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 April 30, 2002
( ) 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 May 17, 2002 12,509,739
ENTRADA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
=============================================================================================================
April 30, January 31,
- ------------------------------------------------------------------------------------------- -------------
2002 2002
(unaudited)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 535 $ 698
Restricted cash 300 300
Accounts receivable, net of allowance for doubtful
accounts of $787 and $757, respectively 2,098 1,977
Inventory, net of reserves of $5,459 and $5,650, respectively 4,068 4,099
Prepaid expenses and other current assets 492 527
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 7,493 7,601
- -------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 1,601 1,807
- -------------------------------------------------------------------------------------------------------------
OTHER ASSETS 31 31
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,125 $ 9,439
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 664 $ 686
Current maturities of long term debt 58 115
Accounts payable 2,625 2,713
Other current and accrued liabilities 2,318 2,660
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,665 6,174
- -------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations 50 27
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,715 6,201
- -------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; 50,000 shares authorized; 12,510 shares
issued and outstanding at April 30, 2002; 11,580 shares issued
and outstanding at January 31, 2002 12 12
Additional paid-in capital 52,093 52,072
Accumulated deficit (48,695) (48,846)
- -------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,410 3,238
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,125 $ 9,439
=============================================================================================================
See accompanying notes to consolidated financial statements.
2
ENTRADA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts)
(Statements reclassified for April 30, 2001 to reflect retention
of Sync Research, Inc.)
===================================================================================
Three Months Ended
April 30,
--------------------
2002 2001
- -----------------------------------------------------------------------------------
NET REVENUES $ 3,223 $ 1,321
COST OF SALES 1,907 705
- -----------------------------------------------------------------------------------
GROSS PROFIT 1,316 616
- -----------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 208 1,046
Engineering, research and development 284 2,091
General and administrative 501 555
Other operating expenses 120 267
- -----------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,113 3,959
- -----------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 203 (3,343)
- -----------------------------------------------------------------------------------
OTHER CHARGES
Interest expense (52) (72)
- -----------------------------------------------------------------------------------
TOTAL OTHER CHARGES (52) (72)
- -----------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 151 (3,415)
NET INCOME (LOSS) $ 151 $(3,415)
===================================================================================
INCOME (LOSS) PER COMMON SHARE:
BASIC AND DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (IN THOUSANDS) 12,470 10,993
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ 0.01 $ (0.31)
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.31)
===================================================================================
See accompanying notes to consolidated financial statements.
3
ENTRADA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Statements reclassified for April 30, 2001 to reflect retention of
Sync Research, Inc.
======================================================================================================
Three months ended
April 30,
- ------------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 151 $(3,415)
- ------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 207 273
Accounts receivable and inventory reserves 30 (616)
Warrants issued in conjunction with Long term debt - 43
Issuance of common stock in payment of liabilities 21 -
Changes in assets and liabilities net of effects of business entity
acquisition:
(Increase) decrease in accounts receivable (151) 3,181
Decrease in inventories 31 555
(Increase) decrease in other current assets 34 (300)
Decrease in accounts payable (88) (1,541)
Decrease in accrued expenses (654) (583)
Increase in other current liabilities 335 -
- ------------------------------------------------------------------------------------------------------
NET CASH USED IN CONTINUING
OPERATING ACTIVITIES (84) (2,403)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (1) (323)
- ------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1) (323)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt (21) (1,891)
Repayment of capital lease obligations (57) (256)
- ------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (78) (2,147)
- ------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (163) (4,873)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 698 9,953
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 535 $ 5,080
======================================================================================================
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)
- --------------------------------------------------------------------------------
Entrada Networks, Inc. and its wholly owned subsidiaries, (the
"Company", "we", "our" or "us"), are in the business of developing and marketing
products for the storage networking and network connectivity industries. Our
Torrey Pines Networks ("Torrey Pines") subsidiary is engaged in the design and
development of storage area network ("SAN") transport switching products. Our
Rixon Networks ("Rixon") subsidiary designs, manufactures, markets and sells a
line of fast and gigabit Ethernet products that are incorporated into the remote
access and other server products of Original Equipment Manufacturers ("OEM"). In
addition, some of its products are deployed by telecommunications network
operators, applications service providers, internet service providers, and the
operators of corporate local area and wide area networks for the purpose of
providing access to and transport within their networks. The Sync Research
("Sync") subsidiary designs, manufactures and services frame relay products for
some of the major financial institutions in the U.S. and abroad. We operate in
one business segment, from Irvine, California.
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 April 30, 2002,
and for the three months ended April 30, 2002 and 2001 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, 2002 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 1, 2002.
