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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JANUARY 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File number: 000-26952
ENTRADA NETWORKS, INC.
(Exact name of Registrant as specified in charter)
Delaware 33-0676350
(State or other jurisdiction of incorporation or (IRS Employer Identification Number)
organization)
10070 Mesa Rim Road
San Diego, California 92121
(Address of principal executive offices) (Zip Code)
(858) 623-3265
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Nasdaq
Title of each class Name of exchange on which registered
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The Registrant's revenues for its most recent fiscal year were $25,657,000.
The aggregate market value of voting stock based upon the closing sale price
held by non-affiliates of the Registrant on March 30, 2001 was $11,851,000.
Number of shares outstanding of the Registrant's only class of common stock as
of March 30, 2001 (the latest practicable date): 10,992,634.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
TABLE OF CONTENTS
PART I
Item 1. Description of Business.......................................................... 1
Understanding Our Market..................................................... 1
Entrada's Strategic Plan..................................................... 1
Markets for Entrada's Products............................................... 2
Sales and Marketing.......................................................... 2
Customers and Markets........................................................ 3
Customer Service and Support................................................. 3
Research and Development..................................................... 3
Manufacturing and Quality.................................................... 4
Working Capital Practices.................................................... 4
Forward-Looking Statements--Cautionary Statement.............................. 4
Risk Factors................................................................. 5
Definitions.................................................................. 12
Item 2. Properties....................................................................... 14
Item 3. Legal Proceedings................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.............................. 14
PART II
Item 5. Market for Company's Common Equity and Related Matters........................... 16
Item 6. Selected Financial Data.......................................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 18
Results of Operations: Comparison of the Years Ended January 31, 2001 and
2000......................................................................... 18
Results of Operations: Comparison of the Years Ended January 31, 2000 and
1999......................................................................... 20
Liquidity and Capital Resources.............................................. 20
Effects of Inflation and Currency Exchange Rates............................. 21
New Accounting Standards..................................................... 21
Other Matters................................................................ 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................... 22
Item 8. Financial Statements and Supplementary Data...................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................... 23
PART III
Item 10. Directors and Executive Officers of the Company.................................. 24
Item 11. Executive Compensation........................................................... 26
Employment Agreements........................................................ 27
Compliance with Section 16(a) of the Exchange Act............................ 27
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 28
Item 13. Certain Relationships and Related Transactions................................... 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................. 29
SIGNATURES................................................................................ 31
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PART I
This Annual Report on Form 10-K may contain forward-looking statements that
involve risks and uncertainties. Such statements include, but are not limited
to, statements containing the words "believes, "anticipates," "expects,"
"estimates" and words of similar import. The company's actual results could
differ materially from any forward-looking statements, which reflect
management's opinions only as of the date of this report, as a result of such
risks and uncertainties. The company undertakes no obligation to revise or
publicly release the results of any revisions to these forward-looking
statements. Readers should carefully review the risk factors set forth below in
"Risk Factors" and in other documents the company files from time to time with
the Securities and Exchange Commission, including its quarterly reports on Form
10-Q.
Item 1. Description of Business
Entrada Networks, Inc., designs, manufactures and markets products that
enable the transport of data from storage area networks over Internet Protocol
IP and light to metro and wide area networks. We also design, manufacture and
market fast and gigabit Ethernet products that are incorporated into the remote
access and other server products of Original Equipment Manufacturers OEMs. In
addition, some of our 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 Company is the product of a reverse merger completed on August 31, 2000 with
a wholly owned subsidiary of Sorrento Networks Corporation. This subsidiary was
doing business as Entrada Networks. We acquired all the outstanding capital of
Entrada Networks for 4.24 million of our common shares and issued an additional
2.43 million shares for cash of $8.0 million. Entrada Networks' obligation to
its former parent of $25.5 million was contributed to our capital as part of the
merger. As a result of the merger, the former parent of Entrada Networks held a
majority interest in the combined entity, which was renamed Entrada Networks,
Inc. from Sync Research, Inc. Accordingly, the merger has been accounted for as
a reverse merger, whereby Entrada Networks is deemed to have purchased Sync,
however Sync remains the legal entity and Registrant for Security and Exchange
Commission reporting purposes and the financial statements of the combined
entity now reflect the historical financial information of Entrada Networks
prior to August 31, 2000. Subsequent to the merger the former parent of Entrada
Networks has disposed of 4.56 million of its shares of our common stock
including those it distributed to its shareholders and currently holds
approximately 20.1% of our common shares outstanding.
