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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED MARCH 31, 1998, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-26952
------------------------
SYNC RESEARCH, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0676350
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
40 PARKER
IRVINE, CA 92618
(Address of principal executive offices)
registrant's telephone number, including area code: (949) 588-2070
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
As of April 30, 1998, 17,363,631 shares of the Registrant's Common Stock
were issued and outstanding.
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<PAGE>
SYNC RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Part I. Financial Information......................................................................... 3
Item 1 a) Condensed consolidated balance sheets at March 31, 1998 (unaudited) and December 31,
1997...................................................................................... 3
b) Condensed consolidated statements of operations (unaudited) for the three months ended
March 31, 1998 and March 31, 1997......................................................... 4
c) Condensed consolidated statements of cash flows (unaudited) for the three months ended
March 31, 1998 and March 31, 1997......................................................... 5
d) Notes to condensed consolidated financial statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
Part II. Other Information............................................................................. 19
Item 1. Legal Proceedings............................................................................. 19
Item 2. Changes in Securities and Use of Proceeds..................................................... 19
Item 3. Defaults upon Senior Securities............................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders........................................... 20
Item 5. Other Information............................................................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................................................. 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 19,469 $ 21,734
Accounts and other receivables, net....................... 4,854 4,657
Inventories............................................... 7,256 7,371
Prepaid expenses and other current assets................. 891 522
----------- ------------
Total current assets........................................ 32,470 34,284
Furniture, fixtures and equipment, net...................... 4,120 4,167
Other assets................................................ 47 44
----------- ------------
Total assets................................................ $ 36,637 $ 38,495
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 3,006 $ 2,688
Accrued compensation and related costs.................... 788 949
Severance and related liabilities......................... 161 372
Deferred revenue.......................................... 1,357 1,507
Bank borrowings and current maturities of capitalized
lease obligations....................................... 1,551 50
----------- ------------
Total current liabilities................................... 6,863 5,566
Capitalized lease obligations, less current maturities...... 92 111
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares--50,000
Issued and outstanding shares--17,364 at March 31, 1998
and 17,288 at December 31, 1997......................... 17 17
Additional paid-in capital................................ 71,866 71,786
Deferred compensation..................................... (27) (34)
Accumulated deficit....................................... (42,174) (38,951)
----------- ------------
Total stockholders' equity.................................. 29,682 32,818
----------- ------------
Total liabilities and stockholders' equity.................. $ 36,637 $ 38,495
----------- ------------
----------- ------------
</TABLE>
See accompanying notes.
3
<PAGE>
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Net revenues................................................................................ $ 5,610 $ 5,082
Cost of sales............................................................................... 3,871 3,469
--------- ---------
Gross profit.............................................................................. 1,739 1,613
Operating expenses:
Research and development.................................................................. 1,741 2,198
Selling and marketing..................................................................... 2,832 4,234
General and administrative................................................................ 642 1,297
Severance and facility rationalization cost............................................... -- 506
--------- ---------
Total operating expenses.................................................................. 5,215 8,235
--------- ---------
Operating loss.............................................................................. (3,476) (6,622)
Interest income, net........................................................................ 255 443
--------- ---------
Loss before income taxes.................................................................... (3,221) (6,179)
Provision for income taxes.................................................................. 2 --
--------- ---------
Net loss.................................................................................... $ (3,223) $ (6,179)
--------- ---------
--------- ---------
Basic and diluted net loss per share........................................................ $ (0.19) $ (0.36)
--------- ---------
--------- ---------
Shares used in computing net loss per share................................................. 17,336 16,983
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
4
<PAGE>
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................................................. $ (3,223) $ (6,179)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 461 405
Provision for losses on accounts receivable............................................. 104 115
Deferred compensation expense........................................................... 7 35
Changes in operating assets and liabilities, net:
Accounts and other receivables.......................................................... (301) 2,501
Inventories............................................................................. 115 (28)
Prepaid expenses and other current assets............................................... (369) (318)
Accounts payable and other accrued liabilities.......................................... 264 (1,159)
Accrued compensation and related costs.................................................. (161) 568
Accrued severance and restructuring..................................................... (212) --
Deferred revenue........................................................................ (98) (212)
--------- ---------
Net cash used in operating activities....................................................... (3,413) (4,272)
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in marketable securities, net................................................. -- (3,935)
Purchases of furniture, fixtures and equipment, net....................................... (414) (820)
--------- ---------
Net cash used in investing activities....................................................... (414) (4,755)
CASH FLOWS FROM FINANCING ACTIVITIES
Net bank borrowings (payments)............................................................ 1,500 (802)
Payments on capitalized lease obligations................................................. (18) (22)
Proceeds from common stock options exercised and employee stock purchase plan............. 80 253
--------- ---------
Net cash provided by (used in) financing activities......................................... 1,562 (571)
--------- ---------
Net decrease in cash and cash equivalents................................................... (2,265) (9,598)
Cash and cash equivalents at beginning of period............................................ 21,734 35,874
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 19,469 $ 26,276
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................................. $ 11 $ 11
--------- ---------
--------- ---------
Income taxes paid......................................................................... $ 21 $ 1
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
5
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 1998, the condensed
consolidated statements of operations for the three months ended March 31, 1998
and 1997 and the condensed consolidated statements of cash flows for the three
months ended March 31, 1998 and 1997 have been prepared without audit. In the
opinion of management, the unaudited financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's financial position at March 31, 1998, the results of its
operations for the three months ended March 31, 1998 and 1997 and its cash flows
for the three months ended March 31, 1998 and 1997. The condensed financial
statements should be read in conjunction with the audited financial statements
of Sync Research, Inc. and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997. The results of operations for
the three months ended March 31, 1998 are not necessarily indicative of the
operating results to be expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying financial
statements. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. CASH AND CASH EQUIVALENTS
The Company invests its excess cash in money market funds and short-term
debt instruments of U.S. corporations with strong credit ratings. The Company
has established guidelines with respect to the diversification and maturities
that maintain safety and liquidity. The Company considers all highly liquid
investments with an original maturity of three months or less and money market
funds to be cash equivalents.
