UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
--------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2000
( ) 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
ENTRADA NETWORKS, 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.)
10070 MESA RIM ROAD, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive office) (Zip Code)
(858) 623-3265
(Registrant's telephone number, including area code)
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 the number of shares of each of the registrant's classes of
common stock, as of the latest practicable date.)
Title Date Outstanding
----- ---- -----------
Common Stock, $.001 Par Value December 3, 2000 11,009,319
ENTRADA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
October 31, January 31,
2000 2000
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash $ 12,465 $ 112
Accounts receivable, net of net of allowance for doubtful
accounts of $1,555 and $449, respectively 5,039 5,919
Inventories, net of reserves of $3,681 and $2,026, respectively 5,056 6,041
Due from affiliates - 753
Prepaid expenses and other current assets 590 563
-------- -------
Total current assets 23,150 13,388
Property and equipment, net 1,973 1,384
Capitalized software, net - 1,772
-------- -------
Total assets $ 25,123 $ 16,544
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt $ 3,746 $ 2,264
Current maturities of long-term debt 376 312
Accounts payable 2,726 4,381
Net liabilities of discontinued operations 4,896 -
Other current and accrued liabilities 2,302 2,222
-------- -------
Total current liabilities 14,046 9,179
Long-term debt and capital lease obligations 243 302
Due to former parent company - 21,769
-------- -------
Total liabilities 14,289 31,250
Stockholders' equity
Common stock, $0.001 par value; 50,000 shares
authorized, 11,001 and 4,244 shares issued
and outstanding at October 31, 2000 and
January 31, 2000 11 1
Additional paid-in capital 51,710 5,761
Accumulated deficit (40,887) (20,468)
-------- -------
Total stockholders' equity 10,834 (14,706)
-------- -------
Total liabilities and stockholders' equity $ 25,123 $ 16,544
======== ========
See accompanying notes to consolidated financial statements.
2
ENTRADA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
Three months ended Nine months ended
October 31, October 31,
----------------------- ----------------------
2000 1999 2000 1999
-------- ------- -------- -------
Net sales $ 7,890 $8,030 $ 17,641 $21,035
Cost of sales 5,110 4,459 14,203 12,009
-------- ------- -------- -------
Gross profit 2,780 3,571 3,438 9,026
Operating expenses:
Selling and marketing 1,377 1,502 3,729 3,955
Engineering, research and development 2,264 1,061 5,022 3,355
General and administrative 784 505 1,836 1,743
Other - - 2,088 -
-------- ------- -------- -------
Total operating expenses 4,425 3,068 12,675 9,053
Income (loss) from operations (1,645) 503 (9,237) (27)
Interest expense, net (121) (190) (346) (474)
-------- ------- -------- -------
Income (loss) from continuing operations
before income taxes (1,766) 313 (9,583) (501)
Provision for income taxes - - - -
-------- ------- -------- -------
Net income (loss) from continuing operations (1,766) 313 (9,583) (501)
Loss from discontinued operations (426) - (426) -
Loss on disposal of discontinued operations $(10,410) - (10,410) -
-------- ------- -------- -------
Net income (loss) $(12,602) $ 313 $(20,419) $ (501)
======== ====== ======== =======
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.20) $ 0.07 $ (1.66) $ (0.12)
======== ====== ======== =======
Diluted $ (0.20) $ 0.07 $ (1.66) $ (0.12)
======== ====== ======== =======
Loss from discontinued operations:
Basic $ (1.23) $ - $ (1.88) $ -
======== ====== ======== =======
Diluted $ (1.23) $ - $ (1.88) $ -
======== ====== ======== =======
Net income (loss):
Basic $ (1.43) $ 0.07 $ (3.54) $ (0.12)
======== ====== ======== =======
Diluted $ (1.43) $ 0.07 $ (3.54) $ (0.12)
======== ====== ======== =======
Weighted average shares outstanding:
Basic 8,789 4,244 5,770 4,244
======== ====== ======== =======
Diluted 8,789 4,244 5,770 4,244
======== ====== ======== =======
See accompanying notes to consolidated financial statements.
