<PAGE>
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UNITED STATES
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, 2000, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-26952
---------------------------------
SYNC RESEARCH, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0676350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 MORGAN
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 August 7, 2000, 3,537,401 shares of the Registrant's Common Stock were
issued and outstanding.
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<PAGE>
SYNC RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information.......................................................................... 3
Item 1. a) Condensed consolidated balance sheets at June 30, 2000 (unaudited) and December 31,
1999................................................................................... 3
b) Condensed consolidated statements of operations (unaudited) for the three months and
six months ended June 30, 2000 and June 30, 1999....................................... 4
c) Condensed consolidated statements of cash flows (unaudited) for the six months ended
June 30, 2000 and June 30, 1999........................................................ 5
d) Notes to condensed consolidated financial statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 18
Part II. Other Information.............................................................................. 19
Item 1. Legal Proceedings.............................................................................. 19
Item 2. Changes in Securities and Use of Proceeds...................................................... 19
Item 3. Defaults upon Senior Securities................................................................ 19
Item 4 Submission of Matters to a Vote of Security Holders............................................ 20
Item 5. Other Information.............................................................................. 20
Item 6. Exhibits and Reports on Form 8-K............................................................... 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 8,236 $ 8,632
Accounts and other receivables, net ................... 732 3,173
Inventories, net ...................................... 2,622 5,140
Prepaid expenses and other current assets ............. 751 565
-------- --------
Total current assets ..................................... 12,341 17,510
Furniture, fixtures and equipment, net ................... 1,322 1,632
Other assets ............................................. 55 55
======== ========
Total assets ............................................. $ 13,718 $ 19,197
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 1,202 $ 1,769
Accrued compensation and related costs ............... 547 736
Deferred revenue and customer deposits ................ 1,755 3,048
Other accrued liabilities ............................. 262 297
Current maturities of capitalized lease obligations ... 23 49
-------- --------
Total current liabilities ................................ 3,789 5,899
Capitalized lease obligations, less current maturities ... 5 7
Stockholders' equity:
Preferred stock Series A, $.001 par value:
Authorized shares-700
Issued and outstanding shares-700 .................. 2,066 --
Common stock, $.001 par value:
Authorized shares-50,000
Issued and outstanding shares- 3,537 at June 30, 2000
and 3,505 at December 31, 1999 ..................... 4 4
Additional paid-in capital ............................ 72,017 71,958
Accumulated deficit ................................... (64,163) (58,671)
-------- --------
Total stockholders' equity ............................... 9,924 13,291
-------- --------
Total liabilities and stockholders' equity ............... $ 13,718 $ 19,197
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30 June 30
-------------------------- ------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues ................. $ 2,418 $ 4,405 $ 5,568 $ 9,511
Cost of sales ................ 4,197 2,485 6,113 5,336
------- ------- ------- -------
Gross profit (loss) .......... (1,779) 1,920 (545) 4,175
Operating expenses:
Research and development .. 1,066 1,311 2,128 3,026
Selling and marketing ..... 769 1,356 1,628 3,152
General and administrative 851 647 1,402 1,261
------- ------- ------- -------
Total operating expenses .. 2,686 3,314 5,158 7,439
------- ------- ------- -------
Operating loss ............... (4,465) (1,394) (5,703) (3,264)
Interest income, net ......... 98 105 212 240
------- ------- ------- -------
Loss before income taxes ..... (4,367) (1,289) (5,491) (3,024)
Provision for income taxes ... -- 2 1 2
------- ------- ------- -------
Net loss ..................... $(4,367) $(1,291) $(5,492) $(3,026)
======= ======= ======= =======
Basic and diluted net loss per
share ........................ $ (1.24) $ (0.37) $ (1.56) $ (0.87)
======= ======= ======= =======
Shares used in computing net
loss per share, basic and
diluted ...................... 3,536 3,480 3,527 3,492
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------------
2000 1999
-------- --------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss .................................................................. $ (5,492) $ (3,026)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 427 780
Provision for (recovery of) losses on accounts receivable ............. (14) 75
Inventory reserves .................................................... 2,493 --
Deferred compensation expense ......................................... -- 7
Changes in operating assets and liabilities, net:
Accounts and other receivables ........................................ 2,455 (724)
Inventories ........................................................... 25 747
Prepaid expenses and other current assets ............................. (186) 263
Accounts payable and other accrued liabilities ........................ (602) (1,608)
Accrued severance and restructuring ................................... -- (783)
Accrued compensation and related costs ................................ (189) (113)
Deferred revenue and customer deposits ................................ (1,293) 595
-------- --------
Net cash used in operating activities ....................................... (2,376) (3,787)
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment, net ...................... (117) 88
-------- --------
Net cash provided by (used in) investing activities ......................... (117) 88
FINANCING ACTIVITIES
Payments on capitalized lease obligations ................................ (28) (31)
Net proceeds from sale of Series A preferred stock ....................... 2,066 --
Repurchase of common stock ............................................... -- (136)
Proceeds from common stock options exercised and employee stock
purchase plan ....................................................... 59 58
-------- --------
Net cash provided by (used in) financing activities ......................... 2,097 (109)
-------- --------
Net decrease in cash and cash equivalents ................................... (396) (3,808)
Cash and cash equivalents at beginning of period ............................ 8,632 14,135
-------- --------
Cash and cash equivalents at end of period .................................. $ 8,236 $ 10,137
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ............................................................ $ 4 $ 4
======== ========
Income taxes paid ........................................................ $ 12 $ 14
======== ========
</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, 2000, the
condensed consolidated statements of operations for the three and six months
ended June 30, 2000 and 1999 and the condensed consolidated statements of cash
flows for the six months ended June 30, 2000 and 1999 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, 2000, the results of
its operations for the three and six months ended June 30, 2000 and 1999 and its
cash flows for the six months ended June 30, 2000 and 1999. The condensed
consolidated financial statements should be read in conjunction with the audited
financial statements of Sync Research, Inc. (the "Company") and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999. The results of operations for the three and six months ended June 30,
2000 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.