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and consist of the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Equipment acquired under capital leases............................. $ 275 $ 275
Furniture and fixtures.............................................. 818 795
Computer equipment and software..................................... 6,698 6,326
Leasehold improvements.............................................. 1,103 1,084
----------- ------------
8,894 8,480
Accumulated depreciation and amortization........................... (4,774) (4,313)
----------- ------------
$ 4,120 $ 4,167
----------- ------------
----------- ------------
</TABLE>
6
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SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. INVENTORIES
Inventories consist primarily of computer hardware and components and are
stated at the lower of cost (first-in, first-out) or market, as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -------------
<S> <C> <C>
Raw materials....................................................... $ 3,381 $ 3,636
Work in process..................................................... 888 862
Finished goods...................................................... 2,987 2,873
----------- ------
$ 7,256 $ 7,371
----------- ------
----------- ------
</TABLE>
5. PER SHARE INFORMATION
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform with Statement No. 128.
Net loss per common share is computed using the weighted average number of
common shares and common share equivalents outstanding during the periods
presented. Common share equivalents result from the dilutive effect, if any, of
outstanding options and warrants to purchase common stock.
6. CREDIT AGREEMENT
Under the Company's unsecured credit agreement with a bank, the Company may
borrow an amount not to exceed $5,000,000 at the Bank's prime rate (8.5% at
March 31, 1998). The agreement expires on October 5, 1998. There was $1.5
million outstanding under this agreement as of March 31, 1998.
7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME
(Statement No. 130), which is effective for years beginning after December 15,
1997. Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components with the same prominence as other
financial statement information. The implementation of this statement did not
have a significant effect on the Company's reported results of operations or
financial position.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (Statement No. 131), which is effective for
years beginning after December 15, 1997. Statement No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers.
7
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
The Company operates in one business segment. Accordingly, the adoption of
this statement did not have a significant effect on the Company's financial
statements.
8. LITIGATION
On November 5, 1997, an action entitled Dalarne Partners, Ltd. v. Sync
Research, Inc., et al., No SACV97-877 AHS(Eex) was filed against the Company and
certain of its directors and officers. The action was filed in the U.S. District
Court for the Central District of California, Southern Division. The action
purports to be a class action lawsuit brought on behalf of purchasers of the
Company's common stock during the period from November 18, 1996 through March
20, 1997. The complaint asserts claims for violation of the Securities Exchange
Act of 1934. The complaint seeks to recover damages in an unspecified amount. No
trial date or other deadline has been established. The Company intends to defend
this lawsuit vigorously.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Part
I--Item 1 of this Quarterly Report. In addition, except for the historical
statements contained herein, the following discussion contains forward-looking
statements. The Company wishes to alert readers that the factors set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997,
and in the section of this Item 2 titled "Risk Factors," as well as other
factors that could in the future affect, and in the past have affected, the
Company's results. The Company's actual results for future periods could differ
materially from those expressed in any forward-looking statements made by or on
behalf of the Company. Readers are cautioned not to place undue reliance on
these forward-looking statements which reflect management's analysis only as of
the date hereof. The Company assumes no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
OVERVIEW
Sync commenced operations in 1981 and funded operations through 1988 with
revenue from communications software consulting and custom product development
for equipment vendors and large end-users. The Company shipped its first
commercial WAN product in 1989. In 1991, Sync released its first Conversion Node
and frame relay access products. The Company has historically emphasized 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.
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.
