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, 2001
( ) 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.)
12 Morgan, Irvine, California 92618
(Address of principal executive office) (Zip Code)
(949) 588-2070
(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 8, 2001 10,992,289
Entrada Networks, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
(Statements reclassified to reflect retention of Sync Research, Inc.)
October 31, January 31,
2001 2001
-------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash $ 65 $ 9,953
Restricted cash 300 300
Accounts receivable, net of allowance for doubtful
accounts of $759 and $400, respectively 1,982 4,373
Inventories, net of reserves of $5,295 and $3,340, respectively 4,169 4,636
Prepaid expenses and other current assets 677 298
-------- --------
Total current assets 7,193 19,560
Property and equipment, net 1,474 2,452
Other Assets 679 -
-------- --------
Total assets $ 9,346 $ 22,012
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt $ 548 $ 3,568
Current maturities of long-term debt 132 394
Accounts payable 2,567 1,725
Net liabilities of discontinued operations - 3,892
Other current and accrued liabilities 3,090 2,166
-------- --------
Total current liabilities 6,337 11,745
Long-term debt and capital lease obligations 58 131
-------- --------
Total liabilities 6,395 11,876
Stockholders' equity
Common stock, $0.001 par value; 50,000 shares authorized, 10,992 and
10,993 shares issued and outstanding
at October 31, 2001 and January 31, 2001 11 11
Additional paid-in capital 51,765 51,722
Accumulated deficit (48,825) (41,597)
-------- --------
Total stockholders' equity 2,951 10,136
-------- --------
Total liabilities and stockholders' equity $ 9,346 $ 22,012
======== ========
See accompanying notes to consolidated financial statements.
2
Entrada Networks, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
(Statements reclassified to reflect retention of Sync Research, Inc.)
Three months ended Nine months ended
October 31, October 31,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 3,078 $ 7,890 $ 9,863 $ 17,641
Cost of sales 2,065 7,522 6,250 16,615
------ --------- -------- ---------
Gross profit 1,013 368 3,613 1,026
Operating expenses:
Selling and marketing 671 1,426 3,173 3,778
Engineering, research and development 1,334 2,347 6,093 5,105
General and administrative 934 893 2,989 1,945
Other 1,292 5,874 1,774 6,870
------ --------- -------- ---------
Total operating expenses 4,231 10,540 14,029 17,698
Loss from operations (3,218) (10,172) (10,416) (16,672)
Interest expense, net (79) (121) (213) (346)
------ --------- -------- ---------
Loss from continuing operations
before income taxes (3,297) (10,293) (10,629) (17,018)
Provision for income taxes - - - -
------ --------- -------- ---------
Net loss from continuing operations (3,297) (10,293) (10,629) (17,018)
Income (loss) on disposal of discontinued operations 2,309 (2,309) 3,401 (3,401)
------ --------- -------- ---------
Net loss $ (988) $ (12,602) $ (7,228) $ (20,419)
====== ========= ======== =========
Net loss per common share:
Loss from continuing operations:
Basic $ (0.30) $ (1.17) $ (0.97) $ (2.95)
======= ========= ======== =========
Diluted $ (0.30) $ (1.17) $ (0.97) $ (2.95)
======= ========= ======== =========
Net loss:
Basic $ (0.09) $ (1.43) $ (0.66) $ (3.54)
======= ========= ======== =========
Diluted $ (0.09) $ (1.43) $ (0.66) $ (3.54)
======= ========= ======== =========
Weighted average shares outstanding:
Basic 10,992 8,789 10,992 5,770
======= ========= ======== =========
Diluted 10,992 8,789 10,992 5,770
======= ========= ======== =========
See accompanying notes to consolidated financial statements.
3
Entrada Networks, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
(Statements reclassified to reflect retention of Sync Research, Inc.)
