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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER:
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SYNC RESEARCH, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 33-0676350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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40 PARKER
IRVINE, CA 92618
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 588-2070
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of Class)
------------------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing sale price of the Registrant's Common Stock on
the Nasdaq National Market on March 13, 1998 was approximately $57,544,019 as of
such date. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
There were 17,367,197 shares of Registrant's Common Stock issued and
outstanding as of March 13, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the Registrant's 1998 Annual Meeting of Stockholders scheduled to
be held on June 12, 1998 (the "Proxy Statement").
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the matters
discussed in this document are forward-looking statements. The Company wishes to
alert readers that the factors set forth in Item 7, under "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Risk
Factors," including but not limited to fluctuations in quarterly orders, market
conditions in the networking industry and the amount of charges relating to
expense reductions, involve risks and uncertainties and 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.
OVERVIEW
Sync Research, Inc. together with its subsidiaries (collectively, "Sync" or
the "Company") develops, manufactures, markets and supports wide-area network
("WAN") access, internetworking and management solutions that enable customers
to more reliably deploy business-critical applications over frame relay and
other public switched virtual network ("PSVN") services.
In August 1996, Sync acquired TyLink Corporation ("TyLink"), based in
Norton, Massachusetts. With the addition of TyLink, Sync has enhanced its
product portfolio with an extensive line of digital transmission and circuit
management products for customer premise and service provider applications.
Digital transmission products, including data service units and channel service
units ("DSU/CSU") and Integrated Services Digital Network ("ISDN") termination
products, are the basic elements that comprise frame relay and other
next-generation digital and switched services. The acquisition of TyLink was
accomplished through a merger ("Merger") of a wholly-owned subsidiary of the
Company with and into TyLink. In the Merger, the Company exchanged 2,148,168
shares of its common stock for all of the outstanding shares of TyLink common
and Series A preferred stock and reserved 423,155 shares of Sync common stock
for issuance upon exercise of TyLink options, which were assumed by the Company.
In addition, Sync acquired all of the issued and outstanding Tylink Series B
preferred stock for $4 million in cash and 208,677 shares of Sync common stock.
The Merger has been accounted for as a pooling of interests.
As a result of the growth of computing networks, there has been a worldwide
growth in demand for data bandwidth. At the same time, worldwide
telecommunications reform has caused the transformation of traditional carriers
and has given birth to a new generation of geographically and market aligned
value-added carriers, collectively referred to as "Service Providers." In an
effort to develop new revenue sources and improve competitiveness, many of these
Service Providers have launched innovative data services based on frame relay,
an efficient, low-latency, frame-switched WAN protocol. Frame relay has
experienced rapid growth as a PSVN service due to its speed and economy, its
deployment flexibility, and its ability to combine incompatible "protocols,"
such as International Business Machines Corporation ("IBM") mainframe Systems
Network Architecture ("SNA") and client/server Transmission Control
Protocol/Internet Protocol ("TCP/IP"), onto a single telecommunications circuit.
Frame relay represents an emerging class of cost-effective, intelligent, PSVN
technology, and provides a smooth migration to asynchronous transfer mode
("ATM") and other broadband switching services.
Sync has developed a portfolio of products that provide end users and
service providers with innovative WAN access and management solutions engineered
to support mission-critical applications over frame relay and other PSVN
services. The Company's FrameNode-TM- line of multiservice frame relay access
devices ("FRADs") and frame relay access routers enable the migration of
embedded SNA leased line networks to frame relay, as well as the convergence of
SNA and client/server branch applications across frame relay networks. The
TyLink-Registered Trademark- line of digital transmission products includes
DSU/CSUs, ISDN termination products and voice/data multiplexers. These
technologies form the building blocks of frame relay and other digital-based
services. Sync's new circuit management solutions represent an emerging
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product category consisting of WAN probes and application software that improves
the availability and performance of frame relay and other PSVN services by
providing extensive problem isolation and troubleshooting capabilities and
proactive performance and service-level management.
Industry analysts have estimated that there are approximately 50,000 IBM SNA
networks worldwide. Today, most of these networks use expensive private leased
lines to connect remote sites to central computing facilities or data centers.
Due to favorable carrier pricing and technical suitability, frame relay PSVN
services have emerged as a less expensive, more efficient, direct substitute for
such traditional leased line connections. According to a recent study by
Vertical Systems Group (1997), the worldwide market for frame relay services and
equipment is projected to exceed $14.6 billion by 2000. It is estimated that
more than half of all data traffic on frame relay networks by the year 2000 will
be attributable to SNA network customers migrating to frame relay. As both an
SNA internetworking and frame relay access pioneer, the Company was an early
developer of SNA-over-frame relay and SNA and client/server convergence
solutions. The Company's FRAD products have been selected by a number of
carriers for inclusion in their managed network service offerings for IBM
customers.
Sync continued to expand the breadth and capability of its FrameNode-TM-
family of award winning FRADs and frame relay access routers in 1997. The
Company announced a partnership with Nuera Communications (San Diego, CA) to
integrate voice over frame relay ("VoFR") support on the FrameNode platform. The
first such product is expected to be a new version of the 3600 Series platform
capable of supporting SNA and other legacy protocols, Internet
Protocol/Internetwork Packet Exchange ("IP/IPX") routing and up to two (2) voice
or FAX channels on a single unit. Analysts predict the voice over data market,
and VoFR in particular, will enjoy considerable growth in the next several years
due to its compelling economics; especially in international applications. In
1997, Sync also introduced the 2600 Series--a compact, low-priced single port
FRAD with built-in DSU/CSU that is ideally suited for connecting remote
automatic teller machines, point of sales devices and other standalone terminals
over frame relay. In support of its IBM Original Equipment Manufacturer ("OEM")
relationship, the Company significantly enhanced interoperability between the
FrameNode (IBM Nways 2218 FRAD) and IBM's 2216 Nways Multi-access Controllers
family.
In 1997, the Company also significantly expanded its circuit management
product portfolio with new platforms and software functionality. The new T1 and
fractional T1 Frame Relay Access Probe ("T-FRAP") complements the Company's
56/64Kbps based FRAP platform by adding support for frame relay circuits based
on high-speed digital T1 and fractional T1 services. Such services are typically
used at the central site of a frame relay network to connect remote branch sites
to the data center. Sync also announced its new Pro-Act-TM- software, an
optional software module that enables the FRAP to look inside frame relay
packets to see specific protocol and application level flows. With Pro-Act, the
FRAP provides end users and service providers with real-time, end-to-end
visibility of frame relay permanent virtual circuits ("PVCs") and the traffic
that flows across them. In January 1998, the Company announced its Serial Frame
Relay Access Probe ("S-FRAP"), a non-DSU/CSU version of its FRAP product
designed for existing frame relay networks that already have installed DSU/CSUs
and international markets where DSU/CSUs are integrated by the local loop
carrier. In January 1998, Sync also unveiled its Envisage-TM- suite of network
performance and service-level management applications that leverage the latest
open, Java and Web enabled management technologies to provide advanced
performance and service-level monitoring capabilities.
The Company believes that it is well-positioned with its frame relay access
and circuit management solutions, both for customers deploying business-critical
applications across frame relay and for service providers targeting such
customers with bundled customer premise equipment ("CPE") and managed network
service ("MNS") offerings.
Sync continues to follow a leveraged sales strategy, utilizing IBM and a
number of Regional Bell Operating Companies ("RBOCs") and Interexchange Carriers
("IXCs") as delivery channels for its
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products. Current RBOC and IXC partnerships include Ameritech ("Ameritech"),
Pacific Bell Network Integration ("PacBell"), Sprint Communications Company
("Sprint"), MCI Communications Corporation ("MCI") and Intermedia
Communications, Inc. ("Intermedia Communications") IBM is expected to serve as a
global channel to Fortune 500 customers, many of which are moving their private
SNA leased line networks to frame relay. The Company believes that carrier
partnerships, especially those deploying managed service offerings, are
well-suited to serve the needs of middle and upper market customers.
Sync maintains international sales and operations offices in Europe
(Frankfurt, Germany and Manchester, U.K.) and relationships with its channel
partners to support its worldwide sales efforts.
The Company utilizes a distribution and value-added reseller ("VAR")
channel, which includes a catalog reseller, Black Box Corporation ("Black Box"),
as the primary distribution channel for its digital transmission products. Sales
through this channel have decreased since completion of the Merger. During the
latter half of 1997 and into 1998, the Company implemented several programs to
rebuild and expand this channel and to expand its support of the broader line of
Sync products, including FRADs and circuit management products.
INDUSTRY BACKGROUND
RELIANCE ON SNA FOR BUSINESS-CRITICAL APPLICATIONS
Over the past few decades, organizations have predominantly performed their
business-critical data processing on IBM mainframe systems. These
transaction-oriented data processing applications have traditionally supported
such critical functions as branch banking, credit transactions, retail
point-of-sale transactions and airline reservations. Wide-area networks have
been built to provide access to these applications from geographically-dispersed
branch offices in a "hub and spoke" model, in which as many as several thousand
remote sites are connected to one or two data processing centers.
The critical nature of these business applications requires that host-based
systems deliver high availability with efficient and predictable response times.
IBM's SNA was designed and developed specifically to deliver these benefits to
remote terminals communicating across the current wide-area network
infrastructures, primarily leased lines. SNA has been the prevalent network
architecture for corporate wide-area networks since the late 1970s. Industry
analysts have estimated that there are approximately 50,000 IBM SNA networks
worldwide.
EMERGENCE OF IP AND CLIENT/SERVER COMPUTING
In the late 1980s, a new architecture for information processing called
"client/server" computing emerged, fueled by the growing intelligence in desktop
computers, expanding capabilities of software applications and ease of local
interconnection through local area networks ("LANs"). To facilitate support,
scalability and security, client/server networks are being implemented by
corporations in topologies that physically and logically parallel the
traditional leased-line hub and spoke model of the mainframe SNA network, with
centralized server "farms" mimicking mainframe data centers.
Sync believes that SNA and client/server architectures, each with advantages
for certain business applications, will continue to coexist. Thus, certain
organizations may be required to maintain two separate networks, resulting in
duplication of WAN and equipment costs, network management and support
personnel, as well as increased operational complexity.
PARADIGM SHIFT TO PUBLIC SWITCHED VIRTUAL NETWORK SERVICES
Continuing deregulation and reformation within the worldwide
telecommunications market has resulted in a dramatic increase in the number of
traditional and non-traditional carriers. Although many classifications exist
today defined by regulatory, geographical or target market boundaries, the
generally accepted categories are IXC, Local Exchange Carriers ("LEC"),
Competitive Local Exchange Carrier
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("CLEC"), Network Service Provider ("NSP") and Internetwork Service Provider
("ISP"). Sync refers to these organizations collectively as "Service Providers."
In order to differentiate their services and remain competitive, Service
Providers have deployed a number of data transport networks based on packet and
cell switched technologies; specifically frame relay, Internet Protocol ("IP")
and Asynchronous Transfer Mode ("ATM"). Many end user organizations ("End
Users") have found these PSVN services to be cost-effective alternatives to
private leased line networks and have migrated all or part of their WAN
infrastructures, effectively "out-tasking" WAN planning, provisioning and
management to their Service Provider. Many Service Providers have taken the WAN
"out-tasking" model to the next step by creating adjunct services that take over
end-to-end management of the End user's WAN and, in some instances, even remote
branch LAN. These managed network services ("MNS") often bundle PSVN services
with the customer premise equipment ("CPE") necessary to connect customer sites
to the network.
The paradigm shift from leased lines to PSVN services has created a number
of challenges for End Users and Service Providers alike. Since a significant
portion of their WAN infrastructure is now controlled and managed by their
Service Providers, End Users have diminished visibility and control of mission-
critical applications that traverse the PSVN. In turn, Service Providers have
increased responsibility for end user application performance, especially in
connection with MNS offerings.
THE SYNC SOLUTION
Sync is a provider of WAN access, internetworking and management products
that enable business-critical SNA and client/server applications to be safely
deployed over frame relay or other PSVN services. Sync's products allow
organizations to leverage the performance, utility and cost advantages of these
networks, while maintaining the robustness, reliability and responsiveness of
SNA and preserving the sizable investment in legacy SNA applications, equipment,
management automation, diagnostic tools and staff training. To reach these
customers, Sync has established relationships with key network equipment and
service providers that serve the SNA customer base.
PRODUCTS
Sync has continued to focus almost exclusively on the growing frame relay
marketplace, while monitoring a variety of PSVN technologies in connection with
possible future product directions. The Company's product portfolio targets
three distinct frame relay market related opportunities. Combined, the products
offer a complete, single vendor access, connectivity and management solutions
for deployment and support of mission-critical applications over frame relay.
BRANCH INTERNETWORKING SOLUTIONS
The FrameNode family of FRADs and frame relay access routers reduces
duplication in networks and recurring telecommunications costs by converging
SNA, legacy and client/server (IP/IPX) branch applications across a frame relay
WAN using a single access trunk. Sync FrameNodes successfully combine
deterministic SNA transactions with bursty and bandwidth-demanding client/server
transmissions through a traffic prioritization and bandwidth allocation
capability. Sync's FrameNode 4200 again won industry awards in 1997 for its
measured performance in these areas. In independent testing, the FrameNode has
outperformed frame relay-equipped routers and FRADs from the industry's leading
networking companies in handling mixed SNA and client/server (IP/IPX) branch
traffic. The mid-range FrameNode 3600 Series and low-end 2600 Series platforms
were introduced in January and October 1997, respectively, joining the high-end
4200 Series platform and giving Sync a broad product offering. The FrameNode
3600 and 2600 Series integrate DSU/CSU, ISDN and circuit management technology
from Sync's TyLink-Registered Trademark- product group.
A growing number of large IBM-centric customers, such as First Union
Corporation ("First Union") and Bank of America Corporation ("BofA"), have
selected Sync and its market partners as their frame
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relay solution provider. Several service providers have also chosen the
FrameNode as CPE for their MNS offerings, including CLEC Intermedia
Communications, which became a Sync partner in 1997.
CIRCUIT MANAGEMENT SOLUTIONS
Sync's circuit management technology consists of a series of WAN monitoring
probes and graphical trending, analysis, troubleshooting and reporting
applications. Together, these components allow End Users and Service Providers
to improve network availability and performance by instrumenting their frame
relay networks with extensive performance and service-level management
capabilities. Sync expanded its Frame Relay Access Probe ("FRAP") family of WAN
monitoring probes in 1997 with the addition of a T1/fractional T1 model called
the T-FRAP. Sync also expanded the functions of its TyView Plus applications
improving its graphical reporting capabilities.
DIGITAL TRANSMISSION SOLUTIONS
Sync's TyLink-Registered Trademark- brand high-performance digital
transmission products support a wide range of digital access applications,
including low-speed 56/64Kbps to high-speed T1/E1 models for leased line
connectivity; and data, voice and video integration on a single T1 trunk. The
TyLink-Registered Trademark- 7400 Series WAN Champion is a high-capacity chassis
system that can support up to 32 T1 interfaces. Its port density and
price/performance make it ideal for large-scale T1 termination applications.
Sync's digital transmission products has been installed by Service Providers
in the United States, Korea, Canada, Mexico and other markets as infrastructure
connectivity for leased line, frame relay, cellular and internet service
offerings.
SERIAL-TO-LAN CONVERSION
Sync was a pioneer in serial-to-LAN conversion technology and introduced its
first SDLC-to-LLC2 converter in 1991. Today, Sync provides a broad range of
serial-to-LAN conversion products under the ConversionNode-TM- product name. The
ConversionNode enables SNA and other legacy serial controllers to interoperate
over router-based internetworks by providing serial-to-LAN conversion. It
supports a wide-array of legacy controllers, including SNA, asynchronous BSC3270
and BSC/RJE. Sync marketed the ConversionNode primarily through the Company's
strategic partnership with 3Com Corporation ("3Com"), which marketed the product
under the 3Com LinkBuilder-TM- name.
The ConversionNode market declined in 1997, as anticipated, as increasing
numbers of router vendors developed SNA-to-LLC2 and legacy-to-LLC2 conversion
competency.
PRODUCT STRATEGY
Sync has developed a solid, multifaceted product strategy that the Company
believes significantly expands its total addressable market by concurrently
participating in three frame relay related market segments: frame relay access,
frame relay circuit and service-level management and high-speed digital
transmission; the underpinnings of frame relay (and ISP) connectivity. In 1998,
Sync plans to continue to expand its competency and position in these markets
through focused development, marketing and sales efforts. The Company also plans
to leverage its broad technology base by creating new products that integrate
all three core technologies in a single platform and extending beyond frame
relay to other PSVN technologies, including IP and ATM.
CUSTOMERS AND MARKETS
Sync's three core WAN technologies--access internetworking, circuit
management and digital transmission--are targeted at two macro markets:
enterprise end user customers and service providers.
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ENTERPRISE END USER CUSTOMERS
Industry analysts have estimated that there are approximately 50,000 IBM SNA
networks worldwide. Sync's strategy is to provide a comprehensive product
solution for safely migrating mission-critical SNA and client/server
applications to frame relay, including access, circuit management and digital
connectivity. The Company believes that advantages to its customers include
improved network reliability and determinism, improved efficiencies in circuit
and bandwidth utilization, and reduced capital, telecommunications and operating
costs.
SERVICE PROVIDERS
The FrameNode is designed to be an optimal CPE solution for carrier-managed
service offerings. In addition to its broad support for SNA, legacy, and IP/IPX
protocols, it includes extensive end-to-end network management capabilities.
Sync believes that these capabilities allow for more reliable and consistent
service to customers, improved efficiency in circuit and bandwidth provisioning,
and reduced capital and operating costs for service providers.