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. 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 April 30, 2002
and for the three months ended April 30, 2002, have been made. The results of
operations for the three months ended April 30, 2002 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.
On September 6, 2001, the Company announced that it is restructuring
its business, creating three separate wholly owned subsidiaries. The
discontinued frame relay business will be 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. On September 18, 2001 the Company's Board of Directors
approved a plan to reclassify Sync Research as an operating unit.
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 Income" from
discontinued operations of $1,265 shown on the filed consolidated statements of
operations for three months
5
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
ending April 30, 2001 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.
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. Adopting SFAS 142 does not
have a material effect on our financial position or the 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.
BALANCE SHEET DETAIL
Consolidated inventories at April 30, 2002 and January 31, 2002 consist
of:
6
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
April 30, 2002 January 31, 2002
-------------- ----------------
Raw material $ 5,826 $ 6,599
Work in process 405 27
Finished goods 3,487 2,932
------- -------
9,718 9,558
Less: valuation reserve (5,650) (5,459)
------- -------
$ 4,068 $ 4,099
======= =======
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)
EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings
per share for the three months ended April 30, 2002 and 2001.
Three Months Ended April 30,
2002 2001
---- ----
Net income (loss) available to common
stockholders used in basic EPS $151 $(3,415)
==== =======
Weighted average number of common shares
used in basic EPS 12,469,722 10,992,634
========== ==========
We incurred a net income from continuing operations for the three month
period ended April 30, 2002 and incurred a net loss from continuing operations
from the same period in 2001. 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.
Three Months Ended April 30,
2002 2001
---- ----
Net income (loss) available to common
stockholders used in basic EPS $151 $(3,415)
==== =======
Weighted average number of common shares
used in basic EPS 12,469,722 10,992,634
Effect of dilutive securities:
Stock benefit plans 36,406 2,127
---------- ----------
Weighted average number of common shares
and dilutive potential common
stock used in diluted EPS 12,506,128 10,994,761
========== ==========
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. 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 2,675,776 for the three months
ended April 30, 2002.
7
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
COMMITMENTS
Our credit facility with Silicon Valley Bank 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 $43 of deferred interest in connection with these
warrants. The deferred interest was amortized in fiscal year 2002 as interest
expense. The credit arrangement is subject to covenants regarding our tangible
net worth, and is collateralized by accounts receivable, inventory and
equipment. The credit facility expired on February 20, 2002, and on May 15, 2002
it was extended until July 31, 2002. During this extension the facility has a
maximum limit of $3.5 million and bear's an interest rate of prime plus 2.5%.
There can be no guarantee that this will be extended further or that the bank
would renew this facility.
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.
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 April 30, 2002. We perform
ongoing evaluations of our customers and require letters of credit or other
collateral arrangements as appropriate.
Three customers each account for 21.0%, 14.4% and 10.1% of net
receivables at April 30, 2002. At January 31, 2002, three customers each
accounted for 47.0%, 14.2%, and 11.7% of net receivables.
Customers accounting for more than 10% of net revenue during the
quarters ended April 30, 2002 and 2001:
April 30, 2002 April 30, 2001
-------------- --------------
Customer W 60.4% 19.2%
Customer X - 13.8
8
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
OPERATING SUBSIDARY INFORMATION
We have three operating subsidiaries, Rixon Networks, Inc., Torrey Pines
Networks, Inc. and Sync Research, Inc.
Torrey
Rixon Sync Pines
Networks Research Networks Total
-------- -------- -------- ------
Quarter ended April 30, 2002
Revenue from External Customers $2,629 $ 594 - $3,223
Intersegment Revenues - - - -
------ ----- ---- ------
Total Revenues 2,629 594 - 3,223
------ ----- ---- ------
Operating profit (loss) 114 79 (42) 151
Depreciation and amortization expense 150 17 40 207
Valuation allowance additions 134 87 - 221
Capital asset additions - 1 - 1
Total Assets $5,883 $2,674 $568 $9,125
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.
On September 6, 2001, the Company announced that it is restructuring its
business, creating three separate wholly owned subsidiaries. The discontinued
frame relay business was retained as Sync Research, Inc., as one of the three
subsidiaries. Sync Research, Inc. serves its current frame relay customers and
provides manufacturing, service and repair facilities for the other
subsidiaries. On September 18, 2001 the Company's Board of Directors approved a
plan to reclassify Sync Research as an operating unit. In this capacity, Sync
Research, Inc. became an integral part of the Entrada Networks business
community.
Consolidated results are shown including Sync Research, Inc. as retained.