Nine months ended
31-Oct
---------------------------
2001 2000
------------- ------------
Cash flows from operating activities:
Net loss $ (7,228) $ (10,009)
Adjustments to reconcile net loss from operations to net cash
used in operating activities:
Depreciation and amortization 2,399 2,319
Accounts receivable and inventory reserves 2,695 4,794
Changes in assets and liabilities:
Accounts receivable 2,032 (625)
Due from affiliates - 753
Inventories (1,869) (2,303)
Other current assets (411) (27)
Accounts payable 841 (1,655)
Accrued expenses 925 80
-------- ---------
Net cash used in operating activities (616) (6,673)
Discontinued operations (3,892) 6,799
-------- ---------
Net cash provided by (used in) operating activities (4,508) 126
Cash flows from investing activities:
Purchase of property and equipment (2,069) (1,136)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of repayments - 1,482
Proceeds (repayments) from issuance of short-term debt, net (3,281) 206
Repayment of capital lease obligations (73) (201)
Advances from former parent company, net of repayments - 3,700
Proceeds from the sale of common stock 8,025
Financing activities of discontinued operations 151
Warrants issued in conjunction with credit facility 43 -
-------- --------
Net cash provided by (used in) financing activities (3,311) 13,363
-------- --------
Net increase (decrease) in cash and cash equivalents (9,888) 12,353
Cash and cash equivalents at beginning of period 10,253 112
-------- ---------
Cash and cash equivalents at end of period $ 365 $ 12,465
======== =========
See accompanying notes to consolidated financial statements.
4
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
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 were developing
storage area networks ("SANs") transport technology in our wholly owned
subsidiary Torrey Pines Networks which would have enabled inter-networking of
isolated islands of SANs over wide area networks, metro area networks and local
area networks via internet protocol and light before this development was
suspended. 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 Irvine, California. We perform assembly, system
integration, quality control, final testing and configuration at our facility in
Irvine, California. 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 are based in Irvine, California. 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 ("OEMs"), telecommunication service providers
and governmental agencies.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Entrada Networks, Inc., the "Company," "We," "Our" or "Us," has
prepared, without audit, the accompanying financial data as of October 31, 2001,
and for the three and nine months ended October 31, 2001 and 2000 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, 2001 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 Annual Report on Form 10-K filed on May 4,
2001.
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, 2001 and for the three and nine
months ended October 31, 2001, have been made. The results of operations for the
three and nine months ended October 31, 2001 are not necessarily indicative of
the operating results for the full year.
Retained Operations
On September 29, 2000, the Company had entered into a plan to
discontinue its frame relay business segment. On October 13, 2000, Entrada
Networks' Board of Directors approved a plan for the Company to explore
strategic and financial alternatives for its frame relay business for the
purpose of enhancing shareholder value. The Company had planned to complete
disposition of its frame relay business by September 30, 2001. 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 consisted 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. For the purposes of
comparable financial statements, the prior period income statements for three
and nine months ended October 31, 2000 have reclassified the impaired inventory
of $2.2 million to "cost of sales", and $5.9 and $4.9 million, respectively of
the disposal to "other expenses" leaving $2.3 and $3.4, respectively, remaining
as the loss from discontinued operations.
On September 6, 2001, the Company announced that it is restructuring
its business, creating three separate wholly owned subsidiaries. On September
18, 2001 the Company's Board of Directors approved a plan to reclassify Sync
Research as one of the three subsidiaries. Sync Research, Inc. will serve its
current frame relay customers and provide manufacturing, service and repair
facilities for the other subsidiaries.
The accompanying financial statements reflect the operations and
financial position of Sync Research the frame relay business segment as a
retained business segment for all periods reported in conformity with generally
accepted accounting principles. All historical consolidated financial statements
have been reclassified according to EITF 90-16, "Accounting for Discontinued
Operations Subsequently Retained." In that regard, the net loss from
discontinued operations of $426 thousand shown on the filed consolidated
statements of operations for three and nine months ending October 31, 2000 has
been reclassified into operating expense accounts for cost of sales, selling and
marketing, engineering, and general and administrative. The net loss for the
periods remains the same as filed.
On October 31, 2001, Sync had net accounts receivables of 0.9 million,
net inventory of $0.6 million, and prepaid expenses of $0.4 million offset by
current liabilities of $2.1 million. The net increase in shareholder equity from
the retention of Sync increased $2.3 million from July 31, 2001 and $3.4 million
from January 31, 2001.
5
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after July 1, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141. The
Company does not believe the adoption of SFAS 141 will have a material effect,
if any, on our financial position of results of operations.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test nine months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The Company does not believe
the adoption of SFAS 142 will have a material effect, if any, on our financial
position of results of operations.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The Company believes the adoption of this Statement will have
no material impact on its financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFASB 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses
that have not yet occurred. SFASB 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally,
are to be applied prospectively. The Company believes the adoption of this
Statement will have no material impact on its financial statements.
