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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-26952
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SYNC RESEARCH, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0676350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 MORGAN
IRVINE, CA 92618
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 588-2070
----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of Class)
----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based upon the closing sale price of the Registrant's Common
Stock on the Nasdaq National Market on March 6, 2000 was approximately
$13,665,348 as of such date. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
There were 3,516,899 shares of Registrant's Common Stock issued and
outstanding as of March 6, 2000.
PART I
ITEM 1. BUSINESS
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 Item 7, under "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Risk
Factors," including but not limited to fluctuations in operating results and
market conditions in the networking industry, involve risks and uncertainties
and 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.
OVERVIEW
Sync Research, Inc. ("Sync" or the "Company") develops, manufactures,
markets, supports and sells wide-area network ("WAN") 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.
As data bandwidth requirements increase, telecommunications service
providers, traditionally carriers, have implemented frame relay data services in
an effort to develop new revenue sources and improve competitiveness. Frame
relay, a low-latency, frame-switched WAN protocol, has experienced rapid growth
due to its speed and economy, stability, its deployment flexibility, and its
ability to combine incompatible "protocols," such as International Business
Machines Corporation ("IBM") mainframe Systems Network Architecture ("SNA") and
client/server Transmission Control Protocol/Internet Protocol ("TCP/IP"), onto a
single telecommunications circuit. Frame relay represents a cost-effective and
stable technology, that provides a smooth migration to asynchronous transfer
mode ("ATM") and other broadband services generally used in the backbone of many
of these service providers.
The Company's strategy is to produce highly reliable and value-added
network access devices and management software applications that are engineered
to support mission-critical applications over frame relay and other digital
services at the lowest possible overall cost of ownership. The Company's
FrameNode-TM- line of frame relay access devices ("FRADs") and frame relay
access routers converge business critical SNA, IP/IPX and voice/fax branch
applications across frame relay. Sync's circuit management solutions consists of
WAN probes and application software that improve the availability and
performance of frame relay networks by providing extensive problem isolation and
troubleshooting capabilities and proactive performance and service-level
management. Sync's TyLink-Registered Trademark- line of digital transmission
products including data service units and channel service units ("DSU/CSU") and
Integrated Services Digital Network ("ISDN") termination products, are the basic
elements that provide low cost connectivity to a digital WAN.
Today, many mainframe or similarly hosted data networks use expensive
leased lines to connect remote sites to central computing facilities or data
centers. Due to favorable carrier pricing and technical suitability, frame relay
is a less expensive, more efficient, direct substitute for such traditional
leased line connections and due to its maturity, is very stable as compared to
other technology based alternatives, including the internet or other IP based
services.
Sync follows a sales strategy relying primarily on a direct sales force
and leveraging resellers, distributors, OEM partners and a number of Regional
Bell Operating Companies ("RBOCs") and Interexchange Carriers ("IXCs") as
delivery channels for its products. Current partners include, AT&T, MCI WorldCom
("MCI"), Electronic Data Systems, Unisys and Diebold. The Company believes that
its relationships provide sufficient alternative channels of fulfillment to
serve the needs of middle and upper market customers. The Company utilizes a
distribution and value-added reseller ("VAR") channel and will utilize the
internet as the primary distribution channels for its digital transmission
products.
Sync does not have any dedicated international sales offices, however,
the Company sells its products through partners and resellers located in Europe
including Germany, France, UK and Ireland and in
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the Pacific Rim.
INDUSTRY BACKGROUND
SNA FOR BUSINESS CRITICAL APPLICATIONS
Historically, organizations have predominantly performed their
business-critical data processing predominantly on hierarchical, centralized
computer systems, mainly IBM mainframe or similar systems. These
transaction-oriented data processing applications have traditionally supported
such critical functions as branch banking, credit transactions, retail
point-of-sale transactions, inventory management and airline reservations.
Wide-area networks have been built to provide access to these applications from
geographically-dispersed branch offices in a "hub and spoke" model, in which as
many as several thousand remote sites are connected to one or two data
processing centers.
The critical nature of these business applications requires that
host-based systems deliver high availability with efficient and predictable
response times. IBM's SNA was designed and developed specifically to deliver
these benefits to remote terminals communicating across the current wide-area
network infrastructures, primarily leased lines. SNA has been widely deployed as
a network architecture for corporate wide-area networks since the late 1970s.
EMERGENCE OF IP AND CLIENT/SERVER COMPUTING
In the late 1980s, "client/server" computing emerged, expanding
capabilities of software applications and ease of local interconnection through
local area networks ("LANs"). To facilitate support, scalability and security,
client/server networks are being implemented by corporations in topologies that
parallel the traditional leased-line hub and spoke model of the mainframe SNA
network. In addition, as users increasingly demand higher bandwidth, savings and
quality, carriers and service providers are rolling out new packet based voice
and data services, including Asynchronous Digital Subscriber Line (ADSL), etc.
OUTSOURCING OF NETWORK SERVICES
Continuing deregulation and reformation within the worldwide
telecommunications market has resulted in a dramatic increase in the number of
carriers, service providers and other companies that outsource networking and
telecommunications support and services. In order to differentiate their
services, these "Service Providers" have deployed new data transport networks
based on packet and cell switched technologies; specifically frame relay,
Internet Protocol ("IP"), ATM and ADSL. Many end user organizations ("End
Users") have found these services to be cost-effective alternatives to private
leased line networks and have migrated all or part of their WAN infrastructures
including the planning, provisioning and management of their networks to their
Service Provider. These services often bundle telecommunications services with
the components necessary to connect customer sites to the network.
The shift from leased lines to these services has created a number of
challenges for End Users and Service Providers alike. Since a significant
portion of their WAN infrastructure is now controlled and managed by their
Service Providers, End Users have diminished visibility and control of
mission-critical applications that traverse the public switched virtual network
(PSVN). In turn, Service Providers have increased responsibility for end user
application performance and higher service level commitments, especially in
connection with managed network services offerings.
THE SYNC SOLUTION
Sync is a provider of WAN access, internetworking and management
products and related services that enable business-critical SNA and
client/server applications to be safely deployed over frame relay or other
packetized transmission services. Sync's products allow organizations to
leverage the performance, utility and cost advantages of these networks, while
maintaining the robustness, reliability and responsiveness of SNA and preserving
the sizable investment in legacy SNA applications, equipment, management
automation, diagnostic tools and staff training.
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PRODUCTS
Sync's current product offerings have focused almost exclusively on the
growing frame relay marketplace. The Company's product portfolio targets three
distinct frame relay market related opportunities. Combined, the products offer
a broad single vendor solution for deployment and support of mission-critical
applications over frame relay.
ACCESS INTERNETWORKING SOLUTIONS
The FrameNode-Registered Trademark- FRADs and frame relay access
routers reduce duplication in networks and recurring telecommunications costs by
converging SNA, legacy and client/server (IP/IPX) branch applications across a
frame relay WAN using a single access trunk. Sync FrameNodes-Registered
Trademark- successfully combine deterministic SNA transactions with bursty and
bandwidth-demanding client/server transmissions through a traffic prioritization
and bandwidth allocation capability.
Sync provides a broad range of serial-to-LAN conversion products under
the ConversionNode-TM- product name. The ConversionNode-TM- enables SNA and
other legacy serial controllers to interoperate over router-based internetworks
by providing serial-to-LAN conversion. It supports a wide-array of legacy
controllers, including SNA, asynchronous BSC3270 and BSC/RJE.
A number of large IBM-centric customers, such as Bear Sterns, First
Union Corporation ("First Union"), Electronic Data Systems, Experian, and VISA
International, have selected Sync's frame relay solutions.
CIRCUIT MANAGEMENT SOLUTIONS
Sync's circuit management technology consists of a series of WAN
monitoring probes and graphical applications. Together, these components allow
End Users to improve network availability and performance and reduce network
operating costs by enhancing problem isolation, identification and
troubleshooting and providing performance and service-level management
capabilities.
DIGITAL TRANSMISSION SOLUTIONS
Sync's TyLink-Registered Trademark- brand digital transmission products
support a wide range of digital access applications, including low-speed
56/64Kbps to high-speed T1/E1 models for leased line connectivity; and data,
voice and video integration on a single T1 trunk. The 7400 Series WAN Champion
is a high-capacity chassis system that can support up to 32 T1 interfaces. Its
port density and price/performance make it ideal for large-scale T1 termination
applications.
PRODUCT STRATEGY
Sync has developed a multifaceted product strategy that the Company
believes addresses many of the issues that are important to successful
deployment of frame relay (and IP) connectivity: access circuit and
service-level management, and high-speed digital transmission. The Company is
focusing its new product development efforts on creating new product
capabilities in these three areas. During 1999, the Company released its 4300
and 3700 families of integrated frame relay access products, which combine the
feature and functions of its frame relay access products, circuit management and
digital transmission products with alternative ISDN and Async point-to-point
(PPP) backup capabilities into one combined solution. The Company believes this
product provides a cost-effective solution that enhances high availability
through alternative bandwidth functionality. Going forward, Sync plans to
continue to leverage its technology strengths through the development of
products that support for higher speeds and increase its capabilities in
supporting Internet Protocol based applications. The Company expects that the
first of these new products will begin to become available to the general market
during mid 2000. However, there can be no assurance that the Company will be
able to introduce these new products on a timely basis, if at all, or that these
products will gain market acceptance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Risk Factors-Rapid
Technological Change and New Products."
CUSTOMERS AND MARKETS
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Sync's three core WAN technologies: access internetworking, circuit
management and digital transmission are targeted at two macro markets:
enterprise middle market end user customers and service providers serving such
customers.
ENTERPRISE END USER CUSTOMERS
Sync's strategy is to provide a comprehensive product solution for
safely migrating mission-critical SNA and IP/IPX applications to frame relay and
other WAN technologies. In addition, the Company offers a broad range of
services to complement its products, including network design consulting, remote
network monitoring, onsite maintenance and technical assistance. The Company
believes that advantages to its customers include improved network reliability,
improved efficiencies in circuit and bandwidth utilization, and reduced capital,
telecommunications and operating costs. Sync has been successful in winning
several large end-user customers, however, the Company's primary focus is at the
AS400 enterprise user and middle market companies with 25 to 500 branch sites.
Many of these companies host their business critical applications on a
centralized basis in a leased line environment and can benefit from Sync's
solutions to provide a cohesive convergence of SNA and IP applications across
the same network. In addition, the Company believes that the larger
telecommunications equipment companies do not adequately serve these mid-sized
enterprises.
SERVICE PROVIDERS
The FrameNode-Registered Trademark- is also designed to be an effective
customer premises equipment (CPE) solution for managed service offerings. In
addition to its broad support for SNA, IP/IPX and certain legacy protocols, it
includes extensive end-to-end network management capabilities facilitate more
reliable and consistent service to customers, improved efficiency in circuit and
bandwidth provisioning, and reduced capital and operating costs for service
providers.
While enterprise customers view frame relay as a cost-effective vehicle
for converging remote SNA and IP/IPX applications, Sync believes they will
continue to demand the stability, resiliency and the management-rich attributes
of their leased line networks. Sync's circuit management technology provides
customers and service providers with the management capabilities necessary to
maximize network performance and availability requirements.
CUSTOMER BASE
The Company's products are used in a wide variety of industries worldwide by
both End Users and Service Providers. The Company has been in, but not limited
to, the banking and financial services; credit and transaction processing;
manufacturing and industrial; insurance; retail and network; and application
outsourcing industries. Sync's customer base includes but is not limited to,
First Union Corporation, Wells Fargo, Visa International, First Data Resources,
McJunkin Corporation, Piedmont Natural Gas, GEICO Insurance; Experian,
Electronics Data Systems Corporation (EDS), Korea Telecom, and Rhodes/Helig
Myers.
SALES AND PARTNER CHANNELS
The Company follows a sales strategy relying primarily on a U.S. based
direct sales force and leveraging resellers, distributors, and a number of
Service Providers as delivery channels for its products, including several
partners serving the international market. The Company utilizes a distribution
and value-added reseller ("VAR") channel and will utilize the internet as the
primary distribution channels for its digital transmission products. The Company
has from time to time entered into OEM relationships with selected
internetworking companies and will continue to develop such relationships as
appropriate.
DIRECT SALES
Sync's sales and marketing strategy focuses on developing relationships
with end-user middle market enterprises through its direct sales organization to
promote the Company's products and drive demand for Sync products and support
channel partners. The primary roles of the Company's sales force are (i) to
assist end user customers in addressing complex network problems; (ii) to
differentiate the
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features and capabilities of the Company's products from competitive
offerings; and (iii) provide support to channel partners as fulfillment
channels in meeting the needs of end-user customers. The Company believes
that its investment in direct sales enables the Company to monitor changing
customer requirements. As of December 31, 1999, the Company had 12 domestic
field sales and support personnel currently operating out of locations in 8
states. First Union Corporation, a direct sales customer, represented $1.8
million or 9.8% in 1999, $4.6 million or 18.5% in 1998, $1.5 million or 6.5%
in 1997of the Company's net revenues.
