<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-26952
----------------------
SYNC RESEARCH, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0676350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 PARKER
IRVINE, CA 92618
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 588-2070
----------------------
Indicate by check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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, 1999, 17,498,258 shares of the Registrant's Common Stock were
issued and outstanding.
<PAGE>
SYNC RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information.......................................................................... 3
Item 1. a) Condensed consolidated balance sheets at March 31, 1999 (unaudited) and December 31,
1998................................................................................... 3
b) Condensed consolidated statements of operations (unaudited) for the three months ended
March 31, 1999 and 1998................................................................ 4
c) Condensed consolidated statements of cash flows (unaudited) for the three months ended
March 31, 1999 and 1998................................................................ 5
d) Notes to condensed consolidated financial statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........
8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 18
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,
1999 1998
------- -------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $10,683 $14,135
Accounts and other receivables, net...................................................... 4,070 2,443
Inventories.............................................................................. 5,699 6,111
Prepaid expenses and other current assets................................................ 664 808
------- -------
Total current assets........................................................................ 21,116 23,497
Furniture, fixtures and equipment, net...................................................... 2,787 3,247
Other assets................................................................................ 47 47
------- -------
Total assets................................................................................ $23,950 $26,791
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 2,342 $ 3,138
Accrued compensation and related costs................................................... 1,047 956
Accrued severance and restructuring costs................................................ 1,536 1,976
Deferred revenue......................................................................... 2,059 2,063
Other accrued liabilities................................................................ 977 975
Current maturities of capitalized lease obligations...................................... 53 52
------- -------
Total current liabilities............................................................. 8,014 9,160
Capitalized lease obligations, less current maturities...................................... 42 60
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares-2,000
Issued and outstanding shares-none..................................................... - -
Common stock, $.001 par value:
Authorized shares-50,000
Issued and outstanding shares-17,580 at March 31, 1999
and 17,458 at December 31, 1998....................................................... 17 17
Additional paid-in capital............................................................... 72,009 71,958
Deferred compensation.................................................................... - (7)
Accumulated deficit...................................................................... (56,132) (54,397)
------- -------
Total stockholders' equity.................................................................. 15,894 17,571
------- -------
Total liabilities and stockholders' equity.................................................. $23,950 $26,791
------- -------
------- -------
</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,
-------------------------
1999 1998
------ ------
<S> <C> <C>
Net revenues................................................................... $5,106 $5,610
Cost of sales.................................................................. 2,851 3,871
------ ------
Gross profit................................................................ 2,255 1,739
Operating expenses:
Research and development.................................................... 1,715 1,741
Selling and marketing....................................................... 1,796 2,832
General and administrative.................................................. 614 642
------ ------
Total operating expenses.................................................... 4,125 5,215
------ ------
Operating loss................................................................. (1,870) (3,476)
Interest income, net........................................................... 135 255
------ ------
Loss before income taxes....................................................... (1,735) (3,221)
Provision for income taxes..................................................... - 2
------ ------
Net loss....................................................................... $ (1,735) $(3,223)
------ ------
------ ------
Basic and diluted net loss per share........................................... $ (0.10) $ (0.19)
------ ------
------ ------
Shares used in computing net loss per share.................................... 17,525 17,336
------ ------
------ ------
</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,
--------------------------
1999 1998
------- -------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss.................................................................................. $(1,735) $(3,223)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................................... 447 461
Provision for losses on accounts receivable............................................ 53 104
Deferred compensation expense.......................................................... 7 7
Changes in operating assets and liabilities, net:
Accounts and other receivables......................................................... (1,680) (301)
Inventories............................................................................ 412 115
Prepaid expenses and other current assets.............................................. 144 (369)
Accounts payable and accrued liabilities............................................... (794) 264
Accrued severance and restructuring.................................................... (440) (212)
Accrued compensation and related costs................................................. 91 (161)
Deferred revenue....................................................................... (4) (98)
------- -------
Net cash used in operating activities........................................................ (3,499) (3,413)
INVESTING ACTIVITIES
Sales (purchases) of furniture, fixtures and equipment, net............................... 13 (414)
FINANCING ACTIVITIES
Net borrowings under credit agreements.................................................... - 1,500
Payments on capitalized lease obligations................................................. (17) (18)
Proceeds from common stock options exercised and employee stock
purchase plan............................................................................. 51 80
------- -------
Net cash provided by financing activities.................................................... 34 1,562
------- -------
Net decrease in cash and cash equivalents.................................................... (3,452) (2,265)
Cash and cash equivalents at beginning of period............................................. 14,135 21,734
------- -------
Cash and cash equivalents at end of period................................................... $10,683 $19,469
------- -------
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................................. $ 2 $ 11
------- -------
------- -------
Income taxes paid......................................................................... $ 14 $ 21
------- -------
------- -------
</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, 1999, the
condensed consolidated statements of operations for the three months ended March
31, 1999 and 1998 and the condensed consolidated statements of cash flows for
the three months ended March 31, 1999 and 1998 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, 1999, the results of its
operations for the three months ended March 31, 1999 and 1998 and its cash flows
for the three months ended March 31, 1999 and 1998. The condensed consolidated
financial statements should be read in conjunction with the audited financial
statements of Sync Research, Inc. and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. The results of
operations for the three months ended March 31, 1999 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,
1999 1998
------- -------
<S> <C> <C>
Equipment acquired under capital leases................................... $ 275 $ 275
Furniture and fixtures.................................................... 848 848
Computer equipment and software........................................... 7,449 7,462
Leasehold improvements.................................................... 1,109 1,109
------- -------
9,681 9,694
Accumulated depreciation and amortization................................. (6,894) (6,447)
------- -------
$ 2,787 $ 3,247
------- -------
------- -------
</TABLE>
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,
1999 1998
--------- --------
<S> <C> <C>
Raw materials............................................................. $ 2,512 $ 2,983
Work in process........................................................... 539 752
Finished goods............................................................ 2,648 2,376
--------- --------
6
<PAGE>
$ 5,699 $ 6,111
--------- --------
--------- --------
</TABLE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. PER SHARE INFORMATION
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
In April 1999, the Company entered into a new $3,000,000 credit
agreement with a bank. Outstanding borrowings under this credit agreement will
be secured by substantially all of the Company's assets and subject to an
interest rate equal to the Bank's prime rate plus one half percent on amounts
outstanding. The agreement is expected to expire in April 2000. There were no
borrowings outstanding as of March 31, 1999.