The Company has entered into an Amended and Restated Agreement and Plan
of Merger (the "Agreement") with Osicom Technologies, Inc., a New Jersey
corporation ("Parent"), pursuant to which, (i) Entrada Networks ("Entrada"), a
wholly owned subsidiary of Parent will be merged with and into a subsidiary of
the Company (the "Merger") and will become a wholly-owned subsidiary of the
Company, and (ii) Parent will own between 56% and 64% of the issued and
outstanding common stock of the Company. The consummation of the Merger is
subject to certain conditions, including, but not limited to, the approval of
the Company's stockholders. The shareholders will vote on the merger at the
annual meeting to be held on August 30, 2000. It is expected that the Merger
will be completed in the third quarter. The Merger is expected to be accounted
for as an acquisition of the Company by Parent under the "purchase" method of
accounting in accordance with generally accepted accounting principles.
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 90 days or less and money market
funds to be cash equivalents.
3. 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,
2000 1999
---------------- ----------------
<S> <C> <C>
Raw materials............................ $ 508 $ 2,707
Work in process.......................... 139 366
Finished goods........................... 1,975 2,067
---------------- ----------------
$ 2,622 $ 5,140
================ ================
</TABLE>
6
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
4. 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,
2000 1999
--------------- ---------------
<S> <C> <C>
Equipment acquired under capital leases................................... $ 275 $ 275
Furniture and fixtures.................................................... 563 559
Computer equipment and software........................................... 7,353 7,239
Leasehold improvements.................................................... 415 415
--------------- ---------------
8,606 8,488
Accumulated depreciation and amortization................................. (7,284) (6,856)
--------------- ---------------
$ 1,322 $ 1,632
=============== ===============
</TABLE>
5. STOCKHOLDERS' EQUITY
On May 15, 2000, the Company completed a private placement of 700,000
shares of its Series A Preferred Stock, for net proceeds of approximately $2.1
million in cash. The Series A Preferred Stock is convertible into shares of
common stock on a one-for-one basis, and will be automatically converted upon
completion of the Merger. The Series A Preferred Stock is also entitled to a 6%
annual dividend, and has liquidation preferences. If the Merger has not closed
by August 31, 2000, provided that at least 350,000 shares of the Series A
Preferred Stock is held by the Series A Preferred Stock purchaser and/or its
affiliates, the Series A Preferred stockholder will be entitled to designate one
member of the Company's board of directors and the Company will be required to
obtain the Series A purchaser's consent for certain company actions.
6. 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. Dilutive net loss per
share also reflects the accumulation of approximately $18,000 dividends on the
Company's issued and outstanding Series A Preferred 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.
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 Division 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 January 28, 2000, the court dismissed the complaint
with prejudice. Plaintiffs appealed the dismissal. However, the plaintiff
decided not to pursue the appeal and the appeal was dismissed on July 6, 2000.
The District Court's judgment in favor of the Company, therefore, is final.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
in Part I-Item 1 of this Quarterly Report. Except for the historical information
contained herein, the matters discussed in this document are forward-looking
statements. The Company wishes to alert readers that the factors set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999,
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
The Company develops, manufactures, markets, supports and provides
wide-area network access and management products and services designed to
economically and reliably support business critical applications across carrier
provided packetized transmission services, such as frame relay. The Company's
products include a line of frame relay access devices and routers, serial to
local network protocol converters, circuit management products, digital
transmission devices and supporting software. The Company follows a sales
strategy relying primarily on a direct sales force and leveraging resellers,
distributors and carriers as delivery channels for its products.
PROPOSED MERGER WITH OSICOM TECHNOLOGIES, INC.
