<PAGE>
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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 JUNE 30, 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
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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 (X) 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 July 31, 1999, 3,486,201 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>
Part I. Financial Information.......................................................................... 3
Item 1. a) Condensed consolidated balance sheets at June 30, 1999 (unaudited) and December 31,
1998................................................................................... 3
b) Condensed consolidated statements of operations (unaudited) for the three and six
months ended June 30, 1999 and 1998.................................................... 4
c) Condensed consolidated statements of cash flows (unaudited) for the six months ended
June 30, 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.......... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 20
Part II. Other Information.............................................................................. 21
Item 1. Legal Proceedings.............................................................................. 21
Item 2. Changes in Securities and Use of Proceeds...................................................... 21
Item 3. Defaults upon Senior Securities................................................................ 22
Item 4 Submission of Matters to a Vote of Security Holders............................................ 22
Item 5. Other Information.............................................................................. 22
Item 6. Exhibits and Reports on Form 8-K............................................................... 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------------- ----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 10,327 $ 14,135
Accounts and other receivables, net...................................................... 3,091 2,443
Inventories.............................................................................. 5,364 6,111
Prepaid expenses and other current assets................................................ 546 808
--------------- ----------------
Total current assets........................................................................ 19,328 23,497
Furniture, fixtures and equipment, net...................................................... 2,379 3,247
Other assets................................................................................ 47 47
--------------- ----------------
Total assets................................................................................ $ 21,754 $ 26,791
--------------- ----------------
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 1,625 $ 3,138
Accrued compensation and related costs................................................... 842 956
Accrued severance and restructuring costs................................................ 1,193 1,976
Deferred revenue......................................................................... 2,658 2,063
Other accrued liabilities................................................................ 880 975
Current maturities of capitalized lease obligations...................................... 53 52
--------------- ----------------
Total current liabilities................................................................... 7,251 9,160
Capitalized lease obligations, less current maturities...................................... 29 60
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares-2,000
Issued and outstanding shares-none..................................................... - -
Common stock, $.005 par value:
Authorized shares-10,000
Issued and outstanding shares-3,453 at June 30, 1999
and 3,491 at December 31, 1998........................................................ 18 17
Additional paid-in capital............................................................... 71,880 71,958
Deferred compensation.................................................................... - (7)
Accumulated deficit...................................................................... (57,424) (54,397)
--------------- ----------------
Total stockholders' equity.................................................................. 14,474 17,571
--------------- ----------------
Total liabilities and stockholders' equity.................................................. $ 21,754 $ 26,791
--------------- ----------------
--------------- ----------------
</TABLE>
See accompanying notes.
SYNC RESEARCH, INC.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
------------------ ------------------ ----------------- ----------------
1999 1998 1999 1998
------------------ ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $ 4,405 $ 7,076 $ 9,511 $ 12,686
Cost of sales 2,485 4,387 5,336 8,258
------------------ ------------------- ----------------- ----------------
Gross profit 1,920 2,689 4,175 4,428
Operating expenses:
Research and development 1,311 1,817 3,026 3,558
Sales and marketing 1,356 3,112 3,152 5,944
General and administrative 647 676 1,261 1,318
Non-recurring charges - 267 - 267
------------------ ------------------- ----------------- ----------------
Total operating expenses 3,314 5,872 7,439 11,087
------------------ ------------------- ----------------- ----------------
Operating loss (1,394) (3,183) (3,264) (6,659)
Interest income, net 105 219 240 473
------------------ ------------------- ----------------- ----------------
Loss before income taxes (1,289) (2,964) (3,024) (6,186)
Provision for income taxes 2 - 2 2
------------------ ------------------- ----------------- ----------------
Net loss $ (1,291) $ (2,964) $ (3,026) $ (6,188)
------------------ ------------------- ----------------- ----------------
------------------ ------------------- ----------------- ----------------
Basic and diluted net loss per share $ (0.37) $ (0.85) $ (0.87) $ (1.81)
------------------ ------------------- ----------------- ----------------
------------------ ------------------- ----------------- ----------------
Shares used in computing net loss per share 3,480 3,476 3,492 3,416
------------------ ------------------- ----------------- ----------------
------------------ ------------------- ----------------- ----------------
</TABLE>
4
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SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss................................................................................... $(3,026) $(6,188)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................................... 780 931
Provision for losses on accounts receivable............................................ 75 339
Deferred compensation expense.......................................................... 7 14
Changes in operating assets and liabilities, net:
Accounts and other receivables......................................................... (724) 259
Inventories............................................................................ 747 630
Prepaid expenses and other current assets.............................................. 263 (410)
Accounts payable and accrued liabilities............................................... (1608) 2249
Accrued severance and restructuring.................................................... (783) (81)
Accrued compensation and related costs................................................. (113) (76)
Deferred revenue....................................................................... 595 (76)
------------- ------------
Net cash used in operating activities........................................................ (3,787) (2,409)
INVESTING ACTIVITIES
Sales (purchases) of furniture, fixtures and equipment, net............................... 88 (846)
FINANCING ACTIVITIES
Repurchase of common stock................................................................ (136)
Payments on capitalized lease obligations................................................. (31) (30)
Proceeds from common stock options exercised and employee stock
purchase plan........................................................................ 58 111
------------- ------------
Net cash provided (used) by financing activities............................................. (109) 81
------------- ------------
Net decrease in cash and cash equivalents.................................................... (3,808) (3,174)
Cash and cash equivalents at beginning of period............................................. 14,135 21,734
------------- ------------
Cash and cash equivalents at end of period................................................... $10,137 $18,560
------------- ------------
------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................................. $ 4 $ 37
------------- ------------
------------- ------------
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 June 30, 1999, the condensed
consolidated statements of operations for the three and six months ended June
30, 1999 and 1998 and the condensed consolidated statements of cash flows for
the six months ended June 30, 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 June 30, 1999, the results of its
operations for the three and six months ended June 30, 1999 and 1998 and its
cash flows for the six months ended June 30, 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 and six months ended June 30, 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>
JUNE 30, DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Equipment acquired under capital leases................................... $ 275 $ 275
Furniture and fixtures.................................................... 848 848
Computer equipment and software........................................... 7,374 7,462
Leasehold improvements.................................................... 1,109 1,109
--------------- ---------------
9,606 9,694
Accumulated depreciation and amortization................................. (7,227) (6,447)
--------------- ---------------
$ 2,379 $ 3,247
--------------- ---------------
--------------- ---------------
</TABLE>
6
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
JUNE 30, DECEMBER 31,
1999 1998
---------------- ---------------
<S> <C> <C>
Raw materials............................................................. $ 2,622 $ 2,983
Work in process........................................................... 284 752
Finished goods............................................................ 2,458 2,376
---------------- ---------------
$ 5,364 $ 6,111
---------------- ---------------
---------------- ---------------
</TABLE>
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. All share amounts
have been adjusted to reflect the implementation of the Company's one for five
reverse stock split on June 28,1999.
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 are secured by
substantially all of the Company's assets and are subject to an interest rate
equal to the Bank's prime rate plus one half percent. The agreement to expires
in April 2000. There were no borrowings outstanding as of June 30, 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 17, 1999, the U.S. District Court issued an
order granting the Company's motion to dismiss the first amended complaint,
granting leave to amend. 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 September
13, 1999. The complaint seeks to recover damages in an unspecified amount. The
Company intends to defend this lawsuit vigorously.