3
ENTRADA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<CAPTION
Nine months ended
October 31,
------------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net loss from continuing operations $(9,583) $ (501)
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities:
Depreciation and amortization 2,319 1,501
Accounts receivable and inventory reserves 4,794 390
Changes in assets and liabilities, net of effects
of business entity acquisitions:
Accounts receivable (625) (2,607)
Inventories (2,303) (2,531)
Other current assets (27) (189)
Accounts payable (1,655) 2,006
Accrued expenses 80 (755)
Due from affiliates 753 (295)
------- -------
Net cash used in continuing operating activities (6,247) (2,981)
Net cash provided by discontinued operations 6,373 -
------- -------
Net cash provided by (used in) operating activities 126 (2,981)
Cash flows from investing activities:
Purchase of property and equipment (1,136) (140)
Capitalized software development costs - (325)
------- -------
Net cash used in investing activities (1,136) (465)
Cash flows from financing activities:
Proceeds from sale of common stock 8,025 -
Proceeds from issuance of short-term debt, net of repayments 1,482 (460)
Proceeds from long-term debt 206 435
Repayment of long-term debt (201) (94)
Advances from former parent company, net of repayments 3,700 4,252
Financing activities of discontinued operations 151 -
------- -------
Net cash provided by financing activities 13,363 4,133
------- -------
Net increase in cash and cash equivalents 12,353 687
Cash and cash equivalents at beginning of year 112 198
------- -------
Cash and cash equivalents at end of period $12,465 $ 885
======= =======
See accompanying notes to consolidated financial statements.
4
ENTRADA NETWORKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------
We design, manufacture and market products that provide access to and enhance
the performance of data and telecommunication networks, and is currently
developing storage area networks ("SANs") transport technology which will enable
inter-networking of isolated islands of SANs over wide area networks, metro area
networks and local area networks via internet protocol and light. Our products
are deployed by telecommunications network operators, application service
providers, internet service providers, and the operators of corporate local area
and wide area networks for the purpose of providing access transport within
their networks. Our corporate headquarters and engineering facilities are
located in San Diego, California. We perform assembly, system integration,
quality control, final testing and configuration at our facility in Annapolis
Junction, Maryland. In addition, we have various sales offices located in the
United States. We pursue a strategy of outsourcing some of our products and
components to third party contract manufacturers to enable us to react quickly
to market demand and avoid significant capital investment required to establish
and maintain full manufacturing facilities. Operations of our frame relay
segment based in Irvine, California, are being discontinued. We market and sell
our products and services directly to end users as well as through a broad array
of channels including system integrators, worldwide distributors, value added
resellers, original equipment manufacturers ("OEM's"), telecommunication service
providers and governmental agencies.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Entrada Networks, Inc. (the "Company," "Entrada," "We," "Our," or "Us")
has prepared, without audit, the accompanying financial data as of October 31,
2000 and January 31, 2000, for the three and nine months ended October 31, 2000
and 1999 in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The January 31, 2000 balance sheet was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. However, we believe that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in our Registration
Statement on Form S-4 filed on May 19, 2000 and as amended on Form S-4/A on
August 3, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets, liabilities, revenues and expenses, the
disclosure of contingent assets and liabilities and the loss on disposal of
discontinued operations. Actual results could differ from these estimates. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows as of October 31, 2000 and for the three and nine
months ended October 31, 2000, have been made. The results of operations for the
nine months ended October 31, 2000 are not necessarily indicative of the
operating results for the full year.
BUSINESS COMBINATION
On August 31, 2000, Sync Research, Inc., acquired all the outstanding
capital of a wholly-owned subsidiary of Osicom Technologies, Inc., a New Jersey
corporation, which was doing business as Entrada Networks and also named Osicom
Technologies, Inc., a Delaware corporation, in a merger transaction and received
cash of $8,025. The shareholder of Entrada Networks received common shares equal
to Entrada Networks' outstanding stock at the time of the merger, or 4,244,155
shares, as well as an additional 2,448,818 shares of Sync's common
5
ENTRADA NETWORKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------
stock. Entrada Networks' obligation to its former parent company of $25.5
million was contributed to capital as part of the merger.