7. LITIGATION
On November 5, 1997, an action entitled Dalarne Partners, Ltd. Vs.
Sync Research, Inc., et al., No. SACV97-877 AHS(Eex) was filed against the
Company and certain of its directors and officers. The action was filed in
the U.S. District Court for the Central District of California, Southern
Division. The action purported 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 asserted claims for violation
of the Securities Exchange Act of 1934. On February 16, 1999, the U.S.
District Court issued an order granting the Company's motion to dismiss the
first amended complaint. The plaintiffs filed a second amended complaint on
March 22, 1999. The Company and the other defendents have moved to dismiss
the second amended complaint which currently is scheduled for hearing on June
28, 1999. The complaint seeks to recover damages in an unspecified amount.
The Company intends to defend this lawsuit vigorously.
7
<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. Except for the historical information
contained herein, the matters discussed in this document are forward-looking
statements. The Company wishes to alert readers that the factors set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
and in the section of this Item 2 titled "Additional Factors That May Affect
Future Results," 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 has
developed and sells frame relay access devices (FRADs), circuit management
probe products and digital transmission devices. The Company follows a
leveraged sales strategy utilizing resellers, distributors, original
equipment manufacturer (OEM) partners and carriers as delivery channels for
its products. Current partners include PacBell, Sprint, MCI, Intermedia
Communications, Electronic Data Systems, Diebold and Wang Global. The Company
has also sold its products through OEM relationships with IBM and 3Com among
others. The agreement between IBM and Sync expired in March 1999. 3Com has
discontinued its support for the Company's products. Accordingly, the Company
believes that revenue derived from sales to IBM and 3Com will decline in the
future and represent a small percentage of its total revenue.
In 1998 and 1997, the Company implemented various expense reduction
programs with the goal of enabling the Company to achieve profitability at lower
revenue levels. However, there can be no assurance that its efforts to implement
expense reductions will enable it to become profitable at lower revenue levels,
if at all. Also, there can be no assurance that the Company'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.
RESULTS OF OPERATIONS
NET REVENUES
The Company derives its revenues primarily from sales of advanced
wide-area networking products, which are recognized upon shipment. The Company
generally does not have any 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 1999 were $5.1 million,
compared to net revenues of $5.6 million for the quarter ended March 31,
1998. The decrease in net revenues in the first quarter of 1999 compared to
the first quarter of 1998 was due primarily to decreased sales of frame relay
access products, circuit management and transmission products partially
offset by increases in other revenues, primarily service fees. Sales to IBM
were $0.1 million or 2.0% of the Company's total revenues for the three
months ended March 31, 1999, and $0.8 million or 14.3% of the Company's total
revenues for the three months ended March 31, 1998. The agreement between IBM
and the Company expired in March 1999. During the first quarter of 1999, two
end-user customers represented 22.1% and 11.9% of the Company's total
revenues. During the first quarter of 1998, one end-user customer represented
11.4% of the Company's total revenues.
8
<PAGE>
Net revenues by product group for the three months ended March 31, 1999 and 1998
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 % 1998 %
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Frame relay access products................................... $2,427 48% $2,916 52%
Circuit management products................................... 509 10 752 13
Transmission products......................................... 349 7 617 11
Other......................................................... 1,821 35 1,325 24
---------- --------- ---------- ---------
$5,106 100% $5,610 100%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
The percentage of net revenues represented by sales through channel
partners and other resellers declined to 47.4% for the three months ended March
31, 1999 from 65.6% for the corresponding period in 1998, due primarily to
decreased revenue from sales to IBM. The sales mix of channel partners and other
resellers may change from period to period.
International sales represented 25.3% of the Company's total sales
during the three months ended March 31, 1999, as compared to 6.5% during the
three months ended March 31, 1998. The increase was due primarily to the
timing of one large European customer opportunity representing 15.8% of the
Company's total revenues. Domestic sales represented 74.7% and 93.5% of the
Company's total sales during the three months ended March 31, 1999 and 1998,
respectively. The decrease was due primarily to lower sales to IBM.
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 in the Company's
manufacturing and service employees.
Gross profit increased to $2.3 million for the three months ended March
31, 1999 as compared to $1.7 million in the corresponding prior year period.
Gross profit as a percentage of net revenues increased to 44.2% for the three
months ended March 31, 1999 as compared to 31.0% for the three months ended
March 31, 1998. The increase in margins during the first quarter of 1999
compared to the prior year period was primarily due to the higher percentage of
direct end-user sales in the first quarter of 1999 which tend to have higher
margins than sales through reseller channels, increased sales of higher
performance frame relay access products which have higher margins than other
products and lower manufacturing and service overhead costs realized from the
Company's recent expense reduction program.
OPERATING EXPENSES
Research and development expenses primarily consist of compensation
paid to personnel, including consultants, engaged in research and development
activities, amounts paid for outside development services and costs of
materials utilized in the development of hardware products, including product
prototypes 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 in accordance with Financial Accounting Standard No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE
MARKETED. To date, $380,000 of externally acquired software has been
capitalized. Research and development expenses totalled $1.7 million for the
first quarter of 1999 and 1998.
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 $1.8 million for the quarter ended March 31,
1999, as compared to $2.8 million in the quarter ended March 31, 1998. The
decrease in selling and marketing
9
<PAGE>
expenses resulted primarily from headcount reductions and other cost reduction
measures.