While enterprise customers view frame relay as a cost-effective vehicle for
converging remote SNA and client/server applications, Sync believes they will
not be willing to give up the stable, deterministic, resilient and
management-rich attributes of their SNA leased line networks. The goal of Sync's
new circuit management technology is to equip customers and service providers
with the management capabilities necessary to safely migrate business-critical
SNA and client/server applications to frame relay and other PSVN services
without compromising on network performance and availability requirements.
CUSTOMER BASE
The Company's products are used in a wide variety of industries worldwide.
Sync's customer base continues to expand and today includes a broad mix of major
End Users and Service Providers. The following organizations are among the
customers that have purchased products directly from Sync or through channel
partners or other resellers:
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BANKING AND FINANCIAL SERVICES INDUSTRIAL
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Bank of America Corporation Allied Signal, Inc.
Bank of Boston The Broken Hill Proprietary
Bear, Stearns & Company, Inc. Company Ltd.
Chase Manhattan Caterpillar
Chemical Financial Corporation Occidental Petroleum Corporation
Citicorp Piedmont Natural Gas
First Bank Systems, Inc. Rockwell International Corporation
First Citizens Bank Safety-Kleen Corporation
First Union Corporation Sony Corporation
Harris Trust and Savings Bank National Steel
Legg Mason, Inc. USX Corporation
U.S. Bancorp
Wachovia Corporation
Wells Fargo & Company
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GOVERNMENT INSURANCE AND HEALTH CARE
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Federal Bureau of Investigation Kaiser Foundation Health Plan Inc.
Federal Reserve Bank The St. Paul Companies, Inc.
Georgia Power Company The Travelers Corporation
State of California Ullico Inc.
U.S. Navy UNUM Corporation
State of Minnesota Manor Care, Inc.
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RETAIL OTHER
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Acme Boots Electronics Data Systems Corp.
Pier 1, Inc. Experian
SportMart, Inc. United Van Lines Ltd.
Dayton-Hudson Corporation Computer Sciences Corporation
Long's Drugstores DaCom
Hills Department Stores Korea Telecom
Visa International
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SALES AND PARTNER CHANNELS
The Company's sales and channel strategy includes deployment through channel
partners, distributors and a direct sales force, both in North America and
overseas. The Company has established channel partnerships with selected
internetworking companies, as well as carriers. In addition to its relationships
with channel partners and other resellers, the Company continues to maintain a
direct sales force to ensure close customer contact and facilitate channel field
sales engagement.
CHANNEL PARTNERS AND OTHER RESELLERS
The Company's sales and marketing strategy focuses on establishing channel
partnerships with selected, leading networking companies and carriers that are
attempting to expand their presence in the SNA customer base. Sync has
implemented a variety of programs to assist its channel partners in enhancing
their ability to participate in this market. Sync and its channel partners work
closely together in various activities, including collaborative marketing
efforts, joint sales calls, field training and support and custom product
development. The Company currently maintains OEM, marketing and sales
arrangements with networking companies such as IBM and 3Com, as well as Service
Providers such as Sprint, MCI, Ameritech, PacBell and Intermedia Communications.
The Company intends to maintain direct sales, marketing and systems engineering
activities in order to drive demand for Sync products and support channel
partners.
IBM: IBM is the leading supplier of mainframe systems and the developer of
the SNA network architecture. In 1994, IBM announced support for frame relay,
and IBM's current SNA and WAN products incorporate a frame relay interface and a
wide array of frame relay switching and termination functions. In August 1995,
the Company entered into a cooperative marketing agreement with IBM. In March
1996, Sync and IBM announced a new private label resale relationship in which
IBM is offering Sync's FrameNode product family under the name IBM Nways 2218.
In January 1997, the Company announced that IBM was awarded a contract to
provide Sync-manufactured frame relay access devices for Bank of America's
Versateller network upgrade project. Over 3,000 IBM Nways 2218 units are
expected to be installed in Versateller locations throughout California in
conjunction with this project. Sales to IBM accounted for 16.5% and 4.9% of the
Company's net revenues in 1997 and 1996, respectively.
3Com Corporation: 3Com offers a broad range of global networking solutions
including routers, hubs, ISDN equipment and network adapters. Concurrently with
an equity investment in the Company in April 1994, 3Com and Sync entered into a
private label and resale relationship, pursuant to which Sync developed certain
custom products incorporating ConversionNode technology and agreed to sell these
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products to 3Com on an exclusive basis. Sales to 3Com accounted for 6.5%, 19.2%
and 17.9% of the Company's net revenues in 1997, 1996 and 1995, respectively.
The Company believes that revenue derived from sales to 3Com will continue to
decline as competitive products impact the conversion product business.
Service Providers: Sync has developed FrameNode and FRAP CPE resale and
bundled managed service relationships with a number of IXC, LEC and CLEC service
providers, including MCI, Sprint, and Intermedia Communications. In a "managed
service" program, the carrier combines Sync's networking products with the
carrier's own wide-area network service offering. The carrier installs, deploys,
and manages the customer's network, providing a single service invoice monthly.
This service allows customers to avoid the expense of selecting, purchasing,
deploying and managing the vendor equipment and carrier circuits that comprise
its network infrastructure.
Other Resellers: The Company sells its products through other resellers, in
addition to its channel partners, including distributors and Value Added
Resellers ("VARs"). The Company plans to develop and expand its reseller channel
to accommodate, in particular, its line of WAN access, transmission and
management product lines.
In general, the Company's resale agreements with its channel partners and
other resellers (i) have terms ranging from one to five years, subject to
renewal, (ii) do not restrict the sale of products that compete with those of
the Company, (iii) provide for discounts based on expected or actual volumes of
products purchased or resold by the channel partner in a given period, (iv) do
not require minimum purchases, (v) provide for worldwide distribution rights,
(vi) prohibit product distribution by the Company through certain categories of
third parties under certain conditions, (vii) can be terminated by the reseller,
under certain conditions, with limited notice and with little or no penalty, and
(viii) provide manufacturing rights and access to source code upon the
occurrence of specified conditions or defaults.
During 1996, sales to Network Equipment Technology, Inc. ("NET") and
Racal-Datacom, Inc. ("Racal") accounted for 6.6% and 4.4% of the Company's net
revenues, respectively. During 1996, both NET and Racal developed product and
product strategies, which place them in competition with the Company. Moreover,
the product lines acquired in the Merger compete with certain Racal products.
Accordingly, these customers did not account for a significant portion of the
Company's 1997 revenues and the Company expects revenues from these customers to
be limited to continuing service revenue and replacement products generated from
installed customers.
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Risk Factors-Dependence on Channel
Partners and Other Resellers" and "Intense Competition."
DIRECT SALES
In addition to its channel partner strategy, Sync maintains a direct sales
organization to promote the Company's products and to ensure direct contact with
the Company's current and potential customers. The primary roles of the
Company's sales force are (i) to provide support to channel partners, (ii) to
assist end user customers in addressing complex network problems and (iii) to
differentiate the features and capabilities of the Company's products from
competitive offerings. In addition, the Company believes that its investment in
direct sales enables the Company to monitor changing customer requirements.
Also, such direct customer contact often generates additional sales revenues. As
of December 31, 1997, the Company had 38 domestic field sales and support
personnel currently operating out of locations in 15 states.
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INTERNATIONAL SALES
The Company currently expects the frame relay equipment market outside of
the United States to grow in the next several years, with Europe, Asia Pacific
and Canada representing the largest market opportunities. Sync believes its
strategy for international expansion will allow the Company to participate in
these emerging growth markets. In addition, the growth in the international
frame relay market requires Sync to develop a worldwide presence in order to
support Sync's global carrier, OEM and resale partners.
The Company has designed its products and established its marketing and
sales channels to address the global market opportunities for digital
transmission and frame relay access and circuit management products.
Historically, the Company's international sales have been conducted primarily
through independent country-specific distributors. These distributors generally
are responsible for importation, system installation, technical support and
follow-on services to customers in their respective territories. The Company
believes that there is a large potential international market for its products
and intends to address this market in the future increasingly through its
channel partners, many of which have a well-established international presence
and reputation.
The Company expanded its international sales presence in 1996 by
establishing a European, Middle East and Africa office, headquartered in
Frankfurt, Germany. In connection with its cost reduction programs, the Company
terminated its agreement Pacific Advantage Ltd. ("Pacific Advantage"),
headquartered in Hong Kong which was previously engaged to manage the operations
and assist in market development and support for its global and local sales
partners. The Company will focus its sales efforts in the Pacific Rim through
its relationships with its other partners and direct sales efforts.
Sales to customers outside of the United States accounted for approximately
$4.5 million, $4.6 million and $3.7 million, or 19.1%, 12.7% and 10.7% of the
Company's net revenues in 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 expects that international sales will
continue to represent an important percentage of net revenues in future periods.
However, as a result of the recent Asian currency crisis the Company experienced
project delays and order cancellations during the fourth quarter of 1997. The
near-term outlook on the Company's sales to the Pacific Rim, which represented
approximately 14% of the Company's 1997 net revenues, remains uncertain. Certain
business risks are inherent in international transactions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors--Dependence on and Risks Associated with International Sales."
CUSTOMER SERVICE
The Company installs, maintains and supports products sold directly in the
United States with the Company's service and support personnel and through
contracted service providers. The Company's resellers generally provide
installation, maintenance and support services to their customers, with the
Company providing backup support. Sync employs systems engineers who work
closely with the Company's channel partners and direct sales personnel to assist
End Users with pre- and post-sales support. As a result, the Company believes
that these systems engineers are able to provide valuable input to the product
development process based on their experience in the field. The Company also
supports customers and sales personnel by providing telephone support and remote
access to customer installations through the Company's technical assistance
centers in Irvine, California and Norton, Massachusetts. Remote access is
accomplished either through a digital dial-up network connection directly to a
customer's installation or through a modem connection to the control port of the
customer's system. This connection allows Company representatives to remotely
analyze and correct software, installation and configuration problems. The
Company also offers on-site installation and technical assistance for fixed
fees. The Company's customers may select among various levels of maintenance
options. In certain cases the Company subcontracts with one of its third-party
service providers for the provision of installation and
10
<PAGE>
maintenance services. Sync provides its direct end user customers with a twelve
to sixty month warranty, which commences on product shipment.
RESEARCH AND DEVELOPMENT
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 Company intends to continue to make substantial
investments in product and technology development. The Company monitors changing
customer needs and works closely with its switching, backbone and carrier
channel partners and resellers, end user customers and market research
organizations to monitor changes in the marketplace. The Company intends to
support industry standards and to continue to support emerging wide-area
networking protocols.
The Company is focusing its development efforts on expanding the
functionality of each of its product lines--frame relay access, digital
transmission and circuit management--to support emerging carrier services and
additional industry standards. Efforts to integrate digital transmission and
circuit management technology into the Company's frame relay access products are
continuing. The Company also plans to develop higher capacity platforms and to
expand the Company's network management capabilities. The Company has a variety
of new products being tested and developed. No assurances can be given that the
Company will be able to introduce any or all of these products on a timely
basis, if at all. Moreover, 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, including new PSVN services, or product announcements by
competitors. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Factors--Rapid Technological Change and New
Products," "--Product Errors" and "Business--Products."
The Company's research and development expenditures totalled $7.2 million,
$7.7 million and $5.6 million in 1997, 1996 and 1995, respectively. At December
31, 1997, 46 full-time employees were engaged in research and product
development. In 1997, the Company implemented significant expense reductions
with the goal of enabling the Company to achieve profitability at lower
revenues. These expense reductions included a reduction in force, including a
reduction in the number of employees engaged in research and development. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations" and "Risk Factors--Dependence on Key
Personnel."
MANUFACTURING
Sync's operational strategy continues to emphasize outsourcing of
manufacturing to reduce costs and to provide flexibility in meeting market
demand. The Company's manufacturing operations consist primarily of materials
planning and procurement, light assembly, system integration, test and quality
assurance. The Company entered into an arrangements with contract manufacturers
in 1995 and 1996 to outsource substantial portions of its procurement, assembly
and system integration operations.
The Company designs substantially all of the hardware subassemblies for its
products. Outside subcontractors are used for part of this process. The Company
installs its proprietary software into the electronically erasable programmable
read only memory ("EEPROM") of its systems in order to configure products to
meet customer needs and to maintain quality control and system security.
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
11
<PAGE>
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 identifies a
replacement manufacturer. Such an event could have a material adverse effect on
the Company's business, operating results and financial condition.
In addition to outsourcing, the Company attempts to reduce manufacturing
costs by minimizing single and limited source and custom parts, and designing in
capability for automated assembly and testing. The manufacturing process enables
the Company to configure hardware and software in combinations to meet a wide
variety of individual customer requirements.
The Company uses a rolling six-month forecast based on anticipated product
orders to determine its general materials and manufacturing staffing
requirements. Lead times for materials and components ordered by the Company
vary significantly, and depend on factors such as the specific supplier,
contract terms and demand for a component at a given time. Currently, the
Company acquires materials and completes certain standard subassemblies based on
the Company's forecast. Upon receipt of firm orders from customers, the Company
assembles fully-configured systems and subjects them to a number of tests before
shipment. The Company's manufacturing procedures are designed to assure rapid
response to customer orders, but may in certain instances create a risk of
excess or inadequate inventory if orders do not match forecasts.
Although the Company generally uses standard parts and components for its
products, certain key components are currently purchased only from single or
limited sources. At present, single-sourced components include programmable
integrated circuits, selected other integrated circuits and cables,
custom-molded plastics and custom-tooled sheet metal and limited-sourced
components, including 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 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. 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 receive 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.
The Company's Irvine facility obtained ISO 9001 certification in September
1997 and has subsequently completed a recertification audit. The Company
anticipates that its Norton facility will undergo the certification process in
1998. The Company's inability to achieve ISO certification of its Norton
facility or maintain certification of all of its facilities could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company increased manufacturing capacity in 1996 through expansion of
its relationships with contract manufacturers and internal manufacturing
resources. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Dependence on Contract
Manufacturers," and "--Dependence on Suppliers."
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 Systems,
Inc. ("Cisco") and Bay Networks, Inc. ("Bay Networks"); FRAD
12
<PAGE>
providers such as Hypercom Network Systems ("Hypercom"), Motorola Information
Systems Group ("Motorola ISG"), and Cabletron Systems, Inc. ("Cabletron"), and
circuit management and digital transmission providers such as Visual Networks,
Inc. ("Visual Networks"), Digital Link Corporation ("Digital Link"), Racal, AT&T
Paradyne and Adtran, Inc. ("Adtran"), among others. Potential competitors
include other internetworking and WAN access and transmission companies, frame
relay switch providers, IBM and the Company's other channel partners. Certain of
these companies have 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
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Intense Competition."
Sync believes that the principal competitive factors in its market are
expertise and familiarity with SNA networks and protocols, product performance,
features, functionality and reliability, price, timeliness of new product
introductions, adoption of emerging industry standards, service, support, size
and installed base. The Company believes that it generally is competitive with
respect to most of these factors.
PROPRIETARY RIGHTS
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Dependence on Proprietary Technology."
13
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company employed 155 persons, including 46 in
engineering, 49 in sales and marketing, 44 in operations and 16 in finance and
administration. During March 1997 and September 1997, the Company initiated cost
reductions that included a reduction in workforce. There can be no assurance
that the Company will be successful in retaining its key employees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "Risk Factors--Dependence on Key
Personnel."
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company as of March 13, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ---------------------------------------------------------
<S> <C> <C>
John H. Rademaker............ 50 Co-Chief Executive Officer and Vice Chairman of the Board
Gregorio Reyes............... 57 Co-Chief Executive Officer and Chairman of the Board
Salvatore Alini.............. 54 Vice President of Product Group
William K. Guerry............ 32 Vice President of Finance and Administration, Secretary
and Chief Financial Officer
Todd J. Krautkremer.......... 38 Vice President of Strategic Marketing
James D. McNally............. 56 Senior Vice President of Worldwide Sales
Karen Ratta.................. 45 Vice President of Manufacturing
Richard M. White............. 51 Vice President of Customer Service
</TABLE>
MR. REYES has served in the Office of the Chief Executive Officer of the
Company since October 1997 and Chairman of the Company's Board of Directors
since January 1995. From 1990 to August 1994, he served as Chairman and Chief
Executive Officer of Sunward Technologies, Inc., a provider of rigid disk
magnetic recording head products for the data storage industry. Previously, he
was Chairman and Chief Executive Officer of American Semiconductor Equipment
Technologies, a wafer stepper company. Mr. Reyes currently also serves as a
director of Diamond Multimedia Systems, Inc., C-Cube Microsystems, Inc.,
Stormedia, Inc. and several privately-held companies. Mr. Reyes received a B.S.
in Mechanical Engineering from Rensselaer Polytechnic Institute and a M.S. in
Management from the Stevens Institute of Technology.
MR. RADEMAKER, a founder of the Company, has served as a director since the
Company's inception in 1981, as the Company's Chief Executive Officer to May
1997 and was named to the office of the Chief Executive Officer in October 1997.
Mr. Rademaker also served as the Company's President from inception to March
1996. Mr. Rademaker received his B.S. in Sociology from the University of
California, Berkeley.