CHANNEL PARTNERS AND OTHER RESELLERS
The Company's indirect sales and marketing strategy focuses on
establishing channel partnerships with selected, leading networking companies
and carriers that serve the AS400 and/or middle market enterprises. Sync works
with its channel partners in various activities, including joint sales calls,
field training and support and custom product development. The Company currently
maintains marketing and sales arrangements with Service Providers such as
Sprint, MCI, Ameritech, EDS, Lucent Technologies and Datacomm Systems and
various distributors and VAR's.
In general, the Company's resale agreements with its channel partners
and other resellers (i) have terms ranging from one to five years, subject to
renewal, (ii) do not restrict the sale of products that compete with those of
the Company, (iii) provide for discounts based on expected or actual volumes of
products purchased or resold by the channel partner in a given period, (iv) do
not require minimum purchases, (v) provide for worldwide distribution rights,
(vi) prohibit product distribution by the Company through certain categories of
third parties under certain conditions, (vii) can be terminated by the reseller,
under certain conditions, with limited notice and with little or no penalty, and
(viii) provide manufacturing rights and access to source code upon the
occurrence of specified conditions or defaults.
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Risk
Factors-Dependence on Channel Partners and Other Resellers" and "Intense
Competition."
INTERNATIONAL SALES
Sales to customers outside of the United States accounted for
approximately $2.4 million, $1.7 million and $4.5 million, or 13.2%, 6.9% and
19.1% of the Company's net revenues in 1999, 1998 and 1997, respectively. The
Company targets international sales on an opportunistic basis and has
historically sold products internationally 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.
The Company does not have any dedicated international sales offices,
however, the Company sells its products through partners and resellers located
in Europe including Germany, France, UK, and Ireland, and in the Pacific Rim.
Certain business risks are inherent in international transactions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors-Dependence on and Risks Associated with International
Sales."
CUSTOMER SERVICE
The Company installs, maintains and supports products in the United
States and in selected International locations with the Company's service and
support personnel and through contracted service providers. The Company's
resellers generally provide installation, maintenance and support services to
their customers, with the Company providing backup support. Sync employs systems
engineers to deliver network consulting services and assist End Users with
pre-sales and post-sales support. As a result, the Company believes that these
systems engineers are able to provide valuable input to the product development
process based on their experience in the field. The Company also supports
customers and
6
sales personnel by providing remote telephone through its technical
assistance centers in Irvine, California and Norton, Massachusetts. Through a
digital dial-up network connection or a modem connection to the customer's
system the Company's representatives remotely analyze and correct software,
installation and configuration problems. The Company also offers on-site
installation, technical assistance, consulting and repair services for fixed
fees. The Company's customers may select among various levels of maintenance
options. In certain cases the Company subcontracts with one of its
third-party service providers for the provision of onsite installation and
maintenance services. Sync provides its direct end user customers with a
twelve to sixty month warranty, which commences on product shipment.
RESEARCH AND DEVELOPMENT
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 Company intends to continue to make substantial
investments in product and technology development. The Company monitors changing
customer needs and intends to support industry standards and migrate to new
wide-area networking protocols.
The Company's research and development expenditures aggregated $5.5
million, $7.4 million and $7.2 million in 1999, 1998 and 1997, respectively. At
December 31, 1999, 41 full-time employees were engaged in research and product
development. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Risk Factors-Dependence on Key Personnel" and "Results
of Operations."
The Company is focusing its new product development efforts on creating
new product capabilities. During 1999, the Company released its 4300 and 3700
families of integrated frame relay access products, which combine the feature
and functions of its frame relay access products, circuit management and digital
transmission products with alternative ISDN and Async PPP backup capabilities
into one combined solution. The Company believes this product provides a
cost-effective solution that enhances high availability through alternative
bandwidth functionality. Going forward, Sync plans to continue to leverage its
technology strengths through the development of products that support higher
speeds and increase its capabilities in supporting Internet Protocol based
applications. The Company expects that the first of these new products will
begin to become available to the general market during mid-2000. However, no
assurances can be given that the Company will be able to introduce any or all of
these products on a timely basis, if at all. Also, 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, including new PSVN services,
or product announcements by competitors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"-Risk Factors-"Rapid
Technological Change and New Products" and "Product Errors."
MANUFACTURING
Sync's operational strategy continues to emphasize outsourcing of
board-level manufacturing to reduce costs and to provide flexibility in meeting
market demand. The Company's manufacturing operations consist primarily of
materials planning and procurement, light assembly, system integration, testing
and quality assurance. The Company designs substantially all of the hardware
subassemblies for its products and has entered into arrangements with contract
manufacturers to outsource substantial portions of its subassembly 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 Sync's ability to
fulfill orders while the Company identifies a replacement manufacturer. Such an
event could have a material adverse
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effect on the Company's business, operating results and financial condition.
The Company uses a rolling three-month forecast based on anticipated
product orders to determine its general materials and manufacturing staffing
requirements. Lead times for materials and components ordered by the Company
vary significantly, and depend on factors such as the specific supplier,
contract terms and demand for a component at a given time. Currently, the
Company acquires materials and completes certain standard subassemblies based on
the Company's forecast. Upon receipt of firm orders from customers, the Company
assembles fully-configured systems and subjects them to a number of tests before
shipment. The Company's manufacturing procedures are designed to assure rapid
response to customer orders, but 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors-Dependence on Contract Manufacturers," and "Dependence
on Suppliers."
Although the Company generally uses standard parts and components for
its products, certain key components 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, including flash memories, dynamic random access memory (DRAM),
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 directly buys 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 interruption in the supply of any of
these components, or the inability of the Company to procure these components
from alternate sources at acceptable prices and within a reasonable time, could
have a material adverse effect upon the Company's business, operating results
and financial condition. 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 receive 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's has obtained ISO 9001 certification for all of its
facilities. The Company's inability to maintain certification of all of its
facilities could have a material adverse effect on the Company's business,
operating results and financial condition.
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
Systems, Inc. ("Cisco") and Nortel, FRAD providers such as Hypercom Network
Systems ("Hypercom"), Motorola Information Systems Group ("Motorola ISG"), and
Cabletron Systems, Inc. ("Cabletron"), and circuit management and digital
transmission providers such as Visual Networks, Inc. ("Visual Networks"),
NetScout, Digital Link Corporation ("Digital Link"), Racal Datacom, Inc., AT&T
Paradyne ("Paradyne") and Adtran, Inc. ("Adtran"), among others. Potential
competitors include other internetworking and WAN access and transmission
companies, frame relay switch providers, the Company's channel partners. Certain
of these companies have announced products and intentions to enter the frame
relay access or circuit management market.
Many of the Company's current and potential competitors have longer
operating histories and greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the development, promotion, sale and support of
their products than the Company. Many also have long-standing customer
relationships with large enterprises that are part of the Company's target
market, and
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these relationships may make it more difficult to complete sales of the
Company's products to these enterprises. Further, certain of the Company's
channel partners have in the past developed competitive products and
terminated their relationships with the Company, and such developments could
occur in the future. As a consequence of all these factors, the Company
expects increased competition, particularly in the frame relay market.
Increased competition could result in significant price competition, reduced
profit margins or loss of market share, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Risk Factors-Intense Competition."
Sync believes that the principal competitive factors in its market are
expertise and familiarity with SNA networks and protocols, expertise and
knowledge with high capacity mission-critical network issues and solutions,
product performance, features, functionality and reliability, price, overall
cost of ownership, timeliness of new product introductions, adoption of emerging
industry standards, service, support, size and installed base. The Company
believes that it generally is competitive with respect to most of these factors.
However, there can be no assurance that the Company will be able to compete
successfully in the future.
PROPRIETARY RIGHTS
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Risk Factors-Dependence on Proprietary Technology."
EMPLOYEES
As of December 31, 1999, the Company employed 103 persons, including 41
in engineering, 21 in sales and marketing, 29 in operations and 12 in finance
and administration. There can be no assurance that the Company will be
successful in retaining its key employees. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Results of Operations"
and "Risk Factors-Dependence on Key Personnel."
ITEM 2. PROPERTIES
The Company leases approximately 24,000 square feet of space for the
Company's headquarters facility in Irvine, California. The current lease on the
Irvine facility expires in August 2004. In addition, the Company's Tylink
operation leases an industrial building in Norton, Massachusetts. This building
lease expires at the end of July 2002. The Company also has sales and support
offices in 8 other states.
ITEM 3. 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.
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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
There are no other material legal proceedings to which the Company is a
party or to which any of its properties are subject. No material legal
proceedings were terminated in the year ended December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed on the Nasdaq Stock Market and
trades under the symbol SYNX. The following table presents the high and low
closing sale prices for the Company's common stock for the periods indicated.
All sales prices have been adjusted to reflect the Company's one for five
reverse stock split effected in June 1999.
HIGH LOW
----- -----
1999
Q1.............................................. $6.56 $2.97
Q2.............................................. 3.59 1.87
Q3.............................................. 2.75 1.94
Q4.............................................. 3.25 2.19
1998
Q1.............................................. 19.38 11.71
Q2.............................................. 20.31 10.44
Q3.............................................. 19.38 6.88
Q4.............................................. 7.81 3.56
The Company had 218 stockholders of record and 2,776 beneficial
shareholders as of March 6, 2000.
The Company has never paid cash dividends on its capital stock and does
not intend to pay cash dividends on its capital stock in the foreseeable future.
The Company's bank line of credit prohibits the Company from paying cash
dividends without the bank's prior written consent. Any future determination to
pay cash dividends will be at the discretion of the Board of Directors and will
be dependent upon the Company's financial condition, results of operations,
capital requirements and such other factors as the Board of Directors deems
relevant.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from, and are
qualified by reference to, the audited financial statements of the Company and
reflects the merger with Tylink in August 1996, which was accounted for using
the pooling-of-interests method. The data should be read in conjunction with the
financial statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere in this
Report.
YEARS ENDED DECEMBER 31
-------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues........................................ $ 18,152 $ 24,702 $ 23,256 $36,346 $34,933
Cost of sales....................................... 9,905 15,850 14,724 19,995 17,584
-------- --------- -------- ------- -------
Gross profit........................................ 8,247 8,852 8,532 16,351 17,349
Operating expenses:
Research and development......................... 5,503 7,420 7,195 7,687 5,636
Selling and marketing............................ 5,136 11,851 14,318 14,484 11,248
General and administrative....................... 2,284 3,048 3,741 5,795 2,871
Non-recurring charges............................ - 2,852 1,241 - -
-------- --------- -------- ------- -------
Total operating expenses................... 12,923 25,171 26,495 27,966 19,755
-------- --------- -------- ------- -------
Operating loss...................................... (4,676) (16,319) (17,963) (11,615) (2,406)
Interest income, net................................ 408 875 1,455 2,184 461
-------- --------- -------- ------- -------
Loss before income taxes............................ (4,268) (15,444) (16,508) (9,431) (1,945)
Provision for income taxes.......................... 6 2 - 2 45
-------- --------- -------- ------- -------
Net loss $ (4,274) $ (15,446) $(16,508) $(9,433) $(1,990)
======== ========= ======== ======= =======
Basic and diluted net loss per share................ $ (1.22) $ (4.44) $ (4.81) $ (3.04) $ (2.31)
======== ========= ======== ======= =======
Shares used in computing net loss per share
(1).............................................. 3,493 3,479 3,434 3,258 1,364
======== ========= ======== ======= =======
YEARS ENDED DECEMBER 31
------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents..................... $ 8,632 $14,135 $21,734 $35,874 $50,633
Working capital............................... 11,611 14,337 28,718 44,336 58,260
Total assets.................................. 19,197 26,791 38,495 55,692 66,672
Capitalized lease obligations, less current
maturities................................. 7 60 111 146 398
Mandatorily redeemable preferred stock........ - - - - 5,591
Total stockholders' equity.................... 13,291 17,571 32,818 48,803 54,862
Certain prior year amounts have been reclassified to conform with the
current year presentation.
- --------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used to
compute basic and diluted net loss per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
In 1998 and 1997, the Company implemented various expense reduction
programs with the goal of enabling the Company to achieve profitability at
lower revenue levels. However, there can be no assurance that its efforts to
implement expense reductions will enable it to become profitable at lower
revenue levels, if at all. Also, there can be no assurance that the Company's
products will achieve significant market penetration, either through its
channel partners and other resellers or its direct sales force, or that the
Company will successfully introduce new and enhanced products or compete
effectively in its market.