The Company has entered into an Amended and Restated Agreement and Plan
of Merger (the "Agreement") with Osicom Technologies, Inc., a New Jersey
corporation ("Parent"), pursuant to which, (i) Entrada Networks ("Entrada"), a
wholly owned subsidiary of Parent will be merged with and into a subsidiary of
the Company (the "Merger") and will become a wholly-owned subsidiary of the
Company, and (ii) Parent will own between 56% and 64% of the issued and
outstanding common stock of the Company. The consummation of the Merger is
subject to certain conditions, including, but not limited to, the approval of
the Company's stockholders. The shareholders will vote on the merger at the
annual meeting to be held on August 30, 2000. It is expected that the Merger
will be completed in the third quarter. The Merger is expected to be accounted
for as an acquisition of the Company by Parent under the "purchase" method of
accounting in accordance with generally accepted accounting principles. A copy
of the Agreement has been filed with the Securities and Exchange Commission in
the Company's registration statement on Form S-4.
Entrada, based in Annapolis Junction, Maryland, designs, manufactures
and markets products that provide access to and enhance the performance of data
and telecommunications networks, and is currently developing products that
provide connectivity for storage networks. Many of Entrada's products are
incorporated into the remote access and other server products of original
equipment manufacturers ("OEMs"). In addition, certain of Entrada's products are
deployed by telecommunications network operators, applications service
providers, internet service providers, and the operators of corporate local area
and wide area networks for the purpose of providing access to and transport
within their networks.
There can be no assurance that the Merger will be consummated, or, if
consummated, that the operations and personnel of Entrada will be successfully
combined. The risks associated with the Merger include the potential disruption
of the respective ongoing businesses of the Company and Entrada, the inability
of the combined company's management to maximize the financial and strategic
position of the combined entity through successful incorporation of Entrada's
personnel and clients, the inability to implement uniform standards, controls,
procedures and policies and the impairment of relationships with existing
employees and clients as a result of the Company's integration of new management
personnel. In addition, the Company has incurred and will continue to incur
significant expenses as a result of the negotiation and implementation of the
Merger. These factors and the other factors discussed in the Company's
registration statement on Form S-4 dated August 3, 2000 and under the section of
this Item 2. Titled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" could have a material adverse effect on the Company's
business, financial condition and operating results.
RECENT DEVELOPMENTS.
In June 2000, the Company recorded a $2.5 million inventory valuation
allowance based upon its recent and expected business levels. In July 2000,
the Company implemented a program to reduce its operating costs including
headcount reductions
8
<PAGE>
and the closure of its Norton, Massachusetts facility. In connection with this
program, the Company will record a charge of approximately $500,000 for facility
closure, employee-related costs and asset write-offs associated with the
program.
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. Service revenues for training,
installation and consulting services are recognized when the service is
performed.
Net revenues for the second quarter of 2000 were $ 2.4 million,
compared to net revenues of $4.4 million for the quarter ended June 30, 1999.
Net revenues for the six months ended June 30, 2000 were $5.6 million, compared
to $9.5 million for the six months ended June 30, 1999. The decrease in net
revenues in the three and six months ended June 30, 2000, compared to the three
and six months ended June 30, 1999 was due primarily to decreased sales of frame
relay access products and circuit management products reflecting higher sales
from Year 2000 related network upgrades in 1999, partially offset by increases
in other revenues, primarily service fees.
Sales to one customer accounted for 12.6% of revenues for the quarter
ended June 30, 2000. Sales to three customers were 14.0%, 12.0% and 11.0% for
the quarter ended June 30, 1999. For the six months ended June 30, 2000 sales to
two customers aggregated 12.7% and 11.0% of revenues comparable to one customer
aggregating 13.0% for the six months ended June 30, 1999.
The percentage of net revenues represented by sales through channel
partners and other resellers was 43.5% and 47.2% for the three and six months
ended June 30, 2000 as compared to 56.5% and 51.6% for the three and six months
ended June 30, 1999. The sales mix of channel partners and other resellers may
change from period to period.
International sales represented 8.7% and 5.8% of the Company's total
sales during the three and six months ended June 30, 2000 as compared to 12.7%
and 19.4%, respectively, for the three and six months ended June 30, 1999. The
decrease was due primarily to shipments to one major European customer during
the three months ended March 31, 1999 and reduced shipments to the pacific rim
during the three months and six months ended June 30, 2000.
GROSS PROFIT (LOSS)
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 a negative $1.8 million and a negative $0.5
million for the three and six months ended June 30, 2000, respectively, from
$1.9 million and $4.2 million in the corresponding prior year period. The
lower gross profit for the three month period ended June 30, 2000 was
primarily due to lower sales revenues and a $2.5 million inventory valuation
allowance recorded during the quarter. Gross profit as a percentage of net
revenues, excluding the provision, decreased to 29.2% and 35.7%, respectively,
for the three and six months ended June 30, 2000 as compared to 43.6% and
43.9% for the comparable periods in 1999. The decrease in margins during the
three and six months ended June 30, 2000 compared to the same periods of 1999
was primarily due to lower margins with one major customer and the overall
decrease in sales levels, partially offset by cost reductions implemented in
1999.