As a result of the merger and stock sale the former shareholder of
Entrada Networks held a majority interest in the combined entity which was
renamed Entrada Networks, Inc. from Sync Research, Inc. Generally accepted
accounting principles require in certain circumstances that a company whose
shareholders retain the majority voting interest in the combined business to be
treated as the acquirer for financial reporting purposes. Accordingly, the
merger has been accounted for as a "reverse merger," whereby Entrada Networks is
deemed to have purchased Sync Research, Inc. However, Sync remains the legal
entity and the Registrant for Security and Exchange Commission reporting
purposes. The merger is also accounted for under the purchase method of
accounting, which requires the inclusion of the results of operations of Sync
from the date acquired. The periods presented in the accompanying financial
statements include the results of operations of Sync beginning on September 1,
2000. Financial results prior to September 1, 2000 consist entirely of the
results of operations of Entrada Networks, the former subsidiary of Osicom
Technologies, Inc., a New Jersey corporation. The aggregate fair value of assets
acquired and the net cash invested in this business was $7,982. The excess of
the aggregate cost over the fair value of net assets acquired was $4,326, which
was recorded as goodwill in the third quarter ended October 31, 2000 and has
been written off as a component of loss on disposal of discontinued business
segment. We have also changed our year-end to that of Entrada Networks.
DISCONTINUED OPERATIONS
On September 29, 2000, after careful consideration of our plans and
business alternatives, our Board of Directors, upon recommendation by
management, entered into a plan to discontinue our frame relay business segment.
The Board concluded that the frame relay business segment would not contribute
to our profitability or toward our goal of entering the storage area networking
market space. The accompanying financial statements reflect the operations and
financial position of the frame relay business segment as a discontinued
business segment for all periods reported in conformity with generally accepted
accounting principles.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS 137 and 138, is effective for financial statements with fiscal quarters of
all fiscal years beginning after June 15, 2000. The Accounting Standards
Executive Committee issued Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," and SOP
98-5, "Reporting on the Costs of Start-up Activities," effective in the current
or future periods. The adoption or future adoption of these standards has had or
will have no material effects, if any, on our financial position or results of
operations.
The Financial Accounting Standards Board issued Interpretation ("FIN")
No. 44, "Accounting for Certain Transactions involving Stock Compensation," an
Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion No. 25 for (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 2, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of this
standard had no material effect, if any, on our financial position or results of
operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101, Revenue Recognition ("SAB 101") which broadly addresses how companies
report revenues in their financial statements effective the fourth
6
ENTRADA NETWORKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------
fiscal quarter of years beginning after December 31, 1999. We are currently
evaluating the effect, if any, of the adoption of this policy on our financial
position or results of operations.
BALANCE SHEET DETAIL
Inventories at October 31, 2000 and January 31, 2000 consist of:
October 31, 2000 January 31, 2000
---------------- ----------------
Raw material $ 5,722 $ 4,740
Work in process 822 1,958
Spare parts 54 141
Finished goods 2,139 1,228
------- -------
8,737 8,067
Less: Valuation reserve 3,681 2,026
------- -------
$ 5,056 $ 6,041
======= =======
STOCKHOLDERS' EQUITY
We are authorized to issue the following shares of stock:
50,000 shares of Common Stock ($0.001 par value)
2,000 shares of Preferred Stock (0.001 par value), of which
the following series have been designated:
700 shares of Preferred Stock, Series A
All shares of our preferred stock, Series A, were automatically
converted into 700 shares of our common stock in connection with our merger
described above in "Business Combination."
EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings
per share for the quarters ended October 31, 2000 and 1999.
Three Months Ended October 31, Nine Months Ended October 31,
2000 1999 2000 1999
-------- ------- -------- ------
Net income (loss) available to common
stockholders used in basic EPS $ (12,602) $ 313 $ (20,419) $ (501)
======= === ======= ====
Average number of common shares
used in basic EPS 8,789 4,244 5,770 4,244
===== ===== ===== =====
We had a net loss for the quarter and nine months ended October 31,
2000 and for the nine months ended October 31, 1999. Accordingly, the effect of
dilutive securities including vested and nonvested stock options to acquire
common stock are not included in the calculation of EPS because their effect
would be antidilutive. The following data shows the effect on income and the
weighted average number of shares of dilutive potential common stock.