6
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------
BALANCE SHEET DETAIL
Consolidated inventories at October 31, 2001 and January 31, 2001
consist of:
October 31, 2001 January 31, 2001
---------------- ----------------
Raw material $ 5,598 $ 5,659
Work in process 881 672
Finished goods 2,985 1,645
------- -------
9,464 7,976
Less: Valuation reserve (5,295) (3,340)
------- -------
$ 4,169 $ 4,636
======= =======
STOCKHOLDERS' EQUITY
We are authorized to issue the following shares of stock:
50,000,000 shares of Common Stock ($0.001 par value)
2,000,000 shares of Preferred Stock ($0.001 par value)
None of our preferred stock was outstanding during the nine months
ended October 31, 2001
EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings
per share for the three and nine month periods ended October 31, 2001 and 2000.
Three Months Ended October 31, Nine Months Ended October 31,
2001 2000 2001 2000
---- ---- ---- ----
Net loss available to common
stockholders used in basic EPS $ (988) $ (12,602) $ (7,228) (20,419)
========== ========= ========== =========
Average number of common shares
used in basic EPS 10,992,289 8,789,000 10,992,289 5,770,000
========== ========= ========== =========
We incurred a net loss from continuing operations for the three and
nine month periods ended October 31, 2001 and 2000. Accordingly, the effect of
dilutive securities including vested and non-vested 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 SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------
Three Months Ended October 31, Nine Months Ended October 31,
2001 2000 2001 2000
---- ---- ---- ----
Net loss available to common
stockholders used in basic EPS $ (988) $ (12,602) $ (7,228) $ (20,419)
========== ========= ========== =========
Average number of common shares
used in basic EPS 10,992,289 8,789,000 10,992,289 5,770,000
Effect of dilutive securities:
Stock benefit plans 13,886 - 22,443 -
========== ========= ========== =========
Average number of common shares
and dilutive potential common
stock used in diluted EPS 11,005,175 8,789,000 11,014,732 5,770,000
========== ========= ========== =========
The shares issuable upon exercise of options represent 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 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 nine months ended October 31, 2000.
Options to purchase common shares that were outstanding but were not included in
the computation of diluted earnings per shares because their exercise price was
greater than the average market price of the common shares for the period each
option was outstanding were 2,990,233 and 3,337,334 for the three and nine
months ended October 31, 2001, respectively.
COMMITMENTS
On February 20, 2001, our credit arrangement with Coast Business Credit
was fully replaced with a credit facility with Silicon Valley Bank. The Silicon
Valley Bank credit facility has a maximum limit of $5.0 million, subject to a
limitation equal to 65% of our eligible receivables plus the lesser of $1.0
million or 40% of the liquidation value of our eligible inventory. Borrowings
under the credit line bear interest at the bank's prime rate plus 1.75%. In
connection with the line of credit, we issued Silicon Valley Bank five-year
warrants to purchase 75,757 shares of our common stock at $3.30 per share. We
have accrued $54 of deferred interest in connection with these warrants. The
deferred interest is being amortized as interest expense over the twelve month
term of the credit arrangement. The credit arrangement is subject to covenants
regarding our tangible net worth, and is collateralized by accounts receivable,
inventory and equipment.
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. At times such amounts may exceed F.D.I.C.
limits. None of our short-term investment accounts at a single institution
exceeded F.D.I.C. limits at October 31, 2001.
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, 2001. We perform
ongoing evaluations of our customers and require letters of credit or other
collateral arrangements as appropriate.
Two customers each account for 52.7%, and 22.0 % of net receivables at
October 31, 2001, which is within terms. At January 31, 2001, three customers
each accounted for 37.0%, 12.6%, and 12.1% of net receivables.
Customers accounting for more than 10% of net sales during the quarters
ended October 31, 2001 and 2000:
October 31, 2001 October 31, 2000
---------------- ----------------
Customer W 57.1% 50.8%
Customer X 16.8 21.1
Customer Y 11.9 -
SEGMENT INFORMATION
8
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------
We have three operating business segments, Rixon Networks, Inc., Torrey
Pines Networks, Inc. and Sync Research, Inc. Sync Research, Inc. which designs
and manufactures computer networking products commonly known as frame relay
products was discontinued in October, 2000 and the segment's results of
operations were shown as "Loss from discontinued operations" in the Consolidated
Statements of Operations. During this quarter, Sync Research Inc. was retained
and is included in the three month and nine month Consolidated Statements of
Operations and the October 31, 2001 Consolidated Balance Sheet. The October 31,
2000 quarter and nine month Consolidated Statements of Operations and the
January 31, 2001 Consolidated Balance sheet follow the EITF 90-16 "Accounting
for Discontinued Operations Subsequently Retained" guidelines for reclassifying
operating results from discontinued operations to continuing operations in prior
periods.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern that contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. However, the Company has determined that its available cash resources
will be insufficient to meet its anticipated working capital requirements for
the next twelve months. These factors, along with the fact that the Company has
suffered recurring operating losses, raise substantial doubt about the Company's
ability to continue as a going concern.