RESULTS OF OPERATIONS
NET REVENUES
The Company derives its revenues primarily from sales of advanced wide-area
networking products. Product revenues are recognized upon shipment and the
Company generally does not have any significant remaining obligations upon
shipment of its products. Product returns and sales allowances are provided for
at the date of sale. Service revenues from customer maintenance fees for ongoing
customer support and product updates are recognized ratably over the term of the
maintenance period, which is typically 12 months.
Net revenues for the first quarter of 1998 were $5.6 million, compared to
net revenues of $5.1 million for the quarter ended March 31, 1997. The increase
in net revenues in the first quarter of 1998 compared to the first quarter of
1997 was due primarily to increased sales of frame relay access products and
higher service revenues, partially offset by a reduction in sales of
transmission products.
9
<PAGE>
Net revenues by product group for the three months ended March 31, 1998 and
1997 were as follows ($ in thousands):
<TABLE>
<CAPTION>
1998 % 1997 %
--------- --- --------- ---
<S> <C> <C> <C> <C>
Frame relay access products.............................. $ 2,916 52% $ 1,600 31%
Circuit management products.............................. 752 13 939 19
Transmission products.................................... 617 11 1,260 25
Other.................................................... 1,325 24 1,283 25
--------- --- --------- ---
$ 5,610 100% $ 5,082 100%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
The increase in revenues from sales of frame relay access products was due
primarily to continued acceptance of the Company's 3600 frame relay access
device product line that was released in the first quarter of 1997. The decline
in revenues from sales of transmission products was due primarily to continued
uncertainties created as a result of the recent Asian currency crisis and the
increase in other revenue was due primarily to increased maintenance and
installation revenue, partially offset by lower sales of the Company's older
products.
The percentage of net revenues represented by sales through channel partners
and other resellers declined to 65.4% in 1998 from 80.7% in 1997. The Company
expects that average selling prices may 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 to channel partners and
other resellers may change from period to period.
International sales represented approximately 6.5% of the Company's total
sales during the three months ended March 31, 1998 as compared to 19.1% during
the three months ended March 31, 1997. The decline was due to continued
sluggishness in the Company's sales to the Pacific Rim as a result of the
current Asian currency crisis. The near-term outlook on the Company's sales to
the Pacific Rim remains uncertain.
GROSS PROFIT
Cost of sales primarily consists of purchased materials used in the assembly
of the Company's products, fees paid to third party subcontractors for
installation and maintenance services, and compensation paid to employees in the
Company's manufacturing and service organizations.
Gross profit increased to $1.7 million for the three months ended March 31,
1998 from $1.6 million in the corresponding prior year period. Gross profit as a
percentage of net revenues decreased to 31.0% for the three months ended March
31, 1998, as compared to 31.7% for the three months ended March 31, 1997. The
decrease in margin in the first quarter of 1998 as compared to the first quarter
of 1997 was due primarily to 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 and costs of materials utilized in the
development of hardware products, including prototype units and the depreciation
and amortization of equipment and tools utilized in the development process. It
is the Company's policy to expense all research and development costs as
incurred and to capitalize certain software development costs subsequent to the
establishment of technological feasibility. To date, no significant costs have
been capitalized. Research and development expenses decreased to $1.7 million
for the first quarter of 1998, as compared to $2.2 million for the first quarter
of the prior year. The decrease in expenses in the first quarter of 1998 was
primarily due to the Company's 1997 cost reduction programs.
10
<PAGE>
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 $2.8 million for the quarter ended March 31,
1998, as compared to $4.2 million in the quarter ended March 31, 1997. The
decrease in 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 administrative personnel, payments to consultants, professional services and
costs related to public company activities. General and administrative
expenditures decreased to $642,000 for the three months ended March 31, 1998, as
compared to $1.3 million for the three months ended March 31, 1997. The expenses
were lower in the 1998 period because of the Company's cost reduction programs
in 1997.
Severance and facility rationalization costs include expenses related to the
reduction in employees and the elimination or reduction of certain lease
obligations undertaken at the end of March 1997 and similar costs related to
Company's expense reduction efforts undertaken at the end of September 1997.
Net interest income was $255,000 for the three months ended March 31, 1998
as compared to $443,000 for the three months ended March 31, 1997. The decrease
in net interest income was primarily due to the Company's lower cash balances
resulting from the utilization of cash to fund the Company's operating
activities.
INCOME TAXES
There was no provision for income tax in 1997. The provision for income
taxes in 1998 represents minimum state taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's principal sources of liquidity consisted
of $19.5 million of cash and cash equivalents and a $5 million unsecured bank
line of credit which expires in October 1998. As of March 31, 1998, $1.5 million
was outstanding and $3.5 million was available under the line of credit. During
the three months ended March 31, 1998, cash utilized by operating activities was
$3.4 million, compared to $4.3 million for the three months ended March 31,
1997. Capital expenditures during the first three months of 1998, consisting
primarily of computer hardware and software purchases, were $414,000, compared
to $820,000 for the same period of 1997.