Our principal business is the business formerly operated by Entrada Networks,
and in September 2000, our Board of Directors concluded that the operations of
our frame relay business segment would not contribute to our profitability or
toward our goal of entering the storage area networking market space and adopted
a formal plan to discontinue this business segment operated by Sync. Our
financial statements reflect the operations and financial position of the frame
relay business segment as a discontinued operation for all periods reported.
Unless otherwise specifically noted, this Annual Report refers to the Entrada
business and not to the former Sync business.
Understanding Our Market
(A glossary can be found beginning on page 12 for technical terms used
throughout this document.)
Entrada's Strategic Plan
o Pioneering SAN Transport. We are a pioneer in the transport of storage over IP
and light. Our storage area network ("SAN") transport technology will enable
OEMs and integrators to inter-network isolated islands of SANs over wide area
("WAN") and metro area ("MAN") networks over IP and light. The Company's line of
storage transport products will offer the widest available choice of
connectivity and protocol options to optimize data exchange between SANs. These
products will help ensure data integrity regardless of distance and provide
continuous access to mission-critical information. Our expertise in optical
networking, Internet, Fibre Channel and fast and gigabit Ethernet technologies
will enable us to offer unrivaled storage transport products, such as our
Silverline'TM'-222 six port switch that connects Fibre Channel based SANs over
IP networks.
o Pioneering Storage over Light Transport. We will be introducing, in early
calendar 2002, a line of next generation storage transport products using wave
division multiplexing ("WDM") technology that will extend, passively or
intelligently as the problem may require, the distance of a SAN's fabric,
gigabit Ethernet, enterprise system connection ("ESCON") or fibre connectivity
("FICON") to a mainframe computer. This line of innovative optical products is
already under development at our San Diego headquarters. We plan to follow these
products with a unique storage over IP and light director, that will have the
functionality of a typical Fibre Channel based fabric director, storage over IP
router, WDM modules, and be fully fault tolerant system with an up time of
99.999%.
o Continue Providing Network Connectivity Products. Our legacy products include
network interface, or "adapter," cards that allow computers, servers, load
balancers and other devices to connect to a local area network ("LAN"). These
network interface cards support both the widely employed fast Ethernet protocol
and the emerging gigabit Ethernet protocol. Our products have already achieved
acceptance among server and other network products OEMs.
o Focus on OEMs and emerging storage service providers. We plan to sell our
products primarily to large storage and networking OEMs. A secondary target is
the emerging storage utility providers such as Storage Service Providers
("SSPs"), integrators, carriers, Internet Service Providers ("ISPs") and others.
In Europe, Japan, Korea
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and the rest of the Far East, we plan to use value added resellers.
Markets for Entrada's Products
Our products address the growing connectivity needs for networked high bandwidth
data communications. The networking industry has experienced dramatic growth
since the early 1990's as corporations discovered increasing value in connecting
desktop devices through local area networks. The emergence of the Internet as a
cost-efficient data transport medium has accelerated this movement and moved the
revenue opportunity beyond the LAN to the MAN and WAN environments. Our products
address the demand for connectivity solutions in the traditional data networking
markets plus the emerging market for storage area networking. There can be no
assurance that any of the projections cited in the following discussion
regarding the growth of traditional data networking markets or of the storage
area networking market will prove accurate.
Storage Area Networking Market
The technology behind storage area networks is similar to that of LANs and WANs.
Storage area networks are essentially separate local area networks that consist
of servers, storage devices (such as disc drives) and the networking equipment
used to connect and route traffic among them. These devices include adapters,
hubs, switches and routers supporting the Fibre Channel standard. Storage area
networks create a shared storage resource that is readily available, highly
scalable and designed to be easily protected and managed.