8. LEASE COMMITMENTS
In July 1999, the company executed an agreement to terminate its existing
headquarters facility lease and enter into a new five year lease on another
facility. In addition, the company extended a portion of its Norton facility
lease for a period of three years. As a result, the future minimum operating
lease commitment as of July 1, 1999 are as follows:
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7/99 - 12/99 $199,115
2000 308,902
2001 317,420
2002 286,250
2003 235,499
Thereafter 157,000
</TABLE>
9. STOCKHOLDERS' EQUITY
On June 28, 1999, the Company implemented a one-for-five reverse stock
split of common stock. All common stock amounts and per share information have
been restated to reflect the reverse stock split for all periods presented.
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. 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 develops and sells frame relay access devices (FRADs), circuit
management probe products and digital transmission devices. The Company
follows a leveraged sales strategy utilizing a direct sales force, resellers,
distributors, OEMs, and carriers as delivery channels for its products.
Current partners include PacBell, Sprint, MCI, Intermedia Communications,
Electronic Data Systems, Diebold and Wang Global.
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. Product revenues 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 second quarter of 1999 were $4.4 million, compared to
net revenues of $7.1 million for the quarter ended June 30, 1998. Net revenues
for the six months ended June 30, 1999 were $9.5 million, compared to $12.7
million for the comparable period in 1998. The decrease in net revenues in the
three and six months ended June 30, 1999 compared to the three and six months
ended June 30, 1998 was due primarily to decreased sales of frame relay access
products and circuit management products, partially offset by increases in other
revenues, primarily service fees. Sales to IBM and one large end user customer
decreased significantly to 1.1% and 8.3% of the Company's total revenue for the
three months ended June 30, 1999, respectively, as compared to 20.9% and 33.8%,
respectively, for the three months ended June 30, 1998. For the six months ended
June 30, 1999 sales to IBM and one large end user customer were 1.7% and 7.8%,
respectively, as compared to 18.1% and 24.4% for the six months ended June 30,
1998.
Sales to three customers were 14%, 12% and 11% of sales for the quarter
ended June 30, 1999. Sales to two customers aggregated 34% and 21% of sales
for the quarter ended June 30, 1998. For the six months ended June 30, 1999,
one customer represented 13% and for the comparable prior year period two
customers represented 24% and 18% of the Company's sales.
9
<PAGE>
Net revenues by product group for the three months ended June 30, 1999 and 1998
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 % 1998 %
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Frame relay access products................................... $1,802 41% $4,690 66%
Circuit management products................................... 846 19 1,203 17
Transmission products......................................... 248 6 244 4
Other......................................................... 1,502 34 939 13
---------- --------- ---------- ---------
$4,398 100% $7,076 100%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
Net revenues by product group for the six months ended June 30, 1999 and 1998
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 % 1998 %
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Frame relay access products................................... $4,229 45% $7,606 60%
Circuit management products................................... 1,355 14 1,955 15
Transmission products......................................... 597 6 861 7
Other......................................................... 3,323 35 2,264 18
---------- --------- ---------- ---------
$9,504 100% $12,686 100%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
The percentage of net revenues represented by sales through channel
partners and other resellers was 56.5% and 51.6% for the three and six months
ended June 30, 1999 respectively, as compared to 42.8% and 52.8%, respectively,
for the corresponding periods in 1998. The sales mix of channel partners and
other resellers may change from period to period.
International sales represented 12.7% and 19.4% of the Company's total
sales during the three and six months ended June 30, 1999, respectively, as
compared to 6.6% and 6.5% during the three and six months ended June 30,
1998, respectively. The increase was due primarily to the timing of shipments
to the European operations of one large U.S. based multinational customer
representing 4.0% and 8.9% of the Company's total revenues for the three and
six months ended June 30, 1999, respectively. Domestic sales represented
87.3% and 80.6% of the Company's total sales during the three and six months
ended June 30, 1999, respectively, as compared to 93.4% and 93.5% of the
Company's total sales for the three and six month periods ended June 30,
1998, respectively. The decrease in percentage of the Company's total sales
in both the three and six month periods of 1999 was due primarily to export
sales to the large multinational customer and 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 the
Company's manufacturing and service employees.
Gross profit decreased to $1.9 and $4.2 million for the three and six
months ended June 30, 1999, respectively, from $2.7 and $4.4 million in the
corresponding prior year periods. The lower gross profit for the three and six
month periods ended June 30, 1999 was primarily due to lower sales revenue.
Gross profit as a percentage of net revenues increased to 43.6% and 43.9% for
the three and six months ended June 30, 1999, respectively, as compared to 38.0%
and 34.9% for the three and six months ended June 30, 1998. The increase in
margins during the three and six months ended June 30, 1999 compared to the same
period of 1998 was primarily due to lower manufacturing and service overhead
costs realized from the Company's expense reduction initiatives.
10
<PAGE>
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, $300,000 of
externally acquired software has been capitalized. Research and development
expenses decreased to $1.3 and $3.0 million for the three and six months ended
June 30, 1999, respectively, as compared to $1.8 and $3.6 million for the
comparable periods in 1998. The decreased expenditures for both the three and
six month periods ended June 30, 1999 were due primarily to reduced headcount
and lower utilization of outside consultants.
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 $1.4 and $3.2 million for the three and six
months ended June 30, 1999, respectively, as compared to $3.1 and $5.9 million
for the comparable periods in 1998. The decrease in selling and marketing
expenses for both the three and six month periods 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 $647,000 for the quarter ended
June 30, 1999, as compared to $676,000 for the quarter ended June 30, 1998, and
decreased to $1,261,000 for the six months ended June 30, 1999 from $1,318,000
for the six months ended June 30, 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 and second quarters of 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION ACCRUAL ACCRUAL
AT 12/31/98 ACTIVITY AT 6/30/99
------------- ------------- -------------
<S> <C> <C> <C>
Severance and related expenses..................... $ 854 $(637) $ 217
Idle and excess facility charges
and write-off of assets......................... 1,110 (161) 949
Other non-recurring charge........................ 12 15 27
------------- ------------- -------------
Total.............................................. $1,976 $(783) $1,193
------------- ------------- -------------
------------- ------------- -------------
</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 $105,000 and $240,000 for the three and six months
ended June 30, 1999, respectively, as compared to $219,000 and $473,000 for the
three and six months ended June 30, 1998, respectively. The decrease in net
interest income was primarily due to the Company's lower cash balances resulting
from the utilization of cash to fund the Company's operating activities.
INCOME TAXES
The provisions for income taxes in 1998 and 1999 represent minimum state
taxes.
LIQUIDITY AND CAPITAL RESOURCES
11
<PAGE>
As of June 30, 1999, the Company's principal sources of liquidity consisted
of $10.3 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 June 30, 1999.
During the six months ended June 30, 1999, cash utilized by operating
activities was $3.8 million, compared to $2.4 million in the corresponding
period in 1998. The increased cash utilization resulted primarily from increases
in accounts receivable of $724,000 and decreases in accounts payable of
$1,608,000 and accrued severance and restructuring of $783,000 partially offset
by lower inventories of $747,000, and prepaid expenses of $263,000 and higher
deferred revenues of $595,000. At June 30, 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
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 $3.0 million for the six months ended June 30,
1999. As of June 30, 1999, the Company had an accumulated deficit of
approximately $57.4 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; the rate of migration of 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
12
<PAGE>
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-Registered Trademark- 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 1.7%, 14.1%, 16.5% and 4.9% of the Company's net
revenues in the six months ended June 30, 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
During the the six months ended June 30, 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 45% and 49%, respectively, of the Company's net revenues. The
market for SNA-over-frame relay products is 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 rather than remaining on leased
line networks or selecting newer and/or alternative technologies. 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 51.6%, 62.5%, 67.0%
and 85.7% of net
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revenues of the Company for the six months ended June 30, 1999 and fiscal
years 1998, 1997 and 1996, respectively. Current partners include 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 1.7%, 14.1%, 16.5%
and 4.9% of the Company's net revenues for the first six months of 1999 and
for the fiscal years 1998, 1997 and 1996, respectively. Sales to 3Com
accounted for 4.3%, 2.6%, 6.5% and 19.2% of the Company's net revenues for
the first six months 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 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.
