<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 4, 2000, 3,531,007 shares of the Registrant's Common Stock were issued
and outstanding.
================================================================================
<PAGE>
SYNC RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information.......................................................................... 3
Item 1. a) Condensed consolidated balance sheets at March 31, 2000 (unaudited) and December 31,
1999................................................................................... 3
b) Condensed consolidated statements of operations (unaudited) for the three months ended
March 31, 2000 and 1999................................................................ 4
c) Condensed consolidated statements of cash flows (unaudited) for the three months ended
March 31, 2000 and 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..................................... 21
Part II. Other Information.............................................................................. 22
Item 1. Legal Proceedings.............................................................................. 22
Item 2. Changes in Securities and Use of Proceeds...................................................... 22
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>
MARCH 31, DECEMBER 31,
2000 1999
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 7,696 $8,632
Accounts and other receivables, net...................................................... 1,399 3,173
Inventories.............................................................................. 5,184 5,140
Prepaid expenses and other current assets................................................ 991 565
--------- ---------
Total current assets........................................................................ 15,270 17,510
Furniture, fixtures and equipment, net...................................................... 1,514 1,632
Other assets................................................................................ 55 55
========= =========
Total assets................................................................................ $16,839 $19,197
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 1,702 $ 1,769
Accrued compensation and related costs.................................................. 502 736
Deferred revenue and customer deposits................................................... 2,082 3,048
Other accrued liabilities................................................................ 283 297
Current maturities of capitalized lease obligations...................................... 36 49
--------- ---------
Total current liabilities................................................................... 4,605 5,899
Capitalized lease obligations, less current maturities...................................... 9 7
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- 3,531 at March 31, 2000
and 3,505 at December 31, 1999........................................................ 4 4
Additional paid-in capital............................................................... 72,017 71,958
Accumulated deficit...................................................................... (59,796) (58,671)
--------- ---------
Total stockholders' equity.................................................................. 12,225 13,291
--------- ---------
Total liabilities and stockholders' equity.................................................. $16,839 $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
MARCH, 31,
-----------------------------------------
2000 1999
------------------ --------------------
<S> <C> <C>
Net revenues $ 3,150 $ 5,106
Cost of sales 1,916 2,851
------------------ --------------------
Gross profit 1,234 2,255
Operating expenses:
Research and development 1,062 1,715
Sales and marketing 859 1,796
General and administrative 551 614
------------------ --------------------
Total operating expenses 2,472 4,125
------------------ --------------------
Operating loss (1,238) (1,870)
Interest income, net 114 135
------------------ --------------------
Loss before income taxes (1,124) (1,735)
Provision for income taxes 1 -
------------------ --------------------
Net loss $ (1,125) $(1,735)
================== ====================
Basic and diluted net loss per share $ (0.32) $ (0.50)
================== ====================
Shares used in computing net loss per share,
basic and diluted 3,516 3,505
================== ====================
</TABLE>
See accompanying notes.
4
<PAGE>
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................................................. $(1,125) $(1,735)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................................... 227 447
Provision for losses on accounts receivable............................................ 108 53
Deferred compensation expense.......................................................... - 7
Changes in operating assets and liabilities, net:
Accounts and other receivables......................................................... 1,666 (1,680)
Inventories............................................................................ (44) 412
Prepaid expenses and other current assets.............................................. (426) 144
Accounts payable and accrued liabilities............................................... (81) (794)
Accrued severance and restructuring.................................................... - (440)
Accrued compensation and related costs................................................. (234) 91
Deferred revenue and customer deposits................................................. (966) (4)
---------- -------------
Net cash used in operating activities........................................................ (875) (3,499)
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment............................................ (109) 13
---------- -------------
Net cash used in investing activities........................................................ (109) 13
FINANCING ACTIVITIES
Payments on capitalized lease obligations................................................. (11) (17)
Proceeds from common stock options exercised and employee stock
purchase plan........................................................................ 59 51
---------- -------------
Net cash provided by financing activities.................................................... 48 34
---------- -------------
Net decrease in cash and cash equivalents.................................................... (936) (3,452)
Cash and cash equivalents at beginning of period............................................. 8,632 14,135
---------- -------------
Cash and cash equivalents at end of period................................................... $7,696 $10,683
========== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................................. $ 3 $ 2
========== =============
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 March 31, 2000, the
condensed consolidated statements of operations for the three months ended March
31, 2000 and 1999 and the condensed consolidated statements of cash flows for
the three months ended March 31, 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 March 31, 2000, the results of its
operations for the three months ended March 31, 2000 and 1999 and its cash flows
for the three months ended March 31, 2000 and 1999. 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, 1999. The results of
operations for the three months ended March 31, 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.