7
ENTRADA NETWORKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------
Three Months Ended October 31, Nine Months Ended October 31,
2000 1999 2000 1999
-------- ------- -------- ------
Net loss available to common
stockholders used in basic EPS $ (12,602) $ 313 $ (20,419) $ (501)
======= === ======= ====
Average number of common shares
used in basic EPS 8,789 4,244 5,770 4,244
Effect of dilutive securities:
Stock benefit plans 116 - 13 -
------ -------- ------- --------
Average number of common shares
and dilutive potential common
stock used in diluted EPS 8,905 4,244 5,783 4,244
===== ===== ===== =====
The shares issuable upon exercise of options represents the quarterly
average of the shares issuable at exercise net of the shares assumed to have
been purchased, at the average market price for the period, with the assumed
exercise proceeds. Accordingly, options and warrants with exercise prices in
excess of the average market price for the period are excluded because their
effect would be antidilutive. There were no options to purchase common shares or
convertible preferred stock outstanding during the three and nine months ended
October 31, 1999. Options to purchase common shares that were outstanding but
were not included in the computation of diluted earnings per shares because the
their exercise price was greater than the average market price of the common
shares for the period each option was outstanding were 1,934 and 675 for the
three and nine months ended October 31, 2000, respectively.
COMMITMENTS
In July 2000, we entered into a 66-month agreement to lease a 19,000
square foot facility in San Diego, California, of which approximately 17% has
been subleased to a subsidiary of Osicom Technologies, Inc. This facility has
been established as our new corporate headquarters. The total annual rent
payments will be approximately $213,000.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us to concentration of
credit risk consist primarily of temporary cash investments and trade
receivables. As regards the former, we place our temporary cash investments with
high credit financial institutions and limit, by policy, the amount of credit
exposure to any one institution.
Although we are directly affected by the economic well being of
significant customers listed in the following tables, management does not
believe that significant credit risk exists at October 31, 2000. We perform
ongoing evaluations of our customers and require letters of credit or other
collateral arrangements as appropriate.
8
ENTRADA NETWORKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------
One customer accounts for 37.5% of net receivables at October 31, 2000,
which is within terms, and no customer accounts for more than 10% of net
receivables at January 31, 2000.
Customers accounting for more than 10% of net sales during the quarters
ended October 31, 2000 and 1999:
October 31, 2000 October 31, 1999
---------------- ----------------
Customer Y 50.8% 12.9%
Customer Z 21.1 42.9
SEGMENT INFORMATION
We operate one business segment for the design and manufacture of
computer networking products. The operations of the business segment formerly
known as Sync Research, Inc., are being discontinued and the segment's results
of operations are shown as "Loss from discontinued operations" in the
accompanying Consolidated Statements of Operations. Export sales are not a
material component of total sales.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated unaudited
financial statements and related notes thereto. The results of operations in the
consolidated unaudited financial statements reflect the operating results of
Entrada Networks, the former subsidiary of Osicom Technologies, Inc., a New
Jersey corporation, for all periods presented. The periods presented include the
operating results of the former Sync Research, Inc., beginning on September 1,
2000, as discontinued operations. Further reference should be made to our Form
S-4, filed May 19, 2000, containing our audited financial statements for the
year ended January 31, 2000, and to our form S-4/A, filed August 3, 2000.
RESULTS OF OPERATIONS/COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2000
AND 1999
Net sales. Net sales were $7.9 million for the three months ended October 31,
2000, compared with $8.0 million for the three months ended October 31, 1999.
The decrease in net sales in the three months ended October 31, 2000 resulted
primarily from decreased sales to distributors of remote access and print server
products, partially offset by increased sales to OEMs of fast Ethernet local
area networking ("LAN") adapter products. The shift in sales toward OEMs
reflects our focus on expanding sales to OEMs and the roll out of our new
generation products.