General and administrative expenses consist primarily of compensation
paid to corporate and administrative personnel, payments to consultants and
professional service providers, and public company related costs. General and
administrative expenditures decreased slightly to $614,000 for the quarter ended
March 31, 1999, as compared to $642,000 for the quarter ended March 31, 1998.
During the fourth quarter of fiscal 1998, the Company implemented
expense reduction programs to reduce its overall cost structure and, as a
result, recognized a $2.9 million non-recurring charge consisting of
severance and related headcount reduction costs, idle and excess facility
charges and write-offs of assets no longer in use due to the reduction
efforts. The components of the activity during the first quarter of 1999 were
as follows (in thousands):
<TABLE>
<CAPTION>
Description Accrual Accrual
- ----------- At 12/31/99 Charge Activity At 3/31/99
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Severance and related expenses..................... $ 854 $ - $(333) $ 521
Idle and excess facility charges
and write-off of assets......................... 1,110 - (107) 1,003
Other non-recurring charge........................ 12 - - 12
------------- ------------- ------------- -------------
Total.............................................. $1,976 $ - $(440) $1,536
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The Company expects all 1998 expense reduction program activities will
be substantially completed during fiscal 1999. The Company will continue to
evaluate and may adjust its organization and cost structure.
Net interest income was $135,000 for the three months ended March 31,
1999 as compared to $255,000 for the three months ended March 31, 1998. 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 has been no provision for income tax in 1999. The provision for
income taxes in 1998 represents minimum state taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's principal sources of liquidity
consisted of $10.7 million of cash and cash equivalents and a $3 million secured
bank line of credit which expires in April 2000. There were no borrowings
outstanding as of March 31, 1999.
During the three months ended March 31, 1999, cash utilized by
operating activities was $3.5 million, compared to $3.4 million in the
corresponding period in 1998. At March 31, 1999 the Company had no material
commitments for capital expenditures.
The Company believes that its available cash and cash equivalents will
be sufficient to meet its working capital requirements at least through 1999.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that, except for the historical information
contained therein, the previous discussion under "Results of Operations" and
"Liquidity and Capital Resources" constitutes forward-looking statements that
are dependent on certain risks and uncertainties which may cause actual results
to differ materially from those expressed in any forward-looking statements made
by or on behalf of the Company. The following is a description of certain major
risks and uncertainties.
HISTORY OF LOSSES; SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS; UNCERTAIN
PROFITABILITY
10
<PAGE>
The Company has experienced operating losses since inception, with, in
recent years, operating losses of, $11.6 million in 1996, $18.0 million in 1997
and $16.3 million in 1998 and $1.9 million for the three months ended March 31,
1999. As of March 31, 1999, the Company had an accumulated deficit of
approximately $56.1 million. The Company has experienced, and may in the future
experience, significant fluctuations in revenues and operating results from
quarter to quarter and from year to year due to a combination of factors.
Factors that have in the past caused, or may in the future cause, the Company's
revenues and operating results to vary significantly from period to period
include: the timing of significant orders; the relatively long length of the
sales cycles for certain of the Company's products; the market conditions in the
networking industry; the timing of capital expenditures by the Company'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; impact of Year 2000 compliance problems on the networking industry and
the Company's customers, disruption in sources of supply; changes in foreign
currency exchange rates; and general economic conditions. In addition, revenues
and gross margins may fluctuate due to the mix of distribution channels employed
and the mix of products sold. For example, the Company generally realizes a
higher gross margin on direct sales than on sales through its channel partners
and other resellers. Accordingly, if channel partners and other resellers
continue to account for a large percentage 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, 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 the Company'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 the Company's channel partners and other resellers
will continue to offer the Company's products. A significant portion of the
Company's expenses are relatively fixed in advance, based in large part on the
Company's forecasts of future sales. If sales are below expectations in any
given period, the adverse effect of a shortfall in sales on the Company's
operating results may be magnified by the Company's inability to adjust spending
to compensate for such shortfall. The Company has in the past and may in the
future reduce prices or increase spending to respond to competition or to pursue
new product or market opportunities. Accordingly, there can be no assurance that
the Company will be able to attain or sustain profitability on a quarterly or an
annual basis. In addition, if the Company's operating results fall below the
expectations of public market analysts and investors, the price of the Company's
common stock would likely be materially and adversely affected.
DEPENDENCE ON THE IBM CUSTOMER BASE
The Company's frame relay access products are targeted at the large
installed base of IBM customers utilizing SNA networks. Thus, the Company faces
the risks associated with a relatively concentrated customer base, including the
possibility that larger IBM customers may migrate to frame relay at a
slower-than-expected rate, if at all, and the possibility that IBM customers may
purchase IBM-sponsored frame relay products other than Sync products or other
suppliers' products. IBM has sold the Company's FrameNode(R) product family
under the name IBM Nways 2218. The agreement between IBM and the Company expired
in March 1999. Sales to IBM respectively accounted for 2.0%, 14.1%, 16.5% and
4.9% of the Company's net revenues in the first quarter of 1999 and fiscal years
1998, 1997 and 1996, respectively, and are expected to decline further in 1999.
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, or that IBM will not endorse the products of competitors
or networking solutions not offered by the Company. Any of these events could
have a material adverse effect on the Company's business, operating results and
financial condition.
UNCERTAIN MARKET ACCEPTANCE OF FRAME RELAY FOR MISSION-CRITICAL APPLICATIONS
11
<PAGE>
During the first quarter of 1999 and for the fiscal year 1998, sales of
frame relay access products, which enable systems network architecture (SNA) and
client/server internet-working over frame relay, represented approximately 48%
and 49%, respectively, of the Company's net revenues. The market for
SNA-over-frame relay products is relatively new and still evolving. The success
of the Company and its channel partners in generating significant sales of frame
relay access products will depend in part on their ability to educate end users
about the benefits of the Company's technology and convince end users to switch
their mission-critical applications to frame relay. In addition, broad
acceptance of frame relay services will also depend upon the tariffs for such
services, which are determined by carriers. If the tariff structure for
dedicated leased lines becomes more favorable relative to tariffs for a
comparable network utilizing frame relay, the market for frame relay networking
products could be adversely affected. There can be no assurance that the market
will adopt frame relay for mission-critical applications to any significant
extent. The failure of such adoption to occur could have a material adverse
effect on the Company's business, operating results and financial condition.