IDC (International Data Corporation), a provider of analysis and market data for
the Information Technology ("IT") industry, projects that the amount of disk
storage capacity being shipped by vendors will grow by 86% per year, from
116,000 terabytes in 1998 to 2.6 million terabytes in 2003. IDC projects storage
capacity based on the UNIX operating system to grow 76% annually to nearly
460,000 terabytes in 2002 and storage capacity based on the Windows NT operating
system to increase by 114% annually to more than 610,000 terabytes in 2002. The
Yankee Group, a research and consulting firm which focuses on e-business, the
Internet, and enterprise applications, reports that storage is now the biggest
line item in the IT budgets of corporations interviewed.
While storage area networks are not new, we believe that trends already under
way will move them into the mainstream of distributed networking and that they
will become the standard way of accessing stored information. A report by
Dataquest, an IT market research and consulting firm, projects sales of the
networking equipment used to build storage area networks to reach $5.4 billion
by 2003, representing a cumulative annual growth rate of 87%. In addition, the
Gartner Group, a market research & consulting firm, forecasts that 80% of the
world's storage will be connected to a SAN by 2004.
The SAN Transport Market
We believe we are a pioneer in the SAN transport market with our Silverline'TM'
switches. A sub-segment of the overall SAN market, SAN transport is also known
as SAN connectivity or SAN extension. The growth in this market is directly
related to the growth of SANs and can be measured by the ports devoted to
connecting the SAN to local, metro and wide area networks. We expect the number
of interfaces devoted to connecting SANs to grow rapidly in the coming years.
Recent research suggests that the total number of SAN extension connections will
grow from 90,000 in calendar 2001 to almost 900,000 in calendar 2003. The market
for SAN extensions needing optical connections is expected to grow from 2,500 in
calendar 2001 to 210,000 in calendar 2003. And the market for extensions in the
SAN over IP market, where our Silverline'TM' product is aimed, is expected to
grow from 12,600 in 2001 to 690,000 in 2003.
Sales and Marketing
Our current sales and marketing activities are concentrated on gaining customer
acceptance of the Silverline'TM' switches by large storage OEMs and increasing
market and account penetration for the existing network connectivity product
lines whose customers are primarily OEM computer and peripheral vendors. The
sales and marketing teams are led by the Vice President of Sales and the Vice
President of Marketing, respectively.
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Our sales and marketing organization at January 31, 2001 consisted of 24
individuals, including managers, sales representatives, and support personnel.
The current channel mix is approximately 90% OEM and 10% indirect. We support
our customers by providing product training, regular mailing of promotional and
technical material, telephone and other technical support. Our marketing staff
also engages in a number of marketing communication activities including public
relations, advertising, trade shows, seminars and internet/electronic marketing.
Customers and Markets
Our sales and marketing strategy is focused on communicating key benefits of SAN
transport to both our OEM customer base and the end-user market that the OEMs
service. In summary, we are sending the message that SAN transport will:
o Efficiently protect more data than IT Managers can with isolated SAN
islands
o Easily and efficiently deploy more corporate information, anywhere in the
company
o Leverage the company's investment in an existing IP network infrastructure
o Utilize existing bandwidth for "cost-free" backup. If existing IP network
is idle during off-hours (e. g., midnight to 6 am), bandwidth and
infrastructure can be used for free. Silverline'TM'can even help leverage
underutilized IP network capacity.
o Lower total cost of ownership with a high performance to price ratio
For fiscal 2001, one customer accounted for 40.0% of our net sales, and
another customer accounted for 25.2% of our net sales.
Customer Service and Support
Our customer service organization is structured to assist OEM and system
integrator accounts. Post-sales support for all of our customers include product
warranty against defects in material and workmanship. The length of product
warranties varies by product, from 12 months in some instances, to 60 months for
a broad range of products, and previously, lifetime warranties for certain
legacy products. Telephone technical support programs for hardware and software
generally cover the first 12 months from purchase. On-site support and shared
support agreements are designed to provide a high level of service to fulfill a
broad spectrum of customer needs.