MR. ALINI has served as the Company's Vice President of Engineering since
October 1997. Prior to such time, he was Vice President and General Manager,
Enterprise Service Division for Amdahl Corporation, a supplier of network
servers, storage subsystems and mainframe computers. From May 1994 to August
1996, Mr. Alini served as Vice President of Online Transaction Processing
Division of Tandem Computers, a provider of online transaction processing fault
tolerant network systems. From February 1993 to May 1994, Mr. Alini served as
Senior Vice President Systems Group for Symbol Technology, Inc. a manufacturer
of wireless network bar-code data capture systems and products. From May 1991 to
February 1993 Mr. Alini served as Managing Director, Data Networking Service for
Nynex Corporation, a
14
<PAGE>
regional bell operating company. Mr. Alini received his B.S. in Electronic
Engineering from Monmouth University and M.S. in Management and Computer Systems
from Northeastern University.
MR. GUERRY has served as the Company's Vice President of Finance and
Administration, Secretary and Chief Financial Officer since June 1997. From
January 1987 to June 1997, Mr. Guerry held various positions, including Audit
Senior Manager, with Ernst & Young LLP, a Big Six accounting firm. Mr. Guerry
received his B.S. in Accounting from California State Polytechnic University,
Pomona. Mr. Guerry is a Certified Public Accountant in the State of California
and is a member of the California Society of Certified Public Accountants.
MR. KRAUTKREMER has served as the Company's Vice President of Marketing
since April 1995. Prior to such time, he was Director of Field Marketing for the
Company from January 1994 to March 1995 and Director of Sales from October 1988
to December 1993. Mr. Krautkremer received his B.S. in Computer Science from St.
Cloud State University.
MR. MCNALLY has served as the Company's Senior Vice President of Sales since
October 1997. Prior to such time, he was Senior Vice President of Channel Sales
from June 1993 to October 1997 and Vice President of Business Development from
November 1988 to June 1993. Mr. McNally received his B.S. in Electrical
Engineering from California State University, Long Beach.
MS. RATTA has served as the Company's Vice President of Manufacturing since
January 1995. Prior to joining the Company, Ms. Ratta was Director of Operations
for Systech Computer Corporation, a provider of input/output devices for
Unix-based platforms. Ms. Ratta received her B.S. from the University of
Arizona.
MR. WHITE has served as the Company's Vice President of Customer Service
since May 1997. Prior to such time, he was Director of Customer Service from
December 1990. Mr. White received his B.S. in Business Management from the
University of Massachusetts.
ITEM 2. PROPERTIES
The Company entered into a seven-year real estate lease and relocated its
primary operations during the fourth quarter of 1996. In addition, the Company's
Tylink operation leases an industrial building in Norton, Massachusetts. The
Company also has sales and support offices in fifteen other states.
ITEM 3. LEGAL PROCEEDINGS
On November 5, 1997, an action entitled Dalarne Partners, Ltd. Vs. 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.
There are no other material legal proceedings to which the Company is a
party or to which any of its properties are subject. No material legal
proceedings were terminated in the year ended December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the Nasdaq Stock Market and trades
under the symbol SYNX. The following table presents the high and low closing
sale prices for the Company's common stock as reported in the Nasdaq National
Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997
Q1....................................................................... $ 15.75 $ 3.03
Q2....................................................................... $ 5.06 $ 2.25
Q3....................................................................... $ 5.81 $ 3.00
Q4....................................................................... $ 4.75 $ 3.00
1996
Q1....................................................................... $ 44.38 $ 13.00
Q2....................................................................... $ 22.25 $ 13.25
Q3....................................................................... $ 17.13 $ 8.69
Q4....................................................................... $ 19.63 $ 11.75
</TABLE>
The Company had approximately 283 stockholders of record and 4,000
beneficial shareholders as of March 13, 1998.
The Company has never paid cash dividends on its capital stock and does not
intend to pay cash dividends on its capital stock in the foreseeable future. The
Company's bank line of credit prohibits the Company from paying cash dividends
without the bank's prior written consent. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant.
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents the selected consolidated financial data of
Sync Research, Inc. giving effect to the 1996 merger of Sync and Tylink using
the pooling of interests method of accounting. The consolidated statement of
operations data for the years ended December 31, 1997, 1996 and 1995 and the
consolidated balance sheet data at December 31, 1997 and 1996 are derived from,
and are qualified by reference to, the audited financial statements of the
Company included elsewhere in this Report on Form 10-K and should be read in
conjunction with those financial statements and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................. $ 23,256 $ 36,346 $ 34,933 $ 23,315 $ 18,824
Cost of sales................................................ 14,724 19,995 17,584 9,536 7,802
---------- ---------- --------- --------- ---------
Gross profit................................................. 8,532 16,351 17,349 13,779 11,022
Operating expenses:
Research and development................................... 7,195 7,687 5,636 4,543 4,494
Selling and marketing...................................... 14,318 14,484 11,248 8,087 8,483
General and administrative................................. 3,741 5,795 2,871 2,339 2,476
Severance and facility rationalization costs............... 1,241 -- -- -- --
---------- ---------- --------- --------- ---------
Total operating expenses................................... 26,495 27,966 19,755 14,969 15,453
---------- ---------- --------- --------- ---------
Operating loss............................................... (17,963) (11,615) (2,406) (1,190) (4,431)
Interest income (expense), net and other income.............. 1,455 2,184 461 74 (100)
---------- ---------- --------- --------- ---------
Loss before income taxes..................................... (16,508) (9,431) (1,945) (1,116) (4,531)
Provision (benefit) for income taxes......................... -- 2 45 215 (212)
---------- ---------- --------- --------- ---------
Net loss..................................................... $ (16,508) $ (9,433) $ (1,990) $ (1,331) $ (4,319)
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Basic and diluted net loss per share......................... $ (0.96) $ (0.61) $ (0.46) $ (0.46) $ (1.15)
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Shares used in computing net loss per share(1)............... 17,171 16,289 6,819 4,275 3,760
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 21,734 $ 35,874 $ 50,633 $ 8,512 $ 3,653
Working capital.............................................. 28,718 44,336 58,260 13,062 5,368
Total assets................................................. 38,495 55,692 66,672 18,011 11,178
Capitalized lease obligations less current maturities........ 111 146 398 64 94
Mandatorily redeemable preferred stock....................... -- -- 5,591 4,428 --
Total preferred and common stockholders' equity.............. 32,818 48,803 54,862 16,761 6,960
</TABLE>
Certain prior year amounts have been reclassified to conform with current
year presentation.
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used to compute basic and
diluted net loss per share and pro forma net loss per share.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 ConversionNode
and frame relay access products. The Company has historically emphasized the
identification of potential channel partners, educating potential and existing
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 and 3Com, as well as carriers such as
Sprint, MCI, Ameritech, Intermedia Communications, and PacBell and systems
integrators such as Electronic Data Systems and Diebold.
On August 23, 1996, Sync acquired TyLink, pursuant to a merger of a
wholly-owned subsidiary of the Company with and into TyLink (the "Merger"). In
the Merger, the Company exchanged 2,148,168 shares of its common stock for all
of the outstanding shares of TyLink common and Series A preferred stock and
reserved 423,155 shares of Sync common stock for issuance upon exercise of
TyLink options, which were assumed by the Company. In addition, Sync acquired
all of the issued and outstanding Tylink Series B preferred stock for $4 million
in cash and 208,677 shares of Sync common stock. The Merger has been accounted
for as a pooling of interests. Accordingly, the accompanying financial
statements reflect the combination of Sync and TyLink for all periods presented.
In March 1997, the Company implemented expense reduction initiatives with
the goal of enabling the Company to achieve profitability at lower revenue
levels. Additional cost reduction programs were initiated in September 1997.
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.
RISK FACTORS
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
herein, the following discussion under "Results of Operations," "Inflation,"
"Year 2000 Compliance" 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. Such risks and
uncertainties include (but are not limited to) fluctuations in quarterly orders,
market conditions in the networking industry and charges relating to expense
reductions.
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, $11.6 million in 1996
and $18.0 million in 1997. As of December 31, 1997, the Company had an
accumulated deficit of approximately $39.0 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 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
18
<PAGE>
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 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
majority 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. A significant portion
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. 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.
DEPENDENCE ON THE IBM CUSTOMER BASE
The Company's frame relay access products are targeted at the large
installed base of IBM customers utilizing SNA networks. Thus, the Company faces
the risks associated with a relatively 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.
UNCERTAIN MARKET ACCEPTANCE OF FRAME RELAY FOR MISSION-CRITICAL APPLICATIONS
During 1997, sales of frame relay access products, which enable SNA and
client/server internetworking over frame relay, represented approximately 42% of
the Company's net revenues. The market for SNA-over-frame relay products is
relatively new and still evolving. The success of the Company and its channel
partners in generating significant sales of frame relay access 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
19
<PAGE>
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.
RISKS ASSOCIATED WITH ACQUISITION OF TYLINK CORPORATION
In August 1996, the Company acquired TyLink and in 1997 completed the
integration of the personnel and operations of Sync and TyLink. The Company
however, continues to face certain risks, including the possible loss of key
personnel of either Tylink or Sync, potential disruption of the respective
ongoing businesses of TyLink and the Company, the inability of the Company's
management to maximize the financial and strategic position of the combined
entity through successful incorporation of TyLink's personnel and clients, the
inability to implement uniform standards, controls, procedures and policies and
the impairment of relationships with existing employees and clients as a result
of the Company's integration of new management personnel. Any of these factors
could have a material adverse effect on the Company's business, financial
condition and operating results.
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 account, and are expected
to continue to account, for a majority of the Company's net revenues, including
virtually all of its sales outside of the United States. Sales through channel
partners and other resellers accounted for 67.0%, 85.7% and 88.1% of net
revenues of the Company in 1997, 1996 and 1995, respectively. The Company
currently maintains OEM, marketing and sales arrangements with communications
and networking companies such as IBM and 3Com, as well as carriers such as
Sprint, MCI, Ameritech, Intermedia Communications, and PacBell and systems
integrators such as Electronic Data Systems and Diebold. 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, prohibit distribution of certain products by the
Company through certain categories of third parties under certain conditions and
provide manufacturing rights and access to source code upon the occurrence of
specified conditions or defaults.
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, both NET and Racal, which accounted for, respectively, 6.6% and 4.4% of
the
20
<PAGE>
Company's net revenues in 1996, have developed competitive products and product
strategies and accordingly, did not account for a significant portion of 1997
revenues. Sales to 3Com accounted for 6.5%, 19.2% and 17.9% of net revenues of
the Company in 1997, 1996 and 1995, respectively. The Company believes the
relative amount of revenues derived from sales to 3Com will continue to 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 majority 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.
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 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
21
<PAGE>
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; 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, 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 CONTRACT MANUFACTURERS
The Company's manufacturing operations consist primarily of materials
planning and procurement, light assembly, system integration, testing and
quality assurance. The Company entered into arrangements with contract
manufacturers in 1995 and 1996 to outsource 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
identifies 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 increased manufacturing capacity in 1995 and 1996 through the expansion
of its relationships with contract manufacturers and internal manufacturing
resources. 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.
22
<PAGE>
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, 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.
DEPENDENCE ON AND RISKS ASSOCIATED WITH INTERNATIONAL SALES
Sales to customers outside of the United States accounted for approximately
19.1%, 12.7% and 10.7% of the Company's net revenues in 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 will continue to be an important percentage
of the Company's net revenues in future periods. However, as a result of the
recent Asian currency crisis the Company experienced project delays and order
cancellations during the fourth quarter of 1997. The near-term outlook on the
Company's sales to the Pacific Rim, which represented approximately 14% of the
Company's 1997 net revenues, remains uncertain.
Historically, the Company's international sales have been conducted
primarily through independent country-specific distributors. The Company intends
to market its products in foreign countries in the future increasingly through
its channel partners. 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.
23
<PAGE>
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.
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. Four of the eight current executive officers joined
the Company since January 1995, and thus the management team is still relatively
new. 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, the Company
implemented significant expense reductions, including reductions in force, with
the goal of enabling the Company to achieve
24
<PAGE>
profitability at lower revenues. The loss of the services of any of the
Company's 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
Factors such as announcements of technological innovations or the
introduction of new products by the Company or 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.
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.
RESULTS OF OPERATIONS
COMPARISON OF 1997 AND 1996 RESULTS
NET REVENUES. The Company derives its revenues primarily from sales of
advanced wide-area networking products, which are recognized upon shipment. The
Company generally does not have any
25
<PAGE>
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 in 1997 were $23.3 million, a decrease from the net revenues of
$36.3 million in 1996. The lower net revenues in 1997 reflected decreased sales
volumes in all of the Company's major product lines and lower average selling
prices partially offset by an increase in service revenues. Net revenues by
product group for the years ended December 31, 1997 and 1996 were as follows ($
in thousands):
<TABLE>
<CAPTION>
1997 % 1996 %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Frame relay access products............................ $ 9,873 42.4% $ 14,214 39.1%
Circuit management products............................ 4,833 20.8 7,036 19.4
Transmission products.................................. 4,394 18.9 6,348 17.5
Other.................................................. 4,156 17.9 8,748 24.0
--------- --------- --------- ---------
$ 23,256 100.0% $ 36,346 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The shift in revenues to frame relay access and circuit management products
from other products was consistent with the Company's expected change in product
mix from its older product offerings. Sales of frame relay access and circuit
management products are expected to continue to grow as a percentage of net
revenues and transmission and other revenues are expected to decline as a
percentage of net revenues.
The decrease in net revenues from sales of frame relay access products
during 1997 as compared to 1996 was, in part, due to the loss of Racal and NET
as channel partners. Racal and NET, which aggregated to more than 10% of the
Company's 1996 revenues, decreased to less than 1% of 1997 revenues as they have
developed competing products and no longer purchase frame relay products from
the Company. Also contributing to this change was a reduction in sales to 3Com,
primarily older legacy products, which represented $1.0 and $5.0 million of the
Company's frame relay access product revenues in 1997 and 1996, respectively.
The percentage of net revenues represented by sales through channel partners
and other resellers declined to 67.0% in 1997 from 85.7% in 1996. The Company
expects that average selling prices will continue to decline and that sales
through channel partners and other resellers will continue to account for a
majority of net revenues; however, the mix of sales among channel partners and
other resellers may change from period to period.
International sales accounted for 19.1% of net revenues in 1997, as compared
to 12.7% of net revenues in 1996. The Company expects that international sales
will continue to represent an important percentage of net revenues in future
periods. However, as a result of the recent Asian currency crisis the Company
experienced project delays and order cancellations during the fourth quarter of
1997. The near-term outlook on the Company's sales to the Pacific Rim, which
represented 14.2% of the Company's 1997 net revenues, remains uncertain.
In October 1997, the AICPA issued Statement of Position (SOP) No. 97-2,
Software Revenue Recognition, which changes the requirements for revenue
recognition effective for transactions that the Company will enter into
beginning January 1, 1998. The Company believes that this SOP will not have a
material impact on its 1998 financial statements.
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.
26
<PAGE>
Gross profit decreased to $8.5 million for 1997 from $16.4 million in 1996
due primarily to lower sales volumes. Gross profit as a percentage of net
revenues decreased to 36.7% for the year ended December 31, 1997 from 45.0% for
the year ended December 31, 1996, due primarily to lower sales volumes which
have resulted in lower absorption of manufacturing costs, a significant portion
of which are primarily fixed in nature, increased expenditures to support
service activities, increased sales to IBM at higher discounts than encountered
in other channels and lower average selling prices.
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, 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. Research and development expenses decreased to $7.2 million
for the year ended December 31, 1997, from $7.7 million for the year ended
December 31, 1996. The decreased expenses in 1997 were primarily due the
Company's cost reduction programs implemented in March 1997 and September 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 $14.3 million for the year ended December 31,
1997 from $14.5 million for the year ended December 31, 1996. The decreased
expenses resulted primarily from sales and marketing headcount reductions as
part of the Company's 1997 cost reduction programs.
General and administrative expenses consist primarily of compensation paid
to corporate and administrative personnel, payments to consultants and
professional service providers, and public company related costs. General and
administrative expenditures decreased to $3.7 million for the year ended
December 31, 1997, as compared to $5.8 million for the year ended December 31,
1996. The decrease in general and administrative expenses was primarily due to
the Company's 1997 cost reduction programs and reflected $1.3 million in
expenditures incurred in connection with the Merger of Sync and TyLink in 1996
for which no similar cost was incurred in 1997.
In March 1997 and September 1997, the Company implemented various cost
reduction programs in order to improve its results of operations. The expenses
associated with these programs aggregated approximately $1.2 million and
consisted primarily of severance and related headcount reduction activities and
to a lesser extent lease termination costs related to redundant facilities.
The Company recorded deferred compensation of $644,000 during 1995 for the
difference between the option exercise price or restricted stock price and the
deemed fair value of the Company's common stock for options granted and
restricted stock sold in 1995. The deferred compensation is being amortized to
operating expense and cost of sales over the related 48-month vesting period of
the shares and will, therefore, continue to have an adverse effect on the
Company's results of operations. Included in operating expenses and cost of
sales for the year ended December 31, 1997 were $79,000 of such expenses, as
compared to $265,000 for the year ended December 31, 1996.
Net interest income was $1.5 million for the year ended December 31, 1997,
as compared to $2.2 million in the year ended December 31, 1996. The decrease in
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 1996 represented minimum state taxes.
COMPARISON OF 1996 AND 1995 RESULTS
NET REVENUES. Net revenues in 1996 were $36.3 million, an increase of 4%
from the net revenues of $34.9 million in 1995. The higher net revenues in 1996
reflected increased sales of frame relay access
27
<PAGE>
products and management products, partially offset by lower sales of the older
conversion products and lower average selling prices.