UNCERTAIN MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS; PRODUCT CONCENTRATION
The Company currently derives substantially all of its revenues from
its frame relay access, circuit management, transmission and other products and
expects that revenues from these products will continue to account for
substantially all of its revenues for the foreseeable future. Broad market
acceptance of, and continuing demand for, these products, is, therefore,
critical to the Company's future success. Factors that may affect the market
acceptance of the Company's products include the extent to which frame relay is
adopted for mission-critical applications, the availability and price of
competing products and technologies, announcements by IBM relating to products,
services or pricing relevant to the Company, the success of the sales efforts of
the Company and its resellers and tariff rates for carrier services. Moreover,
the Company's operating history in the WAN internetworking market and its
resources are limited relative to those of certain of its current and potential
competitors. The Company's future performance will also depend in part on the
successful development, introduction and market acceptance of new and enhanced
products. Failure of the Company's products to achieve market acceptance could
have a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON CHANNEL PARTNERS AND OTHER RESELLERS
The Company's channel partners and other resellers account, and are
expected to continue to account, for a large percentage of the Company's net
revenues, including most of its sales outside of the United States. Sales
through channel partners and other resellers accounted for 47.4%, 62.5%, 67.0%
and 85.7% of net revenues of the Company for the first quarter of 1999 and
fiscal years 1998, 1997 and 1996, respectively. Current partners include
PacBell, Sprint, MCI, Intermedia Communications, Electronic Data Systems,
Diebold and Wang Global. The Company has also sold its products through OEM
relationships with IBM and 3Com among others. The agreement between IBM and Sync
expired in March 1999 and was not renewed. Sales to IBM accounted for 2.0%,
14.1%, 16.5% and 4.9% of the Company's net revenues for the first quarter of
1999 and for the fiscal years 1998, 1997 and 1996, respectively. Sales to 3Com
accounted for 7.7%, 2.6%, 6.5% and 19.2% of the Company's net revenues for the
first quarter of 1999 and fiscal years 1998, 1997 and 1996, respectively. 3Com
has discontinued its support for the Company's products. Accordingly, the
Company believes that revenue derived from sales to 3Com and IBM will decline in
the future and represent a small percentage of total revenue.
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.
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. In addition, these agreements
generally provide for discounts based on expected or actual volumes of products
purchased or resold by the reseller in a given period, do not require minimum
purchases, prohibit distribution of certain products by the Company through
certain categories of third parties under certain conditions and provide
manufacturing rights and access to source code upon the occurrence of specified
conditions or defaults.
Certain of the Company's channel partners offer alternative solutions,
designed by themselves or third parties, for SNA internetworking or have
pre-existing relationships with current or potential competitors of the Company.
Certain of the Company's channel partners have in the past developed competitive
products and terminated their relationships with the Company, and such
developments could occur in the future. Many of the Company's resellers offer
competitive products manufactured either by third parties or by themselves.
12
<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 significant
portion of the Company's net revenues, gross profit as a percentage of net
revenues may decline.
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 the
Company'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 and other resellers could have a material adverse effect on
the Company's business, operating results and financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer and telecommunications systems and
software products were not designed to consider the impact of moving into the
21st century. As a result, errors or system failures could result if these
systems and applications are not corrected or replaced prior to the year 2000.
The Company continues to evaluate the impact of the "Year 2000" issue upon its
products, support systems and overall business.
The Company has defined Year 2000 compliance using the British
Standards Institute (BSI) definition. The BSI DISC PD2000-1 definition provides
that Year 2000 compliance shall mean that neither product performance nor
functionality is affected by dates prior to, during and after the year 2000. The
Company has either internally or in collaboration with certain of its suppliers
and customers evaluated, tested and verified the Year 2000 compliance of its
latest product offerings. The Company believes that several of its discontinued
or earlier versions of its conversion and frame relay products are not Year 2000
compliant and the Company currently does not plan to update these products.
However, the Company offers for sale upgrade programs to its customers of most
of these non-compliant discontinued products. Certain of the Company's products
rely on date information from other devices resident in the networks in which
they operate. Thus, any Year 2000 problems within these third party networking
products could cause the Company's products not to work accurately or cause
disruption in their operation.
The Company relies on a number of computer systems and applications to
operate and monitor all major aspects of its business. The Company has evaluated
all of its business critical systems, internal information and non-information
systems, and most of its non-critical systems through inquiries with the
respective manufacturers and testing or the completion of other verification
procedures. Substantially all of the Company's critical systems have been
verified to meet the Company's Year 2000 requirements and the Company's
non-critical systems are expected to be made fully compliant by December 31,
1999. The Company believes that several manufacturers of the Company's systems
have already updated their products to comply with the Year 2000 issue or will
make updates available by mid-1999, or relatively low cost alternative solutions
may be available. However, there can be no assurance that any such updates will
be completed on a timely basis, if at all, or at a reasonable cost, or that such
updates will work as anticipated in the year 2000.
The Company relies on third party suppliers for the management and
control of fabrication, assembly and testing of substantially all of the
Company's products. The Company is currently in the process of making inquiries
regarding Year 2000 compliance of all of its significant vendors and service
providers upon which it relies. The Company intends to establish contingency
plans to provide for alternative sources as necessary.
The Company has not incurred substantial costs to date to address the
Year 2000 issue and is unable to estimate the additional cost, if any, that may
arise from actions taken by the Company, if any, to address the Year 2000 issue
or from the interaction of the Company's products with other companies'
networking devices and systems. In addition, the Company is unable to assess the
potential risks and exposures associated with changes in generally accepted
definitions of Year 2000 compliance that may impact the compliance of its
13
<PAGE>
products. Any failure by the Company to make its products Year 2000 compliant
could result in a decrease in sales of the Company's products, diversion of
development resources, damage to the Company's reputation, increased service and
warranty costs and/or possible claims against the Company by customers as a
result of Year 2000 problems caused by the Company's products, any of which
could have a material adverse effect on the Company, its business, operating
results and financial condition.