Research and Development
As of January 31, 2001, there were 36 employees and 7 independent contractors
working in our research and development area. Our research and development
expenditures were $6.8 million for the fiscal year 2001 ended January 31, 2001.
Our research and development efforts are targeted to achieve technological
advances that will allow us to introduce innovative products to market. Product
introduction is driven by a combination of rapidly evolving technology and
standards, as well as changing customer requirements. Our R&D team works closely
with our systems engineering staff, performing continuous evaluations of
customer needs, emerging trends and technical challenges in order to identify
new market opportunities. And, our research and development program focuses on
combining of various proprietary technologies into a single, common,
standards-based platform. We believe that our ability to introduce new products
on a timely basis depends upon our ability to maintain advanced technology
research programs while simultaneously focusing on their practical application
to our customers' strategic requirements.
The development team runs concurrent multiple parallel development efforts. The
staff is now capable of conducting maintenance of the current product release,
development of a follow-on release, design of new interfaces for each of these
products, and advanced development of a new product. The size of our development
team allows us to provide appropriate service to existing customers as well as
develop new and enhanced product offerings.
In addition to engineers working on near-term product development and testing,
we maintain a team of engineers and scientists devoted to long-term, advanced
developments. Included on this team are two Ph.D.s, not including Dr.
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Chadha, our President and Chief Executive Officer, with strong interdisciplinary
backgrounds in optics, communications, complex systems and software design,
simulations and modeling.
Manufacturing and Quality
We get our products manufactured on an outsourced basis from various contract
manufacturers. Final assembly, test and quality assurance are performed by us at
our Annapolis Junction, Maryland facility.
Our manufacturing strategy is to outsource all repetitive operations to
top-tier, third party manufacturers. These manufacturers provide us with access
to enhanced supply chain agreements, volume purchasing power, a lower cost labor
base, and improved quality and process control. We concurrently undertake
manufacturing engineering with development engineering to ensure that reliable,
high yield and low cost manufacturing processes that meet our customers'
manufacturing standards are designed into our products from inception. We
perform final integration and testing at our Annapolis Junction, Maryland,
facility.
We actively manage our components supply chain. Silverline'TM' and network
connectivity product assemblies consist of approximately 500 individual part
types, and all of these parts have been qualified to current, purchasing
customers' standards. For approximately 90% of these parts we have qualified
second or third sources in place.
We believe that our strategy of outsourcing the majority of our manufacturing
activities to third party contract manufacturers enables us to react quickly to
market demand and avoid the significant capital investment that would be
required to establish and maintain full manufacturing facilities. We are
therefore able to focus our manufacturing resources on final assembly, burn-in
and final testing to ensure reliability and quality assurance for our products.
We have a quality assurance program in place and continually evaluate this
process to ensure quality practices throughout the organization and to monitor
the performance of our third party vendors.
Working Capital Practices
We have historically maintained high levels of inventories to meet the output
requirements of our customers and to ensure an uninterrupted flow of inputs from
our suppliers. As of January 31, 2001, we had 96 days of inventory on hand.
We perform ongoing credit evaluations of each of our customers' financial
condition and we extend unsecured credit related to the sales of various
products. As of January 31, 2001, three customers accounted for 37%, 13% and 12%
of net receivables. One customer accounted for 39% of net receivables at
January 31, 2000. Days sales outstanding was at 53 days at January 31, 2001.
Forward-Looking Statements--Cautionary Statement
Certain statements in this Annual Report on Form 10-K, in our future filings
with the Securities and Exchange Commission, in our press releases and in our
oral statements made with the approval of an authorized executive officer are
forward-looking statements, including, but not limited to, Part II, Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this form 10-K. These 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, are not historical facts but rather reflect
current expectations concerning future results and events. Words such as
"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, 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 this form 10-K.