RISK FACTORS
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 herein, the following discussion under
"Results of Operations," "Inflation," "Year 2000 Compliance" 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 of the major risks and uncertainties.
HISTORY OF LOSSES; SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS; UNCERTAIN
PROFITABILITY
The Company has experienced operating losses since inception, with,
in recent years, operating losses of, $4.7 million in 1999, $16.3 million in
1998 and $18.0 million in 1997. As of December 31, 1999, the Company had an
accumulated deficit of approximately $58.7 million. The Company has
experienced, and may in the future experience, significant fluctuations in
revenues and operating results from quarter to quarter and from year to year
due to a combination of factors. Factors that have in the past caused, or may
in the future cause, the Company's revenues and operating results to vary
significantly from period to period include: the timing of significant
orders; the relatively long length of the sales cycles for certain of the
Company's products; the market conditions in the networking industry; the
timing of capital expenditures by the Company's target market customers;
competition and pricing in the industry; the Company's success in developing,
introducing and shipping new products; new product introductions by the
Company's competitors; 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
13
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 FOR FRAME RELAY FOR MISSION-CRITICAL APPLICATIONS
During 1999, 1998 and 1997, sales of frame relay access products,
which enable multiprotocol (IP, IPX and SNA) internet-working over frame
relay, represented approximately 37.7%, 49.2% and 43.1%, 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-Registered Trademark- product family under the name IBM Nways 2218.
The agreement between IBM and the Company expired in March 1999. Sales to IBM
accounted for 0.8%, 14.1% and 16.5% of the Company's net revenues in 1999,
1998 and 1997, 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
14
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
47.1%, 62.5% and 67.0% of net revenues of the Company in 1999, 1998 and 1997,
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. The agreement between IBM and Sync
expired in March 1999. Sales to IBM accounted for 0.8%, 14.1% and 16.5% of
the Company's net revenues for in 1999, 1998, and 1997, 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.
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
15
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 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
16
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 $2.4 million, $1.7 million and $4.5 million, or 13.2%, 6.9% and
19.1% of the Company's net revenues in 1999, 1998 and 1997 respectively. The
Company targets international sales on an opportunistic basis and has
historically sold products internationally 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.
17
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 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.
18
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. 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.
RESULTS OF OPERATIONS
COMPARISON OF 1999 AND 1998 RESULTS
NET REVENUES. The Company derives its revenues primarily from sales
of advanced wide-area networking products, which are recognized upon
shipment. The Company generally does not have any significant remaining
obligations upon shipment of its products. Product returns and sales
allowances are provided for at the date of sale. Service revenues from
customer maintenance fees for ongoing customer support and product updates
are recognized ratably over the term of the maintenance period, which is
typically 12 months. Service revenues for training, installation and
consulting services are recognized when the service is performed.
Net revenues in 1999 were $18.2 million, a decrease from net
revenues of $24.7 million in 1998. Net
19
revenues by product group for the years ended December 31, 1999 and 1998 were
as follows ($ in thousands):
1999 % 1998 %
------- ------ ------- ------
Frame relay access products.................. $6,837 37.7% $12,145 49.2%
Circuit management products.................. 3,372 18.6 5,344 21.6
Transmission products........................ 1,187 6.5 2,041 8.3
Service and other............................ 6,756 37.2 5,172 20.9
------- ------ ------- ------
$18,152 100.0% $24,702 100.0%
------- ------ ------- ------
------- ------ ------- ------
The decrease in product revenues was primarily due to completion of
several large projects in 1998. The increase in service and other revenue
represents higher service revenues resulting from the emphasis in selling
support and consulting services during 1999.
The percentage of net revenues represented by sales through channel
partners and other resellers declined to 47.1% in 1999 from 62.5% in 1998.
Sales to IBM accounted for 0.8% and 14.1% of the Company's net revenues in
1999 and 1998. The agreement between IBM and Sync expired in March 1999. The
Company expects that average selling prices may continue to decline and that
sales through channel partners and other resellers may continue to account
for a relatively large portion of net revenues; however, the mix of sales
among channel partners and other resellers may change from period to period.
International sales accounted for 13.2% of net revenues in 1999, as
compared to 6.9% of net revenues in 1998. The increase was primarily due to
shipments for international locations of a U.S. based customer
GROSS PROFIT. Cost of sales primarily consists of purchased
materials used in the assembly of the Company's products, fees paid to third
party subcontractors for installation and maintenance services, and
compensation paid to employees in the Company's manufacturing and service
organizations.
Gross profit decreased to $8.2 million for 1999 compared to $8.9
million in 1998, primarily as a result of the lower revenue levels. Gross
profit as a percentage of net revenues increased to 45.4% in 1999 from 35.8%
in 1998, due primarily to lower manufacturing overhead costs and an increase
in higher margin service revenues.
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, 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 research and development process.
Research and development expenses decreased to $5.5 million in 1999, from
$7.4 million in 1998 due to the Company's cost reduction efforts and
unstaffed development positions resulting from employee turnover.
Selling and marketing expenses consist primarily of base and
incentive compensation paid to sales and marketing personnel, travel and
related expenses, and costs associated with promotional and trade show
activities. Selling and marketing expenses decreased to $5.1 million in 1999
from $11.9 million in 1998 due primarily to the Company's cost reduction
efforts and unstaffed sales positions resulting from employee turnover.
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 expenses decreased to $2.3 million in 1999
from $3.0 million in 1998. The decrease in general and administrative
expenses was primarily due to the Company's cost reduction efforts.
20
During the fourth quarter of fiscal 1998, the Company implemented
additional expense reduction programs to reduce its overall cost structure
and, as a result, recognized a $2.9 million non-recurring charge consisting
of severance and related headcount reduction costs, idle and excess facility
charges and write-offs of assets no longer in use due to the reduction
efforts. The activity of the Company's cost reduction efforts are summarized
as follows (in thousands):
ACCRUAL ACCRUAL
DESCRIPTION AT 12/31/98 ACTIVITY AT 12/31/99
----------- ----------- -------- -----------
Severance and related expenses....... $ 854 $(854) $ -
Idle and excess facility charges
and write-off of assets............ 1,110 (1,110) -
Other non-recurring charges.......... 12 (12) -
-------- ------- -------
Total................................ $ 1,976 $(1,976) $ -
-------- ------- -------
-------- ------- -------
The Company completed substantially all of its cost reduction
measures during fiscal 1999. The Company will continue to evaluate and may
adjust its organization and cost structure in the future.
Net interest income was $0.4 million in 1999, as compared to $0.9
million in 1998. The decrease in interest income was primarily due to the
Company's lower cash balances resulting from the use of cash to fund the
Company's operating activities.
INCOME TAXES. The provision for income tax in 1999 and 1998
represented minimum state taxes.
COMPARISON OF 1998 AND 1997 RESULTS
NET REVENUES. Net revenues in 1998 were $24.7 million, an increase
from net revenues of $23.3 million in 1997. Net revenues by product group for
the years ended December 31, 1998 and 1997 were as follows ($ in thousands):
1998 % 1997 %
------- ------ ------- ------
Frame relay access products............ $12,145 49.2% $10,011 43.0%
Circuit management products............ 5,344 21.6 4,847 20.8
Transmission products.................. 2,041 8.3 4,394 18.9
Service and other...................... 5,172 20.9 4,004 17.3
------- ------ ------- ------
$24,702 100.0% $23,256 100.0%
------- ------ ------- ------
------- ------ ------- ------
The increase in frame relay access and circuit management and
service revenues, was due to several large orders placed and fulfilled during
1998. The reduction in transmission products reflects a reduction in sales of
transmission products to the Pacific Rim caused by the continued currency and
financial instability in the region.
The percentage of net revenues represented by sales through channel
partners and other resellers declined to 62.5% in 1998 from 67.0% in 1997.
Sales to IBM accounted for 14.1% and 16.5% of the Company's net revenues in
1998 and 1997, respectively.
International sales accounted for 6.9% of net revenues in 1998, as
compared to 19.1% of net revenues in 1997 primarily due to a decrease in
sales to the Pacific Rim due to economic conditions in that region.
GROSS PROFIT. Gross profit increased slightly to $8.9 million for
1998 compared to $8.5 million in 1997. Gross profit as a percentage of net
revenues decreased to 35.8% for the year ended December 31, 1998 from 36.7%
for the year ended December 31, 1997, due primarily to increased discounts to
IBM in 1998, as well as a decrease in average selling prices.
OPERATING EXPENSES. Research and development expenses increased
slightly to $7.4 million for the
21
year ended December 31, 1998, from $7.2 million for the year ended December
31, 1997.
Selling and marketing expenses decreased to $11.9 million for the
year ended December 31, 1998 from $14.3 million for the year ended December
31, 1997. The decreased expenses resulted primarily from sales and marketing
consultant and employee headcount reductions.
General and administrative expenses decreased to $3.0 million for
the year ended December 31, 1998, as compared to $3.7 million for the year
ended December 31, 1997. The decrease in general and administrative expenses
was primarily due to the Company's expense reduction programs.
In the first and fourth quarters of fiscal 1997, the Company
implemented various expense reduction programs to improve its results of
operations. In connection with these programs, the Company recorded a
non-recurring charge of $1.2 million, consisting of severance and related
headcount reduction costs and lease termination costs related to redundant
sales office facilities.
The non-recurring charges taken in 1998 and 1997 were as follows (in
thousands):
ACCRUAL ACCRUAL
DESCRIPTION AT 12/31/97 CHARGE ACTIVITY AT 12/31/98
----------- ----------- ------ -------- -----------
Severance and related expenses....... $ 354 $ 1,210 $ (710) $ 854
Idle and excess facility charges
and write-off of assets............ 9 1,547 (446) 1,110
Other non-recurring charges.......... 9 95 (92) 12
----- ------- ------- -------
Total................................ $ 372 $ 2,852 $(1,248) $ 1,976
----- ------- ------- -------
----- ------- ------- -------
In 1998, the Company completed its 1997 expense reduction program
activities.
Net interest income in 1998 decreased to $0.9 million from $1.5 million
in 1997 primarily due to lower cash balances.
INCOME TAXES. The provision for income tax in 1998 represented minimum
state taxes. There were no provisions for income taxes in 1997.
INFLATION
The effects of inflation have not historically had, and are not
expected to have, a material effect on the Company's operating results or
financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer and telecommunications systems and
software products were not designed to consider the impact of moving into the
21st century. To date, the Company has tested its products and internal systems
for Year 2000 compliance and has verified that its significant vendors,
customers and service provides or any other third party upon which it
significantly relies have taken prudent measures to mitigate the risk of the
Year 2000. The Company has not experienced or been informed of any significant
Year 2000 issues that may directly or indirectly affect its business. The
Company will continue to monitor and evaluate the impact of the Year 2000 upon
its overall business as latent Year 2000 related issues may arise in the future.
To date, the Company has not incurred substantial costs to address the
Year 2000 issue and is unable to estimate the additional cost, if any, that may
arise from Year 2000 related issues identified in the future.
Despite the Company's efforts to address the Year 2000 impact on its
products, internal systems and business operations, latent Year 2000 related
issues may result in a material disruption of its business or have a material
adverse effect on the Company's business, financial condition or results of
operations.
22
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company's principal sources of liquidity
consisted of $8.6 million of cash and cash equivalents. The Company also has
available a $2 million secured bank line of credit which will expire in April
2000. There were no borrowings outstanding as of December 31, 1999.
During 1999, cash used in operating activities was $4.8 million,
compared to $6.5 million for fiscal 1998. Use of cash during 1999 resulted
primarily from the Company's net loss of $4.3 and the payment of costs
associated with the Company's restructuring plan. Capital expenditures during
fiscal 1999 were $0.6 million, compared to $1.2 million for 1998. At December
31, 1999, the Company had no material commitments for capital expenditures.
As of December 31, 1999, the Company's net working capital was $11.6
million, of which $8.6 million was invested in cash and cash equivalents, $3.2
million was invested in accounts receivable, and $5.1 million was invested in
inventory. The Company believes that its available cash and cash equivalents
will be sufficient to meet its working capital requirements at least through
2000.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH FOREIGN EXCHANGE
In 1999, approximately 13.2% of the Company's net revenues were derived
from sales to international customers, primarily in the Pacific Rim and Europe.
As a result, the Company is exposed to market risk from changes in foreign
exchange rates and international economic conditions, which could affect its
results of operations and financial condition. In order to reduce the risk from
fluctuation in foreign exchange rates, the Company's product sales are
denominated in U.S. dollars. The Company has not entered into any currency
hedging activities.
