares as to which
the Option would not otherwise be exercisable. If the Administrator makes an
Option exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option shall be exercisable for a period of fifteen (15) days from the date of
such notice, and the Option will terminate upon the expiration of such period.
15. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
16. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
17. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
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then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
19. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
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[LOGO]
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release ("Agreement") is
entered into by and between SYNC RESEARCH, INC., a Delaware corporation (the
"Company"), and John Rademaker ("Employee").
WHEREAS, Employee has been employed by the Company;
WHEREAS, the Company and Employee have entered into an agreement
regarding confidential information and ownership of inventions (the "Employee
Agreement");
WHEREAS, the Company and Employee have mutually agreed to terminate
the employment relationship and to release each other from any claims arising
from or related to the employment relationship;
NOW, THEREFORE, in consideration of the mutual promises made herein,
the Company and Employee (collectively referred to as the "Parties") hereby
agree as follows:
1. RESIGNATION AND TERMINATION. The Company and Employee
acknowledge and agree that Employee will resign as Co-Chief Executive Officer
and as an employee and as a Director of the Company effective July 31, 1998
(the "Resignation Date"). The parties acknowledge that the Company has paid
Employee's regular salary through the date of this Agreement in accordance
with the Company's normal payroll practices, has paid Employee any accrued
vacation pay and has reimbursed all expenses appropriately incurred by
Employee on the Company's behalf. Any payments made under this Agreement
shall be subject to withholding for taxes to the extent required under
applicable law. Following the date of this Agreement, Employee shall not be
entitled to any other employee benefits, including vacation, except as
expressly set forth above and in Section 5 below.
2. CONSIDERATION. In consideration for the release of claims set
forth below and other obligations under this Agreement, the Company agrees to
pay Employee his normal salary at the rate of $16,666.67 per month (less
applicable tax withholding) through July 31, 1998, as well as a lump sum
payment of $216,666.67, less applicable tax withholding and less amounts owed
by Employee to Company for legal fees and expenses incurred by the Company in
connection with Employee's personal loan transactions (which legal fees and
expenses total $10,899.65). Such amounts shall be paid to Employee in full
immediately following the expiration of the seven (7) day revocation period
provided for in Section 9 below, provided Employee does not exercise his
revocation rights during such period.
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3. STOCK OPTIONS. In consideration of the amounts paid to
Employee hereunder, Employee and the Company agree that vesting of any Option
Agreement(s) between Employee and the Company shall continue through, and
cease effective as of, May 31, 1998, and any such Option Agreement(s) are
hereby amended accordingly. No additional option shares shall vest after such
date. In accordance with the terms of the Option Agreement(s) between the
Company and Employee, vested options will be exercisable until 60 days after
the Resignation Date.
4. TERMINATION OF CHANGE OF CONTROL AGREEMENT. Effective with the
Resignation Date, the Amended and Restated Change of Control Severance
Agreement dated September 30, 1996 between the Company and Employee is hereby
terminated.
5. BENEFITS.
(a) Employee shall continue to receive the Company's
standard medical, dental and life insurance benefits through the Resignation
Date. After such date, Employee shall have the right to continue, at his own
expense, coverage under the Company's health insurance as provided by the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA").
(b) Employee shall be entitled to participate in the
Company's 401(k) Plan and Section 125 Plan until the Resignation Date.
(c) Employee shall not continue to accrue vacation after the
Resignation Date.
6. NON-SOLICITATION. For a period extending for 18 months
following the Resignation Date, Employee will not (a) directly or indirectly,
recruit, solicit, assist others in recruiting, or refer to others concerning
employment, any person who is an employee of the Company or any of its
subsidiaries or induce or attempt to induce any such employee to terminate
such employee's employment with the Company or any of its subsidiaries; or
(b) solicit or accept employment or be retained by any party that, within six
months prior to the Resignation Date, was a customer of the Company, if such
employment or retainer involves the provision of services that are the same
as or substantially similar to those provided by the Company. In addition,
for a period extending for six months following the Resignation Date,
Employee will not solicit or accept the business of any customer for which
Employee performed services on behalf of the Company during Employee's
employment with the Company within one year prior to the Resignation Date.
Nothing in this Section 6 will limit Employee's right to hire former
employees of the Company so long as Employee does not, directly or
indirectly, recruit, solicit, assist others in recruiting or refer to others
concerning employment, any person who is an employee of the Company or any of
its subsidiaries or induce or attempt to induce any such employee to
terminate such employee's employment with the Company or any of its
subsidiaries.