<TABLE>
<CAPTION>
1996 % 1995 %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Frame relay access products............................ $ 14,214 39.1% $ 9,160 26.2%
Circuit management products............................ 7,036 19.4 3,183 9.1
Transmission products.................................. 6,348 17.5 5,585 16.0
Other.................................................. 8,748 24.0 17,005 48.7
--------- --------- --------- ---------
$ 36,346 100.0% $ 34,933 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The increase in net revenues from frame relay access products reflected the
full year impact of the Company's new 4200 product, which was introduced in the
last quarter of 1995, and overall growth in the frame relay access market. The
increase in sales of circuit management products was primarily due to increased
acceptance of the Company's products that were introduced by TyLink in July
1995. Revenue from other products declined in 1996 as compared to 1995 as a
result of lower sales of older conversion products which declined significantly.
The percentage of net revenues represented by sales through channel partners and
other resellers declined to 85.7% in 1996 versus 88.1% in 1995. International
sales accounted for 12.7% of net revenues in 1996, as compared to 10.7% of net
revenues in 1995.
GROSS PROFIT. Gross profit decreased to $16.4 million for 1996 from $17.3
million in 1995 due primarily to lower average selling prices, especially in
transmission products, which faced severe price pressure in the marketplace, and
lower margins earned on increased sales of frame relay access products. These
frame relay access products were sold through channel partners and other
resellers, and thus typically have lower margins than direct sales. The decrease
in gross profit in 1996 was partially offset by decreases in manufacturing
costs.
Gross profit as a percentage of net revenues decreased to 45.0% for the year
ended December 31, 1996 as compared to 49.7% for the year ended December 31,
1995, due primarily to increases in the percentage of sales of frame relay
access products through channel partners and resellers and lower average selling
prices, partially offset by decreases in manufacturing costs.
OPERATING EXPENSES. Research and development expenses increased to $7.7
million for the year ended December 31, 1996, as compared to $5.6 million for
the year ended December 31, 1995. The increased expenses in 1996 were primarily
due to the addition of personnel for the development of new products and the
continued enhancement of existing products.
Selling and marketing expenses increased to $14.5 million for the year ended
December 31, 1996, as compared to $11.2 million for the year ended December 31,
1995. The increased expenses principally reflected increased hiring and
personnel-related expenses associated with the build- up of the Company's sales
organization.
General and administrative expenditures increased to $5.8 million for the
year ended December 31, 1996, as compared to $2.9 million for the year ended
December 31, 1995. The increased expenses were primarily due to $1.3 million in
expenditures incurred in connection with the Merger of Sync and TyLink,
increased administrative personnel costs, and costs related to public company
and investor relation activities since the Company completed its initial public
offering in November 1995.
As noted above, the Company recorded deferred compensation of $644,000
during 1995 which is being amortized to operating expense and cost of sales over
the related 48-month vesting period of the shares. Included in operating
expenses and cost of sales for the year ended December 31, 1996 were $265,000 of
such expenses, as compared to $223,000 for the year ended December 31, 1995.
28
<PAGE>
Net interest income was $2.2 million for the year ended December 31, 1996,
as compared to $0.5 million in the year ended December 31, 1995, as a result of
significantly higher cash balances from the Company's initial public offering in
November 1995.
INCOME TAXES. The provisions for income taxes in 1996 and 1995 represent
minimum state taxes and federal and state minimum taxes, respectively.
INFLATION
The effects of inflation have not historically had, and are not expected to
have, a material effect on the Company's operating results or financial
condition.
YEAR 2000 COMPLIANCE
The Company believes that its management information systems and
substantially all of its products are Year 2000 compliant and that the Year 2000
issue is not expected to materially impact the Company's business and internal
operations. However, Year 2000 considerations may have an effect on certain of
the Company's customers and suppliers, and thus may indirectly affect the
Company. Although, the Company has not been advised of any significant current
or potential problems of its customers or suppliers that it believes will have a
material adverse effect on the Company's business, it is not possible to
quantify the effect of Year 2000 issues residing with the Company's customers
and suppliers.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's principal sources of liquidity
consisted of $21.7 million of cash and cash equivalents generated from the
Company's November 1995 initial public offering and a $5 million unsecured bank
line of credit which expires in October 1998. As of December 31, 1997, there
were no amounts outstanding under the line of credit. As of December 31, 1997,
the substantial majority of the Company's cash was invested in high grade
commercial paper with maturities of less than three months and money market
funds.
During 1997, cash utilized by operating activities was $12.4 million,
compared to $9.3 million for fiscal 1996. Utilization of cash during 1997
resulted primarily from the Company's net loss of $16.5 million, and a net
reduction in accounts payable and accrued liabilities of $1.4 million, partially
offset by an increase in deferred revenue of $1.0 million. These changes
reflected the higher operating loss, lower level of purchasing and related
payables and increased billings of service revenue involving one large project
signed during the latter part of the year. Capital expenditures during fiscal
1997 were $1.3 million, compared to $3.1 million for 1996. The decrease in 1997
capital expenditures was primarily attributable to the higher levels of computer
hardware support related to staff increases, leasehold improvements in the new
building and the establishment of improved hardware and software test capability
incurred in 1996. At December 31, 1997, the Company had no material commitments
for capital expenditures.
As of December 31, 1997, the Company's net working capital was $28.7
million, of which $21.7 million was invested in cash and cash equivalents, $4.7
million was invested in accounts receivable, and $7.4 million was invested in
inventory. The Company believes that its available cash and cash equivalents
will be sufficient to meet its working capital requirements at least through
1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the financial statements and supplementary
financial information that are attached hereto.
29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sync Research, Inc.
We have audited the accompanying consolidated balance sheets of Sync
Research, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, mandatorily redeemable preferred stock and preferred
and common stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the index at item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements and
schedule of TyLink Corporation, which statements reflect total revenues of $11.9
million for the year ended March 29, 1996. Those statements and schedule were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for TyLink Corporation, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sync Research, Inc. at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Orange County, California
January 27, 1998
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
June 13, 1996, except as to Note 11
which is as of August 23, 1996
The Board of Directors and Stockholders of
TyLink Corporation
In our opinion, the balance sheet (not separately presented herein) and the
related statements of operations, of mandatory redeemable preferred stock and
common stockholders' deficit and of cash flows (not presented separately herein,
including the Financial Statement Schedule, not presented separately herein)
present fairly, in all material respects, the financial position of TyLink
Corporation at March 29, 1996, and the results of its operations and its cash
flows for each of the two years in the period ended March 29, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
31
<PAGE>
SYNC RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 21,734 $ 35,874
Accounts and other receivables, less allowance for doubtful accounts of $393 in 1997 and
$348 in 1996............................................................................ 4,657 7,587
Inventories............................................................................... 7,371 7,139
Prepaid expenses and other current assets................................................. 522 479
--------- ---------
Total current assets.................................................................... 34,284 51,079
Furniture, fixtures and equipment, net...................................................... 4,167 4,570
Other assets................................................................................ 44 43
--------- ---------
Total assets................................................................................ $ 38,495 $ 55,692
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 2,172 $ 3,984
Accrued compensation and related costs.................................................... 949 974
Accrued severance and restructuring costs................................................. 372 --
Deferred revenue.......................................................................... 1,507 501
Other accrued liabilities................................................................. 516 443
Bank borrowings........................................................................... -- 802
Current maturities of capitalized lease obligations....................................... 50 39
--------- ---------
Total current liabilities............................................................... 5,566 6,743
Capitalized lease obligations less current maturities....................................... 111 146
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares--2,000
Issued and outstanding shares--none..................................................... -- --
Common stock, $.001 par value:
Authorized shares--50,000
Issued and outstanding shares 17,288 in 1997 and 16,946 in 1996......................... 17 17
Additional paid-in capital................................................................ 71,786 71,385
Deferred compensation..................................................................... (34) (156)
Accumulated deficit....................................................................... (38,951) (22,443)
--------- ---------
Total stockholders' equity.............................................................. 32,818 48,803
--------- ---------
Total liabilities and stockholders' equity.................................................. $ 38,495 $ 55,692
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
32
<PAGE>
SYNC RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues.................................................................. $ 23,256 $ 36,346 $ 34,933
Cost of sales................................................................. 14,724 19,995 17,584
---------- ---------- ----------
Gross profit................................................................ 8,532 16,351 17,349
Operating expenses:
Research and development.................................................... 7,195 7,687 5,636
Selling and marketing....................................................... 14,318 14,484 11,248
General and administrative.................................................. 3,741 5,795 2,871
Severance and facility rationalization costs................................ 1,241 -- --
---------- ---------- ----------
Total operating expenses.................................................. 26,495 27,966 19,755
---------- ---------- ----------
Operating loss................................................................ (17,963) (11,615) (2,406)
Interest income, net.......................................................... 1,455 2,184 461
---------- ---------- ----------
Loss before income taxes...................................................... (16,508) (9,431) (1,945)
Provision for income taxes.................................................... -- 2 45
---------- ---------- ----------
Net loss...................................................................... $ (16,508) $ (9,433) $ (1,990)
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted net loss per share.......................................... $ (0.96) $ (0.61) $ (0.46)
---------- ---------- ----------
---------- ---------- ----------
Shares used in computing net loss per share................................... 17,171 16,289 6,819
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
33
<PAGE>
SYNC RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................................................... $ (16,508) $ (9,433) $ (1,990)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 1,718 777 620
Issuance of common stock for consulting services.......................... -- -- 175
Provision for losses on accounts receivable............................... 223 420 158
Deferred compensation expense............................................. 79 265 223
Changes in operating assets and liabilities:
Accounts and other receivables............................................ 2,707 409 (3,819)
Inventories............................................................... (232) (1,529) (1,883)
Prepaid expenses and other current assets................................. (43) (66) (73)
Accounts payable.......................................................... (1,812) (872) 2,884
Accrued compensation and related costs.................................... (25) 335 258
Accrued severance and restructuring....................................... 372 -- --
Deferred revenue.......................................................... 1,006 412 (35)
Other accrued liabilities................................................. 73 103 106
Other..................................................................... 3 (115) (12)
---------- ---------- ----------
Net cash used in operating activities......................................... (12,439) (9,294) (3,388)
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment............................ (1,315) (3,107) (1,361)
Proceeds on loan to officer............................................... -- 315 --
---------- ---------- ----------
Net cash used in investing activities......................................... (1,315) (2,792) (1,361)
FINANCING ACTIVITIES
Net borrowings (payments) under credit agreements......................... (802) 515 (395)
Payments on capitalized lease obligations................................. (28) (43) (113)
Sale (repurchase) of restricted common stock.............................. (7) -- 115
Proceeds from common stock options and warrants exercised................. 188 687 79
Proceeds from employee stock purchase plan................................ 263 137 --
Repurchase of mandatorily redeemable preferred stock...................... -- (4,000) --
Net proceeds from issuance of common stock................................ -- (19) 47,185
---------- ---------- ----------
Net cash provided by (used in) financing activities........................... (386) (2,723) 46,871
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... (14,140) (14,809) 42,122
Effect of pooling of interests................................................ -- 50 --
Cash and cash equivalents at beginning of year................................ 35,874 50,633 8,511
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 21,734 $ 35,874 $ 50,633
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................. $ 30 $ 105 $ 113
---------- ---------- ----------
---------- ---------- ----------
Income taxes paid......................................................... $ 11 $ 2 $ 17
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
34
<PAGE>
SYNC RESEARCH, INC.
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE PREFERRED STOCK AND PREFERRED
AND COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
MANDATORILY
REDEEMABLE SERIES A SERIES B SERIES C
SERIES B CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK COMMON STOCK
-------------- -------------- -------------- -------------- --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 2,541 $4,428 3,500 $ 4 3,103 $ 3 1,000 $ 1 4,577 $ 5
Exercise of warrants and common stock
options............................. -- -- -- -- -- -- -- -- 438 --
Accretion of cumulative dividend and
redemption value of mandatorily
redeemable preferred stock.......... -- 1,163 -- -- -- -- -- -- -- --
Issuance of restricted common stock... -- -- -- -- -- -- -- -- 574 --
Issuance of common stock.............. -- -- -- -- -- -- -- -- 2,640 3
Adjustment of 1994 cost of stock
issuance............................ -- -- -- -- -- -- -- -- -- --
Deferred compensation................. -- -- -- -- -- -- -- -- -- --
Amortization of deferred
compensation........................ -- -- -- -- -- -- -- -- -- --
Conversion of preferred stock into
common stock........................ -- -- (3,500) (4) (3,103) (3) (1,000) (1 ) 7,604 8
Net loss.............................. -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1995............ 2,541 5,591 -- -- -- -- -- -- 15,833 $ 16
Exercise of warrants and common stock
options............................. -- -- -- -- -- -- -- -- 892 1
Adjustment of 1995 cost of stock
issuance............................ -- -- -- -- -- -- -- -- -- --
Accretion of cumulative dividend and
redemption value of mandatorily
redeemable preferred stock.......... -- 486 -- -- -- -- -- -- -- --
Repurchase of mandatorily redeemable
preferred stock..................... (2,541) (6,077) -- -- -- -- -- -- 209 --
Issuance of stock under employee stock
purchase plan....................... -- -- -- -- -- -- -- -- 12 --
Amortization of deferred
compensation........................ -- -- -- -- -- -- -- -- -- --
Effect of pooling of interests........ -- -- -- -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1996............ -- -- -- -- -- -- -- -- 16,946 17
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Exercise of warrants and common stock
options............................. -- -- -- -- -- -- -- -- 338 1
Repurchase of restricted stock........ -- -- -- -- -- -- -- -- (37) --
Issuance of stock under employee stock
purchase plan....................... -- -- -- -- -- -- -- -- 41 --
Amortization of deferred
compensation........................ -- -- -- -- -- -- -- -- -- --
Cancellation of options granted to
employees........................... -- -- -- -- -- -- -- -- -- (1)
Net loss.............................. -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1997............ -- $ -- -- $ -- -- $ -- -- $ -- 17,288 $ 17
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
ADDITIONAL
DEFERRED PAID-IN ACCUMULATED
COMPENSATION CAPITAL DEFICIT TOTAL
------------ ---------- ----------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............ $ -- $20,309 $(10,084) $10,238
Exercise of warrants and common stock
options............................. -- 79 -- 79
Accretion of cumulative dividend and
redemption value of mandatorily
redeemable preferred stock.......... -- -- (1,163) (1,163)
Issuance of restricted common stock... -- 115 -- 115
Issuance of common stock.............. -- 47,360 -- 47,363
Adjustment of 1994 cost of stock
issuance............................ -- (3) -- (3)
Deferred compensation................. (644) 644 -- --
Amortization of deferred
compensation........................ 223 -- -- 223
Conversion of preferred stock into
common stock........................ -- -- -- --
Net loss.............................. -- -- (1,990) (1,990)
------ ---------- ----------- -------
Balance at December 31, 1995............ (421) 68,504 (13,237) 54,862
Exercise of warrants and common stock
options............................. -- 686 -- 687
Adjustment of 1995 cost of stock
issuance............................ -- (19) -- (19)
Accretion of cumulative dividend and
redemption value of mandatorily
redeemable preferred stock.......... -- -- (486) (486)
Repurchase of mandatorily redeemable
preferred stock..................... -- 2,077 -- 2,077
Issuance of stock under employee stock
purchase plan....................... -- 137 -- 137
Amortization of deferred
compensation........................ 265 -- -- 265
Effect of pooling of interests........ -- -- 713 713
Net loss.............................. -- -- (9,433) (9,433)
------ ---------- ----------- -------
Balance at December 31, 1996............ (156) 71,385 (22,443) 48,803
------ ---------- ----------- -------
Exercise of warrants and common stock
options............................. -- 187 -- 188
Repurchase of restricted stock........ -- (7) -- (7)
Issuance of stock under employee stock
purchase plan....................... -- 263 -- 263
Amortization of deferred
compensation........................ 79 -- -- 79
Cancellation of options granted to
employees........................... 43 (42) -- --
Net loss.............................. -- -- (16,508) (16,508)
------ ---------- ----------- -------
Balance at December 31, 1997............ $ (34) $71,786 $(38,951) $32,818
------ ---------- ----------- -------
------ ---------- ----------- -------
</TABLE>
See accompanying notes.
35
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BACKGROUND
Sync Research, Inc. (the Company) was incorporated in the State of
California on September 8, 1981 and was reincorporated in Delaware on September
12, 1995. The Company's principal activity consists of the development,
manufacture and global sale of network communication software and hardware
products.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sync Research, Inc. and its subsidiaries (the Company). All significant
intercompany transactions and accounts have been eliminated. As described more
fully in Note 2, on August 23, 1996, TyLink Corporation (TyLink) merged with and
into Sync Research, Inc. (Sync) in a transaction (the Merger) accounted for as a
pooling of interests; accordingly, the consolidated financial statements reflect
the combined financial position and results of operations of Sync and TyLink for
all periods presented.
ACCOUNTING PERIODS
TyLink's results of operations and cash flows for its fiscal year ended
March 29, 1996 have been combined in the accompanying consolidated financial
statements for the year ended December 31, 1995. Accordingly, TyLink's results
of operations and cash flows for the three months ended March 29, 1996 have been
included in the consolidated financial statements in both the years ended
December 31, 1995 and 1996. During the three months ended March 29, 1996,
TyLink's revenues, net loss and cash flows were $3,075,000, $713,000 and
$50,000, respectively. The duplicative effect of such loss and cash activity has
been reflected as an adjustment to retained earnings and cash flows in the
consolidated financial statements during the year ended December 31, 1996.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
USE OF ESTIMATES
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.
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 diversifications 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.
36
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories, consisting primarily of computer hardware and components, are
stated at the lower of cost (first-in, first-out) or market as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Raw materials........................................................................ $ 3,636 $ 3,973
Work in process...................................................................... 862 1,043
Finished goods....................................................................... 2,873 2,123
--------- ---------
$ 7,371 $ 7,139
--------- ---------
--------- ---------
</TABLE>
REVENUE RECOGNITION
The Company derives its revenues primarily from sales of wide-area
networking hardware and software products, which are recognized upon shipment.