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We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks and uncertainties are described in the
following section. We specifically decline any obligation to publicly release
the result of any revisions that may be made to any forward-looking statements
to reflect anticipated or unanticipated events or circumstances occurring after
the date of such statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
Risk Factors
In connection with the safe harbor contained in the Private Securities Reform
Act of 1995 we are hereby identifying important factors that could cause actual
results to differ materially from those contained in any forward-looking
statements made by us or on our behalf. Any such statement is qualified by
reference to the following cautionary statements:
o Our industry is highly competitive, and we may not have the resources
required to compete successfully. The market for SAN transport equipment as
well as our other products is extremely competitive and we expect
competition to intensify in the future. Our primary sources of competition
include 3COM, Adaptec, Cisco Systems, Inc., Finisar, Emulex, Intel
Corporation, Interphase, SAN Valley, SAN Castle, Brocade Communications
Systems, Inc., CNT, Gadzoox Networks, Inc., Vixel, ADVA, ONI Systems
Corporation, and many other companies. We may also face competition from a
number of other companies that have announced plans for new products to
address the same problems that our products address. Many of our current
and potential competitors have significantly greater sales and marketing,
technical, manufacturing, financial and other resources as well as greater
name recognition and larger customer base than us. Our competitors may have
more extensive customer relationships than us, including relationships with
our potential customers. In particular, established companies in the
telecommunications equipment or computing industries may seek to expand
their product offerings by designing and selling products using competitive
technology that could render our products obsolete or have a material
adverse effect on our sales.
We operate in a market segment where emerging companies enter the markets
in which we are competing and new products and technologies are introduced.
Increased competition may result in further price reductions, reduced gross
margins and loss of market share, any of which could materially and
adversely affect its business, operating results and financial condition.
There can be no assurance that we will be able to compete successfully
against current and future competitors, or that the competitive factors we
will face will not have a material adverse effect on our business,
operating results and financial condition.
o Our business will be seriously harmed if we are not able to develop and
commercialize new or enhanced products. Our growth depends on our ability
to successfully develop new or enhanced products. The development of new or
enhanced products is a complex and uncertain process that requires the
accurate anticipation of technological and market trends. Our next
generation of storage transport and network management products as well as
our wavelength division multiplexing products are currently under
development. We cannot be sure whether these or other new products will be
successfully developed and introduced to the market on a timely basis or at
all. We will need to complete each of the following steps to successfully
commercialize these and any other new products: complete product
development, qualify and establish component suppliers, validate
manufacturing methods, conduct extensive quality assurance and reliability
testing, complete any software validation, and demonstrate systems
interoperability.
Each of these steps presents serious risks of failure, rework or delay, any
one of which could adversely affect the rate at which we are able to
introduce and market our products. If we do not develop these products in a
timely manner, our competitive position and financial condition could be
adversely affected.
In addition, as we introduce new or enhanced products, we must also manage
the transition from older products to newer products. If we fail to do so,
we may disrupt customer ordering patterns or may not be able to ensure
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that adequate supplies of new products can be delivered to meet anticipated
customer demand. Any failure to effectively manage this transition may
cause us to lose current and prospective customers.
o Our future growth depends on our ability to attract new customers, and on
our customers' ability to sell additional services to their own customers.
Most of our potential customers evaluate storage area products for
deployment in large systems. There are only a relatively limited number of
potential customers for our products. If we are not selected by a potential
customer for particular system projects, our business may be seriously
harmed. Similarly, our growth depends on our customers' success in selling
integrated solutions based on our products and complementary products from
others. Our success will depend on our ability to effectively anticipate
and adapt to customer requirements and offer products and services that
meet customer demands. Any failure of our current or prospective customers
to purchase products from us for any reason, including a downturn in their
business, would seriously harm our ability to grow our business.
o The time that our customers and potential customers require for testing and
qualification before purchasing our networking products can be long and
variable, which may cause our results of operations to be unpredictable.
Before purchasing our products, potential customers must undertake a
lengthy evaluation, testing and product qualification process. In addition,
potential customers require time-consuming field trials of our products.