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. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and
consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- ---------------
<S> <C> <C>
Equipment acquired under capital leases................................... $ 275 $ 275
Furniture and fixtures.................................................... 563 559
Computer equipment and software........................................... 7,346 7,239
Leasehold improvements.................................................... 413 415
------------ ---------------
8,597 8,488
Accumulated depreciation and amortization................................. (7,083) (6,856)
------------ ---------------
$ 1,514 $ 1,632
============ ===============
</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>
MARCH 31, DECEMBER 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Raw materials............................................................. $ 2,774 $ 2,707
Work in process........................................................... 329 366
Finished goods............................................................ 2,081 2,067
---------------- ---------------
$ 5,184 $ 5,140
================ ===============
</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 2000, the Company's $3,000,000 credit agreement with a bank
expired. There were no borrowings outstanding as of March 31, 2000. The Company
currently has no plans to renew this credit line.
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 have appealed the dismissal. There is no date
scheduled for the hearing on the appeal.
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 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, 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. Current partners include AT&T, MCI, Electronic Data Systems,
Unisys and Diebold.
PROPOSED MERGER WITH OSICOM TECHNOLOGIES, INC.
On April 10, 2000, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with Osicom Technologies, Inc., a Delaware corporation
("Osicom") and Osicom Technologies, Inc., a New Jersey corporation that is the
parent and sole shareholder of Osicom ("Osicom Parent"), pursuant to which, if
certain closing conditions are met, (i) Osicom 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) Osicom Parent will own fifty percent (50%)
of the issued and outstanding common stock of the Company. The consummation of
the Merger is subject to certain conditions to closing, including, but not
limited to, the approval of the Company's stockholders. If all closing
conditions are satisfied and no termination event exists, 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 Osicom under the "purchase"
method of accounting in accordance with generally accepted accounting
principles. A copy of the Agreement has been previously filed with the
Securities and Exchange Commission on the Company's Current Report on Form 8-K,
dated April 18, 2000.
Sync 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. Sync follows a sales
strategy relying primarily on a direct sales force and leveraging resellers,
distributors and carriers as delivery channels for its products.
Osicom Technologies, Inc.. Osicom, 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
Osicom's products are incorporated into the remote access and other server
products of original equipment manufacturers (OEMs). In addition, certain of
Osicom's products are deployed by telecommunications network operators,
Applications Service Providers (ASPs), Internet Service Providers (ISPs) 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 Osicom will be successfully
assimilated into the Company's business. The risks associated with the Merger
include the potential disruption of the respective ongoing businesses of Osicom
and the Company, the inability of the combined company's management to maximize
the financial and strategic position of the combined entity through successful
incorporation of Osicom'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 combined entity will
incur significant expenses as a result of the negotiation and implementation of
the Merger. These factors could have a material adverse effect on the Company's
business, financial condition and operating results.
RESULTS OF OPERATIONS
NET REVENUES
8
<PAGE>
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 first quarter of 2000 were $3.2 million, compared
to net revenues of $5.1 million for the quarter ended March 31, 1999. The
decrease in net revenues in the three months ended March 31, 2000 compared to
the three months ended March 31, 1999 was due primarily to higher revenues from
sales of frame relay access and circuit management products in the first quarter
of 1999 resulting from the completion of several large projects in that quarter.
Sales to one customer accounted for 21.2% of revenues for the quarter
ended March 31, 2000. Sales to two customers aggregated 13.1% and 11.9% of
revenues for the quarter ended March 31, 1999.
Net revenues by product group for the three months ended March 31, 2000 and 1999
were as follows ($ in thousands):
<TABLE>
<CAPTION>
2000 % 1999 %
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Frame relay access products................................... $1,083 34% $2,427 48%
Circuit management products................................... 505 16 509 10
Transmission products......................................... 254 8 349 7
Other (including service revenue)............................. 1,308 42 1,821 35
---------- --------- ---------- ---------
$3,150 100% $5,106 100%
========== ========= ========== =========
</TABLE>
The percentage of net revenues represented by sales through channel
partners and other resellers was 50.0% for the three months ended March 31, 2000
as compared to 41.5% for the corresponding period in 1999. The sales mix of
channel partners and other resellers may change from period to period.
International sales represented 3.6% of the Company's total sales
during the three months ended March 31, 2000 as compared to 25.3% during the
three months ended March 31, 1999 . The decrease was due primarily to shipments
to one major European company during the three months ended March 31, 1999 and
reduced shipments to the pacific rim during the three months ended March 31,
2000.