INTEREST RATE RISKS
The Company invests its excess cash in high quality government and
corporate debt instruments. However, the Company may be exposed to fluctuation
in rates on these investments. Increases or decreases in interest rates
generally translate into increases or decreases in the fair value of these
investments. Such changes to these investments have historically not been
material due to the short-term nature of the Company's investment. In addition,
the credit worthiness of the issuer, the relative values of alternative
investments, the liquidity of the instruments and other general market
conditions may affect the fair value of interest rate sensitive instruments. In
order to reduce the risk from fluctuation in rates, the Company invests in money
market funds and short-term debt instruments of U.S. corporations with strong
credit ratings and the federal government with contractual maturities of less
than six months. At December 31, 1999, investments were as follows
($ in millions):
AVERAGE
AVERAGE INTEREST FAIR
BALANCE MATURITY RATE VALUE
------- -------- -------- ------
Short-term debt instruments and money market funds $8.6 2 months 5% $8.6
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the financial statements and
supplementary financial information that are attached hereto.
24
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sync Research, Inc.
We have audited the accompanying consolidated balance sheets of Sync
Research, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the index at item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sync Research, Inc. at December 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Orange County, California
January 28, 2000
25
SYNC RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
DECEMBER 31
------------------
1999 1998
------ ------
Current assets:
Cash and cash equivalents............................................................. $8,632 $14,135
Accounts and other receivables, less allowance for doubtful accounts of $273 in 1999
and $214 in 1998................................................................... 3,173 2,443
Inventories........................................................................... 5,140 6,111
Prepaid expenses and other current assets............................................. 565 808
------- -------
Total current assets............................................................... 17,510 23,497
Furniture, fixtures and equipment, net................................................... 1,632 3,247
Other assets............................................................................. 55 47
------- --------
Total assets............................................................................. $19,197 $26,791
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $1,769 $3,138
Accrued compensation and related costs................................................ 736 956
Accrued severance and restructuring costs............................................. - 1,976
Deferred revenue and customer deposits................................................ 3,048 2,063
Other accrued liabilities............................................................. 297 975
Current maturities of capitalized lease obligations................................... 49 52
------ ------
Total current liabilities.......................................................... 5,899 9,160
Capitalized lease obligations, less current maturities................................... 7 60
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares-2,000
Issued and outstanding shares-none................................................. - -
Common stock, $.001 par value:
Authorized shares-50,000
Issued and outstanding shares 3,505 in 1999 and 3,492 in 1998...................... 4 3
Additional paid-in capital............................................................ 71,958 71,972
Deferred compensation................................................................. - (7)
Accumulated deficit................................................................... (58,671) (54,397)
------- -------
Total stockholders' equity......................................................... 13,291 17,571
------- -------
Total liabilities and stockholders' equity............................................... $19,197 $26,791
======= =======
See accompanying notes.
26
SYNC RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31
------------------------------------
1999 1998 1997
------- -------- --------
Net revenues.......................................................................... $18,152 $ 24,702 $ 23,256
Cost of sales......................................................................... 9,905 15,850 14,724
------- -------- --------
Gross profit.......................................................................... 8,247 8,852 8,532
Operating expenses:
Research and development........................................................... 5,503 7,420 7,195
Selling and marketing.............................................................. 5,136 11,851 14,318
General and administrative......................................................... 2,284 3,048 3,741
Non-recurring charges.............................................................. - 2,852 1,241
------- -------- --------
Total operating expenses........................................................ 12,923 25,171 26,495
------- -------- --------
Operating loss........................................................................ (4,676) (16,319) (17,963)
Interest income, net.................................................................. 408 875 1,455
------- -------- --------
Loss before income taxes.............................................................. (4,268) (15,444) (16,508)
Provision for income taxes............................................................ 6 2 -
------- -------- --------
Net loss.............................................................................. $(4,274) $(15,446) $(16,508)
======= ======== ========
Basic and diluted net loss per share.................................................. $ (1.22) $(4.44) $(4.81)
======= ======== ========
Shares used in computing net loss per share........................................... 3,493 3,479 3,434
======= ======== ========
See accompanying notes.
27
SYNC RESEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
------------ DEFERRED PAID-IN ACCUMULATED
SHARES AMOUNT COMPENSATION CAPITAL DEFICIT TOTAL
------ ------ ------------ ------- ------- -----
Balance at December 31, 1996.................. 3,389 $3 $(156) $71,399 $(22,443) $48,803
Exercise of warrants and common stock options. 68 1 - 187 - 188
Repurchase of restricted stock................ (7) - - (7) - (7)
Issuance of stock under employee stock
purchase plan.............................. 8 - - 263 - 263
Amortization of deferred compensation......... - - 79 - - 79
Cancellation of options granted to employees.. - (1) 43 (42) - -
Net loss...................................... - - - - (16,508) (16,508)
------- ------- ------- -------- -------- --------
Balance at December 31, 1997.................. 3,458 3 (34) 71,800 (38,951) 32,818
Exercise of warrants and common stock options. 27 - - 56 - 56
Repurchase of common stock.................... (4) - - (17) - (17)
Issuance of stock under employee stock
purchase plan.............................. 11 - - 133 - 133
Amortization of deferred compensation......... - - 27 - - 27
Net loss...................................... - - - - (15,446) (15,446)
------- ------- ------- -------- -------- --------
Balance at December 31, 1998.................. 3,492 3 (7) 71,972 (54,397) 17,571
Exercise of warrants and common stock options. 62 1 - 75 - 76
Repurchase of common stock.................... (64) - - (136) - (136)
Issuance of stock under employee stock
purchase plan.............................. 15 - - 47 - 47
Amortization of deferred compensation......... - - 7 - - 7
Net loss...................................... - - - - (4,274) (4,274)
------- ------- ------- -------- -------- --------
Balance at December 31, 1999.................. 3,505 $4 $ - $71,958 $(58,671) $13,291
======= ======= ======= ======== ======== ========
See accompanying notes.
28
SYNC RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
-------- --------- ---------
OPERATING ACTIVITIES
Net loss...................................................................... $ (4,274) $(15,446) $(16,508)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 1,309 1,798 1,718
Asset write-offs in connection with non-recurring charge................... 902 336 -
Provision for losses on accounts receivable................................ 225 298 223
Deferred compensation expense.............................................. 7 27 79
Changes in operating assets and liabilities:
Accounts and other receivables............................................. (955) 1,916 2,707
Inventories................................................................ 971 1,260 (232)
Prepaid expenses and other current assets.................................. 243 (286) (43)
Accounts payable........................................................... (1,369) 966 (1,812)
Accrued compensation and related costs..................................... (220) 7 (25)
Accrued severance and restructuring........................................ (1,976) 1,604 372
Deferred revenue........................................................... 985 631 1,006
Other accrued liabilities.................................................. (678) 384 73
Other...................................................................... (8) (3) 3
-------- --------- ---------
Net cash used in operating activities......................................... (4,838) (6,508) (12,439)
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment............................. (596) (1,214) (1,315)
-------- --------- ---------
Net cash used in investing activities......................................... (596) (1,214) (1,315)
FINANCING ACTIVITIES
Net payments under credit agreements....................................... - - (802)
Payments on capitalized lease obligations.................................. (56) (49) (28)
Repurchase of common stock................................................. (136) (17) (7)
Proceeds from common stock options and warrants exercised.................. 76 56 188
Proceeds from employee stock purchase plan................................. 47 133 263
-------- --------- ---------
Net cash provided by (used in) financing activities........................... (69) 123 (386)
-------- --------- ---------
Net decrease in cash and cash equivalents..................................... (5,503) (7,599) (14,140)
Cash and cash equivalents at beginning of year................................ 14,135 21,734 35,874
-------- --------- ---------
Cash and cash equivalents at end of year...................................... $ 8,632 $ 14,135 $ 21,734
-------- --------- ---------
-------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.............................................................. $ 8 $ 41 $ 30
-------- --------- ---------
-------- --------- ---------
Income taxes paid.......................................................... $ 14 $ 15 $ 11
-------- --------- ---------
-------- --------- ---------
See accompanying notes.
29
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BACKGROUND
Sync Research, Inc. (the "Company") develops, manufactures, markets,
supports and provides wide-area network ("WAN") 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.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Sync Research, Inc. and its subsidiaries (the Company). All significant
intercompany transactions and balances have been eliminated in consolidation.
RECLASSIFICATIONS AND STOCK SPLIT
Certain prior year amounts have been reclassified to conform with the
current year presentation. The company effected a one for five reverse stock
split in June 1999. All share and per share information in the accompanying
financial statements have been restated to reflect this reverse stock split.
USE OF ESTIMATES
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 financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include the allowance for doubtful accounts, certain accrued liabilities,
inventory reserves, and income tax valuation allowances.
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 diversifications 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.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method. Inventories consisting primarily
of computer hardware and components are as follows (in thousands):
DECEMBER 31
----------------
1999 1998
------ ------
Raw materials................................... $2,707 $2,983
Work in process................................. 366 752
Finished goods.................................. 2,067 2,376
------ ------
$5,140 $6,111
------ ------
------ ------
REVENUE RECOGNITION
The Company derives its revenues primarily from sales of wide-area
networking hardware and software products, which are recognized upon shipment.
The Company generally does not have any significant remaining obligations upon
shipment of its products. Product returns and sales allowances are provided for
at the date of sale. Service revenues from customer maintenance fees for ongoing
customer support and product updates and installation or other assistance are
recognized ratably over the term of the maintenance period, which is typically
12 months or as the work is performed.
30
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITALIZED SOFTWARE
Software development costs incurred subsequent to determination of
technical feasibility are capitalized. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred between completion of the working model and the
point at which the product is ready for initial shipment have historically not
been significant. Amortization begins when products is available for general
release to customers. The Company also capitalizes costs related to the purchase
or license of software developed by third parties which are used in certain of
its products. Such costs are amortized over the applicable license period or
estimated useful life of the product. In connection with its cost reduction
program, the Company wrote off $405,000 of its capitalized purchased software in
1999 as such software products were no longer supported.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost. Depreciation
and amortization are provided on the straight-line method over the following
estimated useful lives:
Equipment acquired under capitalized leases Term of lease (ranging from 3 to 5 years)
Furniture and fixtures 5 to 7 years
Computers, software and equipment 3 to 7 years
Leasehold improvements Term of lease
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If required, the recoverability test is performed at the lowest
level practicable based on undiscounted net cash flows.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Continuous
research and development is necessary for the Company to maintain its
competitive position.
WARRANTY
The Company provides a warranty on all products and records a related
provision for estimated warranty costs at the date of sale.
INCOME TAXES
Deferred income tax assets and liabilities are computed for the
difference between the financial statement and tax basis of assets and
liabilities based on enacted tax laws and rates applicable to the period in
which differences are expected to affect taxable income. Valuation allowances
are established, when necessary to reduce deferred tax assets to amounts which
are more likely than not to be realized. The provision for income taxes consists
of the taxes payable and refundable for the period plus or minus the change
during the period in deferred income tax assets and liabilities.
NON-RECURRING CHARGES
In the first and fourth quarters of fiscal 1997, the Company
implemented various expense reduction programs to improve its results of
operations. In connection with these programs, the Company recorded a
non-recurring charge of $1.2 million, consisting of severance and related
headcount reduction costs and lease termination costs related to redundant sales
office facilities.
During the fourth quarter of fiscal 1998, the Company implemented
additional expense reduction programs to reduce its overall cost structure and,
as a result, recognized a $2.9 million non-recurring charge consisting of
severance and related headcount reduction costs, idle and excess facility
charges
31
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and write-offs of assets no longer in use due to the reduction efforts. The
non-recurring charges taken in 1998 and 1997 are summarized as follows (in
thousands):
Accrual at Accrual at Accrual at
Description 12/31/97 Expense Activity 12/31/98 Activity 12/31/99
----------- -------- ------- -------- -------- -------- --------
Severance and related expenses $354 $1,210 $(710) $854 $(854) $ -
Idle and excess facility 9 1,547 (446) 1,110 (1,110) -
chargesand write-off of assets
Other non-recurring charges 9 95 (92) 12 (12) -
---- ------ ------- ------ ------- ------
Total $372 $2,852 $(1,248) $1,976 $(1,976) $ -
---- ------ ------- ------ ------- ------
---- ------ ------- ------ ------- ------
In 1999, the Company completed its expense reduction program
activities. The Company will continue to evaluate and may adjust its
organization and cost structure.
STOCK-BASED COMPENSATION
The Company has elected to use the intrinsic value method described
in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES(APB 25) and related Interpretations in accounting for its employee
stock options.
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings(loss) per share is computed using the
weighted average number of common shares and common share equivalents
outstanding during the year and excludes the anti-dilutive effects of options.
2. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and consist
of the following (in thousands):
DECEMBER 31
-------------------
1999 1998
------ ------
Equipment under capital leases.................................. $275 $275
Furniture and fixtures.......................................... 559 848
Computers, software and equipment............................... 7,239 7,462
Leasehold improvements.......................................... 415 1,109
------ ------
8,488 9,694
Accumulated depreciation and amortization....................... (6,856) (6,447)
------ ------
$1,632 $3,247
------ ------
------ ------
3. CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company operates in a market which is subject to rapid
technological advancement and competition. The introduction of
technologically advanced products by competitorsand new technological
developments could have a substantial impact on the future operations of the
Company.
A substantial portion of the Company's revenues are concentrated
with a few communications, networking, and telecommunications companies and
large enterprise end-user organizations. Sales to six customers represented
49.9% of the Company's total revenues in 1999. There was no single customer
in 1999 that represented more than 10% of the Company's total revenues.
Revenue from two customers represented 18.5% and 14.1% of the Company's total
revenues in 1998. Sales to one customer represented 16.5% of total revenues
in 1997.
Accounts receivable represent the Company's only significant financial
instrument with potential
32
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
credit risk. The Company performs periodic credit evaluations of its
customer's financial condition and generally does not require collateral.
Credit losses have been within management's expectations and within amounts
provided through the allowances for doubtful accounts. To date, the Company
has not experienced any material write-offs or collection problems. At
December 31, 1999, five major customers represented 56.1% of total accounts
receivable.
The Company is dependent upon certain suppliers of key components
and contract manufacturers.
Revenues from foreign customers, primarily in Europe and the Pacific
Rim, aggregated $2.4 million or 13.2% and $1.7 million or 6.9%, and $4.5
million or 19.1%, of revenues in 1999, 1998 and 1997, respectively.
4. INCOME TAXES
A reconciliation of the provision for taxes based upon income at the
U.S. federal statutory rate compared to the Company's effective tax rate
follows (in thousands):
DECEMBER 31
-------------------------------
1999 1998 1997
------- ------- -------
Statutory federal benefit for income taxes...... $(1,451) $(5,251) $(5,613)
Incentive stock option compensation............. - - (142)
State tax, net of federal benefit............... 1 2 -
Tax effect of losses without current benefit.... 1,421 5,278 5,722
Other, net...................................... 35 (27) 33
------- ------- -------
$ 6 $ 2 $ -
------- ------- -------
------- ------- -------
Significant components of the provision for income taxes are as follows
(in thousands):
DECEMBER 31
----------------------------
1999 1998 1997
---- ---- ----
Current:
Federal......................................... $ - $ - $ -
State........................................... 6 2 -
--- --- ---
Total current...................................... $ 6 $ 2 $ -
--- --- ---
--- --- ---
The Company has approximately $59 million of federal net operating
loss carryforwards, including acquired net operating losses of an acquired
entity, Tylink Corporation, which will begin to expire in 2006. Approximately
$11 million of this loss carryforward is attributable to deductions from the
exercise of non-statutory stock options. A valuation allowance has been
established for the entire deferred tax asset related to these net operating
losses. When realized, the federal and state tax benefits related to the
reversal of this valuation allowance will be applied to reduce income tax
expense, except for the portion of the net operating losses that relates to
the deductions for the exercise of non-qualified stock options which will be
directly credited to additional paid-in capital.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred taxes are as follows (in
thousands):
33
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31
-----------------------
1999 1998
-------- --------
Deferred tax assets:
Allowance for doubtful accounts.................................... $ 108 $ 92
Depreciation....................................................... 601 425
Warranty reserve................................................... 90 107
Accrued commission................................................. 7 80
Accrued severance and restructuring costs.......................... 7 846
Net operating loss carryforwards................................... 21,427 19,138
Deferred revenue................................................... 1,214 884
Inventory reserves................................................. 308 490
Accrued vacation................................................... 121 232
Other.............................................................. 88 291
-------- --------
Total deferred tax assets................................................ 23,971 22,585
Deferred tax liabilities:
Operating leases................................................... (51) (55)
Other.............................................................. (2) (12)
-------- --------
Total deferred tax liabilities........................................... (53) (67)
-------- --------
Total net deferred tax assets............................................ 23,918 22,518
Valuation allowance for deferred tax assets.............................. (23,918) (22,518)
-------- --------
Net deferred tax assets.................................................. $ - $ -
-------- --------
-------- --------
The Tax Reform Act of 1986 contains provisions which could
substantially limit the availability of the net operating loss carryforwards
if there is a greater than 50% change in ownership during a three year
period. As a result of the initial public offering and the Merger with Tylink
Corporation, the Company and TyLink experienced an ownership change of more
than 50%, resulting in a limitation on the utilization of their net operating
loss carryforwards. The limitation is based on the value of the companies on
the date that the effective change in ownership occurred. Management cannot
determine whether the limitation on the net operating losses will have a
material adverse effect on the Company's ability to fully utilize its net
operating loss carryforwards in the future. The ultimate realization of the
loss carryforwards is dependent on the future profitability of the Company.
5. EMPLOYEE BENEFIT PLANS
The Company sponsors a plan (the Plan) pursuant to Section 401(k) of
the Internal Revenue Code (the Code), whereby substantially all eligible
employees may contribute a percentage of their compensation, subject to a
maximum allowed under the Code. The Company may contribute to the Plan, as
determined by the Board of Directors. For the years ended December 31, 1999,
1998 and 1997, matching contributions made and expensed by the Company
aggregated $104,000, $149,000 and $164,000, respectively.
The Company sponsors an Employee Stock Purchase Plan (the Purchase
Plan), under which 40,000 shares of Common Stock has been reserved for
issuance. Under the Purchase Plan, the Company's employees meeting certain
eligibility requirements, may elect on a semiannual basis to purchase Common
Stock through payroll deductions, which may not exceed 5% of each employee's
compensation (subject to certain limitations). The stock price is set at the
lower of 85% of the fair market value of the Company's common stock at the
beginning or end of each semiannual offering period.
6. STOCK OPTIONS
The Company has various stock option plans that provide for the
granting of incentive or non-statutory stock options to certain key
employees, non-employee members of the Board of Directors, consultants and
independent contractors. Options are granted at a price equal to 100% of the
fair market value of the Company's common stock at the date of grant. Options
typically vest at a rate of 25% of the shares on the first anniversary of the
vesting commencement date and 1/48th of the shares at the end of
34
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
each month and expire not later than 10 years from the date of grant. The
number of shares reserved and available for grant under these plans
aggregated 1,672,816 and 199,539 shares, respectively, at December 31, 1999.
The Company has elected to follow the intrinsic value method
described in APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and
related Interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock option awards and its
stock purchase plan because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant.
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:
1999 1998 1997
------------------------- ------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Options outstanding at
beginning of year........ 675,068 $9.05 843,450 $17.60 671,808 $53.40
Granted..................... 916,300 2.59 635,815 8.65 887,697 27.35
Exercised................... (61,301) 1.22 (27,182) 2.00 (67,680) 1.70
Forfeited/canceled.......... (552,852) 8.75 (777,015) 18.10 (648,375) 68.25
-------- -------- --------
Options outstanding at end
of year.................. 977,215 $3.56 675,068 $9.05 843,450 $17.60
-------- ----- -------- ----- -------- ------
-------- ----- -------- ----- -------- ------
Exercisable at end of year.. 199,047 $6.23 291,672 $9.05 174,058 $11.15
-------- ----- -------- ----- -------- ------
-------- ----- -------- ----- -------- ------
Weighted-average fair value
of options granted
during the year.......... $2.23 $5.50 $19.10
----- ----- ------
----- ----- ------
In April 1997 substantially all of the Company's outstanding options
were canceled and repriced with new options having an exercise price of
$19.70 per share, the fair market value as of the date of the repricing. The
vesting of the repriced options was suspended for a period of six months from
the date of the repricing. A total of 411,292 shares were repriced.
In October 1998, a majority of the Company's outstanding options
were canceled and repriced with new options having an exercise price of $5.63
per share, the fair market value as of the date of the repricing. The
exerciseability of the repriced options was suspended for a period of six
months from the date of the repricing. A total of 418,115 shares were
repriced.
The weighted average remaining contractual life of options as of
December 31, 1999 were as follows:
OUTSTANDING EXERCISABLE
----------------------------------------------- ---------------------------------
WEIGHTED AVERAGE WEIGHTED
NUMBER OF REMAINING AVERAGE
SHARES CONTRACTUAL LIFE EXERCISE SHARES WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- --------- ----------- ----------------
$0.20 to $1.00................... 19,527 5.13 $0.78 19,527 $0.78
$1.94 to $3.28................... 609,299 9.51 2.09 19,290 2.15
$1.13 to $6.00................... 321,389 8.45 4.92 143,105 5.26
Greater than $11.00.............. 27,000 8.21 22.45 17,125 25.15
Pro forma information regarding results of operations and net loss per
share is required by FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (Statement No. 123) for stock based awards
35
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to employees as if the Company had accounted for such awards using fair value
method permitted under Statement No. 123.
Stock-based awards to employees were valued using the Black-Scholes
option pricing model using the following weighted average assumptions:
1999 1998 1997
------- ------- -------
Risk free interest rate................................. 6.0% 6.0% 6.0%
Stock volatility factor................................. 1.15 1.14 1.30
Weighted average expected option life................... 6 years 6 years 6 years
Expected dividend yield................................. 0% 0% 0%
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. Pro
forma information is as follows (in thousands, except for per share
information):
1999 1998 1997
-------- --------- ---------
Pro forma net loss...................................... $(4,714) $(20,391) $(21,505)
Pro forma net loss per share............................ $ (1.35) $ (5.86) $ (6.26)
7. COMMITMENTS AND CONTINGENCIES
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
There are no other material legal proceedings to which the Company is a
party or to which any of its properties are subject. No material legal
proceedings were terminated in the year ended December 31, 1999.
The Company leases its office facilities and certain equipment under
noncancelable operating leases expiring through 2003. The Company also has
various leased equipment under capital leases that are included in furniture,
fixtures and equipment in the accompanying balance sheets. The accumulated
depreciation and amortization of these leased assets was $235,000 and $192,000
at December 31, 1999 and 1998, respectively. Depreciation and amortization of
leased equipment under capital leases are included in depreciation expense.
36
SYNC RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The annual commitment under these noncancelable leases at December
31, 1999 is as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
2000...................................................................... $ 55 $ 309
2001...................................................................... 7 317
2002...................................................................... - 286
2003...................................................................... - 239
2004...................................................................... - 153
---- ------
Total minimum future lease payments................................... $ 62 $1,304
------
------
Amounts representing interest (9% to 15%)................................. (6)
----
Present value of net minimum lease payments............................... 56
Less current portion of capital lease obligations......................... (49)
----
Long-term portion of capital lease obligations............................ $ 7
----
----
Rent expense for 1999, 1998 and 1997 was $509,000, $634,000 and
$744,000, respectively.
In connection with certain agreements with several of its customers,
the Company has indemnified these customers against losses arising from
specific events, including product/service performance failures and
third-party intellectual property rights. Management believes that any costs
incurred under these indemnification arrangements will not have a material
adverse impact on the Company's financial position or results of operations.
8. CREDIT AGREEMENT
The Company has a $2,000,000 credit agreement with a bank which
expires in April 2000.Outstanding borrowings under this credit agreement will
be secured by substantially all of the Company's assets and are subject to an
interest rate equal to the Bank's prime rate plus one half percent on amounts
outstanding. There were no borrowings outstanding as of December 31, 1999.
9. BUSINESS SEGMENT
Effective January 1, 1998, the Company adopted the Statement of
Financial Accounting Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION(Statement 131). Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments both for annual and interim financial periods. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers.The Company operates in one
business segment. Accordingly, the adoption of Statement No. 131 did not have
a material effect on the Company's consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
37
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of March 6, 2000:
NAME AGE POSITION
---- --- --------
William K. Guerry.......... 34 President and Chief Executive Officer, Chief Financial Officer
and Director
Tim Favazza................ 40 Vice President of Sales and Service
Carl Rambert............... 51 Vice President of Engineering and Marketing
Gregorio Reyes............. 59 Chairman of the Board of Directors
Charles A. Haggerty........ 58 Director
William J. Schroeder....... 55 Director
MR. GUERRY has served as the Company's President and Chief Executive
Officer and as a Director of the Company since October 1999 and as the
Company's Vice President of Finance and Administration, Secretary and Chief
Financial Officer since June 1997. From January 1987 to June 1997, Mr. Guerry
held various positions, including Audit Senior Manager, with Ernst & Young
LLP. Mr. Guerry received his B.S. in Accounting from California State
Polytechnic University, Pomona. Mr. Guerry is a Certified Public Accountant
in the State of California and is a member of the California Society of
Certified Public Accountants.