Many of the Company's customers and prospective customers are expected
to devote a substantial portion of their information systems budgets to the Year
2000 problem over the next several years, and, as a result, spending may be
diverted from wide area networking solutions. In addition, the Company's
customers, which consists primarily of mid size to large enterprises operating
business critical applications over the wide area networks that are supported by
the Company's products, may be less willing to purchase wide area networking
products or otherwise implement new network solutions during the second half of
1999 in anticipation of the Year 2000. The Company relies on a large variety of
business enterprises such as customers, suppliers, creditors, financial
organizations, and domestic and international governmental entities, for the
accurate exchange of data. Any disruption in the computer systems of any of
these third parties could materially and adversely affect the Company. Due to
the Company's focus on the wide area networking market, which is vulnerable to
technological issues involving the Year 2000, substantially all of the Company's
revenues may be at risk. Despite the Company's efforts to address the Year 2000
impact on its products, internal systems and business operations, the Year 2000
issue may result in a material disruption of its business or have a material
adverse effect on the Company's business, financial condition or results of
operations.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new product
introductions. The Company's success will depend to a substantial degree upon
its ability to develop and introduce in a timely fashion enhancements to its
existing products and new products that meet changing customer requirements and
emerging industry standards. The development of new, technologically advanced
products is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. There
can be no assurance that the Company will be able to identify, develop,
manufacture, market or support new products successfully, that such new products
will gain market acceptance or that the Company will be able to respond
effectively to technological changes, emerging industry standards or product
announcements by competitors. In addition, the Company has on occasion
experienced delays in the introduction of product enhancements and new products.
There can be no assurance that in the future the Company will be able to
introduce product enhancements or new products on a timely basis. Further, from
time to time, the Company may announce new products, capabilities or
technologies that have the potential to replace 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 the
Company'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 Nortel; FRAD providers, such as Hypercom, Motorola ISG and
Cabletron; and circuit management and digital transmission providers such as
Visual Networks, Netscout, 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. Increased competition
could result in significant price competition, reduced profit margins or loss
of market share, any of which could have a material adverse effect on the
Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to compete successfully in the
future.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company's manufacturing operations consist primarily of materials
planning and procurement, light assembly, system integration, testing and
quality assurance. The Company entered into arrangements with contract
manufacturers 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 the
Company's ability to fulfill orders while the Company identifies a replacement
manufacturer. Such an event could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's manufacturing procedures may in certain instances create
a risk of excess or inadequate inventory if orders do not match forecasts. 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
15
<PAGE>
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 25.3%, 6.9%, 19.1% and 12.7% of the Company's net revenues for the
first quarter of 1999 and fiscal years 1998, 1997 and 1996, respectively.
However, these percentages may understate sales of the Company's products to
international end users because certain of the Company's U.S-based channel
partners market the Company's products abroad. The Company expects that
international sales may represent an important percentage of net revenues in
future periods. The near-term outlook on the Company's sales to the Pacific Rim,
which represented approximately 6.1% of the Company's net revenues for the first
quarter of 1999 and 3.7% of the Company's net revenues in 1998, remains
uncertain.
Historically, the Company's international sales have been conducted
primarily through independent country-specific distributors. The Company intends
to continue to market its products in foreign countries in the future through
its channel partners. Failure of these resellers to market the Company's
products internationally or the loss of any of these resellers could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company's ability to increase sales of its
products to international end users may be limited if the carrier services, such
as frame relay, or protocols supported by the Company's products are not widely
adopted internationally. A number of additional risks are inherent in
international transactions. The Company's international sales currently are U.S.
dollar-denominated. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies, as has occurred recently in several Asian
markets, could make the Company's products less competitive in international
markets. International sales may also be limited or disrupted by the imposition
of governmental controls, export license requirements, restrictions on the
export of critical technology, currency exchange fluctuations, political
instability, trade restrictions and changes in tariffs. In addition, sales in
Europe and certain other parts of the world typically are adversely affected in
the third quarter of each year as many customers and end users reduce their
business activities during the summer months. These international factors could
have a material adverse effect on future sales of the Company's products to
international end users and, consequently, the Company's business, operating
results and financial condition.
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
16
<PAGE>
results and financial condition. In addition, the Company's products must meet
industry standards and receive certification for connection to certain public
telecommunications networks prior to their sale. In the United States, the
Company's products must comply with various regulations defined by the Federal
Communications Commission and Underwriters Laboratories. Internationally, the
Company's products must comply with standards established by telecommunications
authorities in various countries as well as with recommendations of the
Consultative Committee on International Telegraph and Telephony. In addition,
carriers require that equipment connected to their networks comply with their
own standards, which in part reflect their currently installed equipment. Some
public carriers have installed equipment that does not fully comply with current
industry standards, and this noncompliance must be addressed in the design of
the Company's products. Any future inability to obtain on a timely basis or
retain domestic or foreign regulatory approvals or certifications or to comply
with existing or evolving industry standards could have a material adverse
effect on the Company's business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends, to a significant degree, upon the
continued contributions of its key management, sales, marketing, research and
development and manufacturing personnel. The Company believes its future success
will also depend in large part upon its ability to attract and retain highly
skilled engineering, managerial, sales and marketing personnel, and development
engineers. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. During 1998, the Company implemented significant expense reductions,
including reductions in force, with the goal of enabling the Company to achieve
profitability at lower revenues. During 1998 and 1999, the Company also
experienced significant turnover in the composition of its executive officers.
Two of the current four executive officers, including the President and Chief
Executive Officer, have been officers of the Company for less than a year. The
loss of the services of any of the Company's key personnel or the failure to
attract or retain qualified personnel in the future could have a material
adverse effect on the Company's business, operating results or financial
condition.