7. NO OTHER PAYMENTS DUE. Employee acknowledges and agrees that
he has received all salary, accrued vacation, commissions, bonuses,
compensation, shares of stock, options therefor and other such sums due to
Employee, other than amounts to be paid pursuant to
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Sections 2 and 5 of this Agreement. In light of the payment by the Company of
all wages due, or to become due to the Employee, the Parties further
acknowledge and agree that California Labor Code Section 206.5 is not
applicable to the Parties hereto. That section provides in pertinent part as
follows:
No employer shall require the execution of any release of
any claim or right on account of wages due, or to become
due, or made as an advance on wages to be earned, unless
payment of such wages has been made.
8. RELEASE OF CLAIMS. Employee agrees that the foregoing
consideration represents settlement in full of all outstanding obligations
owed to Employee by the Company. Employee and the Company, on behalf of
themselves, and their respective heirs, executors, officers, directors,
employees, investors, shareholders, administrators, attorneys, predecessor
and successor corporations and assigns, hereby fully and forever release each
other and their respective heirs, executors, officers, directors, employees,
investors, shareholders, administrators, predecessor and successor
corporations and assigns from any claim duty, obligation or cause of action
relating to any matters of any kind, whether known or unknown, suspected or
unsuspected, that either of them may possess arising from any omissions, acts
or facts that have occurred up until and including the Effective Date of this
Agreement including, without limitation:
(a) any and all claims relating to or arising from
Employee's employment relationship with the Company and termination of that
relationship;
(b) any and all claims relating to, or arising from,
Employee's right to purchase, or actual purchase of shares of stock of the
Company;
(c) any and all claims for wrongful discharge of employment;
breach of contract, both express and implied; breach of a covenant of good
faith and fair dealing, both express and implied; negligent or intentional
infliction of emotional distress; negligent or intentional misrepresentation
; negligent or intentional interference with contract or prospective economic
advantage; and defamation;
(d) any and all claims for violation of any federal, state
or municipal statute, including, but not limited to, Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment Act of 1967, and the
California Fair Employment and Housing Act.
(e) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination; and
(f) any and all claims for attorney's fees and costs.
The Company and Employee agree that the release set forth in this Section
shall be and remain in effect in all respects as a complete and general
release as to the matters released. This release does not extend to any
obligations incurred under this Agreement. This Agreement
-3-
<PAGE>
shall not affect or limit the enforceability of any option agreement or
option agreements now in effect between Employee and the Company or of the
Employee Agreement.
9. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. Employee
acknowledges that he is waiving and releasing any rights he may have under
the Age Discrimination in Employment Act of 1967 ("ADEA") and that the waiver
and release is knowing and voluntary. Employee and the Company agree that the
waiver and release does not apply to any rights or claims that may arise
under ADEA after the Effective Date of this Agreement. Employee acknowledges
that the consideration given for this waiver and release Agreement is in
addition to anything of value to which Employee was already entitled.
Employee further acknowledges that he has been advised in writing that (a) he
should consult with an attorney prior to executing this Agreement; (b) he has
at least twenty-one (21) days within which to consider this Agreement; (c) he
has a least seven (7) days following the execution of this Agreement by the
parties to revoke this Agreement; and (d) this Agreement shall not be
effective until the revocation period has expired.
10. CIVIL CODE SECTION 1542. The parties represent that they are
not aware of any claim by either of them other than the claims that are
released by this Agreement. Employee and the Company acknowledge that they
are familiar with the provisions of California Civil Code Section 1542, which
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Employee and the Company, being aware of such code section, agree to waive
any rights they may have thereunder, as well as under any other stature or
common law principles of similar effect. In connection with such waiver and
relinquishment, the parties hereby acknowledge that they are aware that they,
or their attorneys, may hereafter discover claims or facts in addition to or
different from those which they now know of or believe to exist with respect
to the subject matter of this Agreement, but that their intention is to
hereby fully, finally and forever settle and release all of the disputes and
differences, known or unknown, suspected or unsuspected, which do now exist,
which may exist in the future, or which heretofore have existed between the
parties. In furtherance of such intention, the releases herein given shall be
and remain in effect as a full and complete general release, notwithstanding
the discovery or existence of any such additional or different claims or
facts. The parties acknowledge that they separately bargained for the
foregoing waiver of the provisions of Section 1542 of the California Civil
Code.
11. TAX CONSEQUENCES. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any sums to
Employee under the terms of this Agreement. Employee agrees and understand
that he is responsible for payment, if any, of local, state and/or federal
taxes on the sums paid hereunder by the Company and any penalties
-4-
<PAGE>
or assessments thereon.
12. CONFIDENTIALITY. The parties agree to use their best efforts
to maintain in confidence the existence of this Agreement, the contents and
terms of this Agreement, and the consideration for this Agreement.