The Company believes that its available cash and cash equivalents will be
sufficient to meet its working capital requirements at least through 1998.
YEAR 2000 COMPLIANCE
The Company believes that its management information systems and
substantially all of its products are Year 2000 compliant or tolerant and that
the Year 2000 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 with 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.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that, except for the historical information contained
therein, the previous discussion under "Results of Operations", "Liquidity
11
<PAGE>
and Capital Resources" and "Year 2000 Compliance" constitutes forward-looking
statements that are dependent on certain risks and uncertainties which may cause
actual results to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. The following is a description
of certain of the major risks and uncertainties.
HISTORY OF LOSSES; SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS; UNCERTAIN
PROFITABILITY
The Company has experienced operating losses since inception, with, in
recent years, operating losses of $2.4 million in 1995, $11.7 million in 1996,
$18.0 million in 1997 and $3.2 million for the three months ended March 31,
1998. As of March 31, 1998, the Company had an accumulated deficit of
approximately $42.2 million. The Company has experienced, and may in the future
experience, significant fluctuations in revenues and operating results from
quarter to quarter and from year to year due to a combination of factors.
Factors that have in the past caused, or may in the future cause, the Company's
revenues and operating results to vary significantly from period to period
include: the timing of significant orders; the timing of customer implementation
plans; the relatively long length of the sales cycles for certain of the
Company's products; the market conditions in the networking industry; the timing
of capital expenditures by Sync's target market customers; competition and
pricing in the industry; the Company's success in developing, introducing and
shipping new products; new product introductions by the Company's competitors;
announcements by IBM relating to products, services or pricing relevant to the
Company; the rate of migration of large IBM customers to frame relay; production
or quality problems; changes in material costs; disruption in sources of supply;
changes in foreign currency exchange rates; and general economic conditions. In
addition, revenues and gross margins may fluctuate due to the mix of
distribution channels employed and the mix of products or services sold. For
example, the Company generally realizes a higher gross margin on direct sales
than on sales through its channel partners and other resellers. Accordingly, as
channel partners and other resellers continue to account for a 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. Significant portions of
the Company's expenses are relatively fixed in advance, based in large part on
the Company's forecasts of future sales. If sales are below expectations in any
given period, the adverse effect of a shortfall in sales on the Company's
operating results may be magnified by the Company's inability to adjust spending
to compensate for such shortfall. The Company has in the past and may in the
future reduce prices or increase spending to respond to competition or to pursue
new product or market opportunities. Accordingly, there can be no assurance that
the Company will be able to attain or sustain profitability on a quarterly or an
annual basis. In addition, if the Company's operating results fall below the
expectations of public market analysts and investors, the price of the Company's
common stock would likely be materially and adversely affected.
UNCERTAIN MARKET ACCEPTANCE OF FRAME RELAY FOR MISSION-CRITICAL APPLICATIONS
The market for SNA-over-frame relay 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
12
<PAGE>
in part on their ability to educate end users about the benefits of the
Company's technology and convince end users to switch their mission-critical
applications to frame relay. In addition, broad acceptance of frame relay
services will also depend upon the tariffs for such services, which are
determined by carriers. If the tariff structure for dedicated leased lines
becomes more favorable relative to tariffs for a comparable network utilizing
frame relay, the market for frame relay networking products could be adversely
affected. There can be no assurance that the market will adopt frame relay for
mission-critical applications to any significant extent. The failure of such
adoption to occur could have a material adverse effect on the Company's
business, operating results and financial condition.
UNCERTAIN MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS; PRODUCT CONCENTRATION
The Company currently derives substantially all of its revenues from its
frame relay access, circuit management, transmission and other products and
expects that revenues from these products will continue to account for
substantially all of its revenues for the foreseeable future. Broad market
acceptance of, and continuing demand for, these products, is, therefore,
critical to the Company's future success. Factors that may affect the market
acceptance of the Company's products include the extent to which frame relay
adopted for mission-critical applications, the availability and price of
competing products and technologies, announcements by IBM relating to products,
services or pricing relevant to the Company, the success of the sales efforts of
the Company and its resellers and tariff rates for carrier services. Moreover,
the Company's operating history in the WAN internetworking market and its
resources are limited relative to those of certain of its current and potential
competitors. The Company's future performance will also depend in part on the
successful development, introduction and market acceptance of new and enhanced
products. Failure of the Company's products to achieve market acceptance could
have a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON CHANNEL PARTNERS AND OTHER RESELLERS
The Company's channel partners and other resellers currently account, and
are expected to continue to account, for a majority of the Company's net
revenues. 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, Ameritech, MCI, Intermedia Communications
and PacBell and system 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, and prohibit distribution of certain
products by the Company through certain categories of third parties under
certain conditions. The agreements also specify that the channel partners and
certain other resellers will be provided manufacturing rights and access to
certain of the Company's source code upon the occurrence of specified conditions
or defaults.