Gross profit. Cost of sales consists principally of the cost of components and
subcontract assembly from outside manufacturers, in addition to in-house system
integration, quality control, final testing and configuration. Gross profit
decreased to $2.8 million for the quarter ended October 31, 2000 from $3.6
million for the comparable quarter last year. Our gross margin decreased to
35.2% for the three months ended October 31, 2000 from 44.5% for the comparable
quarter last year. The decline in gross margins resulted from increased sales to
OEM customers that have lower margins than sales to distributors as well as
product transitions in anticipation of the merger of Sync and Entrada Networks.
Selling and marketing. Selling and marketing expenses consist primarily of
employee compensation and related costs, commissions to sales representatives,
tradeshow expenses, facilities costs, and travel expenses. Selling and marketing
expenses decreased to $1.4 million, or 17.4% of net sales for the quarter ended
October 31, 2000, from $1.5 million and 18.7% of net sales for the quarter ended
October 31, 1999. The reduction in selling and marketing costs reflects
personnel reductions resulting from the closure of our Massachusetts facility as
well as personnel reductions in anticipation of the merger of Sync and Entrada
Networks.
Engineering, research and development. Engineering, research and development
expenses consist primarily of compensation related costs for engineering
personnel, facilities costs, and materials used in the design, development and
support of our technologies. Engineering, research and development expenses were
$2.3 million, or 28.7% of net sales, for the quarter ended October 31, 2000,
compared with $1.1 million, or 13.2% of net sales, for the quarter ended October
31, 1999. The increase in research and development expenses was primarily due to
increased new product development costs, partially offset by cost savings
achieved through the consolidation of facilities. The Company expects research
and development expenses to continue to increase as it attempts to enter the SAN
market space. In addition, the Company wrote off capitalized software
development costs of $0.6 million to research and development expenses during
the three months ended October 31, 2000 due to changing market conditions.
General and administrative. General and administrative expenses consist
primarily of employee compensation and related costs, legal and accounting fees
and public company costs. General and administrative expenses increased to $0.8
million, or 9.9% of net sales, for the quarter ended October 31, 2000 from $0.5
million, or 6.3% of net sales, for the quarter ended October 31, 1999. The
increase in general and administrative expenses is primarily due to costs
incurred in the third quarter ended October 31, 2000 relating to the
establishment of our headquarters facility in San Diego. These additional
expenses were partially offset by cost savings from the consolidation of our
facilities as well as the elimination of 37,000 square feet of unused space
leased at our Annapolis Junction, Maryland facility. As a result of the merger
and establishment of the Company as a publicly traded entity headquartered in
San Diego, the Company has added a layer of senior management and will incur
additional costs associated with operating as a public company, including the
costs of proxies, mailing, annual reports and stockholders' meetings. These
costs are incremental to the Company's general and administrative costs and will
continue indefinitely.
Income taxes. There was no provision for income taxes for the three-month
periods ended October 31, 2000 and 1999. We have carry forwards of domestic
federal net operating losses, which may be available, in part, to reduce future
taxable income in the United States. However, the Internal Revenue Code limits
the application of net operating loss carry
10
forwards in the event of ownership changes of greater than 50%. We have had a
change of ownership that will limit the amount of any net operating loss carry
forward we may use in a particular year. In addition, we provided a valuation
allowance in full for our deferred tax assets as it is our opinion that it is
more likely than not that some portion or all of the assets will not be
realized.
Discontinued operations. Loss from discontinued operations was $0.4 million for
the third quarter ended October 31, 2000. This represents the operating results
of the former Sync Research, Inc. frame relay business based in Irvine,
California, for the two-month period from September 1, 2000 through October 31,
2000. On September 29, 2000, after completion of the merger on August 31, 2000,
the Company entered into a plan to discontinue the operations of the frame relay
business segment.
Loss on disposal of discontinued operations of $10.4 million for the third
quarter ended October 31, 2000 represents estimated costs of disposing of the
Company's frame relay business based in Irvine, California. The estimated loss
consists of $4.3 million of goodwill recognized upon completion of the merger on
August 31, 2000, $2.2 million for obsolescent inventory, $1.1 for vendor
payables, $1.1 of severance costs, $0.7 million for lease termination and $1.0
for various other estimated costs for disposal of the business segment.