Notwithstanding the foregoing, the Employee shall be permitted to discuss
provisions of this Agreement in confidence with his attorneys, accountants,
tax advisors and spouse.
13. NONDISCLOSURE OF CONFIDENTIAL AND PROPRIETARY INFORMATION.
Employee shall continue to maintain the confidentiality of all confidential
and propriety information of the Company as provided by the Employee
Agreement previously entered into between the Company and the Employee, a
copy of which is attached hereto as Exhibit A. Employee agrees that at all
times hereafter, Employee shall not intentionally divulge, furnish or make
available to any party any of the trade secrets, patents, patent
applications, price decisions or determinations, inventions, customers,
proprietary information or other intellectual property rights of the Company,
until after such time as information has become publicly known otherwise than
by act of collusion of Employee. Employee further agrees that he will return
all the Company's property and confidential and proprietary information in
his possession to the Company within five business days after the Resignation
Date.
14. BREACH OF THIS AGREEMENT. Employee acknowledges that upon
breach of any of the confidential and proprietary information provisions
contained in Section 13 of this Agreement, the Company would sustain
irreparable harm from such breach, and, therefore, Employee agrees that in
addition to any other remedies which the Company may have for any breach of
this Agreement or otherwise, including termination of the Company's
obligations to provide benefits to Employee as described in Sections 2, 3 and
5 of this Agreement, the Company shall be entitled to obtain equitable
relief, including specific performance and injunctions, restraining Employee
from committing or continuing any such violation of this Agreement.
15. NON-DISPARAGEMENT. Each party agrees to refrain from any
defamation, slander of the other, or tortious interference with the contracts
and relationships of the other.
16. AUTHORITY. The Company represents and warrants that the
undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this
Agreement. Employee represents and warrants that he has the capacity to act
on his own behalf and on behalf of all who might claim through him to bind
them to the terms and conditions of this Agreement. Each Party warrants and
represents that there are no liens or claims of lien or assignments in law or
equity or otherwise of or against any of the claims or causes of action
released herein.
17. NO REPRESENTATIONS. Each party represents that it has
carefully read and understands the scope and effect of the provisions of this
Agreement. Neither party has relied upon any representations or statements
made by the other party which are not specifically set forth in this
Agreement.
-5-
<PAGE>
18. COSTS. The Parties shall each beach their own costs,
attorneys' fees and other fees incurred in connection with this Agreement.
19. INDEMNIFICATION. The Company will continue to provide
indemnification and other benefits to Employee to the extent required under
the Indemnification Agreement between Employee and the Company dated November
6, 1995.
20. SEVERABILITY. In the event that any provision hereof becomes
or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
21. ENTIRE AGREEMENT. This Agreement represents the entire
agreement and understanding between the Company and Employee concerning
Employee's separation from the Company and supersedes and replaces any and
all prior agreements and understandings concerning Employee's relationship
with the Company and his compensation by the Company other than any option
agreement as described in Section 3 and other than the Employee Agreement as
described in Section 13.
22. NO ORAL MODIFICATION. This Agreement may only be amended in
writing signed by Employee and the Company.
23. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of California.
24. EFFECTIVE DATE. This Agreement shall be effective once it has
been signed by both parties and such date is referred to herein as the
"Effective Date".
25. COUNTERPARTS. This Agreement may be executed in counterparts,
and each counterpart shall have the same force and effect as an original and
shall constitute an effective binding agreement on the part of each of the
undersigned.
26. ASSIGNMENT. This Agreement may not be assigned by Employee or
the Company without the prior consent of the other party. Notwithstanding the
foregoing, this Agreement may be assigned by the Company to a corporation
controlling, controlled by or under common control with the Company without
the consent of Employee.
27. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf
of the parties hereto, with the full intent of releasing all claims. The
parties acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation,
negotiation and execution of this Agreement by legal counsel of their own
choice or that they have voluntarily declined to
-6-
<PAGE>
seek such counsel;
(c) They understand the terms and consequences of this
Agreement and of the releases it contains; and
(d) They are fully aware of the legal and binding effect of
this Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
respective dates set forth below.
SYNC RESEARCH, INC.
By: /s/ WILLIAM K. GUERRY
----------------------------------
Title: V.P. Finance
-------------------------------
Dated: September 23, 1998
-------------------------------
EMPLOYEE
/s/ JOHN RADEMAKER
--------------------------------------
Signature
John Rademaker
--------------------------------------
Print Name
Dated: September 28, 1998
--------------------------------
-8-
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,068
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<CURRENT-ASSETS> 25,985
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0
0
<COMMON> 17
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<SALES> 20,227
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