MR. FAVAZZA has served as the Company's Vice President of Sales and
Service since August 1999, as the Company's Director of US Sales from
February 1998 to August 1999 and as a Regional Sales Manager from April 1997
to February 1998.From January 1994 through March 1997, Mr. Favazza served
various sales roles including Direct Sales Manager for General DataComm,
Inc., a company that is a wide area networking systems provider.Mr. Favazza
received his B.S. in Computer Science and Mathematics from Townson State
University and his M.S. in Management Information Systems from the University
of Baltimore.
MR. RAMBERT has served as the Company's Vice President of
Engineering since January 2000. Prior to such time, he served as a consultant
to the Company and other high technology companies from October 1997 to
December 1999. From February 1996 to October 1997, Mr. Rambert was Director
of Software Development for Macrolink, Inc., a company that designs and
manufactures communications, storage, memory and other system modules for
super-mini computers, and from November 1992 to February 1996 was a
consultant to several telecommunications, systems and electronics companies.
Mr. Rambert received his B.S. and M.S. in Electrical Engineering from
Pennsylvania State University.
MR. REYES has served as Chairman of the Company's Board of Directors
since January 1995 and from October 1997 to May 1998 in the Office of the
Chief Executive Officer of the Company. From 1990 to August 1994, he served
as Chairman and Chief Executive Officer of Sunward Technologies, Inc., a
provider of rigid disk magnetic recording head products for the data storage
industry. Previously, he was Chairman and Chief Executive Officer of American
Semiconductor Equipment Technologies, a wafer stepper company. Mr. Reyes
currently also serves as a director of C-Cube Microsystems, Inc. and several
privately-held companies. Mr. Reyes received a B.S. in Mechanical Engineering
from Rensselaer Polytechnic Institute and a M.S. in Management from the
Stevens Institute of Technology.
MR. HAGGERTY has served as a member of the Company's Board of
Directors since June 1995. He
38
served as Chairman, President and Chief Executive Officer of Western Digital
Corp. ("Western Digital"), a manufacturer of disk drives from July 1992
through January 2000. He is currently Chairman of the Board. Mr. Haggerty
also serves as a director of Pentair, Inc., Beckman Coulter Inc., and Vixel
Inc. He received a B.A. in Business and Social Science from the University of
St. Thomas.
MR. SCHROEDER has served as a member of the Company's Board of
Directors since April 1998. Since February 2000 Mr. Schroeder has served as
President and CEO of HolonTech,Corp, a developer of Internet traffic and
content management. Mr. Schroeder served as President and Chief Executive
Officer and Director of Diamond Multimedia Systems, Inc., a supplier of
multi-media peripherals from May 1994 to June 1999. Mr. Schroeder was
employed by Conner Peripherals, Inc. ("Conner"), a manufacturer and
distributor of hard drives, from 1986 to 1994, initially as President and,
from 1989, as Vice Chairman of the Board of Directors. He was also President
of Conner's New Products Group from 1989 to 1990, President of Archive
Corporation (a Conner subsidiary) from January 1993 to November 1993, and CEO
of Arcada Software, Inc. (a Conner subsidiary) from November 1993 to May
1994. Mr. Schroeder is also a director of Xircom, Inc. and CNF Inc, S3
Corporation. He received his M.B.A. from Harvard University and M.S.E.E. and
B.E.E. from Marquette University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than 10% of the Company's Common
Stock (collectively, "Reporting Persons") to file with the Securities and
Exchange Commission ("SEC") initial reports of ownership and changes in
ownership of the Company's Common Stock. Reporting Persons are required by
SEC regulations to furnish the Company with copies of all Section 16(a)
reports they file. To the Company's knowledge, based solely on its review of
the copies of such reports received or written representations from certain
Reporting Persons that no other reports were required, the Company believes
that during its fiscal year ended December 31, 1999, all Reporting Persons
complied with all applicable filing requirements except that Mr. Favazza
filed a report late with respect to his initial form 3 filing upon becoming
an executive officer of the Company (filed subsequently via a form 5).
ITEM 11 EXECUTIVE COMPENSATION
The following table shows the compensation paid during 1999 to (i)
all persons who served as the Company's Chief Executive Officer, (ii) the
other most highly compensated executive officers of the Company whose total
annual salary and bonus earned during 1999 exceeded $100,000 and (iii) two
persons who served as executive officers of the Company during a portion of
fiscal 1999 but are no longer executive officers as of December 31, 1999.
39
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------
SECURITIES
RESTRICTED UNDERLYING
STOCK OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS (#) COMPENSATION
- --------------------------- ---- --------- ----------- ---------- ------------ -----------------
Richard W. Martin 1999 $183,330 - - 20,000(1) $4,353(2)(3)
President and Chief Executive Officer 1998 $116,665 - - 85,000(1) $2,866(2)
William K. Guerry 1999 $158,333 - - 105,000(4) $2,672(2)(5)
President and Chief Executive 1998 $130,000 - - 32,000(4) $1,771(2)(5)
Officer; Chief Financial Officer 1997 $68,000 - - 28,000(4) $1,088(2)(5)
Tim Favazza 1999 $101,250 $243,946(6) - 105,000(7) $2,180(2)(5)
Vice President of Sales and Service 1998 $76,667 $322,106(6) - 7,000(7) $1,251(2)(5)
1997 $39,382 $120,994(6) - 5,000(7) $1,768(2)(5)
James D. McNally 1999 $99,944 - - 5,000(8) $103,218(2)(5)(9)
Senior Vice President of Sales 1998 $203,263 - - 29,000(8) $5,650(2)(5)
1997 $160,000 $8,762(6) - 29,000(8) $4,799(2)(5)
Richard N. Thunen(11) 1999 $140,000 - - 105,000(10) $2,735(2)(5)
Vice President of Engineering 1998 $122,000 $ 19,191(6) - 8,000(10) $3,249(2)(5)
1997 $140,000 $4,171(6) - 6,000(10) $2,059(2)(5)
- ---------------
(1) On June 5, 1998, Mr. Martin was granted options to purchase 65,000
shares of Common Stock at $18.125 per share. On November 6, 1998 Mr.
Martin was granted options to purchase 20,000 shares of Common Stock at
an exercise price of $5.625 per share. On February 12, 1999, Mr. Martin
was granted options to purchase 5,000 shares of Common Stock at an
exercise price of $4.063 per share. On August 11, 1999 Mr. Martin's
option for 65,000 shares at $18.125 per share was canceled. On October
8, 1999 Mr. Martin was granted a fully vested option for 15,000 shares
at a price of $2.1875 per share.
(2) Includes life insurance premiums pursuant to a program generally
available to all employees paid in 1999 in the amount of $2,310 for Mr.
Martin, $297 for Mr. Guerry, $183 for Mr. Favazza, $968 for Mr. McNally
and $635 for Mr. Thunen; paid in 1998 in the amount of $2,866 for Mr.
Martin, $227 for Mr. Guerry, $158 for Mr. Favazza, $3,150 for Mr.
McNally, and $1,324 for Mr. Thunen; paid in 1997 in the amount of $113
for Mr. Guerry, $59 for Mr. Favazza, $2,430 for Mr. McNally, and $1,324
for Mr. Thunen.
(3) Includes temporary living allowances and other relocation expenses in
the amount of $2,043.
(4) On June 23, 1997, Mr. Guerry was granted options to purchase 28,000
shares of Common Stock at $20.625 per share. On June 5, 1998, Mr.
Guerry was granted options to purchase 2,000 shares of Common Stock
each at $18.125 per share.On October 8, 1998, all outstanding options
to purchase Common Stock held by for Mr. Guerry were canceled and
exchanged for new options with an exercise price of $5.625, the closing
sale price of the Company's Common Stock on October 8, 1998. As
consideration for the exchange, Mr. Guerry agreed not to exercise any
options during the six month period after October 8, 1998. On February
12, 1999, Mr. Guerry was granted options to purchase 10,000 shares at
an exercise price of $4.063 per share. On August 11, 1999, Mr. Guerry
was granted options to purchase 95,000 shares of Common Stock at an
exercise price of $1.9375 per share.
40
(5) Includes defined contribution retirement plan contributions made by the
Company in 1999 in the amount of $2,375 for Mr. Guerry, $1,997 for Mr.
Favazza, $2,250 for Mr. McNally, and $2,100 for Mr. Thunen; in 1998 in
the amount of $1,544 for Mr. Guerry, $1,093 for Mr. Favazza, $2,500 for
Mr. McNally, and $1,925 for Mr. Thunen; in 1997 in the amount of $975
for Mr. Guerry, $1,727 for Mr. Favazza, $2,369 for Mr.
McNally, and $1,022 for Mr. Thunen.
(6) Consists of sales commissions and, in addition for Mr. Favazza, a 1999
incentive based bonus of $4,685.
(7) On April 18, 1997, Mr. Favazza was granted options to purchase 2,000
shares of Common Stock at $16.875 per share. On December 9, 1997, Mr.
Favazza was granted options to purchase 3,000 shares of Common Stock at
$19.688 per share. On January 30, 1998, Mr. Favazza was granted options
to purchase 5,000 shares of Common Stock at $15.313 per share. On June
5, 1998, Mr. Favazza was granted options to purchase 2,000 shares of
Common Stock at $18.125 per share. In October 8, 1998 all outstanding
options to purchase Common Stock held by Mr. Favazza were canceled and
exchanged for new options with an exercise price of $5.625, the closing
sale price of the Company's Common Stock on October 8, 1998. On
February 12, 1999, Mr. Favazza was granted options to purchase 20,000
shares of Common Stock, at an exercise price of $4.063 per share. On
August 11, 1999, Mr. Favazza was granted options to purchase 85,000
shares of Common Stock at an exercise price of $1.9375 per share.
(8) On April 18, 1997, Mr. McNally was granted options to purchase 14,000
shares of Common Stock at $16.875 per share, respectively. On December
9, 1997, Mr. McNally was granted options to purchase 15,000 shares of
Common Stock at $19.688 per share. On October 8, 1998, all outstanding
options to purchase Common Stock held by Mr. McNally were canceled and
exchanged for new options with an exercise price of $5.625, the closing
sale price of the Company's Common Stock on October 8, 1998. As
consideration for the exchange, Mr. McNally agreed not to exercise any
options during the six month period after October 8, 1998. On February
12, 1999, Mr. McNally was granted options to purchase 5,000 shares of
Common Stock at an exercise price of $4.063 per share.
(9) Includes severance payments of $100,000 paid to Mr. McNally pursuant to
the terms of the Settlement Agreement and Mutual Release between the
Company and Mr. McNally dated April 13, 1999. Mr. McNally resigned as
the Company's Senior Vice President of Sales effective as of April 15,
1999.
(10) On January 29, 1997, Mr. Thunen was granted options to purchase 2,000
of Common Stock at $71.25 per share. In an option repricing, which was
effective April 14, 1997, these options were canceled and exchanged for
new options with an exercise price of $19.69 per share, the closing
sale price of the Company's Common Stock on April 14, 1997. As
consideration for the exchange, Mr. Thunen agreed to suspend the
vesting on these new options during the six month period after April
14, 1997. On December 9, 1997, Mr. Thunen was granted options to
purchase 2,000 shares of Common Stock at $19.688 per share. On June 5,
1998, Mr. Thunen was granted options to purchase 2,000 shares of Common
Stock at $18.125 per share.On October 8, 1998 all outstanding options
to purchase Common Stock held by Mr. Thunen were canceled and exchanged
for new options with an exercise price of $5.625, the closing sale
price of the Company's Common Stock on October 8, 1998. As
consideration for the exchange, Mr. Thunen agreed not to exercise any
options during the six month period after October 8, 1998. On February
12, 1999, Mr. Thunen was granted options to purchase 31,000 shares of
Common Stock at an exercise price of $4.063 per share. On August 11,
1999, Mr. Thunen was granted options to purchase 74,000 shares of
Common Stock at an exercise price of $1.9375 per share.
(11) Mr. Thunen resigned as the Company's Vice President of Engineering
effective as of January 7, 2000.
41
The following tables set forth information for the Named Executive
Officers with respect to grants of options to purchase Common Stock of the
Company made in the fiscal year ended December 31, 1999, and the value of all
options held by such Named Executive Officers on December 31, 1999.
OPTION/SAR GRANTS IN FISCAL YEAR 1999
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(3)
------------------------------------------------------------- ------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED # (1) FISCAL YEAR% (2) ($/SH) DATE 5%($) 10%($)
---- ------------- ---------------- ------ ---- ----- ------
Richard W. Martin....... 5,000 0.5% $4.063 2/12/09 $12,765 $32,379
15,000 1.6% $2.188 10/8/02 $37,696 $48,267
William K. Guerry....... 10,000 1.1% $4.063 2/12/09 $25,530 $64,758
95,000 10.4% $1.938 8/11/09 $116,263 $294,339
Tim Favazza............. 20,000 2.2% $4.063 2/12/09 $51,059 $129,517
85,000 9.3% $1.938 8/11/09 $104,025 $263,356
James D. McNally........ 5,000 0.5% $4.063 2/12/09 $12,765 $32,379
Richard N. Thunen....... 31,000 3.4% $4.063 2/12/09 $79,142 $200,751
74,000 8.1% $1.938 8/11/09 $90,563 $229,274
- -----------
(1) All options were granted pursuant to the Company's 1991 and 1996 Stock
Plans and become exercisable at the rate of one fourth of the shares
subject to the option on the first anniversary of the vesting
commencement date and 1/48th of the shares at the end of each month
thereafter excepted that Mr. Martin's October 8,1999 option for 15,000
shares were immediately vested.