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. Research and development expenses decreased to $1.1 million
9
<PAGE>
and $2.1 million, respectively, for the three months and six months ended June
30, 2000 as compared to $1.3 million and $3.0 million for the comparable periods
in 1999. The decreased expenditures for the three and six month periods ended
June 30, 2000 was due primarily to reductions in personnel 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 marketing activities. Selling and
marketing expenses decreased to $0.8 million and $1.6 million, respectively, for
the three and six months ended June 30, 2000 as compared to $1.4 million and
$3.2 million for the comparable periods in 1999. The decrease in selling and
marketing expenses for the three and six month periods resulted primarily from
headcount reductions, changes in the mix of personnel utilized, and reductions
in advertising and certain other marketing expenditures.
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 increased to $851,000 and $1.4 million,
respectively, for the three and six month period ended June 30, 2000, as
compared to $647,000 and $1.3 million for the three and six months ended June
30, 1999. The increases were primarily due to $280,000 of Merger related costs
incurred in the second quarter of 2000, partially offset by benefits from the
Company's continued cost reduction efforts.
Net interest income was $98,000 and $212,000, respectively, for the
three and six months ended June 30, 2000 as compared to $105,000 and $240,000
for the three and six months ended June 30, 1999. 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 tax provisions for income taxes in 2000 and 1999 represents minimum
state taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company's principal sources of liquidity
consisted of $8.2 million of cash and cash equivalents.
During the six months ended June 30, 2000, cash utilized by operating
activities was $2.4 million, compared to $3.8 million in the corresponding
period in 1999. For the six months ended June 30, 2000, the decreased cash
utilization resulted primarily from decreases in accounts receivable of $2.5
million partially offset by a reduction in deferred revenue and customer
deposits of $1.3 million. During the second quarter of 2000, the Company
generated $2.1 million of net proceeds from the sale of its Series A Preferred
Stock. At June 30, 2000, 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 2000.
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.
THE COMPANY HAS INCURRED CONSISTENT OPERATING LOSSES AND MAY CONTINUE TO INCUR
SIGNIFICANT NET LOSSES AND NEGATIVE CASH FLOWS IN THE FUTURE, AND MAY NEVER BE
PROFITABLE.
The Company has experienced operating losses since inception, with, in
recent years, operating losses of $5.7 million for the six months ended June 30,
2000, $4.7 million in 1999, $16.3 million in 1998, and $18.0 million in 1997. As
of June 30, 2000, the Company had an accumulated deficit of approximately $64.2
million. The Company has experienced, and may in the future experience,
significant fluctuations in revenues and operating results from quarter to
quarter
10
<PAGE>
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; production or quality problems; changes in material
costs; disruption in sources of supply; changes in foreign currency exchange
rates; and general economic conditions. In addition, revenues and gross margins
may fluctuate due to the mix of distribution channels employed and the mix of
products sold. For example, the Company generally realizes a higher gross margin
on direct sales than on sales through its channel partners and other resellers.
Accordingly, if channel partners and other resellers 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 to 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.
During the past year, the Company has shifted its efforts from a focus utilizing
channel partners to one focused more on a direct sales model while utilizing
channel partners for strategic opportunities and fulfillment. Accordingly, the
Company's revenues in any period are highly dependent upon the sales efforts and
success of the Company's direct sales force and those channel partners upon
which it relies. 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 solutions or that the Company's
channel partners and other resellers will continue to offer the Company's
products. In addition, the Company has shifted its focus from large corporate
Fortune 100 enterprises to the middle market enterprise; those companies with 50
to 500 remote locations. There can be no assurance that the middle market
enterprise prospect customers will select the Company's products as compared to
alternative product offerings provided by other vendors. Significant portions of
the Company's expenses are relatively fixed. If sales are below expectations in
any given period, the adverse effect of a shortfall in sales on the Company's
operating results may be magnified by the Company's inability to adjust spending
to compensate for such shortfall. The Company has in the past and may in the
future reduce prices or increase spending to respond to competition or to pursue
new product or market opportunities. Accordingly, there can be no assurance that
the Company will be able to attain or sustain profitability on a quarterly or an
annual basis. In addition, if the Company's operating results fall below the
expectations of public market analysts and investors, the price of the Company's
common stock would likely be materially and adversely affected.
THE MARKET FOR FRAME RELAY SOLUTIONS FOR MISSION CRITICAL AND LEGACY
APPLICATIONS IS UNCERTAIN.
During the first six months of 2000 and for the fiscal year 1999 sales
of frame relay access products, which enable multiprotocol (IP, IPX and SNA)
internet-working over frame relay, represented approximately 30.8%, and 47.5%,
respectively, of the Company's net revenues. The market for SNA-over-frame relay
products is maturing. 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. The Company's frame relay
access products are targeted at the large installed base of IBM customers
utilizing SNA networks. IBM has sold, in the past, the Company's FrameNode(R)
product family under the name IBM Nways 2218. The agreement between IBM and the
Company expired in March 1999. Sales to IBM accounted for 1.5%, 0.8%, and 14.1%
of the Company's net revenues at the end of the first six months ended June 30,
2000, and at the end of 1999, and 1998, respectively. On August 31, 1999, IBM
announced its intention to discontinue support for many of its wide area network
products and in lieu of such support entered into an arrangement with Cisco
Systems to transition its customers and prospects towards solutions provided by
Cisco. The Company has relied on IBM products, in certain circumstances, to
provide support for Sync products at the customer's data center. Due to the IBM
announcement, the Company will need to enhance its product capability to include
interoperability with products provided by vendors other than IBM. There can be
no assurance that IBM will continue to support frame relay, that IBM will not
develop or promote SNA-over-frame relay products competitive with the Company's
products, that the IBM/ Cisco relationship will not adversely impact the
Company's ability to
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sell its products, or that the Company will be able to sufficiently provide for
interoperability between its products and products provided by vendors other
that IBM. Any of these events could have a material adverse effect on the
Company's business, operating results and financial condition.