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.
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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 the end of 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 continuing to make inquiries and evaluate the 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. Even where assurances have been received, the
Company remains subject to the risk that Year 2000 matters could negatively
affect such companies and, therefore, could cause delays in timely delivery of
products and services to the Company and have a material adverse effect on the
Company.
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 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, 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,
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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.
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. 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 mid-sized and 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
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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 effect on
the Company's business, operating results and financial condition.
DEPENDENCE ON AND RISKS ASSOCIATED WITH INTERNATIONAL SALES
Sales to customers outside of the United States accounted for approximately
19.4%, 6.9%, 19.1% and 12.7% of the Company's net revenues for the six months
ended June 30, 1999 and fiscal years 1998, 1997 and 1996, respectively. The
increase in International Sales in 1999 resulted primarily from sales related to
the European operations of one large U.S. based multinational customer. 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 5.0% of the Company's net
revenues for the first six months 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
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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. 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
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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. In order to comply
with the Nasdaq listing requirements, on June 28, 1999 the Company implemented a
1 for 5 reverse stock split that was approved by its shareholders at the
Company's Annual Meeting on June 11, 1999. As a result of the reverse stock
split, the Company has maintained its stock price above the $1 per share minimum
level, and accordingly, has been informed by Nasdaq that it currently meets the
requirements for continued listing. However, there can be no assurance that the
Company will meet the minimum closing bid price or any other Nadaq listing
requirements on an ongoing basis.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH FOREIGN EXCHANGE
In the first six months of 1999, approximately 19.4% 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 June 30, 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 $10.3 2 months 5% $10.3
</TABLE>
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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 17, 1999, the U.S. District Court issued an
order granting the Company's motion to dismiss the first amended complaint,
granting leave to amend. The plaintiffs filed a second amended complaint on
March 22, 1999. The Company and the other defendants have moved to dismiss the
second amended complaint; which currently is scheduled for hearing on September
13, 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
(a) AMENDMENT TO ARTICLES
On June 25, 1999 the Company filed a Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of the Company pursuant to
which effective as of June 28, 1999, each outstanding share of the Company's
Common Stock was converted into 0.20 of a share of Common Stock.
(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 June 30, 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 June 30, 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...................................... 4,054,353
Acquisition of other business(es)........................................................ 5,338,000
Working capital.......................................................................... (4,247,846)
Operating losses......................................................................... 41,170,362
-----------
Total.............................................................................. $47,168,529(1)
-----------
-----------
</TABLE>
- --------------------
(1) Excludes operating losses, capital expenditures and working capital
changes of Tylink Corporation
21
<PAGE>
("Tylink") prior to the Company's acquisition of Tylink in August 1996.
In addition, the Company used aggregate proceeds of $850,154 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
On June 11, 1999 the Company held its annual meeting of stockholders. At
the annual meeting, the Company's stockholders approved the following matters by
the following votes:
1. Election of the following directors of the Company
<TABLE>
<CAPTION>
Nominees For Against Abstentions Broker Nonvotes
-------- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gregorio Reyes 14,165,509 519,151 0 0
Charles A. Haggerty 14,222,076 462,584 0 0
William J. Schroeder 14,098,112 586,548 0 0
</TABLE>
2. Amendment to the Company's Certificate of Incorporation effecting
a one for five reverse stock split.
<TABLE>
<CAPTION>
For Against Abstenstions Broker Nonvotes
----------------------------------------------------------------------------
<S> <C> <C> <C>
13,341,801 1,316,158 26,701 0
</TABLE>
3. Ratification of appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31,
1999.
<TABLE>
<CAPTION>
For Against Abstenstions Broker Nonvotes
----------------------------------------------------------------------------
<S> <C> <C> <C>
14,522,333 78,092 84,235 0
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
<TABLE>
<C> <S>
3.1 Certificate of Amendment of Amended and Restated Certificate of
Incorporation.
3.2 Amended and Restated Bylaws.
10.15 Amendment to Loan and Security Agreement between the Company and
Silicon Valley Bank dated April 14, 1999.
10.39 Settlement Agreement and Mutual Release with James D. McNally dated
April 13, 1999.
10.40 Amended and Restated Management Agreement between the Company and
Richard Martin dated April 9, 1999.
27.1 Financial Data Schedule.
</TABLE>
22
<PAGE>
(b)REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SYNC RESEARCH, INC.
By: /s/ William K. Guerry
----------------------------------------
William K. Guerry
VICE PRESIDENT OF FINANCE AND ADMINISTRATION
AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED SIGNATORY AND PRINCIPAL
Date: August 16, 1999 FINANCIAL AND ACCOUNTING OFFICER)
23
<PAGE>
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SYNC RESEARCH, INC.
The undersigned hereby certifies that:
1. He is the duly elected and acting Vice President of Finance and
Administration and Secretary of Sync Research, Inc. , a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on September 12, 1995.
3. Pursuant to Section 242 of the General Corporation Law of the State
of Delaware, this Certificate of Amendment adds the following paragraph to the
end of Article III of this corporation's Amended and Restated Certificate of
Incorporation:
"At 12:00 a.m. Eastern Standard Time on June 28, 1999, each outstanding
share of this corporation's Common Stock shall be converted and
reconstituted into 0.20 of a share of this corporation's Common Stock
(the "COMMON REVERSE SPLIT"). In lieu of the issuance of fractional
shares, this corporation shall pay to the holder thereof in cash an
amount equal to the fraction of a share to which such holder is
entitled after applying the Common Reverse Split to each certificate
representing shares of Common Stock then held by such holder multiplied
by the closing bid price of the corporation's Common Stock on June 28,
1999. Shares of Common Stock that were outstanding prior to the Common
Reverse Split, and that are not outstanding after and as a result of
the Common Reverse Split, shall resume the status of authorized but
unissued shares of Common Stock."
4. The foregoing Certificate of Amendment has been duly adopted by this
corporation's Board of Directors and stockholders in accordance with the
applicable provisions of Section 242 of the General Corporation Law of the State
of Delaware.
Executed at Irvine, California, June 25, 1999.
/s/ William K. Guerry
------------------------------------
William K. Guerry, Vice President of
Finance and Administration and Secretary
<PAGE>
BYLAWS
OF
SYNC RESEARCH, INC.
(A DELAWARE CORPORATION)
-i-
<PAGE>
BYLAWS
OF
SYNC RESEARCH, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
The Board of Directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 ANNUAL MEETING
(a) The annual meeting of stockholders shall be held each year on
a date and at a time designated by the Board of Directors. At the meeting,
directors shall be elected and any other proper business may be transacted.
(b) Nominations of persons for election to the Board of Directors
of the corporation and the proposal of business to be transacted by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
the corporation's notice with respect to such meeting, (ii) by or at the
direction of the Board of Directors or (iii) by any stockholder of the
corporation who
-ii-
<PAGE>
was a stockholder of record at the time of giving of the notice provided for
in this Section 2.2, who is entitled to vote at the meeting and who has
complied with the notice procedures set forth in this Section 2.2.