RESULTS OF OPERATIONS/COMPARISON OF THE NINE MONTHS ENDED OCTOBER 31, 2000
AND 1999
Net sales. Net sales were $17.6 million for the nine months ended October 31,
2000, compared with $21.0 million for the nine months ended October 31, 1999.
The decrease in net sales in nine months ended October 31, 2000 resulted
primarily from decreased sales to distributors of remote access and print server
products, partially offset by increased sales to OEMs of networking adapter
products. The shift in sales toward OEMs reflects our focus on expanding sales
to OEMs and the roll out of our new generation products.
Gross profit. Gross profit decreased to $3.4 million for the nine months ended
October 31, 2000 from $9.0 million for the comparable period last year. The
gross profit of $3.4 million for the nine months ended October 31, 2000 is net
of a $2.8 million valuation adjustment comprising $0.6 million for print
servers, $0.6 million for remote access servers and $1.6 million for other
legacy products. Our gross margin, excluding the valuation adjustment, decreased
to 35.6% for the nine months ended October 31, 2000 from 42.9% for the
comparable period last year. The decline in gross margins resulted from
increased sales to OEM customers that have lower margins than sales to
distributors as well as product transitions in anticipation of the merger of
Sync and Entrada Networks.
Selling and marketing. Selling and marketing expenses decreased to $3.7 million
for the nine months ended October 31, 2000, from $4.0 million for the nine
months ended October 31, 1999. The reduction in selling and marketing costs
reflects personnel reductions resulting from the closure in May 2000 of our
Massachusetts facility as well as personnel reductions in anticipation of the
merger of Sync and Entrada Networks. As a percentage of sales, selling and
marketing expenses increased to 21.1% for the nine months ended October 31,
2000, from 18.8% for the same period a year ago. The increase in selling and
marketing costs as a percentage of sales is due to lower sales for the nine
months ended October 31, 2000 compared with prior year period.
Engineering, research and development. Engineering, research and development
expenses increased to $5.0 million, or 28.5% of net sales, for the nine months
ended October 31, 2000, compared with $3.4 million, or 16.0% of net sales, for
the nine months ended October 31, 1999. The increase in research and development
expenses was primarily due to increased new product development costs, partially
offset by cost savings achieved through the consolidation of facilities. The
Company expects research and development expenses to continue to increase as it
attempts to enter the SAN market space. In addition, the Company wrote off
capitalized software development costs of $1.0 million to research and
development expenses during the nine months ended October 31, 2000 due to
changing market conditions.
General and administrative. General and administrative expenses were $1.8
million, or 10.4% of net sales, for the nine months ended October 31, 2000,
compared with $1.7 million, or 8.3% of net sales, for the nine months ended
October 31, 1999. The increase in general and administrative expenses is
primarily due to costs incurred in the third quarter ended October 31, 2000
relating to the establishment of our headquarters facility in San Diego. These
additional expenses were partially offset by cost savings from the consolidation
of our facilities as well as the elimination of 37,000 square feet of unused
space leased at our Annapolis Junction, Maryland facility. As a result of the
merger and establishment of the Company as a publicly traded entity
headquartered in San Diego, the Company has added a layer of senior management
11
and will incur additional costs associated with operating as a public company,
including the costs of proxies, mailing, annual reports and stockholders'
meetings. These costs are incremental to the Company's general and
administrative costs and will continue indefinitely.
Other operating expenses. Other operating expenses for the nine months ended
October 31, 2000 include a $1.4 million valuation reserve recorded against
distributor receivables and $0.5 million of costs associated with the closure of
our Massachusetts facility. We have reduced our staff by 39 through the closure
of our Massachusetts facility and other personnel reductions associated with a
shift in our business focus to OEM sales as well as in anticipation of our
merger with Sync. It is anticipated that the closure of the Massachusetts
facility will reduce annual operating expenses by at least $2.0 million.