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 $1.2 million for the three months ended March
31, 2000 from $2.3 million in the corresponding prior year period. The lower
gross profit for the three month period ended March 31, 2000 was primarily due
to lower sales revenue and a higher percentage of spare sales which are
generally sold at lower margin. Gross profit as a percentage of net revenues
decreased to 39.2% for the three ended March 31, 2000 as compared to 44.2% for
the three months ended March 31, 1999. The decrease in margins during the three
months ended March 31, 2000 compared to the same period of 1999 was primarily
due to lower margins with one major customer 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
9
<PAGE>
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 for the three months ended
March 31, 2000 as compared to $1.7 million for the comparable period in 1999.
The decreased expenditures for the three month period ended March 31, 2000
was 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 marketing activities. Selling and
marketing expenses decreased to $0.9 million for the three months ended March
31, 2000 as compared to $1.8 million for the comparable period in 1999. The
decrease in selling and marketing expenses for the three month period 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 decreased to $551,000 for the quarter ended March
31, 2000, as compared to $614,000 for the quarter ended March 31, 1999. The
reductions were generally due to the Company's continued cost reduction efforts.
Net interest income was $114,000 for the three months ended March 31,
2000 as compared to $135,000 for the three ended March 31, 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 represents minimum state
taxes. There has been no provision for income tax in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company's principal sources of liquidity
consisted of $7.7 million of cash and cash equivalents.
During the nine months ended March 31, 2000, cash utilized by operating
activities was $0.9 million, compared to $3.5 million in the corresponding
period in 1999. The decreased cash utilization resulted primarily from decreases
in accounts receivable of $1.7 million partially offset by a reduction in
deferred revenue of $966,000, and an increase in prepaid expenses of $426,000.
At March 31, 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.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
HISTORY OF LOSSES; SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS; UNCERTAIN
PROFITABILITY
The Company has experienced operating losses since inception, with, in
recent years, operating
10
<PAGE>
losses of $1.1 million for the three months ended March 31, 2000, $4.7 million
in 1999, $16.3 million in 1998, and $18.0 million in 1997. As of March 31, 2000,
the Company had an accumulated deficit of approximately $59.8 million. 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; 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.
UNCERTAIN MARKET ACCEPTANCE OF FRAME RELAY FOR MISSION-CRITICAL APPLICATIONS
During the first quarter 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 34.4%, 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
11
<PAGE>
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 1.0%,
0.8%, and 14.1% of the Company's net revenues at the end of the first quarter
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 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.
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 related services
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, 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 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 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 50.0%,
47.1%, and 62.5% of net revenues of the Company for the quarter ended March 31,
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 1.0%, 0.8%, and 14.1% of the Company's net revenues at the end of the first
quarter 2000, and for the years ended December 31, 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.
12
<PAGE>
The Company generally realizes a higher gross margin on direct sales
than on sales through its channel partners and other resellers. Accordingly, as
channel partners and other resellers continue to account for a 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.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new product
introductions. The Company's success will depend to a substantial degree upon
its ability to develop and introduce in a timely fashion enhancements to its
existing products and new products that meet changing customer requirements and
emerging industry standards. The development of new, technologically advanced
products is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. There
can be no assurance that the Company will be able to identify, develop,
manufacture, market or support new products successfully, that such new products
will gain market acceptance or that the Company will be able to respond
effectively to technological changes, emerging industry standards or product
announcements by competitors. In addition, the Company has on occasion
experienced delays in the introduction of product enhancements and new products.
There can be no assurance that in the future the Company will be able to
introduce product enhancements or new products on a timely basis. Further, from
time to time, the Company may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycle of the
Company's existing product offerings. There can be no assurance that
announcements of product enhancements or new product offerings will not cause
customers to defer purchasing existing Company products or cause resellers to
return products to the Company. Failure to introduce new products or product
enhancements effectively and on a timely basis, customer delays in purchasing
products in anticipation of new product introductions and any inability of the
Company to respond effectively to technological changes, emerging industry
standards or product announcements by competitors could have a material adverse
effect on the Company's business, operating results and financial condition.
PRODUCT ERRORS
Products as complex as those offered by the Company may contain
undetected software or hardware errors. 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.
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 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
13
<PAGE>
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.
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 has entered into arrangements with contract
manufacturers to outsource 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.
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 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.
DEPENDENCE ON AND RISKS ASSOCIATED WITH INTERNATIONAL SALES
Sales to customers outside of the United States accounted for
approximately 3.6%, 13.2% and 6.9% of the Company's net revenues for the quarter
ended March 31, 2000 and in 1999 and 1998, respectively. The Company targets
international sales on an opportunistic basis and has historically sold products
internationally
14
<PAGE>
through partners and resellers. The Company will continue to work with select
partners and resellers to generate sales in the European and Asian markets. At
this time, international sales are expected to continue to represent a small
portion of the Company's sales.