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, and installation or other assistance are
recognized ratably over the term of the maintenance period, which is typically
12 months or as the work is performed.
In October 1997, the AICPA issued Statement of Position (SOP) No. 97-2,
Software Revenue Recognition, which changes the requirements for revenue
recognition effective for transactions that the Company will enter into
beginning January 1, 1998. The Company believes that this SOP will not have a
material impact on its 1998 financial statements.
CAPITALIZED SOFTWARE
Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred between completion of the working model and the
point at which the product is ready for initial shipment have historically not
been significant. The Company also capitalizes costs related to the purchase or
license of software developed by third parties which are used in certain of its
products. Such costs are amortized over the applicable license period or
estimated useful life of the product. As of December 31, 1997, no significant
costs related to software products or licenses have been capitalized.
FURNITURE, FIXTURES AND EQUIPMENT
Depreciation and amortization are provided on the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Equipment acquired under capitalized
leases Term of lease (ranging from 3 to 5 years)
Furniture and fixtures 5 to 7 years
Computers and equipment 3 to 7 years
Leasehold improvements Term of lease
</TABLE>
37
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. In accordance
with SFAS No. 121, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. The adoption of SFAS
No. 121 had no impact on the Company's financial condition or results of
operations.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Continuous research
and development is necessary for the Company to maintain its competitive
position.
WARRANTY
Costs related to after-sale service and repair are accrued as warranty
expense in the year of sale and are included in accrued liabilities.
INCOME TAXES
Deferred taxes are provided for items recognized in different periods for
financial and tax reporting purposes in accordance with Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES.
SEVERANCE AND RESTRUCTURING COSTS
In March 1997 and September 1997, the Company implemented various cost
reduction programs in order to improve its results of operations. The costs
associated with these programs, which aggregated approximately $1.2 million,
were expensed and consisted primarily of severance and related headcount
reduction activities and to a lesser extent lease termination costs related to
redundant facilities.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations in accounting for its employee stock options.
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
38
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from the dilutive effect, if any, of outstanding options and warrants to
purchase common stock. The weighted average number of common shares outstanding
for all periods also reflects the issuance of .157 shares of the Company's
common stock for each share of TyLink Series A preferred and common stock. Net
loss per share reflects the accretion of dividends and liquidation value related
to TyLink mandatorily redeemable preferred stock. Such accretion aggregated
$486,000 and $1,163,000 in 1996 and 1995, respectively. The following table sets
forth the computation of basic and diluted net loss per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
NUMERATOR:
Net loss.............................................................. $ (16,508) $ (9,433) $ (1,990)
Accretion of cumulative dividend and redemption value of mandatorily
redeemable preferred stock........................................... -- (486) (1,163)
---------- --------- ---------
Net loss used for basic and diluted loss per share--loss attributable
to common stockholders............................................... $ (16,508) $ (9,919) $ (3,153)
---------- --------- ---------
---------- --------- ---------
DENOMINATOR:
Denominator for basic and diluted loss per share--weighted average
common shares outstanding............................................ 17,171 16,289 6,819
---------- --------- ---------
---------- --------- ---------
Basic and diluted net loss per share.................................. $ (0.96) $ (0.61) $ (0.46)
---------- --------- ---------
---------- --------- ---------
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
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. Management has not completed its review of
Statement No. 130, but does not anticipate that the adoption of this statement,
other than required financial statement reclassifications, will have a
significant effect on the Company's reported 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. Statement No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997, and therefore the Company will adopt the new requirements retroactively in
1998. The Company operates in one business segment. Accordingly, the Company
does not anticipate that the adoption of this statement will have a significant
effect on the Company's financial statements.
39
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. MERGER
On August 23, 1996, Sync Research, Inc. (Sync), SR Acquisition Corp, a
wholly owned subsidiary of Sync, and TyLink Corporation entered into an
Agreement and Plan of Reorganization (the Agreement). Pursuant to the Agreement
all outstanding shares of TyLink's Series A redeemable preferred and common
stock were exchanged for 2,148,168 shares of Sync common stock and Sync assumed
options outstanding under a TyLink plan aggregating 423,155 shares of Sync
common stock. In addition, Sync purchased all of the outstanding TyLink Series B
mandatorily redeemable preferred stock for $4 million cash plus a sufficient
number of shares of Sync common stock that together have aggregate value equal
to the liquidation value of the TyLink Series B mandatorily redeemable preferred
stock.
The Merger has been accounted for under the pooling-of-interests method of
accounting. Accordingly, the historical financial statements for periods prior
to the consummation of the combination have been restated as though the
companies had been combined.
Separate and combined results of Sync and TyLink, after the elimination of
intercompany transactions, prior to the Merger are as follows:
<TABLE>
<CAPTION>
SYNC TYLINK ELIMINATION COMBINED
--------- --------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Six months ended June 30, 1996 (unaudited)
Revenues............................................... $ 10,079 $ 6,660 $ (75) $ 16,664
Net loss............................................... (3,101) (908) (75) (4,084)
Year ended December 31, 1995 and March 29, 1996,
respectively
Revenues............................................... $ 23,153 $ 11,855 $ (75) $ 34,933
Net income (loss)...................................... 925 (2,840) (75) (1,990)
</TABLE>
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Equipment acquired under capital leases............................................ $ 275 $ 250
Furniture and fixtures............................................................. 795 558
Computer and equipment............................................................. 6,326 5,428
Leasehold improvements............................................................. 1,084 1,032
--------- ---------
8,480 7,268
Accumulated depreciation and amortization.......................................... (4,313) (2,698)
--------- ---------
$ 4,167 $ 4,570
--------- ---------
--------- ---------
</TABLE>
4. TRANSACTIONS WITH RELATED PARTIES
During fiscal 1993, the Company loaned an aggregate of $300,000 to an
officer of the Company which was repaid in fiscal 1996, including accrued
interest.
40
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company operates in a market which is subject to rapid technological
advancement and competition. The introduction of technologically advanced
products by competitors could have a substantial impact on the future operations
of the Company.
A substantial portion of the Company's sales are concentrated with a few
communications, networking, and telecommunications companies. The Company is
dependent upon certain suppliers of key components and contract manufacturers.
Sales to one customer represented 16.5% of the Company's total sales in 1997.
Sales to one customer represented 19% of the Company's total sales in 1996.
Sales to two customers amounted to 17.9% and 11.2%, respectively, of total sales
in 1995.
Accounts receivable represent the Company's only significant financial
instrument with potential credit risk. The Company makes periodic evaluations of
the credit worthiness of its customers and generally does not require
collateral. To date, the Company has not experienced any material write-offs or
collection problems. At December 31, 1997, 17 major customers represented 75% of
total accounts receivable.
Sales to foreign customers, primarily in Europe and the Pacific Rim,
aggregated $4.5 million or 19.1%, $4,617,000 or 12.7%, and $3,749,000 or 10.7%
of net sales in 1997, 1996 and 1995, respectively.
6. INCOME TAXES
A reconciliation of the provision (benefit) for taxes based upon income at
the federal statutory rate compared to the Company's effective tax rate follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal benefit for income taxes................................ $ (5,613) $ (3,206) $ (636)
Incentive stock option compensation....................................... (142) (3,162) 75
State tax, net of federal benefit......................................... -- 2 (136)
Tax effect of losses without current benefit.............................. 5,722 5,882 699
Alternative minimum tax................................................... -- -- 45
Other, net................................................................ 33 486 (2)
--------- --------- ---------
$ -- $ 2 $ 45
--------- --------- ---------
--------- --------- ---------
</TABLE>
41
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal....................................................................... $ -- $ -- $ 650
State......................................................................... -- 2 158
--------- --------- ---------
Subtotal........................................................................ -- 2 808
Utilization of net operating loss carryforwards................................. -- -- (763)
--------- --------- ---------
Total current................................................................... -- 2 45
Deferred:
Federal....................................................................... -- -- --
State......................................................................... -- -- --
--------- --------- ---------
Total deferred.................................................................. -- -- --
--------- --------- ---------
$ -- $ 2 $ 45
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has approximately $38 million of federal net operating loss
carryforwards at December 31, 1997, which will begin to expire in 2006.
Approximately $11 million of this loss carryforward is attributable to
deductions from the exercise of non-qualified stock options. A valuation
allowance has been established for the entire deferred tax asset related to
those net operating losses. When realized, the federal and state tax benefits
related to the reversal of this valuation allowance will be applied to reduce
income tax expense, except for the portion of the net operating losses that
relates to the deductions for the exercise of non-qualified stock options which
will be directly credited to additional paid-in capital.
42
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts......................................... $ 158 $ 139
Depreciation............................................................ 72 98
Warranty reserve........................................................ 101 76
Accrued commission...................................................... 102 174
Accrued severance pay................................................... 149 --
Net operating loss carryforwards........................................ 14,073 9,352
Deferred revenue........................................................ 605 201
Inventory reserves...................................................... 474 507
Accrued vacation........................................................ 189 228
Other................................................................... 38 55
---------- ----------
Total deferred tax assets................................................. 15,961 10,830
Deferred tax liabilities:
Operating leases........................................................ (35) (30)
Depreciation............................................................ -- --
---------- ----------
Total deferred tax liabilities............................................ (35) (30)
---------- ----------
Total net deferred tax assets............................................. 15,926 10,800
Valuation allowance for deferred tax assets............................... (15,926) (10,800)
---------- ----------
Net deferred tax assets................................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The Tax Reform Act of 1986 contains provisions which could substantially
limit the availability of the net operating loss carryforwards if there is a
greater than 50% change in ownership during a three year period. As a result of
the initial public offering and the Merger with Tylink Corporation, the Company
and TyLink experienced an ownership change of more than 50%, resulting in a
limitation on the utilization of their net operating loss carryforwards. The
limitation is based on the value of the companies on the date that the effective
change in ownership occurred. Management believes that the limitation on the net
operating losses will not have a material adverse effect on the Company's
ability to fully utilize its net operating loss carryforwards in the future. The
ultimate realization of the loss carryforwards is dependent on the future
profitability of the Company.
7. EMPLOYEE BENEFIT PLANS
The Company sponsors a plan (the Plan) pursuant to Section 401(k) of the
Internal Revenue Code (Code), whereby substantially all eligible employees may
contribute a percentage of their compensation, subject to a maximum allowed
under the Code. The Company may contribute to the Plan, as determined by the
Board of Directors. For the years ended December 31, 1997, 1996 and 1995,
contributions made by the Company, consisting of matching contributions,
aggregated $164,000, $57,000 and $46,000, respectively.
43
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has various stock option plans that provide for the granting of
incentive or non-statutory stock options to certain key employees, non-employee
members of the Board of Directors, consultants and independent contractors.
Options are granted at a price equal to 100% of the fair market value of the
Company's common stock at the date of grant. Options typically vest at a rate of
25% of the shares on the first anniversary of the vesting commencement date and
1/48th of the shares at the end of each month and expire not later than 10 years
from the date of grant. The number of shares reserved and available for grant
under these plans aggregated 6,623,228 and 368,080 shares, respectively, at
December 31, 1997.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized for its stock option
awards and its stock purchase plan because the exercise price of the Company's
stock options equals the market price of the underlying stock on the date of
grant. FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION requires
pro forma information regarding net income (loss) and net earnings (loss) per
share using compensation that would have been incurred if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value of options granted after the initial public offering
have been estimated at the date of grant using a Black-Scholes option pricing
model using the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate.................................................. 6.0% 6.5% 6.5%
Stock volatility factor.................................................. 1.30 1.00 1.00
Weighted average expected option life.................................... 6 years 6 years 6 years
Expected dividend yield.................................................. 0% 0% 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
compensation expense used in determining the pro forma information may not be
indicative of such expense in future periods as the amounts are only based upon
the grants subsequent to 1994. Pro forma information is as follows (in thousands
except for earnings per share information):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Pro forma net loss.................................................... $ (21,505) $ (16,814) $ (3,477)
Pro forma net loss per share.......................................... $ (1.25) $ (1.03) $ (0.51)
</TABLE>
44
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ----------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ----------------- ---------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of
year.......................... 3,359,042 $ 10.68 2,663,327 $ 1.61 1,594,006 $ 0.11
Granted........................ 4,438,484 5.47 1,918,273 17.41 1,747,088 2.48
Exercised...................... (338,402) 0.34 (892,207) 0.77 (423,551) 0.16
Forfeited...................... (3,241,873) 13.65 (330,351) 6.25 (254,216) 0.20
----------- ------ ---------- ------ ----------- -----
Outstanding--end of year....... 4,217,251 $ 3.52 3,359,042 $ 10.68 2,663,327 $ 1.61
----------- ------ ---------- ------ ----------- -----
----------- ------ ---------- ------ ----------- -----
Exercisable at end of year..... 870,292 $ 2.23 621,904 $ 1.61 500,369 $ 0.15
----------- ------ ---------- ------ ----------- -----
----------- ------ ---------- ------ ----------- -----
Weighted-average fair value of
options granted during the
year.......................... $ 3.82 $ 13.61 $ 2.90
------ ------ -----
------ ------ -----
</TABLE>
In April 1997, substantially all of the Company's outstanding options were
canceled and repriced with new options having an exercise price of $3.94 per
share, the fair market value as of the date of the repricing. The vesting of the
repriced options was suspended for a period of six months from the date of the
repricing. A total of 2,056,460 shares were repriced.
The weighted average remaining contractual life of options as of December
31, 1997 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE AVERAGE
SHARES CONTRACTUAL LIFE EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- ------------------------------------------- ----------- ----------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0.04 to $0.20 558,023 7.87 $ 0.17 412,475 $ 0.15
$0.33 to $1.00 73,450 9.52 0.42 39,341 0.44
$3.17 to $4.88 3,546,778 9.47 3.95 400,539 3.83
Greater Than $5.00 39,000 8.27 18.10 17,937 18.08
</TABLE>
The Company has recorded deferred compensation expense of $644,000 for the
difference between the option exercise price or restricted stock purchase price
and the deemed fair value of the Company's common stock for options granted and
restricted stock sold in 1995. This amount is being amortized over the vesting
period of the individual options, generally four years. Deferred compensation
expense recognized in 1997, 1996 and 1995 totaled $79,000, $265,000 and
$223,000, respectively.
45
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
In August 1995, the Company's Board of Directors approved the Company's 1995
Employee Stock Purchase Plan (the Purchase Plan), under which 200,000 shares of
Common Stock has been reserved for issuance. Under the Purchase Plan, the
Company's employees meeting certain eligibility requirements, may elect on a
semiannual basis to purchase Common Stock through payroll deductions, which may
not exceed 5% of each employee's compensation (subject to certain limitations).
The price of such stock will be equal to the lower of 85% of the fair market
value of the Company's Common Stock at the beginning or end of each respective
semiannual offering period. During each of 1997 and 1996, approximately 41,000
shares were issued under this plan.
8. COMMITMENTS AND CONTINGENCIES
On November 5, 1997, an action entitled Dalarne Partners, Ltd. Vs. 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 and currently does not believe this
lawsuit will have a material impact on its results of operations or financial
position.
The Company leases its office facilities and certain equipment under
noncancelable operating leases expiring through 2002. The Company also has
various leased equipment under capital leases that are included in "furniture,
fixtures and equipment" in the accompanying balance sheets. The cost and
accumulated depreciation and amortization of these leased assets were $275,000
and $121,000, respectively at December 31, 1997 and $250,000 and $72,000,
respectively, at December 31, 1996. Depreciation and amortization of equipment
leased under capital leases are included in depreciation expense.
Future minimum annual rentals under lease arrangements at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
1998..................................................................... $ 67 $ 607
1999..................................................................... 62 487
2000..................................................................... 50 432
2001..................................................................... 11 432
2002..................................................................... -- 432
----- -----------
Total minimum future lease payments.................................. $ 190 $ 2,390
-----------
-----------
Amounts representing interest (9% to 15%)................................ (29)
-----
Present value of net minimum lease payments.............................. 161
Less current portion of capital lease obligations........................ (50)
-----
Long-term portion of capital lease obligations........................... $ 111
-----
-----
</TABLE>
Rent expense for 1997, 1996 and 1995 was $744,000, $659,000 and $465,000,
respectively.
46
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with certain agreements with several of its customers, the
Company has indemnified these customers against losses arising from specific
events, including product/service performance failures and third party
intellectual property rights. Management believes that any costs incurred under
these indemnification arrangements will not have a material adverse impact on
the Company's financial position or results of operations.
9. MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK
On January 23, 1995, TyLink issued 2,540,820 shares of Mandatorily
Redeemable Series B Preferred Stock for proceeds of $1.49135 per share. In
connection with the financing, TyLink also issued 400,366 shares of common stock
for proceeds of $2.40 per share. In connection with the Merger, the Company
purchased all of the outstanding mandatorily redeemable preferred stock for $4
million cash and 208,677 shares of common stock.
10. STOCKHOLDERS' EQUITY
In connection with the Company's initial public offering in November 1995,
all outstanding Series A, Series B and Series C preferred stock was converted
into an aggregate 7,603,240 shares of the Company's common stock.