Income taxes. There was no provision for income taxes for the nine-month periods
ended October 31, 2000 and 1999. We have carry forwards of domestic federal net
operating losses, which may be available, in part, to reduce future taxable
income in the United States. However, the Internal Revenue Code limits the
application of net operating loss carry forwards in the event of ownership
changes of greater than 50%. We have had a change of ownership that will limit
the amount of any net operating loss carry forward we may use in a particular
year. In addition, we provided a valuation allowance in full for our deferred
tax assets as it is our opinion that it is more likely than not that some
portion or all of the assets will not be realized.
Discontinued operations. Loss from discontinued operations was $0.4 million for
the nine months ended October 31, 2000. This represents the operating results of
the former Sync Research, Inc. frame relay business based in Irvine, California,
for the two-month period from September 1, 2000 through October 31, 2000. On
September 29, 2000, after completion of the merger on August 31, 2000, the
Company entered into a plan to discontinue the operations of the frame relay
business segment.
Loss on disposal of discontinued operations of $10.4 million for the nine months
ended October 31, 2000 represents estimated costs of disposing of the Company's
frame relay business based in Irvine, California. The estimated loss consists of
$4.3 million of goodwill recognized upon completion of the merger on August 31,
2000, $2.2 million for obsolescent inventory, $1.1 for vendor payables, $1.1 of
severance costs, $0.7 million for lease termination and $1.0 for various other
estimated costs for disposal of the business segment.
LIQUIDITY AND CAPITAL RESOURCES
Entrada Networks financed its operations before the merger through a combination
of debt and non-interest bearing advances from its former parent, Osicom
Technologies, Inc., a New Jersey corporation. At October 31, 2000, our working
capital was $9.1 million and cash on hand was $12.5 million.
Our operations provided cash flows of $0.1 million during the nine months ended
October 31, 2000 compared to a cash flow deficit of $3.0 million for the nine
months ended October 31, 1999. The increase in cash flows provided by operations
reflects $6.4 million of net cash provided by discontinued operations, nearly
offset by a substantial increase in our net loss from operations after
adjustment for non-cash expenses including depreciation, amortization, reserves
and valuation allowances. During the nine months ended October 31, 2000,
operating cash flow reflected decreases in net accounts receivable, net
inventories, amounts due from affiliates and increases in accrued liabilities,
partially offset by decreases in accounts payable. During the same nine months
last year, our cash flow used in operations reflected increases in accounts
receivable, inventory, other current assets and due from affiliates along with a
decrease in accrued liabilities partially offset by an increase in accounts
payable.
Our investing activities consist primarily of purchases of property, plant and
equipment and software development costs. We purchased $1.1 million and $0.1
million in equipment during the nine months ended October 31, 2000 and 1999,
respectively. During the nine months ended October 31, 1999 the investing
activities also included $0.3 million in software development costs.
Our financing activities during the nine months ended October 31, 2000 provided
cash flows of $13.4 million, primarily in connection with the merger. As part of
the Sync and Entrada Networks merger, we received $8.0 million in cash in
exchange for common stock. Additional sources of net cash provided by financing
activities were $1.5 million in net proceeds from short term borrowings from our
credit facilities and $3.7 million of non-interest bearing advances from our
former parent, net of repayments. During the nine months ended October 31, 1999
financing activities provided cash
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flows of $4.1 million which included $0.5 million of net repayments on short
term borrowings, $0.4 million of proceeds net of repayments on long term debt
financing and $4.3 million of non-interest bearing advances from our former
parent, net of repayments.
We have a line of credit totaling $7.0 million. Outstanding borrowings against
this line of credit were $3.7 million at October 31, 2000. Our credit line is
collateralized by accounts receivable, inventory and equipment, and is
guaranteed by our former parent.