Failure of the Company's international partners and 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, including currency valuation. 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 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, political instability, trade restrictions and changes in
tariffs. In addition, sales in Europe and certain other parts of the world
typically are adversely affected in the third quarter of each year as many
customers and end users reduce their business activities during the summer
months. These international factors could have a material adverse effect on
future sales of the Company's products to international end users and,
consequently, the Company's business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's future success depends, in part, upon its proprietary
technology. The Company does not hold any patents and currently relies on a
combination of contractual rights, trade secrets and copyright laws to establish
and protect its proprietary rights in its products. There can be no assurance
that the steps taken by the Company to protect its intellectual property will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. In the event that protective
measures are not successful, the Company's business, operating results and
financial condition could be materially and adversely affected. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States. The Company is also
subject to the risk of adverse claims and litigation alleging infringement of
intellectual property rights of others. There can be no assurance that third
parties will not assert infringement claims in the future with respect to the
Company's current or future products or that any such claims will not require
the Company to enter into license arrangements or result in litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms. Should litigation with respect to any
such claims commence, such litigation could be extremely expensive and
time-consuming and could have a material adverse effect on the Company's
business, operating results and financial condition regardless of the outcome of
such litigation.
TARIFF AND REGULATORY MATTERS
Rates for public telecommunications services, including features and
capacity of such services, are governed by tariffs determined by carriers and
subject to regulatory approval. Future changes in these tariffs could have a
material effect on the Company's business. For example, should tariffs for frame
relay services increase 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.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends, to a significant degree, upon the
continued contributions of its key
15
<PAGE>
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. During 1999, 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 been officers of the Company
for less than a year. The loss of the services of any of the Company's key
personnel or the failure to attract or retain qualified personnel in the future
could have a material adverse effect on the Company's business, operating
results or financial condition.
GENERAL ECONOMIC CONDITIONS
Demand for the Company's products depends in large part on the overall
demand for communications and networking products, which has in the past and may
in the future fluctuate significantly based on numerous factors, including
capital spending levels and general economic conditions. There can be no
assurance that the Company will not experience a decline in demand for its
products due to general economic conditions. Any such decline could have a
material adverse effect on the Company's business, operating results and
financial condition.
VOLATILITY OF STOCK PRICE
Factors such as announcements of technological innovations or the
introduction of new products by the Company or its competitors, as well as
market conditions in the technology sector, may have a significant effect on the
market price of the Company's common stock. Further, the stock market has
experienced volatility which has particularly affected the market prices of
equity securities of many high technology companies and which often has been
unrelated to the operating performance of such companies. These market
fluctuations may have an adverse effect on the price of the Company's common
stock.
NASDAQ STOCK LISTING
The Company's common stock is listed and traded on The Nasdaq Stock
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 the Company's stockholders at
the 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, 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.
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.
16
<PAGE>
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 WITH OSICOM
SYNC AND OSICOM 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
Sync and Osicom to integrate their respective operations in an efficient and
effective manner. The integration of Osicom's operations into Sync following the
merger will require the dedication of management resources in order to achieve
the anticipated operating efficiencies of the merger which may distract
attention from day to day business operations of the combined companies. The
difficulties of combining the Osicom operations into Sync 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 Osicom into Sync 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
Sync.
THE COMBINED COMPANIES WILL INCUR SUBSTANTIAL EXPENSES AND
RESTRUCTURING CHARGES IN CONNECTION WITH THE MERGER.
Sync and Osicom 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-off of
discontinued products, and severance costs. Sync and Osicom anticipate that the
ultimate integration activities will 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 Sync and Osicom 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.
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 Sync and Osicom 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
17
<PAGE>
purchases, such deferrals or cancellations could have a material adverse
effect on the business, results of operations and financial condition of the
combined companies.
SYNC AND OSICOM MAY NOT BE ABLE TO OBTAIN STOCKHOLDER APPROVAL OR THIRD
PARTY CONSENTS IN CONNECTION WITH THE MERGER.
Sync and Osicom 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 Sync and Osicom to obtain the
consent, waiver or approval of these other parties in connection with the
merger. If consent, waiver or approval cannot be obtained, Sync and Osicom may
lose the right to use intellectual property that is necessary for their
respective businesses. Sync and Osicom have agreed to use commercially
reasonable efforts to secure the necessary consents, waivers and approvals.