Certain of the Company's channel partners offer alternative solutions,
designed by themselves or third parties, for SNA internetworking or have
pre-existing relationships with current or potential competitors of the Company.
Certain of the Company's channel partners have in the past developed competitive
products and terminated their relationships with the Company, and such
developments could occur in the future. Many of the Company's resellers offer
competitive products manufactured either by third parties or by themselves. For
example, NET and Racal, which accounted for, respectively, 6.6% and 4.4% of the
Company's net revenues in 1996, have developed competitive products and product
strategies and accordingly, did not account for a significant portion of 1997
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
amount of revenues derived from sales to 3Com will likely decline as competitive
products impact the conversion product business.
13
<PAGE>
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 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.
14
<PAGE>
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 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.
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 an arrangement 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
attempts to identify a replacement manufacturer. Such an event could have a
material adverse effect on the Company's business, operating results and
financial condition.
15
<PAGE>
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.
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
6.5%, 19.1%, 12.7% and 10.7% of the Company's net revenues in the three months
ended March 31, 1998 and in fiscal years 1997, 1996 and 1995, respectively.
However, these percentages may understate sales of the Company's products to
international end users because certain of the Company's U.S.-based channel
partners market the Company's products abroad. The Company currently anticipates
that international sales may continue to account for a significant percentage of
the Company's net revenues in future periods. However, as a result of the recent
Asian currency crisis, the Company experienced project delays and order
cancellations during the fourth quarter of 1997 and has continued to experience
sluggishness in it sales to the Pacific Rim during the first quarter of 1998.
Sales to the Pacific Rim during the first quarter of 1998 represented 6.5% of
the Company's net revenue for such period.
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,
16
<PAGE>
currency exchange fluctuations, political instability, trade restrictions and
changes in tariffs. In addition, sales in Europe and certain other parts of the
world typically are adversely affected in the third quarter of each year as many
customers and end users reduce their business activities during the summer
months. These international factors could have a material adverse effect on
future sales of the Company's products to international end users and,
consequently, the Company's business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's future success depends, in part, upon its proprietary
technology. The Company does not hold any patents and currently relies on a
combination of contractual rights, trade secrets and copyright laws to establish
and protect its proprietary rights in its products. There can be no assurance
that the steps taken by the Company to protect its intellectual property will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. In the event that protective
measures are not successful, the Company's business, operating results and
financial condition could be materially and adversely affected. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States. The Company is also
subject to the risk of adverse claims and litigation alleging infringement of
intellectual property rights of others. There can be no assurance that third
parties will not assert infringement claims in the future with respect to the
Company's current or future products or that any such claims will not require
the Company to enter into license arrangements or result in litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms. Should litigation with respect to any
such claims commence, such litigation could be extremely expensive and
time-consuming and could have a material adverse effect on the Company's
business, operating results and financial condition regardless of the outcome of
such litigation.
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
17
<PAGE>
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
profitability at lower revenues. The loss of the services of these or any of the
Company's other key personnel or the failure to attract or retain qualified
personnel in the future could have a material adverse effect on the Company's
business, operating results or financial condition.
GENERAL ECONOMIC CONDITIONS
Demand for the Company's products depends in large part on the overall
demand for communications and networking products, which has in the past and may
in the future fluctuate significantly based on numerous factors, including
capital spending levels and general economic conditions. There can be no
assurance that the Company will not experience a decline in demand for its
products due to general economic conditions. Any such decline could have a
material adverse effect on the Company's business, operating results and
financial condition.
VOLATILITY OF STOCK PRICE
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.
18
<PAGE>
SYNC RESEARCH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 5, 1997, an action entitled Dalarne Partners, Ltd. v. Sync
Research, Inc., et al., No. SACV97-877 AHS(EEx) was filed against the Company
and certain of its directors and officers. The action was filed in the U.S.
District Court for the Central District of California, Southern Division. The
action purports to be a class action lawsuit brought on behalf of purchasers of
the Company's common stock during the period from November 18, 1996 through
March 20, 1997. The complaint asserts claims for violation of the Securities
Exchange Act of 1934. The complaint seeks to recover damages in an unspecified
amount. No trial date or other deadline has been established. The Company
intends to defend this lawsuit vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) USE OF PROCEEDS
In connection with its initial public offering in 1995, the Company filed a
Registration Statement on Form S-1, SEC File No. 33-96910 (the "REGISTRATION
STATEMENT"), which was declared effective by the Commission on November 8, 1995.