(c) In addition to the requirements of Section 2.5, for
nominations or other business to be properly brought before an annual meeting
by a stockholder pursuant to clause (iii) of paragraph (b) of this Section
2.2, the stockholder must have given timely notice thereof in writing to the
secretary of the corporation and such business must be a proper matter for
stockholder action under the General Corporation Law of Delaware. To be
timely, a stockholder's notice shall be delivered to the secretary at the
principal executive offices of the corporation not less than twenty (20) days
nor more than ninety (90) days prior to the first anniversary of the
preceding year's annual meeting of stockholders; provided, however, that in
the event that the date of the annual meeting is more than thirty (30) days
prior to or more than sixty (60) days after such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the
ninetieth (90th) day prior to such annual meeting and not later than the
close of business on the later of the twentieth (20th) day prior to such
annual meeting or the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (i) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected);
(ii) as to any other business that the stockholder proposes to bring before
the meeting, a brief description of such business, the reasons for conducting
such business at the meeting and any material interest in such business of
such stockholder and the beneficial owner, if any, on whose behalf the
proposal is made; and (iii) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made
(A) the name and address of such stockholder, as they appear on the
corporation's books, and of such beneficial owner and (B) the class and
number of shares of the corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
(d) Only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.2. The chairman of the meeting shall
determine whether a nomination or any business proposed to be transacted by the
stockholders has been properly brought before the meeting and, if any proposed
nomination or business has not been properly brought before the meeting, the
chairman shall declare that such proposed business or nomination shall not be
presented for stockholder action at the meeting.
(e) For purposes of this Section 2.2, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service.
-iii-
<PAGE>
(f) Nothing in this Section 2.2 shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
2.3 SPECIAL MEETING
(a) A special meeting of the stockholders may be called at any
time by the Board of Directors, or by the chairman of the board, or by the
president.
(b) Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which directors are to be
selected pursuant to such notice of meeting (i) by or at the direction of the
Board of Directors or (ii) by any stockholder of the corporation who is a
stockholder of record at the time of giving of notice provided for in Section
2.5, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in Section 2.5.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.5 of these Bylaws not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notice shall specify
the place, date and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES
Only persons who are nominated in accordance with the procedures set
forth in this Section 2.5 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 2.5. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the secretary of the corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the corporation not less than sixty (60) days nor more than ninety
(90) days prior to the meeting; provided, however, that in the event that less
than sixty (60) days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
re-election as a Director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the corporation which are
beneficially owned by such person and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as
-iv-
<PAGE>
amended (including, without limitation, such person's written consent to
being named in the proxy statement as a nominee and to serving as a director
if elected); and (b) as to the stockholder giving the notice (1) the name and
address, as they appear on the corporation's books, of such stockholder and
(2) the class and number of shares of the corporation which are beneficially
owned by such stockholder. At the request of the Board of Directors any
person nominated by the Board of Directors for election as a director shall
furnish to the secretary of the corporation that information required to be
set forth in a stockholder's notice of nomination which pertains to the
nominee. No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth in
this Section 2.5. The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the Bylaws, and if he or she
should so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his or her address as it appears on the records of the
corporation. An affidavit of the secretary or an assistant secretary or of the
transfer agent of the corporation that the notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
2.7 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the chairman of the meeting or (ii)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 CONDUCT OF BUSINESS
-v-
<PAGE>
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.10 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.12 of these Bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.10, or as
may be otherwise provided in the certificate of incorporation, each stockholder
shall be entitled to one vote for each share of capital stock held by such
stockholder.
2.11 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to receive any payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(b) The record date for determining stockholders for any other
purpose (other than determining stockholders entitled to consent to corporate
action in writing without a
-vi-
<PAGE>
meeting) shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a record date for the
adjourned meeting.
2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 NUMBER OF DIRECTORS
The Board of Directors shall consist of three (3) persons until changed
by a proper amendment of this Section 3.2.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTOR
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not to be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
-vii-
<PAGE>
fill a vacancy, shall hold office until his successor is elected and
qualified or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
attention of the secretary of the corporation.
Subject to the rights of the holders of any class or series of
Preferred Stock, and except as otherwise determined by the Board of Directors or
required by law, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office, though less than a quorum, or the sole remaining director;
directors so chosen shall hold office for a term expiring at the next annual
meeting of stockholders and until such director's successor shall have been duly
elected and qualified.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten percent (10%) of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
-viii-
<PAGE>
3.6 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
At all meetings of the Board of Directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the Board of Directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be
-ix-
<PAGE>
specified in any written waiver of notice unless so required by the
certificate of incorporation or these Bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.11 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
3.12 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that, so long as stockholders of the corporation are entitled to cumulative
voting, if less than the entire board is to be removed, no director may be
removed without cause if the votes cast against his or her removal would be
sufficient to elect him or her if then cumulatively voted at an election of the
entire Board of Directors.
No reduction in the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
ARTICLE IV
COMMITTEES
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4.1 COMMITTEES OF DIRECTORS
The Board of Directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he, she
or they constitute a quorum, may unanimously appoint another member of the Board
of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors or in the Bylaws of the corporation, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (i) amend the certificate
of incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the Bylaws of the corporation; and, unless the board
resolution establishing the committee, the Bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.6 (regular
meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum),
Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting),
with such changes in the context of those Bylaws as are necessary to substitute
the committee and its members for the Board of Directors and its members;
PROVIDED, however, that
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the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board
of Directors and that notice of special meetings of committees shall also be
given to all alternate members, who shall have the right to attend all
meetings of the committee. The Board of Directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chief executive officer,
a president, a secretary, and a chief financial officer. The corporation may
also have, at the discretion of the Board of Directors a chairman of the
board, one or more vice presidents, one or more assistant secretaries, one or
more assistant treasurers, and any such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these Bylaws. Any number of
offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation
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shall not be necessary to make it effective. Any resignation is without
prejudice to the rights, if any, of the corporation under any contract to
which the officer is a party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.
5.6. CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
Board of Directors or as may be prescribed by these Bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these Bylaws.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, the chief executive officer of
the corporation shall, subject to the control of the Board of Directors, have
general supervision, direction, and control of the business and the officers of
the corporation. The chief executive officer shall preside at all meetings of
the stockholders and, in the absence or nonexistence of a chairman of the board,
at all meetings of the Board of Directors. The chief executive officer shall
have the general powers and duties of management usually vested in the office of
chief executive officer of a corporation and shall have such other powers and
duties as may be prescribed by the Board of Directors or these Bylaws.
5.8 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board or the chief executive officer,
the president shall have general supervision, direction, and control of the
business and other officers of the corporation. The President shall have the
general powers and duties of management usually vested in the office of
president of a corporation and shall have such other powers and duties as may be
prescribed by the Board of Directors or these Bylaws.
5.9 VICE PRESIDENTS
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
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5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented
at stockholders, meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered. for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. The secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.11 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. The chief financial
officer shall disburse the funds of the corporation as may be ordered by the
Board of Directors, shall render to the president and directors, whenever they
request it, an account of all his or her transactions as chief financial officer
and of the financial condition of the corporation, and shall have other powers
and perform such other duties as may be prescribed by the Board of Directors or
the Bylaws.
5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this corporation, or any other person authorized by the Board of
Directors or the chief executive officer or the president or a vice president,
is authorized to vote, represent, and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority granted herein may be
exercised either by such person directly
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or by any other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending any civil or criminal action or
proceeding for which indemnification is required pursuant to Section 6.1 or for
which indemnification is permitted
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pursuant to Section 6.2 following authorization thereof by the Board of
Directors shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or
on behalf of the indemnified party to repay such amount if it shall
ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
6.5 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
6.6 CONFLICTS
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the
certificate of incorporation, these Bylaws, a resolution of the stockholders or
an agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
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The corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the Board of Directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the
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corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the Board of Directors, or the chief executive officer or the president or vice
president, and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of such corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
has ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; PROVIDED, HOWEVER, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
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Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained
in (i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
8.9 SEAL
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
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8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The Bylaws of the corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the corporation may,
in its certificate of incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the Board of
Directors of the corporation that the corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation
entitled to vote thereon votes for the proposed dissolution, then a
certificate stating that the dissolution has been authorized in accordance
with the provisions of Section 275 of the General Corporation Law of Delaware
and setting forth the names and residences of the directors and officers
shall be executed, acknowledged, and filed and shall become effective in
accordance with Section 103 of the General Corporation Law of Delaware. Upon
such certificate's becoming effective in accordance
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with Section 103 of the General Corporation Law of Delaware, the corporation
shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent
in writing, either in person or by duly authorized attorney, to a dissolution,
no meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is
threatened with irreparable injury because the directors are so divided
respecting the management of the affairs of the corporation that the required
vote for action by the Board of Directors cannot be obtained and the
stockholders are unable to terminate this division; or
(iii) the corporation has abandoned its business and has
failed within a reasonable time to take steps to dissolve, liquidate or
distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the corporation
and not to liquidate its affairs and distribute its assets, except when the
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.