However, Sync and Osicom 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. In addition, the merger needs to be approved by a majority of the
Sync stockholders present in person or by proxy at the annual stockholders
meeting.
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, including
the expiration or termination of the applicable waiting periods, and any
extension of the waiting periods, under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. Sync and Osicom 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. 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 satisfied, no assurance can be given as to the terms,
conditions and timing thereof.
SYNC'S OFFICERS AND DIRECTORS HAVE CONFLICTS OF INTEREST THAT MAY
INFLUENCE THEM TO SUPPORT THE MERGER.
The directors and officers of Sync have certain interests in the merger
and participate in certain arrangements that are different from, or are in
addition to those of Sync stockholders generally. These interests and
arrangements include:
- All executive officers of Sync 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 Sync board of
directors,
18
<PAGE>
will remain as a director of Sync following the merger, and
certain current executive officers of Sync will remain as
executives of Sync 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 SYNC STOCKHOLDERS' HOLDINGS IN SYNC MAY BE DIMINISHED AS A
RESULT OF THE MERGER.
Although the companies believe that beneficial synergies 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 Sync independently, or as to the
period of time required to achieve such result. The issuance of Sync common
stock in connection with the merger may have the effect of reducing Sync's net
income per share from levels otherwise expected and could reduce the market
price of the Sync common stock unless revenue growth or cost savings and other
business synergies sufficient to offset the effect of such issuance can be
achieved. As a consequence of the merger, Sync stockholders will lose the chance
to invest in the development and exploitation of Sync's products on a
stand-alone basis. Additionally, Sync following the merger will have different
management than Sync's current management, and consequently the management of
Sync following the merger may make strategic and operational decisions that
differ from those of Sync's current management.
THE NUMBER OF SYNC SHARES OF COMMON STOCK THAT ARE TO BE EXCHANGED FOR
ALL OF THE SHARES OF OSICOM COMMON STOCK IS FIXED.
Under the terms of the merger agreement, the outstanding shares of
Osicom common stock issued and outstanding at the closing will be converted
into the right to receive shares of Sync 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 Sync common stock. The price of Sync common stock at the closing of the
merger may vary from its prices on the date the proxy statement/prospectus is
mailed and on the date of the annual meeting. These prices may vary because
of changes in the business, operations or prospects of Sync, market
assessments of the likelihood that the merger will be completed, the timing
of the completion of the merger, the prospects of post-merger operations,
regulatory considerations, general market and economic conditions and other
factors. Because the date that the merger is completed may be later than the
date of the annual meeting, the price of Sync common stock on the date of the
annual meeting may not be indicative of its price on the date the merger is
completed. We urge Sync stockholders to obtain current market quotations for
Sync common stock.
19
<PAGE>
SYNC 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 Sync'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 may have an adverse effect on the price of Sync's common
stock following the merger.
THE COMBINED COMPANIES MAY FACE INCREASED CREDIT RISKS AS A RESULT OF
THE MERGER.
Osicom distributes a significant portion of its products through third
party distributors, resellers and OEM partners. Due to the consolidation in the
distribution and reseller channels and Osicom's reliance upon these channels,
Osicom has experienced an increased concentration of credit risks. Financial
difficulties on the part of one or more of the Combined Company's significant
distributors, resellers or OEM partners may have a material adverse effect on
the combined companies.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH FOREIGN EXCHANGE
In the first three months of 2000, approximately 3.6% 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 March 31, 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 $7.7 2 months 5% $7.7
</TABLE>
21
<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 have appealed the dismissal. There is no date
scheduled for the hearing on the appeal.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
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 Oscicom
Technologies, Inc. a Delaware corporation and Oscicom Technologies,
Inc., a New Jersey corporation.
22
<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 AND CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED SIGNATORY AND PRINCIPAL
Date: May 12, 2000 FINANCIAL AND ACCOUNTING OFFICER)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 7,696
<SECURITIES> 0
<RECEIVABLES> 1,707
<ALLOWANCES> (308)
<INVENTORY> 5,184
<CURRENT-ASSETS> 15,270
<PP&E> 8,597
<DEPRECIATION> 7,083
<TOTAL-ASSETS> 16,839
<CURRENT-LIABILITIES> 4,605
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 12,221
<TOTAL-LIABILITY-AND-EQUITY> 16,839
<SALES> 3,150
<TOTAL-REVENUES> 3,150
<CGS> 1,916
<TOTAL-COSTS> 1,916
<OTHER-EXPENSES> 2,472
<LOSS-PROVISION> 108
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (1,124)
<INCOME-TAX> 1
<INCOME-CONTINUING> (1,125)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,125)
<EPS-BASIC> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