THE COMPANY DEPENDS UPON ITS CHANNEL PARTNERS AND OTHER RESELLERS FOR A
SIGNIFICANT PORTION OF ITS SALES.
The Company's channel partners and other resellers account, and are
expected to continue to account, for a relatively 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 43.5%,
47.2%, 47.1%, and 62.5%, respectively, of net revenues of the Company for the
three and six months ended June 30, 2000 and in 1999 and 1998, respectively.
Current partners include AT&T, MCI, Electronic Data Systems, Unisys and Diebold.
The Company has also sold its products through OEM relationships with IBM among
others. Sales to IBM accounted for 1.5%, 0.8%, and 14.1% of the Company's net
revenues at the end of the second quarter 2000, and at the end of 1999, and
1998, respectively.
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 for
manufacturing rights and access to source code upon the occurrence of specified
conditions or defaults.
Many of the Company's channel partners and resellers offer alternative
solutions, designed by themselves or third parties and have pre-existing
relationships with current or potential competitors of the Company. Certain of
the Company's former channel partners have developed competitive products and
terminated their relationships with the Company, and such developments could
occur in the future.
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 relatively large
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.
THE COMPANY'S MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, EVOLVING
STANDARDS AND FREQUENT NEW PRODUCT INTRODUCTIONS.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new product
introductions. The Company's success will depend to a substantial degree upon
its ability to develop and introduce in a timely fashion enhancements to its
existing products and new products that meet changing customer requirements and
emerging industry standards. The development of new, technologically advanced
products is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. There
can be no assurance that the Company will be able to identify, develop,
manufacture, market or support new products successfully, that such new products
will gain market acceptance or that the Company will be able to respond
effectively to technological changes, emerging industry standards or product
announcements by competitors. In addition, the Company has on occasion
experienced delays in the introduction of product enhancements and new products.
There can be no assurance that in the future the Company will be able to
introduce product enhancements or new products on a timely basis. Further, from
time to time, the Company may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycle of the
Company's existing product offerings. There can be no assurance that
announcements of product enhancements or new product offerings will not cause
customers to defer purchasing existing Company products or cause resellers to
return products to the Company. Failure to introduce new products or product
enhancements effectively and on a timely basis, customer delays in purchasing
products in anticipation of new product
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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 DEFECTS CAN HARM THE COMPANY'S BUSINESS.
Products as complex as those offered by the Company may contain
undetected software or hardware errors. Such errors have occurred in the past,
and there can be no assurance that, despite testing by the Company and
customers, errors will not be found 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 end-user customers, channel
partners and other resellers, any of which could have a material adverse effect
on the Company's business, operating results and financial condition.
THE COMPANY FACES INTENSE COMPETITION FROM OTHER VENDORS.
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 and Cabletron; and
circuit management and digital transmission providers such as Visual Networks,
Netscout, Digital Link, Racal, Paradyne and Adtran, among others. Potential
competitors include other internetworking and WAN access and transmission
companies, frame relay switch providers, 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 former channel partners have 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 which could result in significant price competition,
reduced profit margins or loss of market share and 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.
THE COMPANY RELIES ON THIRD PARTY MANUFACTURERS TO PRODUCE ITS PRODUCTS, AND
ITS REPUTATION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY ITS
INABILITY TO MANAGE THE THIRD PARTY MANUFACTURERS' OPERATIONS.
The Company's manufacturing operations consist primarily of materials
planning and procurement, light assembly, system integration, testing and
quality assurance. The Company has entered into arrangements with contract
manufacturers to out-source substantial portions of its board level procurement,
assembly and system test operations. There can be no assurance that these
independent contract manufacturers will be able to meet the Company's future
requirements for manufactured products or that such independent contract
manufacturers will not experience quality problems in manufacturing the
Company's products. The inability of the Company's contract manufacturers to
provide the Company with adequate supplies of high quality products could have a
material adverse effect upon the Company's business, operating results and
financial condition. The loss of any of the Company's contract manufacturers
could cause a delay in the Company's ability to fulfill orders while the Company
identifies a replacement manufacturer. Such an event could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company's manufacturing procedures may in certain instances create
a risk of excess or inadequate inventory if orders do not match forecasts. Any
manufacturing delays, excess manufacturing capacity or inventories or inability
to increase manufacturing capacity, if required, could have a material adverse
effect on the Company's business, operating results and financial condition.