11. CREDIT AGREEMENT
Under the Company's unsecured credit agreement with a bank, the Company may
borrow an amount not to exceed $5,000,000 at the Bank's prime rate on amounts
outstanding(8.5% at December 31, 1997). The agreement expires on October 5,
1998. There were no amounts outstanding under this agreement as of December 31,
1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
47
<PAGE>
PART III
Certain information required by Part III is omitted from this report because
the Company will file a definitive proxy statement within 120 days after the end
of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its
Annual Meeting of Stockholders to be held June 12, 1998, and the information
included therein is incorporated herein by reference to the extent detailed
below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to the Company's executive officers is set forth in "Item
1--Business--Executive Officers of the Company" in this Annual Report on Form
10-K. Information as to the Company's directors is incorporated by reference
from the information under the caption "Election of Directors--Nominees" in the
Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the caption "Executive
Compensation and Related Information" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Common
Stock Ownership of Certain Beneficial Owners and Management" in the Company's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption "Certain
Relationships and Related Transactions" in the Company's Proxy Statement.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE IN
ANNUAL REPORT
ON FORM 10-K
-------------
<S> <C> <C> <C>
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Report of Ernst & Young LLP, Independent Auditors.............................. 30
Report of Price Waterhouse LLP, Independent Accountants........................ 31
Consolidated Balance Sheets at December 31, 1997 and 1996...................... 32
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1996 and 1995.................................................................. 33
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995.................................................................. 34
Consolidated Statements of Mandatorily Redeemable Preferred Stock and Preferred
and Common Stockholders' Equity................................................ 35
Notes to Consolidated Financial Statements..................................... 36
(2) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts for the Years Ended December 31,
1997, 1996 and 1995............................................................ 53
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------ ---------------------------------------------------------------------------------------------
<S> <C>
2.1(3) Agreement and Plan of Reorganization dated June 27, 1996 between the Company and TyLink
Corporation.
3.1(2) Amended and Restated Certificate of Incorporation of Registrant.
3.3 Bylaws of Registrant.
9.1(1) Amended and Restated Shareholders' Agreement dated April 25, 1994.
10.1(1) Form of Indemnification Agreement.
10.2(3) Amended and Restated 1991 Stock Plan (amended as of May 28, 1996) and form of Option
Agreement.
10.3(4) Amended 1995 Employee Stock Purchase Plan (amended as of September 27, 1996) and form of
Subscription Agreement.
10.4(1) 1995 Directors' Option Plan and form of Option Agreement.
10.5(1) Amended and Restated Investors' Rights Agreement among the Registrant and certain
securityholders of the Company, dated as of April 25, 1994.
10.6(1) Consulting Agreement between the Company and Gregorio Reyes dated January 1995.
10.7(1) Series C Preferred Stock Purchase Agreement dated April 25, 1994.
10.8(1) 401(k) Plan.
10.12(1)(6) OEM Purchase Development and Marketing Agreement between 3Com Corporation and the Company
dated April 25, 1994.
</TABLE>
49
<PAGE>
<TABLE>
<S> <C>
10.15(1) Loan and Security Agreement between the Company and Silicon Valley Bank dated September 18,
1991, and amendments dated October 20, 1992 and August 31, 1995 thereto.
10.15a(1) Amendment to Loan and Security Agreement between the Company and Silicon Valley Bank dated
October 5, 1995.
10.15b(7) Amendments to Loan and Security Agreement between the Company and Silicon Valley Bank dated
June 10, 1997, October 6, 1996 and July 3, 1996.
10.15c Amendment to Loan and Security Agreement between the Company and Silicon Valley Bank dated
December 3, 1997.
10.17(1) Letter Agreement dated July 9, 1995 between the Company and Ronald J. Scioscia.
10.18(2) Letter Agreement dated March 5, 1996 between Roger Dorf and the Company.
10.19(3) Real estate lease dated May 30, 1996 between the Company and The Northwestern Mutual Life
Insurance Company.
10.20(5) Assumed TyLink Corporation 1994 Equity Incentive Plan.
10.22(4) Employment Agreement between the Company and Richard Swee, dated August 23, 1996.
10.23(4) Form of Noncompetition Agreement between the Company and Richard Swee, dated August 23, 1996.
10.24(4) Form of Severance Agreement between the Company and each of John Rademaker and Roger Dorf,
dated September 30, 1996.
10.25(4) Form of Severance Agreement between the Company and other Company executive officers, dated
September 30, 1996.
10.26(4) Real Estate Lease between TyLink and Thomas J. Flatley d/b/a The Flatley Company, dated May
14, 1991.
10.27(7) 1996 Non-Executive Stock Option Plan
10.28(8) Letter Agreement dated June 6, 1997 between William K. Guerry and the Company.
10.29 Letter Agreement dated August 14, 1997 between Salvatore Alini and the Company.
10.30 Form of Severance Agreement between the Company and Gregorio Reyes, dated October 24, 1997.
10.31 Form of Settlement Agreement and Mutual Release dated October 27, 1997 between Roger A. Dorf
and the Company.
10.32 Form of Settlement Agreement and Mutual Release dated October 27, 1997 between Dominic J.
Genovese and the Company.
10.33 Form of Settlement Agreement and Mutual Release dated November 16, 1997 between Otto Berlin
and the Company.
22.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
24.1 Power of Attorney.
</TABLE>
- ------------------------
(1) Incorporated by reference from exhibits filed in response to Item 16(a),
"Exhibits," of the Company's Registration Statement on Form S-1, as amended
(File No. 33-06910), which became effective on November 9, 1995.
(2) Incorporated by reference from exhibits filed in response to Item 14,
"Exhibits," of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(3) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996, filed August 12, 1996.
50
<PAGE>
(4) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1996, filed November 14, 1996.
(5) Incorporated by reference from Company's Registration Statement on Form S-8
(No. 333-12315), filed on September 19, 1996.
(6) Confidential treatment has been granted with respect to certain portions of
this Exhibit by the Securities and Exchange Commission by order dated
November 9, 1995.
(7) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997, filed August 14, 1997.
(8) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997, filed November 14, 1997.
(b) Reports on Form 8-K
None.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Irvine,
State of California, on March 31, 1998.
SYNC RESEARCH, INC.
By: /s/ WILLIAM K. GUERRY
-----------------------------------------
William K. Guerry
VICE PRESIDENT OF FINANCE AND
ADMINISTRATION
AND CHIEF FINANCIAL OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John H. Rademaker and William K. Guerry, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JOHN H. RADEMAKER Co-Chief Executive
- ------------------------------ Officer, Vice Chairman March 31, 1998
John H. Rademaker of the Board
/s/ GREGORIO REYES Co-Chief Executive
- ------------------------------ Officer, Chairman of the March 31, 1998
Gregorio Reyes Board
Vice President of Finance
/s/ WILLIAM K. GUERRY and Administration,
- ------------------------------ Secretary and Chief March 31, 1998
William K. Guerry Financial Officer
/s/ CHARLES A. HAGGERTY
- ------------------------------ Director March 31, 1998
Charles A. Haggerty
/s/ WILLIAM J. O'MEARA
- ------------------------------ Director March 31, 1998
William J. O'Meara
</TABLE>
52
<PAGE>
SYNC RESEARCH, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
DEDUCTIONS/
BALANCE AT RECOVERIES BALANCE AT
BEGINNING OF AND END OF
DESCRIPTION PERIOD ADDITIONS WRITE-OFFS ADJUSTMENTS(1) PERIOD
- --------------------------------------------- -------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful accounts
receivable............................... $ 348,276 $ 223,109 $ (178,267) $ -- $ 393,118
Inventory reserves......................... 658,463 449,207 (504,418) -- 603,252
1996
Allowance for doubtful accounts
receivable............................... $ 243,128 $ 354,870 $ (314,722) $ 65,000 $ 348,276
Inventory reserves......................... 833,204 1,029,392 (1,190,929) (13,204) 658,463
1995
Allowance for doubtful accounts
receivable............................... $ 251,956 $ 158,705 $ (102,533) $ -- $ 308,128
Inventory reserves......................... 147,750 769,842 (97,592) -- 820,000
</TABLE>
- ------------------------
(1) Amounts represent the reversal of the net activity of the valuation and
qualifying accounts for the three months ended March 29, 1996 of TyLink
Corporation that have been included in both 1996 and 1995.
53
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.15 Amendment to Loan and Security Agreement between the Company and Silicon Valley Bank dated December 3,
1997
10.29 Letter Agreement dated August 14, 1997 between Salvatore Alini and the Company.
10.30 Form of Severance Agreement between the Company and Gregorio Reyes, dated October 24, 1997.
10.31 Form of Settlement Agreement and Mutual Release dated October 27, 1997 between Roger A. Dorf and the
Company
10.32 Form of Settlement Agreement and Mutual Release dated October 27, 1997 between Dominic J. Genovese and
the Company
10.33 Form of Settlement Agreement and Mutual Release dated November 16, 1997 between Otto Berlin and the
Company
22.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young, LLP, Independent Auditors
23.2 Consent of Price Waterhouse, LLP, Independent Accountants
24.1 Power of Attorney (see page 50)
</TABLE>
54
<PAGE>
[LETTER HEAD]
AMENDED SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: SYNC RESEARCH, INC.
ADDRESS: 40 PARKER
IRVINE, CALIFORNIA 92718
DATED AS OF: DECEMBER 3, 1997
CREDIT LIMIT
(Section 1.1): An amount not to exceed $5,000,000 at any one time
outstanding; PROVIDED, HOWEVER, that upon a Post-IPO
Default (as defined in Section 2.2 of the Loan
Agreement as set forth in the Amendment to Loan and
Security Agreement dated October 5, 1995 between
Silicon and Borrower), the Credit Limit shall be an
amount not to exceed the lesser of: (i) $5,000,000 at
any one time outstanding; or (ii) 70% of the Net Amount
of Borrower's accounts, which Silicon in its discretion
deems eligible for borrowing. "Net Amount" of an
account means the gross amount of the account, minus
all applicable sales, use, excise and other similar
taxes and minus all discounts, credits and allowances
of any nature granted or claimed.
Without limiting the fact that the determination of
which accounts are eligible for borrowing is a matter
of Silicon's discretion, the following will not be
deemed eligible for borrowing: accounts outstanding
for more than 90 days from the invoice date, accounts
subject to any contingencies, accounts owing from any
government agency (unless Borrower completes such
assignment of claims documentation and other
documentation that Silicon determines is necessary or
desirable to perfect and protect the interest of
Silicon therein), accounts owing from an account debtor
outside the United States (unless pre-approved by
Silicon in its discretion, or backed by a letter of
credit satisfactory to Silicon, or FCIA insured
satisfactory to Silicon), accounts owing from one
account debtor to the extent they exceed 25% of the
total eligible accounts outstanding*, accounts owing
from an affiliate of Borrower**, and accounts owing
from an account debtor to whom Borrower is or may be
liable for goods purchased from such account debtor or
otherwise. In addition, if more than 50% of the
accounts owing from an account debtor are outstanding
more than 90 days from the invoice date or are
otherwise not eligible accounts, then all accounts
owing from that account debtor will be deemed
ineligible for borrowing.
-1-
<PAGE>
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AGREEMENT
- -------------------------------------------------------------------------------
*PROVIDED THAT ACCOUNTS OWING FROM AT&T, IBM, 3 COM,
AND RACAL-DATACOM SHALL BE DEEMED INELIGIBLE TO THE
EXTENT ANY SUCH ACCOUNTS EXCEED 40% OF THE TOTAL
ELIGIBLE ACCOUNTS OUTSTANDING
**(OTHER THAN 3 COM)
Silicon, in its reasonable discretion, will from time
to time during the term of this Agreement issue letters
of credit for the account of the Borrower ("Letters of
Credit"), in an aggregate amount at any one time
outstanding not to exceed $1,000,000, upon the request
of the Borrower, provided that, on the date the Letters
of Credit are to be issued, Borrower has available to
it Accounts Loans in an amount equal to or greater than
the face amount of the Letters of Credit to be issued.
Prior to the issuance of any Letters of Credit,
Borrower shall execute and deliver to Silicon
Applications for Letters of Credit and such other
documentation as Silicon shall specify (the "Letter of
Credit Documentation"). Fees for the Letters of Credit
shall be as provided in the Letter of Credit
Documentation. Letters of Credit may have a maturity
date up to twelve months beyond the Maturity Date in
effect from time to time, provided that if on the
Maturity Date, or on any earlier effective date of
termination, there are any outstanding letters of
credit issued by Silicon or issued by another
institution based upon an application, guarantee,
indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon
cash collateral in an amount equal to the face amount
of all such letters of credit plus all interest, fees
and cost due or to become due in connection therewith,
to secure all of the Obligations relating to said
letters of credit, pursuant to Silicon's then standard
form cash pledge agreement.
The Credit Limit set forth above and the Loans
available under this Agreement at any time shall be
reduced by the face amount of Letters of Credit from
time to time outstanding.
FOREIGN EXCHANGE
CONTRACT SUBLIMIT Up to $1,000,000 of the Credit Limit (the "Contract
Limit") may be utilized for spot and future foreign
exchange contracts (the "Exchange Contracts"). The
Credit Limit shall be reduced by the following amounts
(the "Foreign Exchange Reserve") on each day (the
"Determination Date"): (i) on all outstanding Exchange
Contracts on which delivery is to be effected or
settlement allowed more than two business days from the
Determination Date, 10% of the gross amount of the
Exchange Contracts; plus (ii) on all outstanding
Exchange Contracts on which delivery is to be effected
or settlement allowed within two business days after
the Determination Date, 100% of the gross amount of the
Exchange Contracts. In lieu of the Foreign Exchange
Reserve for 100% of the gross amount of any Exchange
Contract, the Borrower may request that Silicon debit
the Borrower's bank account with Silicon for such
amount, provided Borrower has immediately available
funds in such amount in its bank account.
Silicon may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default
occurs or (b) that there is not
-2-
<PAGE>
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AGREEMENT
- -------------------------------------------------------------------------------
sufficient availability under the Credit Limit and
Borrower does not have available funds in its bank
account to satisfy the Foreign Exchange Reserve. If
either Silicon or Borrower terminates the Exchange
Contracts, and without limitation of the FX Indemnity
Provisions (as referred to below), Borrower agrees to
reimburse Silicon for any and all fees, costs and
expenses relating thereto or arising in connection
therewith.
Borrower shall not permit the total gross amount of all
Exchange Contracts on which delivery is to be effected
and settlement allowed in any two business day period
to be more than $500,000 (the "Settlement Limit"), nor
shall Borrower permit the total gross amount of all
Exchange Contracts to which Borrower is a party,
outstanding at any one time, to exceed the Contract
Limit.
Notwithstanding the above, however, the amount which
may be settled in any two (2) business day period may,
in Silicon's sole discretion, be increased above the
Settlement Limit up to, but in no event to exceed, the
amount of the Contract Limit (the "Discretionary
Settlement Amount") under either of the following
circumstances (the "Discretionary Settlement
Circumstances"):
(i) if there is sufficient availability under the
Credit Limit in the amount of the Foreign Exchange
Reserve as of each Determination Date, and Silicon
in advance shall reserve the full amount of the
Foreign Exchange Reserve against the Credit Limit;
or
(ii) if there is insufficient availability under the
Credit Limit as to settlements within any two (2)
business day period, and if Silicon is able to: (A)
verify good funds overseas prior to crediting
Borrower's deposit account with Silicon (in the case
of Borrower's sale of foreign currency); or (B)
debit Borrower's deposit account with Silicon prior
to delivering foreign currency overseas (in the case
of Borrower's purchase of foreign currency);
PROVIDED that it is expressly understood that Silicon's
willingness to adopt the Discretionary Settlement
Amount is a matter of Silicon's sole discretion and the
existence of the Discretionary Settlement Circumstances
in no way means or implies that Silicon shall be
obligated to permit the Borrower to exceed the
Settlement Limit in any two business day period.
In the case of Borrower's purchase of foreign currency,
Borrower shall instruct Silicon in advance upon
settlement either to treat the settlement amount as an
advance under the Credit Limit, or to debit Borrower's
account for the amount settled.
The Borrower shall execute all standard form
applications and agreements of Silicon in connection
with the Exchange Contracts, and without limiting any
of the terms of such applications and agreements, the
Borrower will pay all standard fees and charges of
Silicon in connection with the Exchange Contracts.
-3-
<PAGE>
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AGREEMENT
- -------------------------------------------------------------------------------
Without limiting any of the other terms of this Loan
Agreement or any such standard form applications and
agreements of Silicon, Borrower agrees to indemnify
Silicon and hold it harmless, from and against any and
all claims, debts, liabilities, demands, obligations,
actions, costs and expenses (including, without
limitation, attorneys' fees of counsel of Silicon's
choice), of every nature and description, which it may
sustain or incur, based upon, arising out of, or in any
way relating to any of the Exchange Contracts or any
transactions relating thereto or contemplated thereby
(collectively referred to as the "FX Indemnity
Provisions").
The Exchange Contracts shall have maturity dates no
later than the Maturity Date.
INTEREST RATE
(Section 1.2): A rate equal to the "Prime Rate" in effect from time to
time, per annum, calculated on the basis of a 360-day
year for the actual number of days elapsed. "Prime
Rate" means the rate announced from time to time by
Silicon as its "prime rate;" it is a base rate upon
which other rates charged by Silicon are based, and it
is not necessarily the best rate available at Silicon.
The interest rate applicable to the Obligations shall
change on each date there is a change in the Prime
Rate.
FACILITY FEE
(Section 1.3): As per the Amendment to Loan Agreement of even date.