(2) Options to purchase a total of 916,300 shares of Common Stock were
granted to employees in 1999, including options to purchase 435,600
shares of Common Stock pursuant to the Company's 1996 Stock Plan,
476,700 shares under the Company's 1991 Stock Plan.
(3) These amounts represent certain assumed rates of appreciation only.
Actual gains, if any, on stock option exercises and Common Stock
holdings are dependent on the future performance of the Common Stock
and overall market conditions. There is no assurance that the amounts
reflected will be realized.
42
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1999
AND OPTION/SAR VALUES AT END OF FISCAL YEAR 1999
SECURITIES UNDERLYING NUMBER VALUE OF UNEXERCISED
SHARES OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON 12/31/99(1): 12/31/99(2)($):
NAME EXERCISE VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------- ----------------- ------------------------- -------------------------
Richard W. Martin.............. - - 35,938/4,062 $15,938/-$0-
William K. Guerry.............. - - 20,333/114,667 -$0-/$124,688
Tim Favazza.................... - - 10,146/106,854 -$0-/$111,563
James D. McNally............... 14,250 $21,106 -/- -$0-/-$0-
Richard N. Thunen.............. - - 12,416/101,584 $6,750/$97,125
- -----------------------------
(1) No stock appreciation rights (SARs) were outstanding during 1999.
(2) Based on the closing price of the Company's Common Stock as reported on
the Nasdaq National Market on December 31, 1999 of $3.25. See
"Executive Compensation and Related Information-Compensation of
Executive Officers-Option/SAR Grants in Fiscal Year 1999," footnotes 4
and 5, for discussion of option repricing program which was effected in
October 1998.
COMPENSATION OF DIRECTORS
Mr. Reyes, the Chairman of the Board of Directors, earned $68,000
($6,000 per month through October 1999 and $4000 per month thereafter) during
1999 pursuant to a consulting agreement with the Company. Non-employee
directors are paid a fee of $5,000 per quarter plus $1,000 for each full
meeting of the Board of Directors attended by such director. Directors are
reimbursed for out-of-pocket travel expenses associated with their attendance
at Board meetings. Non-employee directors of the Company will automatically
be granted options to purchase shares of the Company's Common Stock pursuant
to the terms of the Company's 1995 Directors' Stock Option Plan (the
"Directors' Plan"). Under the Directors' Plan, each non-employee director who
is elected to the Board will receive an option to purchase 8,000 shares of
Common Stock on the date on which he or she first becomes a non-employee
director. In addition, on the date of each annual stockholders meeting, each
non-employee director, will be granted an additional option to purchase 2,000
shares of Common Stock if, on such date, he or she has served on the Board
for at least six months and remains a director as of the date of such
meeting. Each option becomes exercisable at the rate of 25% of the total
number of shares subject to such option on the first anniversary of the grant
date, and 1/48th of the total number shares at the end of each month
thereafter.Options granted under the Directors' Plan have an exercise price
equal to the fair market value of the Company's Common Stock on the date of
grant and a term of ten years. Messrs. Haggerty and Schroeder each received
options to purchase 2,000 shares pursuant to the Directors' Plan in 1999.
Subject to their election to the Board of Directors by the stockholders at
the Company's annual meeting of stockholders in 2000, Messrs. Haggerty and
Schroeder will be automatically granted an option to purchase 2,000 shares of
Common Stock each on the date of the annual meeting. There are no family
relationships among the directors or executive officers of the Company.
43
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company enters into Change of Control Severance Agreements with
each of its officers. These agreements provide that upon a change of control
of the Company, fifty percent (50%) of the officer's unvested options shall
immediately vest. The remaining unvested options shall continue to vest at
the same rate as the officer's original vesting schedule, so that the same
number of options continue to vest per month as did prior to the change in
control. In addition, the agreements provide that the Company will enter into
consulting arrangements with each such officer if he or she is involuntary
terminated without cause or has his or her duties significantly reduced or is
otherwise constructively terminated within twelve (12) months after a change
of control of the Company. These consulting arrangements will last for up to
twelve months after such officer's termination. The agreements provide that,
during the consultation period, the officer will continue to receive
compensation at the rate at which he or she was previously compensated during
the twelve months prior to such termination. In addition, the terminated
officer's unvested options will continue to vest during the consultancy
period.
On November 6, 1998, the Company entered into a Management Agreement
with Richard W. Martin. Pursuant to this agreement, upon a merger, sale or
other change of control of the Company, while Mr. Martin serves as Chief
Executive Officer of the Company. The Company has agreed to pay Mr. Martin an
amount equal to $500,000 less the aggregate gross profit received by Mr.
Martin from the sale of securities of the Company held by him in such
transaction. On April 9, 1999, the Company and Mr. Martin amended the
agreement to reduce the payment upon a merger, sale or change of control to
the greater of $250,000 or cash equal to 2% of the value of stock or cash
received by stockholders of the Company in such transaction provided that
such payment shall not exceed $500,000. In addition, the amended Management
Agreement provides that if Mr. Martin is terminated in connection with a
sale, merger or other change of control transaction, he will continue to
receive his base salary and benefits for a period not to exceed three months
following the closing of such transaction. Mr. Martin resigned as Chief
Executive Officer and an employee of the Company effective as of October 1999
and thus the Company has no further obligations under the Management
Agreement.
The 1991 Plan provides that in the event of a merger or sale of all
or substantially all of the assets of the Company, the Administrator of the
1991 Plan will either accelerate the vesting of options and stock purchase
rights held by all employees, including executive officers, or shall
accomplish the assumption or substitution of such options and stock purchase
rights by the successor corporation.
On October 8, 1999, the Company entered into an Amended and Restated
Change-of-Control Severance Agreement with William K. Guerry. Pursuant to
this agreement 1) Upon a merger, sale or other change of control of the
Company, while Mr. Guerry serves as Chief Executive Officer of the Company,
50% of Mr. Guerry's options to purchase Common Stock of the Company shall
immediately fully vest and 2) If Mr. Guerry's employment terminates as a
result of involuntary termination other than for cause at any time within
twelve months following a change of control, then, Mr. Guerry shall continue
as a consultant for up to twenty four months at Mr. Guerry's compensation
prior to termination including insurance coverage and 3) Vesting of Mr.
Guerry's stock options shall continue to vest during the consulting period.
44
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, Messrs. Haggerty and Schroeder comprised the
Compensation Committee of the Board of Directors. None of these persons has
ever been an officer or employee of the Company or any of its subsidiaries.
There were no compensation committee interlocks or other relationships during
1998 requiring disclosure under Item 402(j) of Regulation S-K of the
Securities and Exchange Commission.
REPORT OF COMPENSATION COMMITTEE
During 1999, the Compensation Committee of the Board consisted of
Charles A. Haggerty and William Schroeder, both of whom are non-employee
directors. The Compensation Committee, in conjunction with the Board of
Directors, establishes salaries, incentives and other forms of compensation
for directors, officers and other employees, administers the various
incentive compensation and benefit plans (including the Company's stock
purchase and stock option plans) and recommends policies relating to such
plans. The Compensation Committee also has the exclusive responsibility for
granting options and stock purchase rights under the 1991 Stock Plan to
executive officers and eligible directors. The Compensation Committee will
annually evaluate the performance and determine compensation and long-term
equity incentives of the Chief Executive Officer (the "CEO"), and will review
and approve the CEO's compensation recommendation for other executive
officers of the Company.
The Company's executive compensation program consists of three main
components: (1) base salary, (2) potential for a quarterly and/or annual
bonuses based on overall Company performance as well as individual
performance and (3) stock and/or option grants which provide the executive
officers with the opportunity to build a meaningful stake in the Company, and
which stock and/or options are granted with the objective of aligning
executive officers' long-range interests with those of the stockholders and
encouraging the achievement of superior results over time. The second and
third elements of the compensation program constitute the "at risk"
components.
The Company believes that, in order to attract and retain talented
individuals, it is important to set the base salaries of its executives at
levels that are competitive with those of companies in similar industries, of
comparable size and in the Company's same geographic area. Compensation
committee members utilize their experience, and publicly available resources
as appropriate to determine these base figures.
ANNUAL OR QUARTERLY CASH BONUSES
The Company historically has not had a formal cash bonus program for
executive officers, although cash bonuses have been paid from time to time in
the past to selected executive officers in recognition of superior individual
performance. The Company has paid Mr. Favazza incentive compensation in 1997,
1998, 1999 and he may earn incentive compensation in 2000 equal to a certain
percentage of his respective salary based upon the Company's revenue levels.
None of the executive officers of the Company earned bonuses during fiscal
1999.
Because stock options and stock grants provide an incentive for
executives to maximize stockholder value over time, stock options and stock
grants are a key means of aligning the interests of management and
stockholders. Value accrues to executives only as the value of the Company's
stock appreciates. The Company's typical vesting schedule for all employee
options (including options granted to executive officers) is as follows: 25%
of the total number of shares subject to the option vest one year after the
date of grant and 1/48th of the total number of shares subject to the option
vest at the end of each month thereafter. These vesting schedules are
intended to encourage a long-term commitment to the Company by its executive
officers. The number of shares owned by, or subject to options held by, each
executive officer is periodically reviewed and additional awards are
considered based upon past performance of the executive and the relative
holdings of other executives in the Company and at other companies in the
telecommunications industry. In 1999, the Company granted stock options under
the 1996 Non-Executive Stock Option Plan (the 1996 Stock Plan) to one new
executive officer, Mr. Rambert (75,000 shares), in connection with his
appointment as an executive officer and stock options under the 1991 Stock
Plan to four executive officers,
45
Messrs. Guerry (105,000 shares), Favazza (105,000 shares), Thunen (105,000
shares) Martin (20,000 shares) and McNally (5,000 shares).
The Compensation Committee will meet during the year and will
consult as needed with the Company's CEO to establish the compensation
program for the next year and to evaluate the effectiveness of the Company's
compensation program in meeting its objectives. Additionally, the
Compensation Committee may hold special meetings to approve the compensation
of a newly hired executive or an executive whose scope of responsibility has
significantly changed. Compensation for executive officers will be based on
compensation surveys and assessments as to the demonstrated and sustained
performance of the individual executives.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Compensation Committee evaluates the performance of the
Company's Chief Executive Officer, sets his base compensation and determines
bonuses and awards stock or option grants, if any. The Compensation Committee
determines the CEO's base salary after evaluating a number of factors,
including comparative salaries of chief executive officers of companies of
comparable size in the telecommunications industry, the Chief Executive
Officer's individual performance and the Company's performance.
William K. Guerry was named President and Chief Executive Officer
effective October 1999. From June 1997, Mr. Guerry has also served as the
Company's Chief Financial Officer. In connection with his appointment as Chief
Executive, the board granted Mr. Guerry a non-statutory stock option under
the 1991 stock plan for 95,000 shares and increase his salary from $150,000
to $200,000.
Richard W. Martin served as the Chief Executive Officer of the
Company from June 1998 to October 1999.In connection with his appointment,
the board granted Mr. Martin a non-statutory stock option under the 1991
stock plan for 65,000 shares. In connection with repricing of options in
October 1998, the Board determined not to reprice Mr. Martin's
options. Alternatively, the Board granted Mr. Martin an option to purchase
20,000 shares at $5.625 per share.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code, enacted in 1993,
generally disallows a tax deduction to publicly held companies for
compensation exceeding $1 million paid to certain of the corporation's
executive officers. However, compensation which qualifies as
"performance-based" is excluded from the $1 million limit if, among other
requirements, the compensation is payable upon attainment of pre-established,
objective performance goals under a plan approved by the stockholders.
The compensation to be paid to the Company's executive officers for
the 1999 fiscal year did not exceed the $1 million limit per officer, nor is
it expected that the compensation to be paid to the company's executive
officers for fiscal 1999 will exceed that limit. The Company's 1991 Stock
Plan is structured so that any compensation income realized by an executive
officer as a result of the exercise of an outstanding option or the sale of
option shares under the 1991 Stock Plan or the 1996 Stock Plan will qualify
as "performance-based" compensation which will not be subject to the $1
million limitation. Because it is very unlikely that the cash compensation
payable to any of the Company's executive officers in the foreseeable future
will approach the $1 million limit, the Compensation Committee has decided at
this time not to take any other action to limit or restructure the elements
of cash compensation payable to the Company's executive officers. The
Compensation Committee will continue to monitor the compensation levels
potentially payable under the Company's cash compensation programs, but
intends to retain the flexibility necessary to provide total cash
compensation in line with competitive practice, the Company's compensation
philosophy and the Company's best interests.