The Company is continuing its efforts to secure working capital for
operations. However, there can be no assurance that the Company will be able to
secure additional capital, or that if such capital is available, whether the
terms or conditions would be acceptable to the Company. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty
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 for all periods presented. The periods presented include the
operating results of Sync Research, Inc., beginning on September 1, 2000.
On September 29, 2000, the Company had entered into a plan to
discontinue its frame relay business segment. On October 13, 2000, Entrada
Networks' Board of Directors approved a plan for the Company to explore
strategic and financial alternatives for its frame relay business for the
purpose of enhancing shareholder value. The Company had planned to complete
disposition of its frame relay business by September 30, 2001. Loss on disposal
of discontinued operations of $2.3 and $3.4 million for the three and 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 $2.2 million from inventory impairments included in Cost of Sales
and $5.9 million and $4.8 million, respectively for the three and nine months
ended October 31, 2000 for goodwill, vendor payables, severance costs, lease
termination and various other estimated costs for disposal of the business
segment.
On September 6, 2001, the Company announced that it is restructuring its
business, creating three separate wholly owned subsidiaries. On September 18,
2001 the Company's Board of Directors approved a plan to reclassify Sync
Research as an operating unit. The discontinued frame relay business was
retained as Sync Research, Inc., as one of the three subsidiaries. Sync
Research, Inc. will serve its current frame relay customers and provide
manufacturing, service and repair facilities for the other subsidiaries.
Consolidated results are shown including Sync Research, Inc. as retained.
Further reference should be made to our Form 10-K, filed May 4, 2001, containing
our audited financial statements for the years ended January 31, 2000 and 2001.
Results of Operations/Comparison of the Three Months Ended October 31, 2001 and
2000
Net sales. Net sales were $3.1 million for the three months ended October 31,
2001, compared with $7.9 million for the three months ended October 31, 2000.
The decrease in net sales in the three months ended October 31, 2001 resulted
from decreased sales to customers of frame relay access devices and to OEMs of
fast Ethernet local area networking LAN adapter products due to the general
economic slowdown being experienced by our major OEM customers.
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
increased to $1.0 million for the quarter ended October 31, 2001, compared with
$0.4 million for the comparable quarter last year. The lower gross margin for
the three months ended October 31, 2000 was primarily due to $2.2 million in
inventory impairment loss from the disposal of Sync Research, Inc. reclassified
as a cost of sale. Our gross margin increased to 32.9% for the three months
ended October 31, 2001 for the same reason.
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 $0.7 million, or 21.8% of net sales for the quarter ended
October 31, 2001, from $1.4 million and 18.1% of net sales for the quarter ended
October 31, 2000. The decrease in selling and marketing costs reflects primarily
the expense reduction measures undertaken in the six months ended October 31,
2001.
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
$1.3 million, or 43.3% of net sales, for the quarter ended October 31, 2001,
compared with $2.3 million, or 29.7% of net sales, for the quarter ended October
31, 2000. The decrease in research and development expenses was primarily due to
reductions in our Torrey Pines Networks, Inc.'s storage area networks (SAN) new
product development costs.
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 remained constant
at $0.9 million, or 30.3% of net sales, for the quarter ended October 31, 2001
and $0.9 million, or 11.3 % of net sales, for the quarter ended October 31,
2000.
Other operating expenses. Other operating expenses for the three months ended
October 31, 2001, were $1.3 million, consisting primarily of severance costs
associated with a reduction in staff associated with our products in Rixon
Networks, Inc. and in Torrey Pines Networks. This is a decrease from the three
months ended October 31, 2000 which included $5.9 million from the disposal of
Sync Research, Inc.