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TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I CORPORATE OFFICES.......................................................................... ii
1.1 REGISTERED OFFICE................................................................. ii
1.2 OTHER OFFICES..................................................................... ii
ARTICLE II MEETINGS OF STOCKHOLDERS................................................................... ii
2.1 PLACE OF MEETINGS................................................................. ii
2.2 ANNUAL MEETING.................................................................... ii
2.3 SPECIAL MEETING................................................................... iv
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.................................................. iv
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES............................................ iv
2.6 MANNER OF GIVING NOTICE, AFFIDAVIT OF NOTICE...................................... v
2.7 QUORUM............................................................................ v
2.8 ADJOURNED MEETING; NOTICE......................................................... v
2.9 CONDUCT OF BUSINESS............................................................... v
210. VOTING............................................................................ vi
2.11 WAIVER OF NOTICE.................................................................. vi
2.12 RECORD DATE FOR STOCKHOLDER NOTICE, VOTING; GIVING CONSENTS....................... vi
2.13 PROXIES........................................................................... vii
ARTICLE III DIRECTORS.................................................................................. vii
3.1 POWERS............................................................................ vii
3.2 NUMBER OF DIRECTORS............................................................... vii
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTOR............................ vii
3.4 RESIGNATION AND VACANCIES......................................................... viii
3.5 PLACE OF MEETINGS, MEETINGS BY TELEPHONE.......................................... viii
3.6 REGULAR MEETINGS.................................................................. ix
3.7 SPECIAL MEETINGS; NOTICE.......................................................... ix
3.8 QUORUM............................................................................ ix
3.9 WAIVER OF NOTICE.................................................................. ix
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING................................. x
3.11 FEES AND COMPENSATION OF DIRECTORS................................................ x
3.12 APPROVAL OF LOANS TO OFFICERS..................................................... x
3.13 REMOVAL OF DIRECTORS.............................................................. x
ARTICLE IV COMMITTEES................................................................................. xi
4.1 COMMITTEES OF DIRECTORS........................................................... xi
4.2 COMMITTEE MINUTES................................................................. xi
4.3 MEETINGS AND ACTION OF COMMITTEES................................................. xi
ARTICLE V OFFICERS................................................................................... xii
5.1 OFFICERS.......................................................................... xii
</TABLE>
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<TABLE>
<C> <S> <C>
5.2 APPOINTMENT OF OFFICERS........................................................... xii
5.3 SUBORDINATE OFFICERS.............................................................. xii
5.4 REMOVAL AND RESIGNATION OF OFFICERS............................................... xii
5.5 VACANCIES IN OFFICES.............................................................. xiii
5.6 CHAIRMAN OF THE BOARD............................................................. xiii
5.7 CHIEF EXECUTIVE OFFICER........................................................... xiii
5.8 PRESIDENT......................................................................... xiii
5.9 VICE PRESIDENTS................................................................... xiii
5.10 SECRETARY......................................................................... xiv
5.11 CHIEF FINANCIAL OFFICER........................................................... xiv
5.12 REPRESENTATIONS OF SHARES OF OTHER CORPORATIONS................................... xiv
5.13 AUTHORITY AND DUTIES OF OFFICERS.................................................. xv
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS......................... xv
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS......................................... xv
6.2 INDEMNIFICATION OF OTHERS......................................................... xv
6.3 PAYMENT OF EXPENSES IN ADVANCE.................................................... xv
6.4 INDEMNITY NOT EXCLUSIVE........................................................... xvi
6.5 INSURANCE......................................................................... xvi
6.6 CONFLICTS......................................................................... xvi
ARTICLE VII RECORDS AND REPORTS........................................................................ xvi
7.1 MAINTENANCE AND INSPECTION OF RECORDS............................................. xvii
7.2 INSPECTION BY DIRECTORS........................................................... xvii
ARTICLE VIII GENERAL MATTERS............................................................................ xvii
8.1 CHECKS............................................................................ xvii
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.................................. xvii
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES............................................ xviii
8.4 SPECIAL DESIGNATION ON CERTIFICATES............................................... xviii
8.5 LOST CERTIFICATES................................................................. xviii
8.6 CONSTRUCTION; DEFINITIONS......................................................... xix
8.7 DIVIDENDS......................................................................... xix
8.8 FISCAL YEAR....................................................................... xix
8.9 SEAL.............................................................................. xix
8.10 TRANSFER OF STOCK................................................................. xix
8.11 STOCK TRANSFER AGREEMENTS......................................................... xx
8.12 REGISTERED STOCKHOLDERS........................................................... xx
</TABLE>
-xxiii-
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IX AMENDMENTS................................................................................. xx
ARTICLE X DISSOLUTION................................................................................ xx
ARTICLE XI CUSTODIAN.................................................................................. xxi
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES....................................... xxi
11.2 DUTIES OF CUSTODIANS.............................................................. xxi
</TABLE>
-xxiv-
<PAGE>
SILICON VALLEY BANK
AMENDMENT TO LOAN AND SECURITY
AGREEMENT
BORROWER: SYNC RESEARCH, INC.
ADDRESS: 40 PARKER
IRVINE, CALIFORNIA 92618
DATED: APRIL 14, 1999
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the borrower named above (the "Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated September 18, 1991, as amended by that Extension Agreement dated August
3, 1992, by that Amendment to Loan Agreement dated October 20, 1992, by that
Amendment to Loan Agreement dated August 23, 1993, by that Amendment to Loan
Agreement dated February 10, 1994, by that Amendment to Loan Agreement dated
July 18, 1994, by that Amendment to Loan Agreement dated September 20, 1994,
by that Amendment to Loan and Security Agreement dated August 31, 1995, by
that Amendment to Loan and Security Agreement (the "October 1995 Amendment")
dated October 5, 1995, by that Amendment to Loan Agreement dated July 3,
1996, by that Amendment to Loan and Security Agreement dated October 6, 1996,
by that Amendment to Loan and Security Agreement dated June 10, 1997 and by
that Amendment to Loan and Security Agreement dated as of December 3, 1997
(the "Loan Agreement"), as follows. (Capitalized terms used but not defined
in this Agreement, shall have the meanings set forth in the Loan Agreement.)
1. REVISED SCHEDULE. The Schedule to Loan Agreement is hereby
replaced in its entirety with the Schedule to Loan Agreement as attached
hereto.
2. MODIFICATION TO SECTIONS 2.2 AND 2.2A. Section 2.2 and Section
2.2A of the Loan Agreement are hereby replaced in their entirety with the
following Section 2.2 and Section 2.2A:
"2.2 GRANT OF SECURITY INTEREST IN COLLATERAL. The Borrower grants
Silicon a continuing security interest in all of the Borrower's interest in
the Collateral (as defined below in Section 2.2A) as security for all
Obligations.