Our sales effort requires the effective demonstration of the benefits of
our products to, and significant training of, potential customers. In
addition, even after deciding to purchase our products, our customers may
take several years to deploy our products. The timing of deployment depends
on many factors, including the sophistication of a customer and the
complexity and size of a customer's networks. Our sales cycle, which is the
period from the time a sales lead is generated until the recognition of
revenue, can often be longer than one year. The length and variability of
our sales cycle is influenced by a variety of factors beyond our control,
including: our customers' buildout and deployment schedules, our customers'
access to product purchase financing, our customers' needs for functional
demonstration and field trials, and the manufacturing lead time for our
products. Because our sales cycles are long and variable, our results of
operations may be unpredictable.
o Our products may have errors or defects that we find only after deployment,
which could seriously harm our business. Our products can only be fully
tested after deployment in storage area networks. Our customers may
discover errors or defects in our products, and our products may not
operate as expected. If we are unable to fix errors or other problems that
may be identified, we could experience: loss of or delay in revenues and
loss of market share, loss of customers, failure to attract new customers
or achieve market acceptance, diversion of engineering resources, increased
service and warranty costs, and legal actions by our customers. Any failure
of our current or planned products to operate as expected could delay or
prevent their adoption and seriously harm our business.
o If our products do not interoperate with our customers' systems,
installations will be delayed or cancelled or our products could be
returned. Many of our customers require that our products be designed to
interoperate with their existing networks, each of which may have different
specifications and utilize a variety of protocols. Our customers' networks
contain multiple generations of products that have been added over time as
these networks have grown and evolved. Our products must interoperate with
all of the products within these networks as well as future products in
order to meet our customers' requirements. If we are required to modify our
product design to be compatible with our customers' systems to achieve a
sale, it may result in a longer sales cycle, increased research and
development expense and reduced margins on our products. If our products do
not interoperate with those of our customers' networks, installations could
be delayed, orders for our products could be cancelled or our products
could be returned, any of which could seriously harm our business.
o If we fail to complete certain strategic opportunities, our business may be
harmed. Strategic opportunities such as the sale or spin-off of certain
business units are important to our overall business plan. We cannot be
certain that we will be able to complete transactions on terms that are
favorable to us. In addition, we cannot be certain that we will be
successful in negotiating and completing future sales or spin-offs. Our
business may be harmed if we fail to successfully complete such
transactions.
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o If we fail to establish and successfully maintain strategic alliances, our
business may be harmed. Strategic alliances are an important part of our
effort to expand our sales opportunities and technological capabilities. We
cannot be certain that we will be able to enter strategic alliances on
terms that are favorable to us. Our business may be harmed if we fail to
establish and maintain strategic alliances.
o Our business may be seriously harmed if we are unable to establish
successful relationships with distributors and systems integrators. We
believe that our future success is dependent upon our ability to establish
successful relationships with a variety of distributors and systems
integrators. As we expand internationally, we will increasingly depend on
distributors and systems integrators. If we are unable to establish and
expand these relationships, we may not be able to increase market awareness
or sales of our products, which may prevent us from achieving and
maintaining profitability.
o Our business may be seriously harmed if the market for storage area
networking products does not develop as we expect. Our current and future
product offerings are focused on the needs of providers that service
storage area networks. The market for storage area networking products is
new, and we cannot be certain that a viable market for our products will
develop or be sustainable. If this market does not develop, or develops
more slowly than we expect, our business may be seriously harmed.
Furthermore, the storage area networking industry is subject to rapid
technological change and newer technology or products developed by others
could render our products non-competitive or obsolete. In developing our
products, we have made, and will continue to make, assumptions about the
networking standards that our customers and competitors may adopt. If the
standards adopted are different from those that we have chosen to support,
market acceptance of our products would be significantly reduced and our
business will be seriously harmed.
o We depend upon contract manufacturers and any disruption in these
relationships may cause us to fail to meet the demands of our customers and
damage our customer relationships. We use contract manufacturers to
manufacture and assemble our products in accordance with our
specifications. We do not have long-term contracts with any of them, and
none of them are obligated to perform services for us for any specific
period or at any specified price, except as may be provided in a particular
purchase order. We may not be able to effectively manage our relationships
with these manufacturers and they may not meet our future requirements for
timely delivery or provide us with the quality of products that we and our
customers require.