GENERAL ECONOMIC CONDITIONS
Demand for the Company's products depends in large part on the overall
demand for communications and networking products, which has in the past and may
in the future fluctuate significantly based on numerous factors, including
capital spending levels and general economic conditions. There can be no
assurance that the Company will not experience a decline in demand for its
products due to general economic conditions. Any such decline could have a
material adverse effect on the Company's business, operating results and
financial condition.
VOLATILITY OF STOCK PRICE
Factors such as announcements of technological innovations or the
introduction of new products by the Company or its competitors, as well as
market conditions in the technology sector, may have a significant effect on the
market price of the Company's common stock. Further, the stock market has
experienced volatility which has particularly affected the market prices of
equity securities of many high technology companies and which often has been
unrelated to the operating performance of such companies. These market
fluctuations may have an adverse effect on the price of the Company's common
stock.
NASDAQ STOCK LISTING
The Company's common stock is listed and traded on the Nasdaq
National Market. On January 4, 1999, the Company received a letter from
Nasdaq notifying the Company that it has failed to maintain a closing bid
price of greater than $1.00 in accordance with the Nasdaq listing
requirements. According to the notice, the Company had 90 days from the date
of the letter to cure such deficiency by having a minimum closing bid price
of its common stock equal to or greater than $1.00 per share for ten
consecutive trading days. As of May 17, 1999, the Company has not been able
to cure this deficiency. Accordingly, the Company's Board of Directors has
voted for an amendment to the Company's Certificate of Incorporation to
effect a one-for-five reverse split of the Company's Common Stock, subject to
ratification by the Company's stockholders at the Company's annual meeting on
June 11, 1999. The Company has also requested an oral hearing with Nasdaq,
currently scheduled for May 21, 1999, to stay delisting of the Company from
the Nasdaq National Market pending approval and completion of the reverse
stock split. There can be no assurance that the Company will be successful in
meeting the minimum bid listing requirements even with a one-for-five reverse
stock split or that in the future it will meet this or other listing
requirements. Any such inability could have a material adverse effect the
liquidity of the Company's common stock and on the Company's business,
operating results and financial condition.
17
<PAGE>
ANTI-TAKEOVER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In addition, certain provisions
of the Company's charter documents, including provisions eliminating cumulative
voting, eliminating the ability of stockholders to call meetings or to take
actions by written consent and limiting the ability of stockholders to raise
matters at a meeting of stockholders without giving advance notice, may have the
effect of delaying or preventing a change in control or management of the
Company, which could have an adverse effect on the market price of the Company's
common stock. Certain of the Company's stock option and purchase plans and
agreements provide for assumption of such plans, or, alternatively, immediate
vesting upon a change of control or similar event. In addition, the Company has
entered into severance agreements with its officers, pursuant to which they are
entitled to defined 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>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH FOREIGN EXCHANGE
In the first quarter of 1999, approximately 25.3% of the Company's net
revenues were derived from sales to international customers, primarily in Europe
and the Pacific Rim. As a result, the Company is exposed to market risk from
changes in foreign exchange rates and international economic conditions, which
could affect its results of operations and financial condition. In order to
reduce the risk from fluctuation in foreign exchange rates, the Company's sales
are denominated in U.S. dollars. The Company has not entered into any currency
hedging activities.
INTEREST RATE RISKS
The Company invests its excess cash in high quality government and
corporate debt instruments. However, the Company may be exposed to fluctuation
in rates on these investments. Increases or decreases in interest rates
generally translate into increases or decreases in the fair value of these
investments. Such changes to these investments have historically not been
material due to the short-term nature of the Company's investment. In addition,
the credit worthiness of the issuer, the relative values of alternative
investments, the liquidity of the instruments and other general market
conditions may affect the fair value of interest rate sensitive instruments. In
order to reduce the risk from fluctuation in rates, the Company invests in money
market funds and short-term debt instruments of U.S. corporations with strong
credit ratings and the federal government with contractual maturities of less
than six months. At March 31, 1999, investments were as follows ($ in millions):
<TABLE>
<CAPTION>
Average
Average Interest Fair
Balance Maturity Rate Value
------- -------- ---- -----
<S> <C> <C> <C> <C>
Short-term debt instruments and money market funds $10.7 2 months 5% $10.7
</TABLE>
19
<PAGE>
SYNC RESEARCH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 5, 1997, an action entitled Dalarne Partners, Ltd. Vs.
Sync Research, Inc., et al., No. SACV97-877 AHS(Eex) was filed against the
Company and certain of its directors and officers. The action was filed in
the U.S. District Court for the Central District of California, Southern
Division. The action purported 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 asserted claims for violation
of the Securities Exchange Act of 1934. On February 16, 1999, the U.S.
District Court issued an order granting the Company's motion to dismiss the
first amended complaint. The plaintiffs filed a second amended complaint on
March 22, 1999. The Company and the other defendents have moved to dismiss
the second amended complaint which currently is scheduled for hearing on June
28, 1999. The complaint seeks to recover damages in an unspecified amount.
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, 1999, 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, 1999, 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........................................... $853,660
Purchase and installment of machinery and equipment...................................... 4,049,548
Acquisition of other business(es)........................................................ 5,338,000
Working capital.......................................................................... (236,039)
Operating losses......................................................................... 39,878,719
-----------
Total.............................................................................. $49,883,888 (1)
-----------
-----------
</TABLE>
- -----------
(1) Excludes operating losses, capital expenditures and working capital
changes of Tylink Corporation ("Tylink") prior to the Company's
acquisition of Tylink in August 1996.
In addition, the Company used aggregate proceeds of $808,487 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.
20
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
10.38 Settlement Agreement and Mutual Release with Douglas Antaya dated
February 3, 1999.
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,
1999.
21
<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 17, 1999 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)
<PAGE>
[LOGO]
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release ("Agreement") is entered
into by and between SYNC RESEARCH, INC., a Delaware corporation (the
"Company"), and Douglas Antaya ("Employee").