2.2A COLLATERAL. The term 'Collateral' as used herein shall mean all of
the Borrower's interest in the types of property described below, whether
now owned or hereafter acquired, and wherever located: (a) All accounts,
contract rights, chattel paper, letters of credit, documents, securities,
money, and instruments, and all other obligations now or in the future
owing to the Borrower; (b) All inventory, goods, merchandise, materials,
raw materials, work in process, finished goods, farm products, advertising,
packaging and shipping materials, supplies, and all other tangible personal
property which is held for sale or lease or furnished under contracts
-1-
<PAGE>
of service or consumed in the Borrower's business, and all warehouse
receipts and other documents; and (c) All equipment, including without
limitation all machinery, fixtures, trade fixtures, vehicles, furnishings,
furniture, materials, tools, machine tools, office equipment, computers and
peripheral devices, appliances, apparatus, parts, dies, and jigs; (d) All
general intangibles including, but not limited to, deposit accounts,
goodwill, names, trade names, trademarks and the goodwill of the business
symbolized thereby, trade secrets, drawings, blueprints, customer lists,
patents, patent applications, copyrights, security deposits, loan
commitment fees, federal, state and local tax refunds and claims, all
rights in all litigation presently or hereafter pending for any cause or
claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against Silicon, all
rights to purchase or sell real or personal property, all rights as a
licensor or licensee of any kind, all royalties, licenses, processes,
telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation credit,
liability, property and other insurance), and all other rights, privileges
and franchises of every kind; (e) All books and records, whether stored on
computers or otherwise maintained; and (f) All substitutions, additions and
accessions to any of the foregoing, and all products, proceeds and
insurance proceeds of the foregoing, and all guaranties of and security
for the foregoing; and all books and records relating to any of the
foregoing. Silicon's security interest in any present or future technology
(including patents, trade secrets, and other technology) shall be subject
to any licenses or rights now or in the future granted by the Borrower to
any third parties in the ordinary course of Borrower's business; provided
that if the Borrower proposes to sell, license or grant any other rights
with respect to any technology in a transaction that, in substance, conveys
a major part of the economic value of that technology, Silicon shall first
be requested to release its security interest in the same, and Silicon may
withhold such release in its discretion."
3. MODIFICATION TO SECTION 3.7. Section 3.7 of the Loan Agreement is
hereby amended in its entirety to read as follows:
"3.7 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or
in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
the Borrower, at the times and for the periods therein stated. Since the
last date covered by any such statement, there has been no material adverse
change in the financial condition or business of the Borrower. The
Borrower is now and will continue to be solvent. The Borrower will provide
Silicon: (i) within 30 days after the end of each month, a monthly
financial statement prepared by the Borrower, and a Compliance Certificate
in such form as Silicon shall reasonably specify, signed by the Chief
Financial Officer of the Borrower, certifying that as of the end of such
month the Borrower was in full compliance with all of the terms and
conditions of this Agreement, and setting forth calculations showing
compliance with the financial covenants set forth on the Schedule and such
other information as Silicon shall reasonably request #; and (ii) within
120 days following the end of the Borrower's fiscal year, complete annual
financial statements, certified by independent certified public accountants
acceptable to Silicon and accompanied by the unqualified report thereon by
said independent certified public accountants. *
# (AND SUCH INFORMATION SHALL INCLUDE WITHOUT LIMITATION BANK AND BROKERAGE
STATEMENTS OR OTHER EVIDENCE SATISFACTORY TO SILICON REGARDING THE
LIQUIDITY FINANCIAL COVENANT SET FORTH IN THE SCHEDULE TO THIS AGREEMENT)
-2-
<PAGE>
* BORROWER SHALL ALSO SUPPLY TO SILICON (i) WITHIN 5 DAYS AFTER THE EARLIER
OF THE DATE THE REPORT 10-Q IS FILED OR IS REQUIRED TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO BORROWER, SUCH 10-Q
REPORT; AND (ii) WITHIN 5 DAYS AFTER THE EARLIER OF THE DATE THE REPORT
10-K IS FILED OR IS REQUIRED TO BE FILED WITH THE SECURITIES EXCHANGE
COMMISSION WITH RESPECT TO BORROWER, SUCH 10-K REPORT."
4. MODIFICATION TO SECTION 4.5. Section 4.5 of the Loan Agreement is
hereby deleted in its entirety and replaced with the following:
"4.5 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At all reasonable times,
and upon one business day notice, Silicon, or its agents, shall have the
right to inspect the Collateral, and the right to audit and copy the
Borrower's accounting books and records and Borrower's books and records
relating to the Collateral. Silicon shall take reasonable steps to keep
confidential all information obtained in any such inspection or audit, but
Silicon shall have the right to disclose any such information to its
auditors, regulatory agencies, and attorneys, and pursuant to any subpoena
or other legal process. The foregoing audits shall be at Silicon's
expense, except that the Borrower shall reimburse Silicon for its
reasonable out of pocket costs for semi-annual accounts receivable audits
by third parties retained by Silicon, and Silicon may debit Borrower's
deposit accounts with Silicon for the cost of such semi-annual accounts
receivable audits (in which event Silicon shall send notification thereof
to the Borrower). Notwithstanding the foregoing, after the occurrence of
an Event of Default all audits shall be at the Borrower's expense."
5. FEE. Borrower shall pay to Silicon a facility fee in the amount
of $15,000 concurrently, which shall be in addition to all interest and all
other amounts payable under the Loan Agreement, and which shall not be
refundable.
6. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
7. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and the Borrower,
and the other written documents and agreements between Silicon and the
Borrower set forth in full all of the representations and agreements of the
parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the
parties with respect to the subject hereof. Except as herein expressly
amended, all of the terms and provisions of the Loan Agreement, as so
amended, and all other documents and agreements between Silicon and the
Borrower shall continue in full force and effect and the same are hereby
ratified and confirmed.
BORROWER: SILICON:
SYNC RESEARCH, INC. SILICON VALLEY BANK
BY /S/ RICHARD MARTIN BY /S/ MARLA JOHNSON
----------------------------- -----------------------------
PRESIDENT OR VICE PRESIDENT TITLE VICE PRESIDENT
BY /S/ WILLIAM K. GUERRY
-----------------------------
SECRETARY OR ASS'T SECRETARY
-3-
<PAGE>
EXHIBIT 10.39
[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 James D. McNally ("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 Senior Vice President of Sales and
Service and as an Officer of the Company effective April 15, 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 October 15, 1999
or such time as Employee commences other employment (the "Termination Date"). As
part of such employment, Employee agrees to perform such projects as may be
reasonably requested by the Chairman of the Board of the Company, but in no
event shall such projects require more than 20 hours of service per week. For
purposes of this Agreement, "other employment" is defined as any employment
exceeding 20 hours per week. The parties acknowledge that the Company has paid
Employee's regular salary through the date of this Agreement in accordance with
the Company's normal payroll practices, has paid Employee any accrued vacation
pay as of the Resignation Date and has reimbursed all expenses appropriately
incurred by Employee on the Company's behalf. Any payments made under this
Agreement shall be subject to withholding for taxes to the extent required under
applicable law. Following the date of this Agreement, Employee shall not be
entitled to any other employee benefits, including vacation, except as expressly
set forth above and in Section 5 below.
2. CONSIDERATION. In consideration for the release of claims set forth
below and other obligations under this Agreement, the Company agrees to pay
Employee $16,666.67 (less applicable tax withholding) each month through the
Termination Date, in accordance with the Company's normal payroll practices.