MATURITY DATE
(Section 5.1): OCTOBER 5, 1998
PRIOR NAMES OF BORROWER
(Section 3.2): FALLON & ASSOCIATES, SPECTRUM COMMUNICATIONS, INC.,
TYLINK CORPORATION
TRADE NAMES OF BORROWER
(Section 3.2): SYNCVIEW, INTERNETWORKING SNA
OTHER LOCATIONS AND
ADDRESSES (Section 3.3): 10C COMMERCE WAY, NARRON, MA 02766
MATERIAL ADVERSE
LITIGATION
(Section 3.10): AS DISCLOSED IN THE BORROWER'S SEPTEMBER 30, 1997 10-Q
REPORT
NEGATIVE COVENANTS-
EXCEPTIONS(Section 4.6): Without Silicon's prior written consent, Borrower may
do the following, provided that, after giving effect
thereto, no Event of Default has occurred and no event
has occurred which, with notice or passage of time or
both, would constitute an Event of Default, and
provided that the following are done in compliance with
all applicable laws, rules and regulations: (i)
repurchase shares of Borrower's stock pursuant to any
employee stock purchase or benefit plan, provided that
the total amount paid by Borrower for such stock does
not exceed $75,000 in any fiscal year.
-4-
<PAGE>
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AGREEMENT
- -------------------------------------------------------------------------------
FINANCIAL COVENANTS
(Section 4.1): Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the
end of each fiscal quarter, except as otherwise
specifically provided below:
QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick Assets" to
current liabilities of not less than 3.5 to 1.
TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not
less than $27,500,000, provided that tangible net worth
shall be computed excluding loans by the Borrower to
its officers.
DEBT TO TANGIBLE
NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities to
tangible net worth of not more than .40 to 1.
PROFITABILITY: Borrower shall not incur a loss (after taxes) for the
fiscal year ending December 31, 1998.
DEFINITIONS: "Current assets," and "current liabilities" shall have
the meanings ascribed to them in accordance with
generally accepted accounting principles.
"Tangible net worth" means the excess of total assets
over total liabilities, determined in accordance with
generally accepted accounting principles, excluding
however all assets which would be classified as
intangible assets under generally accepted accounting
principles, including without limitation goodwill,
licenses, patents, trademarks, trade names, copyrights,
and franchises.
"Quick Assets" means cash on hand or on deposit in
banks, readily marketable securities issued by the
United States, readily marketable commercial paper
rated "A-1" by Standard & Poor's Corporation (or a
similar rating by a similar rating organization),
certificates of deposit and banker's acceptances, and
accounts receivable (net of allowance for doubtful
accounts).
SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants
do not include indebtedness which is subordinated to
the indebtedness to Silicon under a subordination
agreement in form specified by Silicon or by language
in the instrument evidencing the indebtedness which is
acceptable to Silicon.
OTHER COVENANTS
(Section 4.1): Borrower shall at all times comply with all of the
following additional covenants:
1. BANKING RELATIONSHIP. Borrower shall at all times
maintain its primary banking relationship with Silicon.
2. MONTHLY BORROWING BASE CERTIFICATE AND LISTING.
After the occurrence of a Post-IPO Default, within 20
days after the end of each month thereafter (including
any month in which the Post-IPO Default
-5-
<PAGE>
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AGREEMENT
- -------------------------------------------------------------------------------
occurs), Borrower shall provide Silicon with a
Borrowing Base Certificate in such form as Silicon
shall specify, and an aged listing of Borrower's
accounts receivable and accounts payable.
3. INDEBTEDNESS. Without limiting any of the
foregoing terms or provisions of this Agreement,
Borrower shall not in the future incur indebtedness for
borrowed money, except for (i) indebtedness to Silicon,
and (ii) indebtedness incurred in the future for the
purchase price of or lease of equipment in an aggregate
amount not exceeding $250,000 at any time outstanding.
4. [RESERVED.]
5. NEGATIVE PLEDGE. Borrower shall not grant a
security interest in any of its present or future
Collateral, other than for specific liens on capital
equipment relating to obligations incurred pursuant to
paragraph 3 above and a lien in favor of Silicon.
6. AGREEMENT TO TERMINATE SECURITY INTEREST UPON IPO;
POST-IPO DEFAULT UCCS; ETC. Due to the prior
completion of the IPO Consummation, Silicon has
terminated its security interest in the Collateral.
Notwithstanding the foregoing, upon the occurrence of a
Post-IPO Default, Borrower agrees that Borrower shall
be deemed to have granted to Silicon a security
interest in the Collateral as set forth in Section 2.2
hereof at such time, and that Borrower agrees to
execute and deliver to Silicon forthwith such UCC
financing statements, instruments and other
documentation as Silicon determines is necessary or
desirable in connection therewith in order to perfect
and otherwise protect its security interest in the
Collateral.
BORROWER:
SYNC RESEARCH, INC.
BY
---------------------------------------
PRESIDENT OR VICE PRESIDENT
BY
---------------------------------------
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY
---------------------------------------
TITLE
-----------------------------------
-6-
<PAGE>
[LETTER HEAD]
AMENDMENT TO LOAN AND SECURITY AGREEMENT
BORROWER: SYNC RESEARCH, INC.
ADDRESS: 40 PARKER
IRVINE, CALIFORNIA 92718
DATED AS OF: DECEMBER 3, 1997
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the borrower named above (the "Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated September 18, 1991, as amended by that Extension Agreement dated August 3,
1992, by that Amendment to Loan Agreement dated October 20, 1992, by that
Amendment to Loan Agreement dated August 23, 1993, by that Amendment to Loan
Agreement dated February 10, 1994, by that Amendment to Loan Agreement dated
July 18, 1994, by that Amendment to Loan Agreement dated September 20, 1994, by
that Amendment to Loan and Security Agreement dated August 31, 1995, by that
Amendment to Loan and Security Agreement (the "October 1995 Amendment") dated
October 5, 1995, by that Amendment to Loan Agreement dated July 3, 1996, by that
Amendment to Loan and Security Agreement dated October 6, 1996 and by that
Amendment to Loan and Security Agreement dated June 10, 1997 (the "Loan
Agreement"), as follows. (Capitalized terms used but not defined in this
Agreement, shall have the meanings set forth in the Loan Agreement.)
1. REVISED SCHEDULE. The Schedule to Loan Agreement is hereby replaced
in its entirety with the Schedule to Loan Agreement as attached hereto.
2. FEE. Borrower shall pay to Silicon a facility fee in the amount of
$25,000 concurrently, which shall be in addition to all interest and all other
amounts payable under the Loan Agreement, and which shall not be refundable.
3. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
4. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and the Borrower, and
the other written documents and agreements between Silicon and the Borrower set
forth in full all of the representations and agreements of the parties with
respect to the subject matter hereof and supersede all prior discussions,
representations, agreements and understandings between the parties with respect
to the subject hereof. Except as herein expressly amended, all of the terms and
provisions of the Loan Agreement, as so amended, and all other documents and
agreements between Silicon and the Borrower shall continue in full force and
effect and the same are hereby ratified and confirmed.
-1-
<PAGE>
SILICON VALLEY BANK CERTIFIED RESOLUTION
- -------------------------------------------------------------------------------
BORROWER: SILICON:
SYNC RESEARCH, INC. SILICON VALLEY BANK
BY BY
-------------------------------- --------------------------------
PRESIDENT OR VICE PRESIDENT TITLE
-----------------------------
BY
--------------------------------
SECRETARY OR ASS'T SECRETARY
-2-
<PAGE>
Revised August 22, 1997
August 14, 1997
Mr. Salvatore Alini
5482 Livorno Court
San Jose, CA 95138
Dear Sal:
I am pleased to extend to you an offer of employment to join Sync Research in
the role Vice President Engineering reporting directly to Roger Dorf, President
and Chief Executive Officer.
The elements of your employment offer are as follows:
The base salary for this position is $9166.67 per month (which annualizes to
$110,000). A new salary will become effective on January 1, 1999, of $13,750
per month ($165,000 annualized) plus any merit increase earned.
A lump sum of $4583.33 per month ($55,000 annualized) plus earned merit, plus
interest (prime rate plus 1%) starting from date of employment, will be paid
June 15, 1999. Should your employment terminate prior to the date of June 15,
1999, the total lump sum to date plus earned merit and interest will be paid
out.
In addition, you would be eligible to participate in our Executive Compensation
Bonus Plan, if approved by the Board, for 1998. This plan is currently under
development. Based upon the Company meeting its annual financial plan, your
individual bonus target would be somewhere between 30% and 50% of salary and
lump sum amount beginning in 1998. For 1997, no Plan payout is anticipated.
Bonus pay out will not occur prior to June 15, 1999.
Subject to the approval of The Board of Directors, you will be granted options
to purchase 200,000 shares of the company's common stock. This grant will be
subject to execution of appropriate written option agreements under the
company's Employee Stock Plan. The options will provide the vesting of 25% of
the shares after one year of employment, and 1/48 per month thereafter, subject
to continued employment. The exercise price of the options will be equal to the
fair market value of the Company's Common Stock on the date of grant.
<PAGE>
Sync Research offers a comprehensive benefits program including medical
insurance which becomes effective on the first of the month following your first
day of employment, as well as eligibility for participation in our 401K Plan.
Vacation time of two weeks per year will be accrued from date of hire, however,
it is understood that you may take a total of three weeks per year.
To assist you and your family in your move to the Southern California area, Sync
will reimburse you for actual and reasonable costs associated with your
relocation up to a maximum of $100,000. This will include costs associated with
the buying and selling of homes, packing, moving and unpacking of household
goods, and temporary living expenses. After completion of your relocation, Sync
will provide you with tax gross up anticipated to be 40% - 50%. The gross up
amount is outside the relocation allowance. Additionally, Sync utilizes the
services of a relocation assistance company to assist with neighborhood
selection, housing availability and all the details of a smooth relocation.
If your employment is terminated by the Company other than for cause (as defined
by statute in California) within one year following a Change in Control, then
the attached Change of Control Severance Agreement will become effective.
If a change of control occurs prior to May 1999, your consulting contract rate
will be $9166.67 per month ($110,000 annualized) until May 1999 and $13,750 per
month ($165,000 annualized) plus any merit increase earned, after May 1999.
Upon acceptance, this letter will form the basis of your "at will" employment
relationship with Sync Research. Either you or Sync reserve the right to end
the employment relationship at any time and for any reason, by giving written
notice to the other party. This offer of employment will expire August 22,
1997, if unaccepted.
As a condition of employment, you are required to provide proof of your legal
right to work in the United States in compliance with the INS (Immigration and
Naturalization Service) rules. This form will be provided to you on your first
day of employment. You will also be expected to execute and deliver a
confidentiality proprietary rights agreement in consideration of your
employment.
<PAGE>
Sal, all of us associated with Sync who have had the opportunity to meet with
you are convinced that you will be a excellent addition to the team. Please
sign a copy of this letter, indicating your anticipated start date and return to
me.
Sincerely,
SYNC RESEARCH
Roger Dorf
President and CEO
ACCEPTED AND AGREED:
Sal Alini Date Start Date
<PAGE>
SYNC RESEARCH, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "AGREEMENT") is made and
entered into by and between Gregorio Reyes (the "CONSULTANT") and Sync Research,
Inc., a Delaware corporation (the "COMPANY"), effective as of October 24, 1997.
RECITALS
A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "BOARD") recognizes that such
consideration can be a distraction to the Consultant and can cause the
Consultant to consider alternative employment opportunities. The Board has
determined that it is in the best interests of the Company and its stockholders
to assure that the Company will have the continued dedication and objectivity of
the Consultant, notwithstanding the possibility, threat or occurrence of a
Change of Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its stockholders to provide the Consultant with an incentive to continue his or
her employment and to motivate the Consultant to maximize the value of the
Company upon a Change of Control for the benefit of its stockholders.
C. The Board believes that it is imperative to provide the Consultant
with certain benefits upon Consultant's termination of provision of services as
a consultant or director following a Change of Control that provide the
Consultant with enhanced financial security and incentive and encouragement to
the Consultant to remain with the Company notwithstanding the possibility of a
Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
The parties hereto agree as follows:
1. TERM OF AGREEMENT. This Agreement shall terminate upon the date that
all obligations of the parties hereto with respect to this Agreement have been
satisfied.
2. AT-WILL EMPLOYMENT. The Company and the Consultant acknowledge that
the Consultant's provision of services is and shall continue to be at-will, as
defined under applicable law. If the Consultant's consultancy or directorship
terminates for any reason, including (without limitation) any termination prior
to a Change of Control, the Consultant shall not be entitled to any benefits,
damages, awards or compensation other than as may otherwise be available in
accordance with the Company's established employee plans and practices or
pursuant to other agreements with the Company.
<PAGE>
3. SEVERANCE BENEFITS.
(a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If the Consultant's
consultancy or directorship terminates as a result of Involuntary Termination
other than for Cause at any time within 12 months following a Change of Control,
then 100% of the unvested portion of any stock option or restricted stock then
held by the Consultant shall automatically be accelerated in full so as to
become completely vested; PROVIDED, HOWEVER, that if such potential vesting
acceleration would cause a contemplated Change of Control transaction that was
intended to be accounted for as a "pooling-of-interests" transaction to become
ineligible for such accounting treatment under generally accepted accounting
principles, as determined by the Company's independent public accountants (the
"Accountants") prior to the Change of Control, Consultant's stock options and
restricted stock shall not have their vesting so accelerated.
(b) VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If the
Consultant's consultancy or directorship terminates by reason of the
Consultant's voluntary resignation (and is not an Involuntary Termination), or
if the Consultant is terminated for Cause, then the Consultant shall not be
entitled to receive any benefits except for those (if any) as may then be
established under the Company's then existing and applicable severance and
benefits plans and practices or pursuant to other agreements with the Company.
(c) DISABILITY; DEATH. If the Company terminates the Consultant's
consultancy or directorship as a result of the Consultant's Disability, or such
Consultant's consultancy or directorship is terminated due to the death of the
Consultant, then the Consultant shall not be entitled to receive any benefits
except for those (if any) as may then be established under the Company's then
existing and applicable severance and benefits plans and practices or pursuant
to other agreements with the Company.
(d) TERMINATION APART FROM CHANGE OF CONTROL. In the event the
Consultant's consultancy or directorship is terminated for any reason, either
prior to the occurrence of a Change of Control or after the twelve-month period
following a Change of Control, then the Consultant shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing and applicable severance and benefits plans and practices or
pursuant to other agreements with the Company.
4. ATTORNEY FEES, COSTS AND EXPENSES. The Company shall promptly
reimburse Consultant, on a monthly basis, for the reasonable attorney fees,
costs and expenses incurred by the Consultant in connection with any action
brought by Consultant to enforce his or her rights hereunder. In the event
Consultant is not the prevailing party, determined without regard to whether or
not the action results in a final judgment, Consultant shall repay such
reimbursements.
5. DEFINITION OF TERMS. The following terms used in this Agreement shall
have the following meanings:
(a) CAUSE. "CAUSE" shall mean (i) gross negligence or willful
misconduct in the performance of the Consultant's duties to the Company; (ii) a
material and willful violation
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<PAGE>
of any federal or state law; (iii) refusal or failure to act in his capacity as
a consultant in accordance with any specific direction or order of the Company;
(iv) commission of any act of fraud with respect to the Company; or
(v) conviction of a felony or a crime involving moral turpitude causing material
harm to the standing and reputation of the Company, in each case as determined
by the Board of Directors of the Company other than Consultant.
(b) CHANGE OF CONTROL. "CHANGE OF CONTROL" means the occurrence of
any of the following events:
(i) The stockholders of the Company approve an agreement for
the sale of all or substantially all of the assets of the Company; or
(ii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or
(iii) Completion of a tender or exchange offer or other
transaction or series of transactions resulting in less than a majority of the
outstanding voting shares of the surviving corporation being held, immediately
after such transaction or series of transactions, by the holders of the voting
shares of the Company outstanding immediately prior to such transaction or
series of transactions.
(c) DISABILITY. "DISABILITY" shall mean that the Consultant has been
unable to perform his or her Company duties as the result of his or her
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Consultant or the Consultant's legal representative
and acceptable to the Company or its insurers (such Agreement as to
acceptability not to be unreasonably withheld). Termination resulting from
Disability may only be effected after at least 30 days' written notice by the
Company of its intention to terminate the Consultant's consultancy or
directorship. In the event that the Consultant resumes the performance of
substantially all of his or her duties hereunder before the termination of his
or her consultancy or directorship becomes effective, the notice of intent to
terminate shall automatically be deemed to have been revoked.
(d) INVOLUNTARY TERMINATION. "INVOLUNTARY TERMINATION" shall mean
(i) without the Consultant's express written consent, the significant reduction
of the Consultant's duties, authority or responsibilities, relative to the
Consultant's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Consultant of such reduced duties,
authority or responsibilities; (ii) without the Consultant's express written
consent, a substantial reduction, without good business reasons, of the
facilities and prerequisites (including office space and location) available to
the Consultant immediately prior to such reduction; (iii) a reduction by the
Company in the base pay of the Consultant as in effect
-3-
<PAGE>
immediately prior to such reduction; (iv) the relocation of the Consultant to a
facility or a location more than thirty (30) miles from the Consultant's then
present location, without the Consultant's express written consent; (v) any
purported termination of the Consultant by the Company as a consultant or
director which is not effected for Disability or for Cause, or any purported
termination for which the grounds relied upon are not valid; (vi) the failure of
the Company to obtain the assumption of this Agreement by any successors
contemplated in Section 7(a) below; or (vii) any act or set of facts or
circumstances which would, under California case law or statute, constitute a
constructive termination of the Consultant.