Further reference should be made to our Form 10-K, filed May 1, 2002, containing
our audited financial statements for the years ended January 31, 2001 and 2002.
Results of Operations/Comparison of the Three months ended April 30, 2002 and
2001
Net revenue. Net revenue was $3.2 million for the three months ended April 30,
2002, compared with $1.3 million for the three months ended April 30, 2001. The
increase in net revenue in the three months ended April 30, 2002 resulted from
increased revenue of $1.9 million from OEMs of fast Ethernet local area
networking ("LAN") adapter 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
increased to $1.3 million for the quarter ended April 30, 2002, compared with
$0.7 million for the comparable quarter last year. The higher gross margin for
the three months ended April 30, 2001 was primarily due to vendor discounts
received and the reclassification of the income from discontinued operations
into cost of sales. Our gross margin decreased to 40.8% for the three months
ended April 30, 2002 from 46.6% for the three months ended April 30, 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 $0.2 million, or 6.4% of net revenue for the quarter ended
April 30, 2002, from $1.0 million and 79.2% of net revenue for the quarter ended
April 30, 2001. The decrease in selling and marketing costs reflects primarily
the expense reduction measures undertaken in the last half of fiscal 2002.
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
$0.3 million, or 8.8% of net revenue, for the quarter ended April 30, 2002,
compared with $2.1 million, or 158.4% of net revenue, for the quarter ended
April 30, 2001. 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 $0.5 million, or 15.5% of net revenue, for the quarter ended April 30, 2002
and $0.6 million, or 42.0 % of net revenue, for the quarter ended April 30,
2001.
Other operating expenses. Other operating expenses decreased to $0.1 million for
the three months ended April 30, 2002 compared to the three months ended April
30, 2001 of, $0.3 million. This consisted of severance costs associated with
reductions in our Torrey Pines Networks subsidiary.
10
Income taxes. There was no provision for income taxes for the three-month
periods ended April 30, 2002 and 2001. 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 April 30, 2002, Sync Research, Inc. net revenues were $0.6 million,
cost of sales were $0.3 million, and operating expenses were $0.2 million with a
net operation income of $0.1 million and a net income of $0.1 million
Liquidity and Capital Resources
Cash flow used in operations was $0.1 million during the three months ended
April 30, 2002 compared with $2.4 million for the three months ended April 30,
2001. The decrease in cash flows used in operations reflects a substantial
increase in our net income 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 three months ended
April 30, 2002, operating cash flow reflected decreases in accounts payable and
accrued expenses and increases in net inventories, in net accounts receivable,
in other current liabilities and in other current assets. During the same three
months last year, our cash flow used in operations reflected decreases in
accounts receivable and inventory along with accounts payable.
Our investing activities consist primarily of purchases of property, plant and
equipment. Minor purchases were made in the three months ended April 30, 2002.
We purchased $0.3 million in equipment during the three months ended April 30,
2001.
Our financing activities during the three months ended April 30, 2002 used cash
flows of $0.1 million, primarily in connection with repayment of capital lease
obligations. During the three months ended April 30, 2001, $2.1 million was used
primarily in conjunction with repayment of short term debt.
Our credit facility with Silicon Valley Bank 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%. The credit arrangement is subject to covenants regarding our
tangible net worth, and is collateralized by accounts receivable, inventory and
equipment. The credit facility expired on February 20, 2002, and on May 15, 2002
it was extended until July 31, 2002. During this extension the facility has a
maximum limit of $3.5 million and bear's an interest rate of prime plus 2.5%.
There can be no guarantee that this will be extended further or that the bank
would renew this facility.
Outstanding borrowings against this line of credit were $0.7 million at April
30, 2002. We anticipate that our available cash resources will be sufficient to
meet our presently anticipated capital requirements through fiscal 2003. We are
always pursuing external equity financing arrangements that could enhance our
liquidity position in the coming years. Nonetheless, our future capital
requirements may vary materially from those now planned including the need for
additional working capital to accommodate 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 April 30, 2002, Sync had net accounts receivables of 2.1 million, net
inventory of $4.1 million, and prepaid expenses of $0.5 million offset by
current liabilities of $5.5 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, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We periodically need additional financing associated with establishing and
expanding our operations. The interest rate that we will be able to obtain
on debt financing will
11
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.
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
On February 14, 2002 we received a letter from The NASDAQ advising us to bring
our stock price to $1.00 per share by August 13, 2002 in order to maintain our
listing on the Nasdaq Small Cap Market.
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 1, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None
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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/ Davinder Sethi
------------------------------
Davinder Sethi, Ph.D.
Chief Financial Officer
Principal Accounting Officer
Date: May 30, 2002
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