<PAGE>
3. STOCK OPTIONS. In consideration of the Employee's willingness to
avail himself to the Company through the Termination Date, vesting of
Employee's options to purchase shares of Common Stock granted to Employee
under the Company's Stock Option Plan that have not been exercised as of the
date of this Agreement, shall continue through the Termination Date. No
additional option shares shall vest after such date. In accordance with the
terms of the Option Agreement(s) issued to Employee, vested options will be
exercisable until 60 days after the Termination Date.
4. TERMINATION OF CHANGE OF CONTROL AGREEMENT. Effective with the
Resignation Date, the Amended and Restated Change of Control Severance
Agreement dated June 5, 1997 between the Company and Employee is hereby
terminated.
5. BENEFITS.
(a) Employee shall continue to receive the Company's
standard medical and dental 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. Except as mutually agreed by both parties in
writing, 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 Company's
development, manufacture, marketing, sales or distribution of Frame Relay
Access Devices, Frame Relay Access Probes, CSU/DSUs and network management
software and other products. The geographical areas in which the restrictions
provided for in the foregoing sentence apply include all cities, counties and
states of the United States and all other countries in which the Company has
engaged in sales or otherwise conducted business or selling efforts at any
time. For a period extending until one year following the Termination Date,
Employee will not, directly or indirectly, recruit, attempt to hire, solicit,
assist others in recruiting or hiring, or refer to others concerning
employment, any person who is an employee of the Company or any of its
subsidiaries or induce or attempt to induce any such employee to terminate
such employee's employment with the Company or any of its subsidiaries.
<PAGE>
7. NO OTHER PAYMENTS DUE. Employee acknowledges and agrees that he
has received all salary, accrued vacation, commissions, bonuses,
compensation, shares of stock, options therefor and other such sums due to
Employee, other than amounts to be paid pursuant to Sections 2, 3 and 5 of
this Agreement. In light of the payment by the Company of all wages due, or
to become due to the Employee, the Parties further acknowledge and agree that
California Labor Code Section 206.5 is not applicable to the Parties hereto.
That section provides in pertinent part as follows:
No employer shall require the execution of any release
of any claim or right on account of wages due, or to
become due, or made as an advance on wages to be earned,
unless payment of such wages has been made.
8. SYNC OWNED EQUIPMENT. Except as provided for in this section, the
Employee agrees to return all Sync owned equipment in the possession or
control of the Employee. Such equipment includes but is not limited to all
personal computers, cellular phones, pagers, fax machines, office furniture,
and office equipment or other items provided to the Employee by Sync or
otherwise paid for by Sync including those items for which Sync reimbursed
the Employee the purchase price for such equipment in connection with the
Employee's expense report submittals. Sync shall pay the freight, shipping or
other transportation costs associated with shipping the equipment. The
Equipment shall be returned to Sync by April 30, 1999. If the equipment is
not returned to Sync, Sync may withhold the original purchase cost of such
equipment from the payment of obligations of Sync to the Employee including
those provided for in this Agreement in lieu of the return of the equipment.
Sync agrees to allow Employee to use the Sync provided AT&T calling
card and to reimburse Employee for his Phoenix office telephone service
(maximum of $100 per month) for purposes of providing assistance to Sync
through the Termination Date, unless otherwise returned to Sync or canceled
by Employee prior to the Termination Date. Employee agrees to utilize calling
card and telephone service for Sync business purposes only and costs related
to any usage for non-Sync purposes shall be reimbursed by Employee to Sync.
Sync also agrees to allow Employee to use a Sync owned laptop computer and to
provide Employee with continued remote email access through Sync's network
server through the Termination Date, unless otherwise returned by Employee
prior to the Termination Date. Employee agrees to utilize the email for Sync
business purposes only and costs related to any usage for non-Sync purposes
shall be reimbursed by Employee to Sync. Notwithstanding the above, Sync, at
it sole discretion, has the right to cancel the AT&T calling card and network
access at any time if it deems usage to be excessive or inappropriate.
9. 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
<PAGE>
and successor corporations and assigns from any claim duty, obligation or
cause of action relating to any matters of any kind, whether known or
unknown, suspected or unsuspected, that either of them may possess arising
from any omissions, acts or facts that have occurred up until and including
the Effective Date of this Agreement including, without limitation:
(a) any and all claims relating to or arising from
Employee's employment relationship with the Company and termination of that
relationship;
(b) any and all claims relating to, or arising from,
Employee's right to purchase, or actual purchase of shares of stock of the
Company;
(c) any and all claims for wrongful discharge of
employment; breach of contract, both express and implied; breach of a
covenant of good faith and fair dealing, both express and implied; negligent
or intentional infliction of emotional distress; negligent or intentional
misrepresentation; negligent or intentional interference with contract or
prospective economic advantage; and defamation;
(d) any and all claims for violation of any federal,
state or municipal statute, including, but not limited to, Title VII of the
Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967,
and the California Fair Employment and Housing Act.
(e) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination; and
(f) any and all claims for attorney's fees and costs.
The Company and Employee agree that the release set forth in 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.
10. 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.
11. 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
<PAGE>
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.
12. TAX CONSEQUENCES. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any such
sums to Employee under the terms of this Agreement. Employee agrees and
understand that he is responsible for payment, if any, of local, state and/or
federal taxes on the sums paid hereunder by the Company and any penalties or
assessments thereon. Employee further agrees to indemnify and hold the
Company harmless from any claims, demands, deficiencies, penalties,
assessments, executions, judgments, or recoveries by any government agency
against the Company for any amounts claimed due on account of Employee's
failure to pay federal or state taxes or damages sustained by the Company by
reason of any such claims, including reasonable attorney's fees.
13. 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.
14. 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.
15. 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
<PAGE>
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.
16. NON-DISPARAGEMENT. Each party agrees to refrain from any
disparagement, criticism, defamation, slander of the other, or tortuous
interference with the contracts and relationships of the other.
17. 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.
18. 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 nor statements
made by the other party which are not specifically set forth in this
Agreement.
19. COSTS. The Parties shall each bear their own costs, attorneys'
fees and other fees incurred in connection with this Agreement.
20. SEVERABILITY. In the event that any provision hereof becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall continue in full force and effect without said
provision.
21. ENTIRE AGREEMENT. This Agreement represents the entire agreement
and understanding between the Company and Employee concerning Employee's
separation from the Company and supersedes and replaces any and all prior
agreements and understandings concerning Employee's relationship with the
Company and his compensation by the Company other than any option agreement
as described in Section 3 and other than the Employee Agreement as described
in Section 12.
22. NO ORAL MODIFICATION. This Agreement may only be amended in
writing signed by Employee and the Company.
23. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of California.
24. EFFECTIVE DATE. This Agreement shall be effective once it has
been signed by both parties and such date is referred to herein as the
"Effective Date".
<PAGE>
25. COUNTERPARTS. This Agreement may be executed in counterparts,
and each counterpart shall have the same force and effect as an original and
shall constitute an effective binding agreement on the part of each of the
undersigned.
26. ASSIGNMENT. This Agreement may not be assigned by Employee or
the Company without the prior consent of the other party. Notwithstanding the
foregoing, this Agreement may be assigned by the Company to a corporation
controlling, controlled by or under common control with the Company without
the consent of Employee.
27. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf
of the parties hereto, with the full intent of releasing all claims. The
parties acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation,
negotiation and execution of this Agreement by legal counsel of their own
choice or that they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this
Agreement and of the releases it contains; and
(d) They are fully aware of the legal and binding effect
of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
respective dates set forth below.
SYNC RESEARCH, INC.
By: /s/ William K. Guerry:
-------------------------
Title: VP Finance, CFO
----------------------
Dated: 4/13/99
----------------------
EMPLOYEE
/s/ James D. McNally
----------------------------
Signature
James D. McNally
----------------------------
Print Name
Dated: 4/13/99
----------------------
<PAGE>
SYNC RESEARCH, INC.