Income taxes. There was no provision for income taxes for the three-month
periods ended October 31, 2001 and 2000. 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
taxable 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. On September 29, 2000, after completion of the merger
on August 31, 2000, the Company had entered into a plan to discontinue the
operations of the frame relay business segment and this business was
subsequently reclassified as an operating unit in September 2001. For the
three months ended October 31, 2001, Sync Research, Inc. net revenues
were $1.2 million, cost of sales were $0.9 million, and operating expenses were
$0.7 million with a net operation loss of $0.4 million and a net income of $1.9
million with a gain of $2.3 million from the retention.
10
Results of Operations/Comparison of the Nine Months Ended October 31, 2001 and
2000
Net sales. Net sales were $9.9 million for the nine months ended October 31,
2001, compared with $17.6 million for the nine months ended October 31, 2000.
The decrease in net sales in the nine months ended October 31, 2001 resulted
primarily from decreased sales to customers of frame relay access devices and to
OEMs of fast Ethernet local area networking LAN adapter products due to the
general economic slowdown being experienced by our major OEM customers.
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 was
$3.6 million and $1.0 million, respectively, for the nine months ended October
31, 2001 and 2000. Our gross margin was 36.6% for the nine months ended October
31, 2001, compared with 5.8% for the nine months ended October 31, 2000. The
lower gross margin for the nine months ended October 31, 2000 was primarily due
to $2.2 million inventory impairment loss from the disposal of Sync Research,
Inc. reclassified as a cost of sale.
Selling and marketing. Selling and marketing expenses consist primarily of
employee compensation and related costs, commissions to sales representatives,
tradeshow expenses, advertising, facilities costs, and travel expenses. Selling
and marketing expenses decreased to $3.2 million, or 32.2% of net sales for the
nine months ended October 31, 2001, from $3.8 million and 21.4% of net sales for
the nine months ended October 31, 2000. The decrease in selling and marketing
costs reflects the expense reduction measures undertaken in the nine months
ended October 31, 2001, partially offset by increases in marketing costs for
Torrey Pines Networks SAN product development.
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
$6.1 million, or 61.8% of net sales, for the nine months ended October 31, 2001,
compared with $5.1 million, or 28.9% of net sales, for the nine months ended
October 31, 2000. The increase in research and development expenses was
primarily due to increased new product development costs at Torrey Pines
Networks.
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 $3.0
million, or 30.3% of net sales, for the nine months ended October 31, 2001 from
$1.9 million, or 11.0% of net sales, for the nine months ended October 31, 2000.
As a result of the merger and establishment of the Company as a publicly traded
entity, the Company 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, 2001, were $1.8 million, consisting of primarily severance costs
associated with a reduction in staff associated with our products in Rixon
Networks, Inc. and in Torrey Pines Networks partially offset by the retention
of Sync Research, Inc. Other operating expenses for the nine months ended
October 31, 2000, were $6.9 million, which includes $4.8 million relating to
the disposal of Sync Research.
Income taxes. There was no provision for income taxes for the six-month periods
ended July 31, 2001 and 2000. 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. As of October 31, 2001, the former Sync Research, Inc.
frame relay business based in Irvine, California was retained and included in
the presentation of the financial statements. Both the three month and the nine
month operating statements ending October 31, 2000 include 2 months of Sync
Research, Inc., after completion of the merger on August 31, 2000. For the
nine months ended October 31, 2001, Sync Research, Inc. net revenues were
$4.5million, cost of sales were $2.3 million, and operating expenses were
$1.5 million with a net operating income of $0.7 million and a net income of
$2.8 million primarily from the retention. Due to the merger of Sync Research
and Entrada Networks, Inc. there are no comparable comparisons with the prior
reporting period.
Liquidity and Capital Resources
11
The amounts included in our statement of cash flows for the first nine months of
fiscal 2002 are not comparable to our first nine months of fiscal 2001 amounts
due to the inclusion of the former Sync Research, Inc., for first six months
fiscal 2002. Readers should refer to Sync's quarterly report on Form 10-Q for
information concerning Sync.
We financed our operations before the merger through a combination of debt and
non-interest bearing advances from our former parent. At October 3, 2001, our
working capital was $0.9 million and cash and cash equivalents were $0.4
million, including $0.3 million of restricted cash.
Cash flow used in operations was $0.6 million during the nine months ended
October 31, 2001 compared with $6.7 million for the nine months ended October
31, 2000. The decrease in cash flows used in operations reflects a substantial
increase in our net loss from operations after adjustment for non-cash expenses
including depreciation, amortization, reserves and valuation allowances offset
by the retention of Sync Research, Inc. During the nine months ended October 31,
2001, operating cash flow reflected decreases in net accounts receivable and net
inventories increases in accounts payable and accrued expenses offset partially
by increases in other current assets. During the same six months last year, our
cash flow used in operations reflected increases in accounts receivable and
inventory along with a decrease in accounts payable.