Pursuant to the Registration Statement, the Company registered and sold
2,585,000 shares of its Common Stock, $0.001 par value per share, for its own
account. The offering was completed on November 9, 1995. The aggregate offering
price of the registered shares was $51,700,000. The managing underwriters of the
offering were BancAmerica Robertson, Stephens (formerly Robertson, Stephens &
Company), BT Alex. Brown (formerly Alex. Brown & Sons Incorporated) and Dain
Rauscher Wessels (formerly Wessels, Arnold & Henderson). From November 9, 1995
to March 31, 1998, the Company incurred the following expenses in connection
with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions.......................... $3,619,000
Other expenses.................................................. 912,471
---------
Total Expenses.............................................. $4,531,471
---------
---------
</TABLE>
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total expenses
above were $47,168,529. From November 9, 1995 to March 31, 1998, the Company
used such net offering proceeds, in direct or indirect payments to others, as
follows:
<TABLE>
<S> <C>
Construction of plant, building and facilities................. $ 848,138
Purchase and installment of machinery and equipment............ 3,375,073
Acquisition of other business(es).............................. 5,338,000
Working capital................................................ 3,482,486
Operating losses............................................... 25,921,543
----------
Total...................................................... $38,965,240(1)
----------
----------
</TABLE>
- ------------------------
(1) Excludes operating losses, capital expenditures and working capital changes
of Tylink Corporation ("Tylink") prior to the Company's acquisition of
Tylink in August 1996.
19
<PAGE>
In addition, the Company used aggregate proceeds of $316,292 to make
departing payments to departing officers. This use of proceeds does not
represent a material change in the use of proceeds described in the prospectus
of the Registration Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.27 1996 Non-Executive Stock Option Plan.
27.1 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended March 31,
1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SYNC RESEARCH, INC.
Date: May 15, 1998 By: /s/ WILLIAM K. GUERRY
-----------------------------------------
William K. Guerry
VICE PRESIDENT OF FINANCE AND
ADMINISTRATION
AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED SIGNATORY AND PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
21
<PAGE>
Exhibit 10.27
SYNC RESEARCH, INC.
1996 NON-EXECUTIVE STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to the Employees
and Consultants of the Company and to promote the success of the Company's
business. Options granted hereunder shall be Nonstatutory Stock Options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" shall mean the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "AFFILIATE" shall mean an entity other than a Subsidiary (as
defined below) in which the Company owns an equity interest.
(c) "APPLICABLE LAWS" shall have the meaning set forth in Section
4(a) below.
(d) "BOARD" shall mean the Board of Directors of the Company.
(e) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
(f) "COMMITTEE" shall mean the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan, if one is appointed.
(g) "COMMON STOCK" shall mean the Common Stock of the Company.
(h) "COMPANY" shall mean Sync Research, Inc., a Delaware
corporation.
(i) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, provided that the term Consultant shall not
include Directors or Officers.
(j) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" shall mean
the absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any
other leave of absence approved by the Administrator; PROVIDED that such
leave is for a period of not more than 90 days or reemployment upon the
expiration of such leave is guaranteed by contract or statute. For purposes
of this Plan, a change in status from an Employee to a Consultant or from a
Consultant to an Employee will not constitute a termination of employment.
(k) "DIRECTOR" shall mean a member of the Board.
<PAGE>
(l) "EMPLOYEE" shall mean any person (excluding any Officer or
Director) employed by the Company or any Parent, Subsidiary or Affiliate of
the Company. Notwithstanding the foregoing, an Officer who was not
previously employed by the Company and for whom an Option grant is an
inducement essential to the Officer's entering into an employment
relationship or contract with the Company shall be treated as an Employee for
purposes of the Option grant made to the Officer in connection with
commencement of the Officer's employment with the Company.
(m) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock as quoted on such system on the date of
determination (if for a given day no sales were reported, the closing bid on
that day shall be used), as such price is reported in The Wall Street Journal
or such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the bid and asked prices for the Common Stock or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "NONSTATUTORY STOCK OPTION" shall mean an Option not intended
to qualify as an Incentive Stock Option, as designated in the applicable
written option agreement.
(p) "OFFICER" shall mean a person who is appointed or elected by
the Board of Directors as an officer of the Company, including but not
limited to a person who is an officer of the Company within the meaning of
Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder.
(q) "OPTION" shall mean a stock option granted pursuant to the
Plan.
(r) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(s) "OPTIONEE" shall mean an Employee or Consultant who receives
an Option.
-2-
<PAGE>
(t) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(u) "PLAN" shall mean this 1996 Non-Executive Stock Option Plan.
(v) "RULE 16h-3" shall mean Rule 16b-3 promulgated under the
Exchange Act as the same may be amended from time to time, or any successor
provision.
(w) "SHARE" shall mean a share of the Common Stock, as adjusted in
accordance with Section 14 of the Plan.