AMENDED AND RESTATED MANAGEMENT AGREEMENT
THIS AMENDED AND RESTATED MANAGEMENT AGREEMENT (this "Agreement") is
made as of April 9, 1999, by and between Sync Research, Inc., a Delaware
corporation (the "Company"), and Richard Martin ("Employee").
WHEREAS, Employee and Company are parties to a Management Agreement
dated November 6, 1998 (the "Management Agreement") and an employment offer
letter dated May 26, 1998; and
WHEREAS, each party desires to amend the Management Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Management Agreement is
hereby amended and restated to read in its entirety as follows:
1. SALE OF THE COMPANY.
(a) In the event on or before the earlier of (i) November 30,
1999 or (ii) the Employee's termination as Chief Executive Officer of the
Company, of the closing, or signature by the Company and another party of a
definitive agreement to effect, any of the following events (any of such
events being referred to herein as a "Sale of the Company"):
(i) the acquisition by a single person, entity or group
of affiliated entities of more than 50% of the Common Stock of the Company
(assuming for this purpose conversion of all outstanding securities
convertible into Common Stock) issued and outstanding immediately prior to
such acquisition; or
(ii) any merger of the Company if the shareholders of the
Company immediately before such transaction own immediately after
consummation of such transaction equity securities (other than options and
other rights to acquire equity securities) possessing less than 50% of the
voting power of the surviving or acquired corporation; or
(iii) the sale or other disposition in one transaction or
a series of transactions of all or substantially all of the Company's assets;
then Employee shall receive from the Company, cash compensation (the
"Payments") in an amount equal to the greater of (1) two percent (2%) of the
value of the stock or cash consideration received by stockholders of the
Company in the Sale of the Company [less the Aggregate Gross Profit received
by the Employee in connection with the sale, transfer or termination of
securities in such Sale of the Company] or (2) $250,000 [less the Aggregate
Gross Profit received by the Employee in connection with the sale, transfer
or termination of securities in such Sale of the Company]; provided that the
Payments shall not exceed $500,000. For purposes of this Agreement, such
"Aggregate Gross Profit" shall mean the aggregate gross
<PAGE>
proceeds received by Employee for the sale, transfer or termination of
securities in the Sale of the Company, less amounts paid by Employee for such
securities. In the event the Employee's options for stock of the Company are
assumed by the acquiring company or substituted for options to purchase stock
of the acquiring company, the "Aggregate Gross Profit" shall mean the
aggregate gross proceeds receivable upon exercise of such options immediately
following the closing of the Sale of the Company, less the aggregate exercise
price of such options. To the extent that proceeds from the Sale of the
Company are to be held in escrow or otherwise paid in installments, a Payment
shall be made to Employee each time proceeds from the Sale are paid to other
stockholders of the Company. Each such Payment shall be made in an amount
calculated based on the assumption that Employee will receive the maximum
remaining amount that might ultimately be paid to Employee from escrow or
other remaining installments.
(b) Any non-cash proceeds received in a Sale of the Company
shall be valued at fair market value. In the case of publicly traded
securities, such fair market value shall be based on the closing price of
such securities as reported on the exchange or quotation system on which the
securities trade on the day immediately preceding the closing involving a
Sale of the Company. In the case of non-publicly traded securities or other
property, fair market value shall be determined by the Board of Directors of
the Company at the time of receipt of such proceeds by the Company or its
shareholders.
(c) Notwithstanding the foregoing, in the event of (i) the
closing on or before November 30, 1999 of a Sale of the Company and (ii)
termination of Employee's employment by the Company or the acquiring company
other than for cause (as defined by statute in California) in connection with
or immediately following the Sale of the Company, the Company will enter into
a consulting arrangement with Employee (subject to Employee's execution of a
mutually acceptable Change of Control Severance Agreement) pursuant to which
Employee will be paid consulting fees of $16,666.67 per month and related
benefits for the period through the earlier of (1) three (3) months after the
date of such involuntary termination or (2) November 30, 1999.
(d) In the event of (i) the adoption by the Board of Directors
of the Company of a resolution to liquidate the Company and distribute assets
to the creditors and shareholders of the Company on or before November 30,
1999 (the "Liquidation") and (ii) the termination of Employee's employment
with the Company in connection or immediately following the Liquidation, the
Employee will be paid his current monthly salary of $16,667.67 per month and
related benefits for the period through the earlier of (1) three (3) months
after the date of notice of such termination by Company to Employee or (2)
November 30, 1999.
2. LIMITATION ON PAYMENTS. Notwithstanding the provisions of Section
1, in the event that the Payments provided for in this Agreement or otherwise
payable to Employee (i) constitute "parachute payments" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"),
and (ii) but for this Section 2, would be subject to the excise tax imposed
by Section 4999 of the Code (or any corresponding provisions of state income
tax law), then Employee's Payments shall be either
-2-
<PAGE>
(a) delivered in full, or
(b) delivered as to such lesser extent which would result in no
portion of such Payments being subject to excise tax under Section 4999 of
the Code, whichever of the foregoing amounts, taking into account the
applicable federal, state and local income taxes and the excise tax imposed
by Section 4999, results in the receipt by Employee on an after-tax-basis, of
the greater amount of severance benefits, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code. Unless the Company and Employee otherwise agree in writing, any
determination required under this Section 5 shall be made in writing by the
Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon Employee and the Company
for all purposes. For purposes of making the calculations required by this
Section 2, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order
to make a determination under this Section. The Company shall bear all costs
the Accountants may reasonably incur in connection with any calculations
contemplated by this Section 2. In the event that subsection (a) above
applies, then Employee shall be responsible for any excise taxes imposed with
respect to such severance and other benefits. In the event that subsection
(b) above applies, then each Payment hereunder shall be reduced to the extent
necessary to avoid imposition of such excise taxes.
3. TERM. This Agreement shall terminate on the earlier of (i)
November 30, 1999 or (ii) the Employee's termination as Chief Executive
Officer of the Company; provided, however, that any previously accrued
payment obligations hereunder shall survive such termination.
4. ENTIRE AGREEMENT. This Agreement and the May 28, 1998 employment
offer letter contain the entire agreement and understanding between the
Company and Employee with respect to the subject matter hereof and supersede
all prior oral and written agreements, understandings, commitments and
practices between the parties.
5. AMENDMENTS. The provisions of this Agreement may not be amended,
supplemented, waived or changed orally, but only by a writing signed by the
party as to whom enforcement of any such amendment, supplement, waiver or
modification is sought and making specific reference to this Agreement.
6. SEVERABILITY. If any of this Agreement or any other agreement
entered into pursuant hereto is contrary to, prohibited by or deemed invalid
under applicable law or regulation, such provision shall be inapplicable and
deemed omitted to the extent so contrary, prohibited or invalid, but the
remainder hereof shall not be invalidated thereby and shall be given full
force and effect so far as possible.
7. ASSIGNMENT. This Agreement is not assignable without the express
written consent of all parties to this Agreement.
-3-
<PAGE>
8. ATTORNEYS' FEES. In the event of any litigation in a court of
competent jurisdiction arising in connection with this Agreement, the
prevailing party in judgment shall be entitled to recover reasonable legal
fees and costs in connection with such action from the other party.
9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
10. GOVERNING LAW. This Agreement shall be governed in all respects by
the internal laws of the State of California.
IN WITNESS WHEREOF, this Agreement is executed as of the date first above
written.
"THE COMPANY"
SYNC RESEARCH, INC.
By: /s/ William K. Guerry
------------------------------
Its: VP Finance, C.F.O.
------------------------------
"EMPLOYEE"
/s/ Richard Martin
------------------------------
Richard Martin
-4-
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
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