THE COMPANY WILL BE CONTINUE TO BE DEPENDENT ON SUPPLIERS, MANY OF WHICH WILL
BE THE SOLE SOURCE FOR THEIR COMPONENTS, AND ITS PRODUCTION WOULD BE SERIOUSLY
HARMED IF THESE SUPPLIERS ARE NOT ABLE TO MEET ITS DEMAND AND ALTERNATIVE
SOURCES ARE NOT AVAILABLE.
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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 of a supplier,
increase in lead times, cost increases, component supply interruption, 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.
THE COMPANY DEPENDS ON ITS PROPRIETARY TECHNOLOGY.
The Company's future success depends, in part, upon its proprietary
technology. The Company does not hold any patents and currently relies on a
combination of contractual rights, trade secrets and copyright laws to establish
and protect its proprietary rights in its products. There can be no assurance
that the steps taken by the Company to protect its intellectual property will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. In the event that protective
measures are not successful, the Company's business, operating results and
financial condition could be materially and adversely affected. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States. The Company is also
subject to the risk of adverse claims and litigation alleging infringement of
intellectual property rights of others. There can be no assurance that third
parties will not assert infringement claims in the future with respect to the
Company's current or future products or that any such claims will not require
the Company to enter into license arrangements or result in litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms. Should litigation with respect to any
such claims commence, such litigation could be extremely expensive and
time-consuming and could have a material adverse effect on the Company's
business, operating results and financial condition regardless of the outcome of
such litigation.
TARIFF AND REGULATORY MATTERS ARE SUBJECT TO CHANGE AND MAY SUBSTANTIALLY
IMPACT THE RELATIVE VALUE OF THE COMPANY'S PRODUCTS COMPARED TO COMPETITIVE
TECHNOLOGIES.
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 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 the various
European Community telecommunications authorities. In addition, carriers require
that equipment connected to their networks comply with their own standards. 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.
THE COMPANY DEPENDS UPON KEY PERSONNEL AND WILL HAVE RISKS ASSOCIATED WITH
HIRING, RETENTION, AND INTEGRATION OF SUFFICIENT QUALITY PERSONNEL.
The Company's success depends, to a significant degree, upon the
continued contributions of its key 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.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
Recently, the Company has undergone significant personnel turnover in research
and development, sales, and other functional areas and the Company experienced
significant turnover in the composition of its executive officers. Such turnover
has affected the Company's ability to successfully develop new products and
generate additional business. Two of the current three executive officers have
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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.
THE COMPANY'S FINANCIAL CONDITION AND RESULTS MAY BE ADVERSELY AFFECTED BY A
DECLINE IN 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.
THE COMPANY'S STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Factors such as announcements of technological innovations or the
introduction of new products by the Company or its competitors, as well as
market conditions in the technology sector, may have a significant effect on the
market price of the Company's common stock. Further, the stock market has
experienced volatility which has particularly affected the market prices of
equity securities of many high technology companies and which often has been
unrelated to the operating performance of such companies. These market
fluctuations may have an adverse effect on the price of the Company's common
stock.
THERE IS NO ASSURANCE THAT THE COMPANY WILL CONTINUE TO MEET THE REQUIREMENTS
FOR CONTINUED LISTING ON THE NASDAQ NATIONAL MARKET.
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
it of its failure 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, the Company implemented a 1 for 5 reverse stock
split on June 28, 1999. As a result of the reverse stock split, the Company
maintained its stock price above the $1 per share minimum level, and
accordingly, was informed by Nasdaq that it had met the requirements for
continued listing. However, there can be no assurance that the Company will meet
the minimum closing bid price or any other Nasdaq listing requirements on an
ongoing basis, or that the Company will be able to take action in order to
continue to meet the listing requirements.
ANTI-TAKEOVER PROVISIONS MAY NEGATIVELY IMPACT THE VALUE OF THE COMPANY'S STOCK
PRICE.
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 currently has authority to issue up to 1,300,000
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.
RISKS RELATED TO OUR PROPOSED MERGER
THE COMPANY AND ENTRADA MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THEIR
OPERATIONS AND REALIZE THE COST SAVINGS THAT WE ANTICIPATE.
The success of the merger depends in substantial part on the ability of
the Company and Entrada to integrate their respective operations in an efficient
and effective manner. The integration of Entrada's operations into the Company
following the merger will require the dedication of management resources in
order to achieve the anticipated operating
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efficiencies of the merger which may temporarily distract attention from day to
day business operations of the combined companies. The difficulties of combining
the Entrada operations into the Company are exacerbated by the necessity of
coordinating geographically separated organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures. No
assurance can be given that difficulties encountered in integrating the
operations of Entrada into the Company will be overcome or that the benefits
expected from such integration will be realized. The inability of management to
successfully integrate the operations of the two companies could have a material
adverse effect on the business, results of operations and financial condition of
the combined companies. In addition, as commonly occurs with mergers of
technology companies, aggressive competitors may undertake initiatives to
attract customers and to recruit key employees, which could have a material
adverse effect on the business, results of operations and financial condition of
the Company.