WHEREAS, Employee has been employed by the Company;
WHEREAS, the Company and Employee have entered into an agreement
regarding confidential information and ownership of inventions (the "Employee
Agreement");
WHEREAS, the Company and Employee have mutually agreed to terminate the
employment relationship and to release each other from any claims arising
from or related to the employment relationship;
NOW, THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as the "Parties") hereby agree
as follows:
1. RESIGNATION AND TERMINATION. The Company and Employee acknowledge
and agree that Employee will resign as Vice President Product Marketing &
Management and as an Officer of the Company effective February 4, 1999 (the
"Resignation Date"). The Company agrees to retain Employee as an employee,
and Employee agrees to serve as an employee, until the earlier of August 4,
1999 or such time as Employee commences other employment (the "Termination
Date"). As part of such employment, Employee agrees to perform, from time to
time, such projects as may be reasonably requested by the President and CEO
of the Company. For purposes of this Agreement, "other employment" is
defined as any employment exceeding 20 hours per week. The parties
acknowledge that the Company has paid Employee's regular salary through the
date of this Agreement in accordance with the Company's normal payroll
practices, has paid Employee any accrued vacation pay and has reimbursed all
expenses appropriately incurred by Employee on the Company's behalf. Any
payments made under this Agreement shall be subject to withholding for taxes
to the extent required under applicable law. Following the date of this
Agreement, Employee shall not be entitled to any other employee benefits,
including vacation, except as expressly set forth above and in Section 5
below.
<PAGE>
2. CONSIDERATION. In consideration for the release of claims set
forth below and other obligations under this Agreement, the Company agrees to
pay Employee $10,833.34 (less applicable tax withholding) each month through
the Termination Date, in accordance with the Company's normal payroll
practices.
3. STOCK OPTIONS. In consideration of the Employee's willingness to
avail himself to the Company through the Termination Date, vesting of
Employee's options to purchase shares of Common Stock granted to Employee
under the Company's Stock Option Plan that have not been exercised as of the
date of this Agreement, shall continue through Termination Date. No
additional option shares shall vest after such date. In accordance with the
terms of the Option Agreement(s) issued to Employee, vested options will be
exercisable until 60 days after the Termination Date.
4. TERMINATION OF CHANGE OF CONTROL AGREEMENT. Effective with the
Resignation Date, the Amended and Restated Change of Control Severance
Agreement between the Company and Employee is hereby terminated.
5. BENEFITS.
(a) Employee shall continue to receive the Company's standard
medical, dental and life insurance benefits through the Termination Date.
After such date, Employee shall have the right to continue, at his own
expense, coverage under the Company's health insurance as provided by the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA").
(b) Employee shall be entitled to participate in the Company's
401(k) Plan and Section 125 Plan until the Termination Date.
(c) Employee shall not continue to accrue vacation after the
Resignation Date.
6. NONCOMPETITION. Through the Termination Date, Employee will not,
individually or as an employee, partner, officer, director or shareholder or in
any other capacity whatsoever of or for any person, firm, partnership, company
or corporation, other than the Company or its subsidiaries, own, manage,
operate, sell, control or participate in the ownership, management, operation,
sales or control of any business engaged, in the geographical areas referred to
below, in research, development, marketing, sales or other activities
substantially similar to or competitive with the business of the Company. The
geographical areas in which the restrictions provided for in the foregoing
sentence apply include all cities, counties and states of the United States and
all other countries in which the Company has engaged in sales or otherwise
conducted business or selling efforts at any time. For a period extending until
one year following the Termination Date, Employee will not, directly or
indirectly, recruit, attempt to hire, solicit, assist others in recruiting or
hiring, or refer to others concerning employment, any person who is an employee
of the Company or any of its subsidiaries or induce or attempt to induce any
such
<PAGE>
employee to terminate such employee's employment with the Company or any of
its subsidiaries.
7. NO OTHER PAYMENTS DUE. Employee acknowledges and agrees that he
has received all salary, accrued vacation, commissions, bonuses,
compensation, shares of stock, options therefor and other such sums due to
Employee, other than amounts to be paid pursuant to Sections 2, 3 and 5 of
this Agreement. In light of the payment by the Company of all wages due, or
to become due to the Employee, the Parties further acknowledge and agree that
California Labor Code Section 206.5 is not applicable to the Parties hereto.
That section provides in pertinent part as follows:
No employer shall require the execution of any release of any claim or
right on account of wages due, or to become due, or made as an advance
on wages to be earned, unless payment of such wages has been made.
8. RELEASE OF CLAIMS. Employee agrees that the foregoing
consideration represents settlement in full of all outstanding obligations
owed to Employee by the Company. Employee and the Company, on behalf of
themselves, and their respective heirs, executors, officers, directors,
employees, investors, shareholders, administrators, predecessor and successor
corporations and assigns, hereby fully and forever release each other and
their respective heirs, executors, officers, directors, employees, investors,
shareholders, administrators, predecessor and successor corporations and
assigns from any claim duty, obligation or cause of action relating to any
matters of any kind, whether known or unknown, suspected or unsuspected, that
either of them may possess arising from any omissions, acts or facts that
have occurred up until and including the Effective Date of this Agreement
including, without limitation:
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and termination of that relationship;
(b) any and all claims relating to, or arising from, Employee's
right to purchase, or actual purchase of shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment;
breach of contract, both express and implied; breach of a covenant of good
faith and fair dealing, both express and implied; negligent or intentional
infliction of emotional distress; negligent or intentional misrepresentation;
negligent or intentional interference with contract or prospective economic
advantage; and defamation;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment Act of 1967, and the
California Fair Employment and Housing Act.
(e) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination; and
<PAGE>
(f) any and all claims for attorney's fees and costs.
The Company and Employee agree that the release set forth in the section
shall be and remain in effect in all respects as a complete and general
release as to the matters released. This release does not extend to any
obligations incurred under this Agreement.
9. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. Employee
acknowledges that he is waiving and releasing any rights he may have under
the Age Discrimination in Employment Act of 1967 ("ADEA") and that the waiver
and release is knowing and voluntary. Employee and the Company agree that
the waiver and release does not apply to any rights or claims that may arise
under ADEA after the Effective Date of this Agreement. Employee acknowledges
that the consideration given for this waiver and release Agreement is in
addition to anything of value to which Employee was already entitled.
Employee further acknowledges that he has been advised by the writing that
(a) he should consult with an attorney PRIOR to executing this Agreement; (b)
he has at least twenty-one (21) days within which to consider this Agreement;
(c) he has a least seven (7) days following the execution of this Agreement
by the parties to revoke this Agreement; and (d) this Agreement shall not be
effective until the revocation period has expired.
10. CIVIL CODE SECTION 1542. The parties represent that they are not
aware of any claim by either of them other than the claims that are released
by this Agreement. Employee and the Company acknowledge that they are
familiar with the provisions of California Civil Code Section 1542 which
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Employee and the Company, being aware of such code section, agree to
waive any rights they may have thereunder, as well as under any other stature
or common law principles of similar effect.
11. TAX CONSEQUENCES. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any such
sums to Employee under the terms of this Agreement. Employee agrees and
understands that he is responsible for payment, if any, of local, state
and/or federal taxes on the sums paid hereunder by the Company and any
penalties or assessments thereon. Employee further agrees to indemnify and
hold the Company harmless from any claims, demands, deficiencies, penalties,
assessments, executions, judgments, or recoveries by any government agency
against the Company for any amounts claimed due on account of Employee's
failure to pay federal or state taxes or damages sustained by the Company by
reason of any such claims, including reasonable attorney's fees.
<PAGE>
12. CONFIDENTIALITY. The parties agree to use their best efforts to
maintain in confidence the existence of this Agreement, the contents and
terms of this Agreement, and the consideration for this Agreement.
Notwithstanding the foregoing, the Employee shall be permitted to discuss
provisions of this Agreement in confidence with his attorneys, accountants,
tax advisors and spouse.
13. NONDISCLOSURE OF CONFIDENTIAL AND PROPRIETARY INFORMATION.
Employee shall continue to maintain the confidentiality of all confidential
and propriety information of the Company as provided by the Employee
Agreement previously entered into between the Company and the Employee, a
copy of which is attached hereto as Exhibit A. Employee agrees that at all
times hereafter, Employee shall not intentionally divulge, furnish or make
available to any party any of the trade secrets, patents, patent
applications, price decisions or determinations, inventions, customers,
proprietary information or other intellectual property rights of the Company,
until after such time as information has become publicly known otherwise than
by act of collusion of Employee. Employee further agrees that he will return
all the Company's property and confidential and proprietary information in
his possession to the Company within five business days after the Resignation
Date.
14. BREACH OF THIS AGREEMENT. Employee acknowledges that upon breach
of the confidential and proprietary information provision contained in
Section 13 of this Agreement, the Company would sustain irreparable harm from
such breach, and, therefore, Employee agrees that in addition to any other
remedies which the Company may have for any breach of this Agreement or
otherwise, including termination of the Company's obligations to provide
benefits to Employee as described in Sections 2, 3 and 5 of this Agreement,
the Company shall be entitled to obtain equitable relief, including specific
performance and injunctions, restraining Employee from committing or
continuing any such violation of this Agreement.
15. NON-DISPARAGEMENT. Each party agrees to refrain from any
disparagement, criticism, defamation, slander of the other, or tortious
interference with the contracts and relationships of the other.
16. AUTHORITY. The Company represents and warrants that the
undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this
Agreement. Employee represents and warrants that he has the capacity to act
on his own behalf and on behalf of all who might claim through him to bind
them to the terms and conditions of this Agreement. Each Party warrants and
represents that there are no liens or claims of lien or assignments in law or
equity or otherwise of or against any of the claims or causes of action
released herein.
17. NO REPRESENTATIONS. Each party represents that it has carefully
read and understands the scope and effect of the provisions of this
Agreement. Neither party has relied upon any representations or statements
made by the other party which are not specifically set forth in this
Agreement.
<PAGE>
18. COSTS. The Parties shall each beach their own costs, attorneys'
fees and other fees incurred in connection with this Agreement.
19. SEVERABILITY. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
20. ENTIRE AGREEMENT. This Agreement represents the entire agreement
and understanding between the Company and Employee concerning Employee's
separation from the Company and supersedes and replaces any and all prior
agreements and understandings concerning Employee's relationship with the
Company and his compensation by the Company (including the employment
agreement between the company and employee dated June 27, 1996) other than
any option agreement as described in Section 3 and other than the Employee
Agreement as described in Section 12.
21. NO ORAL MODIFICATION. This Agreement may only be amended in
writing signed by Employee and the Company.
22. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California.
23. EFFECTIVE DATE. This Agreement shall be effective once it has been
signed by both parties and such date is referred to herein as the "Effective
Date".
24. COUNTERPARTS. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and
shall constitute an effective binding agreement on the part of each of the
undersigned.
25. ASSIGNMENT. This Agreement may not be assigned by Employee or the
Company without the prior consent of the other party. Notwithstanding the
foregoing, this Agreement may be assigned by the Company to a corporation
controlling, controlled by or under common control with the Company without
the consent of Employee.
26. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf
of the parties hereto, with the full intent of releasing all claims. The
parties acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;
<PAGE>
(c) They understand the terms and consequences of this Agreement
and of the releases it contains; and
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
respective dates set forth below.
SYNC RESEARCH, INC.
By: /s/ Richard N. Thunen
-----------------------
Title: Vice. President Engineering
----------------------------
Dated: February 3, 1999
-----------------
EMPLOYEE
/s/ Douglas M. Antaya
----------------------
Signature
Douglas M. Antaya
------------------
Print Name
Dated: February 3, 1999
-----------------
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