We anticipate that our available cash resources will be sufficient to meet our
presently anticipated capital requirements for the next nine months. The Company
is currently pursuing external equity financing arrangements that would enhance
our liquidity position in the coming years and enable us to accelerate the
development of SAN products. Nonetheless, our future capital requirements may
vary materially from those now planned including the need for additional working
capital to accommodate planned growth, hiring and infrastructure needs. There
can be no assurances that our working capital requirements will not exceed our
ability to generate sufficient cash internally to support our requirements and
that external financing will be available or that, if available, such financing
can be obtained on terms favorable to us and our shareholders.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133 as amended by SFAS
137 and 138, "Accounting for Derivative Instruments and Hedging Activities," is
effective for financial statements with fiscal quarters of all fiscal years
beginning after June 15, 2000. The Accounting Standards Executive Committee
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," and SOP 98-5, "Reporting on
the Costs of Start-up Activities," effective in the current or future periods.
The adoption or future adoption of these standards has had or will have no
material effects, if any, on our financial position or results of operations.
The Financial Accounting Standards Board issued Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions involving Stock Compensation," an
Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion No. 25 for (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 2, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of this
standard had no material effect, if any, on our financial position or results of
operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
Revenue Recognition ("SAB 101") which broadly addresses how companies report
revenues in their financial statements effective the first fiscal quarter of
years beginning after December 15, 1999. Management believes that adoption of
this policy will have no material effect on our financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We periodically need additional financing for our large operating losses and
capital expenditures associated with establishing and expanding our operations.
The interest rate that we will be able to obtain on debt financing will depend
on market conditions at that time, and may differ from the rates we have secured
on our current debt. Additionally, the interest rates charged by our present
lenders adjust on the basis of the lenders' prime rate.
Almost all of our sales and expenses have been denominated in U.S. dollars and
to date our business has not been significantly affected by currency
fluctuations. However, we conduct business in several different countries and
thus fluctuations in currency exchange rates could cause our products to become
relatively more expensive in particular countries, leading to a reduction in
sales in that country. In addition, inflation in such countries could increase
our expenses. In the future, we may engage in foreign currency denominated sales
or pay material amounts of expenses in foreign currencies and, in such event,
may experience gains and losses due to currency fluctuations. Our operating
results could be adversely affected by such fluctuations. We attempt to minimize
our currency exposure risks through working capital management and do not hedge
our exposure to translation gains and losses related to foreign currency
exposures.
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We do not hold or issue derivative, derivative commodity instruments or other
financial instruments for trading purposes. Investments held for other than
trading purposes do not impose a material market risk.
We believe that the relatively moderate rate of inflation in the United States
over the past few years and the relatively stable interest rates incurred on
short-term financing have not had a significant impact on our sales, operating
results or prices of raw materials. There can be no assurance, however, that
inflation or an upward trend in short-term interest rates will not have a
material adverse effect on our operating results in the future should we require
debt financing in the future.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, including, but not
limited to, Part I, Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, Section
21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, that are not historical facts but
rather reflect current expectations concerning future results and events. The
words "believes," "expects," "intends," "plans," "anticipates," "likely," "will"
and similar expressions identify such forward-looking statements. These
forward-looking statements are subject to risks, uncertainties and other
factors, some of which are beyond the Company's control that could cause actual
results to differ materially from those forecast or anticipated in such
forward-looking statements. These factors include, but are not limited to, the
technical and commercial success of the Company's current and future products,
the performance and ultimate disposition of our discontinued business segment
based in Irvine, California, the integration of operations as a result of the
merger, reliance on vendors and product lines, competition, performance of new
products, performance of affiliates and their future operating results, the
Company's ability to establish successful strategic alliances, quarterly and
seasonal fluctuations, dependence on senior management and possible volatility
of stock price. These factors are discussed generally in greater detail under
the caption "Risk Factors" in our Registration Statement on Form S-4, filed May
19, 2000, as amended by our Form S-4/A, filed August 3, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
21 Subsidiary of the Registrant--filed herewith.
27.1 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K
On September 20, 2000, the Company filed a report on Form 8-K
in connection with the completion of its merger, the
relocation of its principal executive offices to San Diego,
and its change to a fiscal year ending on January 31.
On October 13, 2000, the Company filed a report on Form 8-K in
connection with its decision to discontinue operations of its
frame relay business segment.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENTRADA NETWORKS, INC.
By: /s/ Lana Nino
------------------
Lana Nino
Vice President, Chief Financial Officer
Principal Accounting Officer
Date: December 11, 2000
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