THE COMBINED COMPANIES WILL INCUR SUBSTANTIAL EXPENSES AND RESTRUCTURING CHARGES
IN CONNECTION WITH THE MERGER.
The Company and Entrada expect to incur certain expenses in connection
with the restructuring and consolidation of the operations of the combined
companies including, but not limited to, costs related to the closure and
elimination of duplicate leased facilities and write-offs of related fixed
assets, write-offs of discontinued products, and severance costs. The Company
and Entrada anticipate that the integration activities will ultimately result in
increased efficiencies and lower operating costs. These activities have not been
formalized, and therefore the expenses and related efficiency cost savings are
not currently estimable with a reasonable degree of accuracy. Although the
Company and Entrada expect that the elimination of duplicative expenses as well
as other efficiencies related to the integration of the businesses may offset
additional expenses over time, there can be no assurance that such net benefit
will be achieved in the near term, or at all.
Parent expects to incur direct transaction costs of approximately
$200,000 consisting primarily of legal and accounting costs.
The Company estimates it will incur direct transaction costs of
approximately $800,000 associated with the merger, consisting primarily of fees
for investment banking, filings with regulatory agencies, legal, accounting,
financial printing and other related costs.
THE MERGER MAY ADVERSELY IMPACT THE BUYING PATTERNS OF THE CUSTOMERS OF THE
COMBINED COMPANIES.
There is no assurance that resellers and current and potential
end-users of the Company and Entrada products will continue their current buying
patterns without regard to the announced merger. Certain customers may defer
purchasing decisions as they evaluate the combined companies' future product
strategy and consider product offerings of competitors. If substantial numbers
of customers decide to defer or cancel such purchases, such deferrals or
cancellations could have a material adverse effect on the business, results of
operations and financial condition of the combined companies.
THE COMPANY AND ENTRADA MAY NOT BE ABLE TO OBTAIN THIRD PARTY CONSENTS IN
CONNECTION WITH THE MERGER.
The Company and Entrada each have contracts with many suppliers,
customers and other business partners relating to, among other things, certain
intellectual property rights. Some of these contracts require the Company and
Entrada to obtain the consent, waiver or approval of these other parties in
connection with the merger. If consent, waiver or approval cannot be obtained,
the Company and Entrada may lose the right to use intellectual property that is
necessary for their respective businesses. The Company and Entrada have agreed
to use commercially reasonable efforts to secure the necessary consents, waivers
and approvals. However, the Company and Entrada may not be able to obtain all of
the necessary consents, waivers and approvals, which could have a material
adverse effect on the business, results of operations and financial condition of
the combined companies.
OBTAINING REQUIRED GOVERNMENT APPROVALS AND SATISFYING CLOSING CONDITIONS MAY
DELAY OR PREVENT COMPLETION OF THE MERGER.
Completion of the merger is conditioned upon the receipt of all
material governmental authorizations, consents, orders and approvals. The
Company and Entrada intend to vigorously pursue all required approvals. The
requirement for these approvals could delay the completion of the merger for
a significant period of time after the Company stockholders have approved the
proposals relating to the merger at the annual meeting. No assurance can be
given, however, that these approvals will be obtained or that the required
conditions to closing will be satisfied and, if all such approvals are
obtained and the conditions are
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satisfied, no assurance can be given as to the terms, conditions and timing
thereof.
THE COMPANY'S OFFICERS AND DIRECTORS HAVE CONFLICTS OF INTEREST THAT MAY
INFLUENCE THEM TO SUPPORT THE MERGER.
The directors and officers of the Company have certain interests in the
merger and participate in certain arrangements that are different from, or are
in addition to those of the Company stockholders generally. These interests and
arrangements include:
- All executive officers of the Company are parties to agreements that
provide for the partial vesting of any unvested options upon a
change in control and certain severance benefits if such executive
officer is terminated following a corporate transaction such as the
merger
- Mr. Gregorio Reyes, the current Chairman of the the Company board of
directors, will remain as a director of the Company following the
merger, and certain current executive officers of the Company will
remain as executives of the Company following the merger
- Mr. Reyes is party to an agreement that provides for the full
vesting of any unvested options upon a change in control and certain
severance benefits if he is terminated following a corporate
transaction such as the merger.
THE VALUE OF THE COMPANY STOCKHOLDERS' HOLDINGS IN THE COMPANY MAY BE DIMINISHED
AS A RESULT OF THE MERGER.
Although the companies believe that beneficial synergy's will result
from the merger, there can be no assurance that the combining of the two
companies' businesses, even if achieved in an efficient, effective and timely
manner, will result in combined results of operations and financial condition
superior to what would have been achieved by each company independently, or as
to the period of time required to achieve such result. The issuance of the
Company's common stock in connection with the merger may have the effect of
reducing the Company's net income per share from levels otherwise expected and
could reduce the market price of the the Company's common stock unless revenue
growth or cost savings and other business synergy's sufficient to offset the
effect of such issuance can be achieved. As a consequence of the merger, the
Company's stockholders will lose the chance to invest in the development and
exploitation of the Company's products on a stand-alone basis. Additionally, the
Company following the merger will have different management than the Company's
current management, and consequently the management of the Company following the
merger may make strategic and operational decisions that differ from those of
the Company's current management.