(x) "SUBSIDIARY" shall mean a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14
of the Plan, the maximum aggregate number of shares that may be optioned and
sold under the Plan is 1,880,219 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares that were
subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan. Notwithstanding any other
provision of the Plan, shares issued under the Plan and later repurchased by
the Company shall not become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) COMPOSITION OF ADMINISTRATOR. With respect to grants of
Options to Employees or Consultants, the Plan shall be administered by (A)
the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws. If a
Committee has been appointed pursuant to this Section 4(a), such Committee
shall continue to serve in its designated capacity until otherwise directed
by the Board. From time to time the Board may increase the size of any
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill
vacancies (however caused) and remove all members of a Committee and
thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(m) of the Plan;
(ii) to select the Employees and Consultants to whom Options
may from time to time be granted hereunder;
-3-
<PAGE>
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but
not limited to, the share price and any restriction or limitation, or any
vesting acceleration or waiver of forfeiture restrictions regarding any
Option and/or the shares of Common Stock relating thereto, based in each case
on such factors as the Administrator shall determine, in its sole discretion);
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options may be
granted to Employees and Consultants. An Employee or Consultant who has been
granted an Option may, if he or she is otherwise eligible, be granted an
additional Option or Options.
(b) TYPE OF OPTION. Each Option shall be designated in the
written option agreement as a Nonstatutory Stock Option.
(c) NO EMPLOYMENT RIGHTS. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or
her right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 20 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 16 of the
Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated
in the Option Agreement. However, in the case of an Option granted to an
Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be
-4-
<PAGE>
five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as
provided in this Plan, the maximum number of Shares which may be subject to
options granted to any one Employee under this Plan for any fiscal year of
the Company shall be 50,000.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per Share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be such price as is
determined by the Administrator, provided, however, that the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share
on the date of grant. Notwithstanding anything to the contrary in the
immediately preceding sentence, in the case of an Option granted on or after
the effective date of registration of any class of equity security of the
Company pursuant to Section 12 of the Exchange Act and prior to six months
after the termination of such registration, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(b) PERMISSIBLE CONSIDERATION. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator and may consist entirely of
(1) cash, (2) check, (3) other Shares that (x) in the case of Shares acquired
upon exercise of an Option either have been owned by the Optionee for more
than six months on the date of surrender or were not acquired, directly or
indirectly, from the Company, and (y) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised, (4) authorization from the Company to retain
from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to
the exercise price for the total number of Shares as to which the Option is
exercised, (5) delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price, (7) a
combination of any of the foregoing methods of payment, (8) a combination of
any of the foregoing methods of payment at least equal in value to the stated
capital represented by the Shares to be issued, plus a promissory note for
the balance of the exercise price, or (9) such other consideration and method
of payment for the issuance of Shares to the extent permitted under
Applicable Laws. In making its determination as to the type of consideration
to accept, the Administrator shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance criteria
with respect to the Company and/or the Optionee, and as shall be permissible
under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
-5-
<PAGE>
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may, as authorized by the Administrator, consist
of any consideration and method of payment allowable under Section 9(b) of
the Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company)
of the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to
the Optioned Stock, notwithstanding the exercise of the Option. The Company
shall issue (or cause to be issued) such stock certificate promptly upon
exercise of the Option. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the stock certificate is
issued, except as provided in Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant, such Optionee may, but only within thirty (30) days or such other
period of time, not exceeding six (6) months in the case of a Nonstatutory
Stock Option, as is determined by the Administrator, after the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his or her Option
to the extent that he or she was entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise
the Option at the date of such termination, or if the Optionee does not
exercise such Option (which he or she was entitled to exercise) within the
time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 10(b) above,
in the event of termination of an Optionee's Continuous Status as an Employee
or Consultant as a result of his or her total and permanent disability (as
defined in Section 22(e)(3) of the Code), he or she may, but only within six
(6) months (or such other period of time not exceeding twelve (12) months as
is determined by the Administrator, from the date of such termination (but in
no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), exercise his or her Option to the extent he
or she was entitled to exercise it at the date of such termination. To the
extent that he or she was not entitled to exercise the Option at the date of
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his
death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months (or
such other period of time, not exceeding twelve (12) months,
-6-
<PAGE>
as is determined by the Administrator) following the date of death (but in no
event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance but only
to the extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status as an Employee or
Consultant three (3) months (or such other period of time as is determined by
the Administrator as provided above) after the date of death, subject to the
limitation set forth in Section 5(b); or
(ii) within thirty (30) days (or such other period of time
not exceeding three (3) months as is determined by the Administrator) after
the termination of Continuous Status as an Employee or Consultant, the Option
may be exercised, at any time within six (6) months following the date of
death (but in no event later than the date of expiration of the term of such
Option as set forth in the Option Agreement), by the Optionee's estate or by
a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that had accrued
at the date of termination.