Our investing activities consist primarily of purchases of property, plant and
equipment. We purchased $2.1 million and $1.1 million in equipment during the
nine months ended October 31, 2001 and 2000, respectively.
Our financing activities during the nine months ended October 31, 2001 used cash
flows of $3.3 million, primarily in connection with a $3.3 million decrease in
short-term debt. During the nine months ended October 31, 2000, financing
activities provided cash flows of $13.4 million, which included $3.7 million of
non-interest bearing advances from our former parent, net of repayments.
We have a line of credit totaling $5.0 million. Outstanding borrowings against
this line of credit were 0.7 million at October 31, 2001. Our credit line is
collateralized by accounts receivable, inventory and equipment We anticipate
that our available cash resources will be insufficient to meet our presently
anticipated working capital requirements for the next 12 months. The Company is
currently pursuing possible strategic alternatives including external equity
financing arrangements. Nonetheless, our future capital requirements may vary
materially from those now planned, including the need for additional working
capital to accommodate planned consolidation of all facilities, severance costs
associated with reductions in staff at Rixon Networks and Torrey Pines Networks,
and other 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.
On October 31, 2001, Sync had net accounts receivables of 0.9 million, net
inventory of $0.6 million, and prepaid expenses of $0.4 million offset by
current liabilities of $2.1 million. The net increase in shareholder equity from
the retention of Sync increased $2.3 million from July 31, 2001 and $3.4 million
from January 31, 2001.
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.
We believe that the relatively moderate rate of inflation in the United States
over the past few years has not had a significant impact on our sales or
operating results or on the prices of raw materials. There can be no assurance,
however, that inflation will not have a material adverse effect on our operating
results in the future.
All of our sales and expenses are currently denominated in U.S. dollars and to
date our business has not been affected by currency fluctuations. In the future,
however, we could 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.
12
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.
Part II. Other Information
Item 5. Other Information
Nasdaq Listing Qualifications
We were informed by The Nasdaq National Market that we are not in compliance
with Marketplace Rule 4450(a)(5) because our common stock failed to maintain a
minimum bid price of $1.00 over 30 consecutive trading days. We had been granted
until October 22, 2001 to regain compliance with the Rule. Subsequent to this
this rule was suspended till January 2, 2002. Compliance would have been
determined by the Nasdaq Staff, but generally requires that the bid price of our
common stock be at least $1.00 for a minimum of 10 consecutive trading days. On
December 4, 2001 we received a Nasdaq Staff Determination indicating that the
Company fails to comply with the minimum net tangible assets of $4 million or
the minimum stockholders' equity requirements of $10 million for the continued
listing set forth in Marketplace Rule 4200(a) (3), and that its securities are,
therefore, subject to delisting from the Nasdaq National Market. The Company
believes that it meets the requirements for continued listing on the SmallCap
Market and has filed on December 7, 2001 an application with Nasdaq to transfer
the listing of its securities from the Nasdaq National Market to the SmallCap
Market. This application will stay the delisting order until a final
determination is made. Failure to transfer the listing of our securities to the
SmallCap Market would result in the delisting of our securities from the Nasdaq
National Market. Delisting of our securities could have a material adverse
effect on the price of our common stock and upon the ability of our stockholders
to buy or sell our common stock.
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 Annual Report on Form 10-K, filed May 4, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 21 - Subsidiaries of the Registrant.
(b) Reports on Form 8-K
On September 20, 2001 the Company filed an 8-K outlining its plan to reclassify
Sync Research as an operating unit.
13
On October 23, 2001 the Company filed an 8-K announcing steps to improve its
bottom line, stopping Silverline'TM' product development at Torrey Pines
Networks and that Rixon Networks' Maryland operations will be relocated to
Irvine, California.
On November 21, 2001 the Company filed an 8-K announcing the change of its
principal executive office address to 12 Morgan, Irvine, CA 92618, the corporate
phone number to (949) 588-2070 and the appointment of Dr. Davinder Sethi as Vice
Chairman of its Board of Directors & the Company's Chief Financial Officer.
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/ Davinder Sethi
------------------
Davinder Sethi, Ph.D.
Chief Financial Officer
Principal Accounting Officer
Date: December 21, 2001
14
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as.............................'TM'