THE RATIO FOR DETERMINING THE NUMBER OF THE COMPANY SHARES OF COMMON STOCK THAT
ARE TO BE EXCHANGED FOR ALL OF THE SHARES OF ENTRADA COMMON STOCK IS FIXED.
Under the terms of the merger agreement, the outstanding shares of
Entrada common stock issued and outstanding at the closing will be converted
into the right to receive shares of the Company's common stock. The merger
agreement does not contain any provisions for adjustment of the exchange amount
or termination of the merger agreement based solely on fluctuations in the price
of the Company's common stock.
THE COMPANY CANNOT ASSURE YOU THAT ITS STOCK PRICE WILL NOT DECLINE AFTER THE
MERGER.
Factors such as announcements of technological innovations or the
introduction of new products by the combined companies or their 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 following the merger.
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, together with the substantial
increase in the number of shares of the Company's common stock which will be
available for sale in the market after the merger, may have an adverse effect on
the price of the Company's common stock following the merger.
THE COMBINED COMPANIES MAY FACE INCREASED CREDIT RISKS AS A RESULT OF THE
MERGER.
Entrada distributes a significant portion of its products through third
party distributors, resellers and original equipment manufacturers ("OEMs") and
historically, a significant portion of Entrada's sales have been concentrated
with a few such customers. While the Company and Entrada have each continuously
monitored and managed these credit risks, financial difficulties on the part of
one or more of their respective significant distributors, resellers or OEM
partners may have a material adverse effect on the combined companies.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH FOREIGN EXCHANGE
In the first six months of 2000, approximately 5.8% 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 three months. At June 30, 2000, 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 $8.2 2 months 5% $8.2
</TABLE>
18
<PAGE>
SYNC RESEARCH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 5, 1997, an action entitled Dalarne Partners, Ltd. Vs Sync
Research, Inc., et al., No. SACV97-877 AHS (Eex) was filed against the Company
and certain of its directors and officers. The action was filed in the U.S.
District Court for the Central Division 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 January 28, 2000, the court dismissed the complaint
with prejudice. Plaintiffs appealed the dismissal. However, the plaintiff
decided not to pursue the appeal and the appeal was dismissed on July 6, 2000.
The District Court's judgment in favor of the Company, therefore, is final.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 15, 2000 the Company sold 700,000 shares of Series A Preferred
Stock of the Company to Entrada Holdings LLC ("Entrada") at a purchase price of
$3.19375 per share, for a total of $2.2 million in cash. In connection with the
private placement, the Company paid a fee equal to five percent (5%) of the
aggregate purchase price to Andersen Weinroth Capital Corp., an investment firm
affiliated with Entrada. The Company relied on Rule 506 of Regulation D under
the Securities Act of 1933, as amended ( the "Act"), which, among other things,
provides an exemption from the registration requirements of the Act for sales to
accredited investors (as defined by Rule 501(a) of Regulation D of the Act). The
shares of Series A Preferred Stock are convertible into shares of Common Stock
on a one-for-one basis, and will be automatically converted into shares of
Common Stock on the closing of the Merger. The specific terms of the shares of
Series A Preferred Stock sold to Entrada are contained in the Stock Purchase
Agreement, Registration Rights Agreement and Certificate of Designation of
Rights, Preferences and Privileges of Series A Preferred Stock filed as exhibits
to the Company's report on form 8-K on May 19, 2000.
In connection with the Company's sale of Series A Preferred Stock to Entrada,
the Company filed a Certificate of Designation of the Rights, Preferences and
Privileges of Series A Preferred Stock pursuant to which the holders of Series A
Preferred Stock were granted rights with respect to liquidation and dividends
which are superior to the rights of the holders of Common Stock of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
4.1 Certification of Designation of Rights, Preferences and Privileges of
Series A Preferred Stock (1)
10.1 Stock Purchase Agreement dated May 12, 2000, by and between the
Company and Entrada Holdings LLC (1)
10.2 Registration Rights Agreement dated May 12, 2000, by and between the
Company and Entrada Holdings LLC (1)
27.1 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
On April 18, 2000, the Company filed a report on Form 8-K to report
that it had signed an Agreement and Plan of Merger with Osicom Technologies,
Inc.
On May 19, 2000 the Company filed a report on Form 8-K to report that
on May 15, 2000, It had completed the private placement of 7000,000 shares of
the Company's Series A Preferred Stock.
--------------------------------------------------------------------------------
(1) Incorporated by reference from exhibits filed with the Company's current
report on Form 8-K, Filed May 19, 2000.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SYNC RESEARCH, INC.
By: /s/ William K. Guerry
-------------------------------
William K. Guerry
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND PRINCIPAL
Date: August 14, 2000 FINANCIAL AND ACCOUNTING OFFICER)
<PAGE>
1476-10Q-0600