11. WITHHOLDING TAXES. As a condition to the exercise of Options
granted hereunder, the Optionee shall make such arrangements as the
Administrator may require for the satisfaction of any federal, state, local
or foreign withholding tax obligations that may arise in connection with the
exercise, receipt or vesting of such Option. The Company shall not be
required to issue any Shares under the Plan until such obligations are
satisfied.
12. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding
obligations as provided in this paragraph. When an Optionee incurs tax
liability in connection with an Option which tax liability is subject to tax
withholding under applicable tax laws, and the Optionee is obligated to pay
the Company an amount required to be withheld under applicable tax laws, the
Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, or (c) if permitted by the Administrator, in
its discretion, by surrendering to the Company Shares that (i) in the case of
Shares previously acquired from the Company, have been owned by the Optionee
for more than six months on the date of surrender, and (ii) have a fair
market value on the date of surrender equal to or less than Optionee's
marginal tax rate times the ordinary income recognized, or (d) by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option that number of Shares having a fair market value equal to the amount
required to be withheld. For this purpose, the fair market value of the
Shares to be withheld shall be determined on the date that the amount of tax
to be withheld is to be determined (the "TAX DATE").
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
-7-
<PAGE>
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval
of the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but
such Optionee shall be unconditionally obligated to tender back to the
Company the proper number of Shares on the Tax Date.
13. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution; PROVIDED that
the Administrator may in its discretion grant transferable Nonstatutory Stock
Options pursuant to option agreements specifying (i) the manner in which such
Nonstatutory Stock Options are transferable and (ii) that any such transfer
shall be subject to the Applicable Laws. The designation of a beneficiary by
an Optionee will not constitute a transfer. An Option may be exercised,
during the lifetime of the Optionee, only by the Optionee or a transferee
permitted by this Section 13.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, the maximum number of shares of Common Stock for
which Options may be granted to any employee under Section 8 of the Plan, and
the price per share of Common Stock covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number
of issued shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock,
or any other increase or decrease in the number of issued shares of Common
Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall
not be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number or
price of shares of Common Stock subject to an Option.
(b) CORPORATE TRANSACTIONS. In the event of the proposed
dissolution or liquidation of the Company, the Option will terminate
immediately prior to the consummation of such proposed action, unless
otherwise provided by the Administrator. The Administrator may, in the
exercise of its sole discretion in such instances, declare that any Option
shall terminate as
-8-
<PAGE>
of a date fixed by the Administrator and give each Optionee the right to
exercise his or her Option as to all or any part of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable.
In the event of a proposed sale of all or substantially all of the assets of
the Company, or the merger of the Company with or into another corporation,
the Option shall be assumed or an equivalent option shall be substituted by
such successor corporation or a parent or subsidiary of such successor
corporation, unless the Administrator determines, in the exercise of its sole
discretion and in lieu of such assumption or substitution, that the Optionee
shall have the right to exercise the Option as to some or all of the Optioned
Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Administrator makes an Option exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option shall be exercisable
for a period of fifteen (15) days from the date of such notice, and the
Option will terminate upon the expiration of such period.
15. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the
determination granting such Option or such other date as is determined by the
Administrator. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
16. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval
of the stockholders of the Company in the manner described in Section 20 of
the Plan:
(i) any change in the designation of the class of persons
eligible to be granted Options; or
(ii) any change in the limitation on grants to employees as
described in Section 8 of the Plan or other changes which would require
stockholder approval to qualify options granted hereunder as
performance-based compensation under Section 162(m) of the Code.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee
and the Board, which agreement must be in writing and signed by the Optionee
and the Company.
17. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may
-9-
<PAGE>
then be listed, and shall be further subject to the approval of counsel for
the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required by any of the aforementioned relevant provisions of law.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company's counsel to be necessary to the
lawful issuance and sale of any Shares hereunder, shall relieve the Company
of any liability in respect of the failure to issue or sell such Shares as to
which such requisite authority shall not have been obtained.
19. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF THE COMPANY FOR THE THREE MONTHS ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,469
<SECURITIES> 0
<RECEIVABLES> 5,240
<ALLOWANCES> (386)
<INVENTORY> 7,256
<CURRENT-ASSETS> 32,470
<PP&E> 8,894
<DEPRECIATION> (4,774)
<TOTAL-ASSETS> 36,637
<CURRENT-LIABILITIES> 6,863
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 29,665
<TOTAL-LIABILITY-AND-EQUITY> 36,637
<SALES> 5,610
<TOTAL-REVENUES> 5,610
<CGS> 3,871
<TOTAL-COSTS> 3,871
<OTHER-EXPENSES> 5,215
<LOSS-PROVISION> 104
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> (3,221)
<INCOME-TAX> 2
<INCOME-CONTINUING> (3,223)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,223)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