COMPENSATION COMMITTEE
Charles A. Haggerty
William J. Schroeder
PERFORMANCE GRAPH
The following graph summarizes cumulative total stockholder return
(assuming reinvestment of dividends) for the period beginning on the date the
Company's stock was first registered under Section 12 of the Securities Exchange
Act of 1934 (November 9, 1995) and ending at December 31, 1999.
The graph assumes that $100 was invested on November 9, 1995 in: (i)
the Common Stock of Sync Research, Inc., (ii) the Nasdaq Market Index and (iii)
the MG Network and Communications Devices Index (provided by Media General
Financial Services, Inc.). The Company believes the MG Network and
Communications Devices Index is representative of the Company's industry. The
stock price performance on the following graph is not necessarily indicative of
future stock price performance.
[GRAPHIC]
COMPARE CUMULATIVE TOTAL RETURN
AMONG SYNC RESEARCH, INC.,
NASDAQ MARKET INDEX AND MG GROUP INDEX
11/10/95 12/29/95 12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- -------- -------- --------
Sync Research, Inc.Common Stock............... $100.00 $102.84 $31.25 $8.10 $2.70 $1.48
Nasdaq Market Index........................... $100.00 $101.13 $125.67 $153.73 216.82 551.93
MG Network and Communications
Devices Index.............................. $100.00 $100.74 $131.60 $127.97 $257.07 $382.41
ASSUMES $100 INVESTED ON NOV. 10, 1995
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 1999
47
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the
Company's Common Stock as of March 6, 2000, as to (i) each person who is
known by the Company to beneficially own more than five percent of the
Company's Common Stock, (ii) each of the Company's directors, (iii) all
persons who served as the Company's Chief Executive Officer during fiscal
year 1999, the most highly compensated executive officers who earned salary
and bonus in excess of $100,000 in 1999 and two persons who served as
executive officers during a portion of fiscal 1999 but were no longer
executive officers as of December 31, 1999 (the "Named Executive Officers")
and (iv) all directors and executive officers as a group.
SHARES BENEFICIALLY
OWNED (1)
5% STOCKHOLDERS, DIRECTORS, NAMED EXECUTIVE OFFICERS, ---------------------
AND DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP NUMBER PERCENT
- ----------------------------------------------- ------ -------
Steel Partners II
150 East 52nd Street, 21st Floor
New York, NY 10022............................................ 747,080 21.1
Dimensional Fund Advisors
1299 Ocean Ave. 11th Floor
Santa Monica, CA 90404........................................ 220,400 6.2
Gregorio Reyes(2)............................................. 94,980 2.7
Charles A. Haggerty(3)........................................ 12,604 *
William J. Schroeder(4)....................................... 11,333 *
William K. Guerry(5).......................................... 26,487 *
Tim Favazza(6)................................................ 16,450 *
All current directors and executive officers as a group
(6) persons................................................ 161,845 4.5
- -----------
* Less than 1 percent.
1) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days after March 6, 2000 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purpose of computing
the percentage ownership of any other person.
2) Consists of 56,292 shares held in the name of Gregorio Reyes & Vanessa F.
Reyes, Trustees of the Gregorio Reyes and Vanessa F. Reyes Trust, u/a dtd
April 22, 1983, 5,000 shares held by Reyes Partnership IV, 32,000 shares
held directly by Mr. Reyes and 1,688 shares issuable upon the exercise of
options to purchase common stock within 60 days of March 6, 2000.
3) Includes 2,604 shares issuable upon the exercise of options to purchase
Common Stock within 60 days of March 6, 2000.
48
4) Includes 3,833 shares issuable upon exercise of options to purchase Common
Stock within 60 days after March 6, 2000.
5) Includes 23,708 shares issuable upon exercise of options to purchase Common
Stock within 60 days after March 6, 2000
6) Includes 12,854 shares issuable upon exercise of options to purchase Common
Stock within 60 days after March 6, 2000.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1995, the Company entered into a Consulting Agreement with
Gregorio Reyes, the Chairman of the Board of Directors. This agreement provides
for a monthly consulting fee of $6,000 per month through October 1999 and $4,000
per month thereafter to be paid to Mr. Reyes. For the year ended December 31,
1999, Mr. Reyes earned $68,000 under this contract. This agreement may be
terminated by either party upon thirty days' prior written notice.
The Company has entered into change-of-control severance agreements
with each of its officers. See "Employment Contracts, Termination of Employment
and Change-of-Control Arrangements."
On November 6, 1998, the Company entered into a Management Agreement
with Richard W. Martin. See "Employment Contracts, Termination of Employment and
Change-of-Control Agreements."
The Company has granted options to purchase stock to certain executive
officers and outside directors. See "Compensation of Executive Officers," and
"Compensation of Directors."
The Company has entered into indemnification agreements with its
officers and directors containing provisions which may require the Company,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a culpable
nature) and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE IN
ANNUAL REPORT
ON FORM 10-K
-------------
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Report of Ernst & Young LLP, Independent Auditors..................................... 25
Consolidated Balance Sheets at December 31, 1999 and 1998............................. 26
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and
1997.................................................................................. 27
Consolidated Statements of Stockholders' Equity....................................... 28
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and
1997.................................................................................. 29
Notes to Consolidated Financial Statements............................................ 30
(2) Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts for the Years Ended December 31, 1999,
1998 and 1997......................................................................... 54
Schedules not listed above have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or notes
thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1(3) Agreement and Plan of Reorganization dated June 27, 1996
between the Company and TyLink Corporation.
3.1(12) Amended and Restated Certificate of Incorporation of
Registrant.
3.3 Amended and Restated Bylaws of Registrant.
9.1(1) Amended and Restated Shareholders' Agreement dated April 25,
1994.
10.1(1) Form of Indemnification Agreement.
10.2(8) Amended and Restated 1991 Stock Plan (amended as of June 12,
1998) and form of Option Agreement.
10.3(4) Amended 1995 Employee Stock Purchase Plan (amended as of
September 27, 1996) and form of Subscription Agreement.
10.4(8) Amended and Restated 1995 Directors' Option Plan (amended as
of June 12, 1998) and form of Option Agreement.
10.5(1) Amended and Restated Investors' Rights Agreement among the
Registrant and certain security holders of the Company, dated
as of April 25, 1994.
10.6(1) Consulting Agreement between the Company and Gregorio Reyes
dated January 1995.
10.7(1) Series C Preferred Stock Purchase Agreement dated April 25,
1994.
10.8(1) 401(k) Plan.
10.15(1) Loan and Security Agreement between the Company and Silicon
Valley Bank dated September 18, 1991, and amendments dated
October 20, 1992 and August 31, 1995 thereto.
50
10.15a(1) Amendment to Loan and Security Agreement between the Company
and Silicon Valley Bank dated October 5, 1995.
10.15b(6) Amendments to Loan and Security Agreement between the Company
and Silicon Valley Bank dated June 10, 1997, October 6, 1996
and July 3, 1996.
10.15c(10) Amendment to Loan and Security Agreement between the Company
and Silicon Valley Bank dated December 3, 1997.
10.15d(13) Amendment to Loan and Security Agreement between the Company
and Silicon Valley Bank dated April 14, 1999.
10.15e Amendment to Loan and Security Agreement between the Company
and Silicon Valley Bank dated October 31, 1999.
10.17(1) Letter Agreement dated July 9, 1995 between the Company and
Ronald J. Scioscia.
10.18(2) Letter Agreement dated March 5, 1996 between Roger Dorf and
the Company.
10.20(5) Assumed TyLink Corporation 1994 Equity Incentive Plan.
10.22(4) Employment Agreement between the Company and Richard Swee,
dated August 23, 1996.
10.23(4) Form of Noncompetition Agreement between the Company and
Richard Swee, dated August 23, 1996.
10.24(4) Form of Severance Agreement between the Company and each of
John Rademaker and Roger Dorf, dated September 30, 1996.
10.25(4) Form of Severance Agreement between the Company and other
Company executive officers.
10.26(4) Real Estate Lease between TyLink and Thomas J. Flatley d/b/a
The Flatley Company, dated May 14, 1991.
10.26a(13) Third Amendment to Lease for 10C Commerce Way, Norton, MA
dated July 28, 1999.
10.27(9) Amended and Restated 1996 Non-Executive Stock Option Plan
(amended as of August 21, 1998).
10.28(7) Letter Agreement dated June 6, 1997 between William K. Guerry
and the Company.
10.29(10) Letter Agreement dated August 14, 1997 between Salvatore Alini
and the Company.
10.30(10) Form of Severance Agreement between the Company and Gregorio
Reyes, dated October 24, 1997.
10.31(10) Form of Settlement Agreement and Mutual Release dated October
27, 1997 between Roger A. Dorf and the Company.
10.32(10) Form of Settlement Agreement and Mutual Release dated October
27, 1997 between Dominic J. Genovese and the Company.
10.33(10) Form of Settlement Agreement and Mutual Release dated November
16, 1997 between Otto Berlin and the Company.
10.34(9) Settlement Agreement and Mutual Release with John Rademaker
dated September 28, 1998.
10.35(10) Settlement Agreement and Mutual Release with Salvatore Alini
dated September 30, 1998.
10.36(10) Settlement Agreement and Mutual Release with Karen Ratta dated
December 28, 1998.
10.37(10) Management Agreement between the Company and Richard W.
Martin, dated December 28, 1998.
10.38(11) Settlement Agreement and Mutual Release with Douglas Antaya
dated February 3, 1999.
10.39(12) Settlement Agreement and Mutual Release with James D. McNally
dated April 13, 1999.
10.40(12) Amended and Restated Management Agreement between the Company
and Richard Martin dated April 9, 1999.
10.42(13) Standard Industrial Lease for 12 Morgan, Irvine, CA dated July
19, 1999.
10.43 Form of Amended and Restated Severance Agreement between the
Company and William Guerry, dated October 8, 1999.
21(10) Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (Referenced on Signature Page)
27.1 Financial Data Schedule.
- -----------------------
(1) Incorporated by reference from exhibits filed in response to Item
16(a), "Exhibits," of the Company's Registration Statement on Form S-1,
as amended (File No. 33-06910), which became effective on November 9,
1995.
(2) Incorporated by reference from exhibits filed in response to Item 14,
"Exhibits," of the Company's
51
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(3) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1996, filed August 12, 1996.
(4) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1996, filed November 14, 1996.
(5) Incorporated by reference from Company's Registration Statement on Form
S-8 (No. 333-12315), filed on September 19, 1996.
(6) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1997, filed August 14, 1997.
(7) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1997, filed November 14, 1997.
(8) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998, filed August 14, 1998.
(9) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1998, filed November 16, 1998.
(10) Incorporated by reference from exhibits filed in response to Item 14,
"Exhibits," of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
(11) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1999, filed May 16, 1999.
(12) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1999, filed August 16, 1999.
(13) Incorporated by reference from exhibits filed in response to Item 6,
"Exhibits," of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1999, filed November 15, 1999.
(b) Reports on Form 8-K
None.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William K. Guerry, his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, hereby ratifying and confirming all thatsaid
attorney-in-fact, or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration Statement has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William K. Guerry President and Chief Executive Officer, Chief March 23, 2000
- ----------------------- Financial Officer, Director
William K. Guerry
/s/ Gregorio Reyes Chairman of the Board March 23, 2000
- -----------------------
Gregorio Reyes
/s/ Charles A. Haggerty Director March 23, 2000
- -----------------------
Charles A. Haggerty
/s/ William J. Schroeder Director March 23, 2000
- ------------------------
William J. Schroeder
53
SYNC RESEARCH, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
BALANCE AT DEDUCTIONS/
BEGINNING OF RECOVERIES BALANCE AT
DESCRIPTION PERIOD ADDITIONS AND WRITE-OFFS ADJUSTMENTS(1) END OF PERIOD
----------- ------------ --------- -------------- -------------- -------------
1999
Allowance for doubtful
accounts receivable..... $213,863 $225,265 $(166,513) $ - $272,615
Inventory reserves......... 543,286 516,432 (451,262) - 608,456
1998
Allowance for doubtful
accounts receivable..... $393,118 $297,927 $(477,182) $ - $213,863
Inventory reserves......... 603,252 446,504 (506,470) - 543,286
1997
Allowance for doubtful
accounts receivable..... $348,276 $223,109 $(178,267) $ - $393,118
Inventory reserves......... 658,463 449,207 (504,418) - 603,252