(e) TERMINATION DATE. "TERMINATION DATE" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Consultant (provided that the Consultant
shall not have returned to the performance of the Consultant's duties on a
full-time basis during such thirty (30)-day period), (ii) if the Consultant's
consultancy or directorship is terminated by the Company for any other reason,
the date on which a notice of termination is given, provided that if within
thirty (30) days after the Company gives the Consultant notice of termination,
the Consultant notifies the Company that a dispute exists concerning the
termination or the benefits due pursuant to this Agreement, then the Termination
Date shall be the date on which such dispute is finally determined, either by
mutual written agreement of the parties, or by a final judgment, order or decree
of a court of competent jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected), or (iii) if the Agreement is
terminated by the Consultant, the date on which the Consultant delivers the
notice of termination to the Company.
6. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company (whether
direct or indirect and whether by purchase, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section
6(a) or which becomes bound by the terms of this Agreement by operation of law.
(b) CONSULTANT'S SUCCESSORS. The terms of this Agreement and all
rights of the Consultant hereunder shall inure to the benefit of, and be
enforceable by, the Consultant's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
7. NOTICE.
(a) GENERAL. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or five (5) days after being mailed by U.S. registered
or certified mail, return receipt requested and postage prepaid. In the case of
the Consultant, mailed notices shall be addressed
-4-
<PAGE>
to him or her at the home address which he or she most recently communicated to
the Company in writing. In the case of the Company, mailed notices shall be
addressed to its corporate headquarters, and all notices shall be directed to
the attention of its Secretary.
(b) NOTICE OF TERMINATION. Any termination by the Company for Cause
or by the Consultant as a result of a voluntary resignation and any Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 7(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by the Consultant to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not waive any right of the Consultant hereunder or preclude
the Consultant from asserting such fact or circumstance in enforcing his or her
rights hereunder.
8. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. The Consultant shall not be required to
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Consultant may receive from any
other source.
(b) WAIVER. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Consultant and by an authorized officer of the Company
(other than the Consultant). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) WHOLE AGREEMENT. This Agreement represents the entire agreement
between the Consultant and the Company with respect to the matters set forth
herein. No agreements, representations or understandings (whether oral or
written and whether express or implied) which are not expressly set forth in
this Agreement have been made or entered into by either party with respect to
the subject matter hereof.
(d) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California as applied to agreements entered into and performed within California
solely by residents of that state.
(e) SEVERABILITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) WITHHOLDING. All payments made pursuant to this Agreement will
be subject to withholding of applicable income and employment taxes, if
applicable.
-5-
<PAGE>
(g) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the date set
forth above.
COMPANY: SYNC RESEARCH, INC.
By:
-------------------------------
Title:
----------------------------
CONSULTANT: Signature:
------------------------
-----------------------------------
Gregorio Reyes
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<PAGE>
[LOGO] EXHIBIT 10.31
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release ("Agreement") is entered
into by and between SYNC RESEARCH (the "Company"), and Roger A. Dorf
("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 President and CEO and as an Officer of
the Company effective October 27, 1997 (the "Resignation Date") and that the
employment with the Company will terminate effective July 31, 1998 (the
"Termination Date").
2. Consideration. In the consideration for the release of claims set
forth below and other obligations under this Agreement, the Company agrees to
pay Employee $19,583.33 (less applicable tax withholding) each month through
the Termination Date, in accordance with the Company's normal payroll
practices.
3. Stock Options. In consideration of the Employee's willingness to
avail himself to the Company through the Termination Date, vesting of
Employee's options to purchase shares of Common Stock granted to Employee
under the Company's Stock Option Plan that have not been exercised as of the
date of this Agreement, shall continue though the April 30, 1998. No
additional options shares shall vest after such date. In accordance with the
terms of the Option Agreement(s) issued to Employee, vested options will be
exercisable until June 30, 1998.
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<PAGE>
4. Change of Control. Effective with the Resignation Date, the
Amended and Restated Change of Control Severance Agreement dated and signed
June 5, 1997 becomes null and void.
5. Benefits.
(a) Employee shall continue to receive the Company's standard
medical, dental and life insurance benefits through the Termination 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 Termination Date.
(c) Employee shall not continue to accrue vacation after the
Resignation Date.
6. Termination of Agreement. Should the Employee become an employee
of another company or firm, or enter into a consulting arrangement for more
than 20 hours per work week, prior to the Termination Date, all payments and
participation in the benefit programs will cease immediately. Employee
agrees to engage in employment or a consultant arrangement only on a
non-compete basis.
7. No Other Payments Due. Employee acknowledges and agrees that he
has received, or will receive on April 30, 1998, all salary, accrued
vacation, commissions, bonuses, compensation, shares of stock options
therefore or other such sums due to Employee other than amounts to be paid
pursuant to Sections 2, 3 and 4 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, 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
Page 2
<PAGE>
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 the 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.
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 by the 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.
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<PAGE>
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.
11. Tax Consequences. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any such
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 or
assessments thereon. Employee further agrees to indemnify and hold the
Company harmless from any claims, demands, deficiencies, penalties,
assessments, executions, judgments, or recoveries by any government agency
against the Company for any amounts claimed due on account of Employee's
failure to pay federal or state taxes or damages sustained by the Company by
reason of any such claims, including reasonable attorney's fees.
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.
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<PAGE>
14. Breach of this Agreement. Employee acknowledges that upon breach
of the confidential and proprietary information provision contained in
Section 10 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 4 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
disparagement, criticism, 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.
18. Costs. The Parties shall each beach their own costs, attorneys'
fees and other fees incurred in connection with this Agreement.
19. 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.
20. 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 understanding 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 10.
21. No Oral Modification. This Agreement may only be amended in
writing signed by Employee and the Company.
Page 5
<PAGE>
22. Governing Law. This Agreement shall be governed by the laws of the
State of California.
23. 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".
24. 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.
25. 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.
26. 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 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.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
respective dates set forth below.
COMPANY
By:
------------------------------
Title:
---------------------------
Dated:
---------------------------
EMPLOYEE
----------------------------------
Employee Name
Dated:
---------------------------
Page 6
<PAGE>
[LOGO] EXHIBIT 10.32
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 Dominic J. Genovese ("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 Vice President of U.S. Sales and as an
Officer of the Company effective October 27, 1997 (the "Resignation Date").
The Company agrees to retain Employee as an employee, and Employee agrees to
serve as an employee, until the earlier of April 30, 1998 or such time as
Employee commences other employment (the "Termination Date"). As part of
such employment, Employee agrees to perform such projects as may be
reasonably requested by the Chairman of the Board of the Company, but in no
event shall such projects require more than 20 hours of service per week.
For purposes of this Agreement, "other employment" is defined as any
employment exceeding 20 hours per week. 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 $12,500.00 (less applicable tax withholding) each month through
the Termination Date, in accordance with the
<PAGE>
Company's normal payroll practices. In addition sales commissions will be
paid to Employee to the extent earned through October, 31, 1997.
3. STOCK OPTIONS. In consideration of the Employee's willingness to
avail himself to the Company through the Termination Date, vesting of
Employee's options to purchase shares of Common Stock granted to Employee
under the Company's Stock Option Plan that have not been exercised as of the
date of this Agreement, shall continue through the Termination Date. No
additional option shares shall vest after such date. In accordance with the
terms of the Option Agreement(s) issued to Employee, vested options will be
exercisable until 60 days after the Termination Date.
4. TERMINATION OF CHANGE OF CONTROL AGREEMENT. Effective with the
Resignation Date, the Amended and Restated Change of Control Severance
Agreement dated June 5, 1997 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 Termination 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 Termination Date.
(c) Employee shall not continue to accrue vacation after the
Resignation Date.
6. NONCOMPETITION. Through the Termination Date, Employee will not,
individually or as an employee, partner, officer, director or shareholder or
in any other capacity whatsoever of or for any person, firm, partnership,
company or corporation, other than the Company or its subsidiaries, own,
manage, operate, sell, control or participate in the ownership, management,
operation, sales or control of any business engaged, in the geographical
areas referred to below, in research, development, marketing, sales or other
activities substantially similar to or competitive with the business of the
Company. The geographical areas in which the restrictions provided for in
the foregoing sentence apply include all cities, counties and states of the
United States and all other countries in which the Company has engaged in
sales or otherwise conducted business or selling efforts at any time. For a
period extending until one year following the Termination Date, Employee will
not, directly or indirectly, recruit, attempt to hire, solicit, assist others
in recruiting or hiring, 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.
<PAGE>
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 Sections 2, 3 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, 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.
<PAGE>
The Company and Employee agree that the release set forth in the 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.
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 by the 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.
11. TAX CONSEQUENCES. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any such
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 or
assessments thereon. Employee further agrees to indemnify and hold the
Company harmless from any claims, demands, deficiencies, penalties,
assessments, executions, judgments, or recoveries by any government agency
against the Company for any amounts claimed due on account of Employee's
failure to pay federal or state taxes or damages sustained by the Company by
reason of any such claims, including reasonable attorney's fees.
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
<PAGE>
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 the confidential and proprietary information provision 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
disparagement, criticism, 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.
18. COSTS. The Parties shall each beach their own costs, attorneys'
fees and other fees incurred in connection with this Agreement.
<PAGE>
19. 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.
20. 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 12.
21. NO ORAL MODIFICATION. This Agreement may only be amended in
writing signed by Employee and the Company.
22. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California.
23. 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".
24. 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.
25. 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.
26. 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 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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
respective dates set forth below.
SYNC RESEARCH, INC.
By:
------------------------------
Title:
---------------------------
Dated:
---------------------------
EMPLOYEE
----------------------------------
Signature
----------------------------------
Print Name
Dated:
---------------------------
<PAGE>
[LOGO] EXHIBIT 10.33
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 Otto Berlin ("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 Vice President of International Sales
and as an Officer of the Company effective November 16, 1997 (the
"Resignation Date"). The Company agrees to retain Employee as an employee,
and Employee agrees to serve as an employee, until the earlier of May 16,
1998 or such time as Employee commences other employment (the "Termination
Date"). As part of such employment, Employee agrees to perform such projects
as may be reasonably requested by the Chairman of the Board of the Company,
but in no event shall such projects require more than 20 hours of service per
week. For purposes of this Agreement, "other employment" is defined as any
employment exceeding 20 hours per week. 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 $11,250.00 (less applicable tax withholding) each month through
the Termination Date, in accordance with the
<PAGE>
Company's normal payroll practices. In addition sales commissions will be
paid to Employee to the extent earned through October, 31, 1997.
3. STOCK OPTIONS. In consideration of the Employee's willingness to
avail himself to the Company through the Termination Date, vesting of
Employee's options to purchase shares of Common Stock granted to Employee
under the Company's Stock Option Plan that have not been exercised as of the
date of this Agreement, shall continue through the Termination Date. No
additional option shares shall vest after such date. In accordance with the
terms of the Option Agreement(s) issued to Employee, vested options will be
exercisable until 60 days after the Termination Date.
4. TERMINATION OF CHANGE OF CONTROL AGREEMENT. Effective with the
Resignation Date, the Amended and Restated Change of Control Severance
Agreement dated June 5, 1997 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 Termination 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 Termination Date.
(c) Employee shall not continue to accrue vacation after the
Resignation Date.
6. NONCOMPETITION. Through the Termination Date, Employee will not,
individually or as an employee, partner, officer, director or shareholder or
in any other capacity whatsoever of or for any person, firm, partnership,
company or corporation, other than the Company or its subsidiaries, own,
manage, operate, sell, control or participate in the ownership, management,
operation, sales or control of any business engaged, in the geographical
areas referred to below, in research, development, marketing, sales or other
activities substantially similar to or competitive with the business of the
Company. The geographical areas in which the restrictions provided for in
the foregoing sentence apply include all cities, counties and states of the
United States and all other countries in which the Company has engaged in
sales or otherwise conducted business or selling efforts at any time. For a
period extending until one year following the Termination Date, Employee will
not, directly or indirectly, recruit, attempt to hire, solicit, assist others
in recruiting or hiring, 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.
<PAGE>
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 Sections 2, 3 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, 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.
<PAGE>
The Company and Employee agree that the release set forth in the 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.
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 by the 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.
11. TAX CONSEQUENCES. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any such
sums to Employee under the terms of this Agreement. Employee agrees and
understands 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 or assessments thereon. Employee further agrees to indemnify and
hold the Company harmless from any claims, demands, deficiencies, penalties,
assessments, executions, judgments, or recoveries by any government agency
against the Company for any amounts claimed due on account of Employee's
failure to pay federal or state taxes or damages sustained by the Company by
reason of any such claims, including reasonable attorney's fees.
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
<PAGE>
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 the confidential and proprietary information provision 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
disparagement, criticism, 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.
18. COSTS. The Parties shall each beach their own costs, attorneys'
fees and other fees incurred in connection with this Agreement.
<PAGE>
19. 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.
20. 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 12.
21. NO ORAL MODIFICATION. This Agreement may only be amended in
writing signed by Employee and the Company.
22. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California.
23. 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".
24. 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.
25. 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.
26. 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 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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
respective dates set forth below.
SYNC RESEARCH, INC.
By:
------------------------------
Title:
---------------------------
Dated:
---------------------------
EMPLOYEE
----------------------------------
Signature
----------------------------------
Print Name
Dated:
---------------------------
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF SYNC RESEARCH, INC.
The Company has the following subsidiaries:
TyLink Corporation
10C Commerce Way
Norton, MA 02766
Sync Research Asia Pacific Limited
The Kwangtung Provincial Bank Building Room 1402, 14F
409-415 Hennessy Road
Wanchai, Hong Kong
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-00166) pertaining to the Sync Research, Inc. Amended and
Restated 1991 Stock Plan, the Sync Research, Inc. 1995 Employee Stock Purchase
Plan and the 1995 Directors' Stock Option Plan and related Prospectus and in the
Registration Statement (Form S-8 No. 333-10941) pertaining to the Sync Research,
Inc. Amended and Restated 1991 Stock Plan and related Prospectus and in the
Registration Statement (Form S-8 No. 333-12315) pertaining to the 1994 Assumed
TyLink Corporation Equity Incentive Plan and the Sync Research, Inc. 1996
Non-Executive Stock Option Plan of our report dated January 27, 1998, with
respect to the consolidated financial statements and schedule of Sync Research,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31,
1997.
ERNST & YOUNG LLP
Orange County, California
March 27, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated June 13, 1996, except as
to Note 11 which is as of August 23, 1996, relating to the financial statements
of TyLink Corporation appearing in the Form 10-K of Sync Research, Inc. for the
year ended December 31, 1997. We also consent to the incorporation by reference
of this report in the (i) Registration Statement on Form S-8 (No. 333-00166)
pertaining to the Sync Research, Inc. Amended and Restated 1991 Stock Plan, the
Sync Research, Inc. 1995 Employee Stock Purchase Plan, and the Sync Research,
Inc. 1995 Directors' Stock Option Plan, (ii) Registration Statement on Form S-8
(No. 333-10941) pertaining to the Sync Research, Inc. Amended and Restated 1991
Stock Plan, and (iii) Registration Statement on Form S-8 (No. 333-12315)
pertaining to the Assumed TyLink Corporation 1994 Equity Incentive Plan and the
Sync Research, Inc. 1996 Non-Executive Stock Option Plan.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,734
<SECURITIES> 0
<RECEIVABLES> 5,050
<ALLOWANCES> (393)
<INVENTORY> 7,371
<CURRENT-ASSETS> 34,284
<PP&E> 8,480
<DEPRECIATION> (4,313)
<TOTAL-ASSETS> 38,495
<CURRENT-LIABILITIES> 5,566
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 32,801
<TOTAL-LIABILITY-AND-EQUITY> 38,495
<SALES> 23,256
<TOTAL-REVENUES> 23,256
<CGS> 14,724
<TOTAL-COSTS> 14,724
<OTHER-EXPENSES> 26,495
<LOSS-PROVISION> 223
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> (16,508)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,508)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,508)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER>1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 3-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996
SEP-30-1996
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1996 APR-01-1996
JUL-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996
SEP-30-1996
<CASH> 35,874 50,633 30,665 31,848
24,758
<SECURITIES> 0 0 18,570 11,757
12,751
<RECEIVABLES> 7,935 8,111 8,177 9,880
8,393
<ALLOWANCES> (348) (308) (294) (550)
(519)
<INVENTORY> 7,139 5,256 5,113 6,060
6,356
<CURRENT-ASSETS> 51,079 64,081 62,651 59,690
52,275
<PP&E> 7,268 4,221 4,780 5,320
6,220
<DEPRECIATION> (2,698) (1,982) (2,143) (2,410)
(2,681)
<TOTAL-ASSETS> 55,692 66,672 65,613 62,961
56,175
<CURRENT-LIABILITIES> 6,742 5,821 5,459 5,237
5,978
<BONDS> 0 0 0 0
0
0 5,591 0 0
0
0 0 0 0
0
<COMMON> 17 16 16 16
19
<OTHER-SE> 48,786 54,846 59,723 57,301
50,021
<TOTAL-LIABILITY-AND-EQUITY> 55,692 66,672 65,613 62,961
56,175
<SALES> 36,346 34,933 9,095 7,570
9,251
<TOTAL-REVENUES> 36,346 34,933 9,095 7,570
9,251
<CGS> 19,995 17,584 5,367 4,109
4,976
<TOTAL-COSTS> 19,995 17,584 5,367 4,109
4,976
<OTHER-EXPENSES> 27,966 19,755 5,926 6,549
8,271
<LOSS-PROVISION> 420 158 9 275
100
<INTEREST-EXPENSE> 64 114 29 34
29
<INCOME-PRETAX> (9,431) (1,945) (1,573) (2,513)
(3,481)
<INCOME-TAX> 2 45 0 0
2
<INCOME-CONTINUING> (9,433) (1,990) (1,573) (2,513)
(3,483)
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (9,433) (1,990) (1,573) (2,513)
(3,483)
<EPS-PRIMARY> (0.61) (0.46) (0.12) (0.17)
(0.23)
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