Each of our contract manufacturers also builds products for other
companies. We cannot be certain that they will always have sufficient
quantities of inventory available to fill our orders, or that they will
allocate their internal resources to fill these orders on a timely basis.
Qualifying a new contract manufacturer and commencing volume production is
expensive and time consuming and could result in a significant interruption
in the supply of our products. If we are required to change contract
manufacturers, we may suffer delays that could lead to the loss of revenue
and damage our customer relationships.
o We rely on a limited number of suppliers for some of our components, and
our business may be seriously harmed if our supply of any of these
components is disrupted. We and our contract manufacturers currently
purchase several key components of our products from a limited number of
suppliers. We purchase each of these components on a purchase order basis
and have no long-term contracts for these components. In addition, the
availability of many of these components to us is dependent in part by our
ability to provide suppliers with accurate forecasts of our future
requirements. In the event of a disruption in supply or if we receive an
unexpectedly high level of purchase orders, we may not be able to develop
an alternate source in a timely manner or at favorable prices. Any of these
events could hurt our ability to deliver our products to our customers and
negatively affect our operating margins. In addition, our reliance on our
suppliers exposes us to potential supplier production difficulties or
quality variations. Any such disruption in supply would seriously impact
our present and future sales.
o If we are unable to hire or retain highly skilled personnel, we may not be
able to operate our business successfully. Our future success depends upon
the continued services of our key management, sales and marketing, and
engineering personnel, many of whom have significant industry experience
and relationships. Many of our personnel, in particular, Dr. Kanwar J.S.
Chadha, our President and Chief Executive Officer, would
7
be difficult to replace. We do not have "key person" life insurance
policies covering any of our personnel. The loss of the services of any of
our key personnel could delay the development and introduction of, and
negatively impact our ability to sell, our products. In addition, we will
need to hire additional personnel for most areas of our business, including
our sales and marketing and engineering operations. Competition for highly
skilled personnel is intense in our industry, and we may not be able to
attract and retain qualified personnel, which could seriously harm our
business.
o We may be unable to protect our intellectual property, which could limit
our ability to compete. We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure to protect
our intellectual property rights. We also enter into confidentiality or
license agreements with our employees, consultants and corporate partners,
and control access to, and distribution of, our software, documentation and
other proprietary information. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of
our products is difficult, and we cannot be certain that the steps we have
taken will prevent unauthorized use of our technology, particularly in
foreign countries where the laws may not protect our proprietary rights as
fully as in the United States. If competitors gain access to our
technology, our ability to compete could be harmed.
o We could become subject to litigation regarding intellectual property
rights, which could seriously harm our business and require us to incur
significant costs. In recent years, there has been significant litigation
in the United States involving patents and other intellectual property
rights. We may be a party to litigation in the future to protect our
intellectual property or as a result of an allegation that we infringe
others' intellectual property. Any parties asserting that our products
infringe upon their proprietary rights would force us to defend ourselves
and possibly our customers or manufacturers against the alleged
infringement. These claims and any resulting lawsuits, if successful, could
subject us to significant liability for damages and invalidation of our
proprietary rights. Additionally, any claims and lawsuits, regardless of
their merits, would likely be time-consuming and expensive to resolve and
would divert management time and attention.
Any claims of infringement of the intellectual property of others could
also force us to do one or more of the following: stop selling,
incorporating or using our products that use the challenged intellectual
property; obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which may not be
available to us on reasonable terms, or at all; or redesign those products
that use such technology. If we are forced to take any of the foregoing
actions, our business may be seriously harmed.
o If necessary licenses of third-party technology are not available to us or
are very expensive, our products could become obsolete. We may be required
to license technology from third parties to develop new products or product
enhancements. We cannot assure you that third-party licenses will be
available to us on commercially reasonable terms, if at all. If we are
required to obtain any third-party licenses to develop new products and
product enhancements, we could be required to obtain substitute technology,
which could result in lower performance or greater cost, either of which
could seriously harm the competitiveness of our products.
o The markets that our products address are governed by regulations and
evolving industry standards. The market that we sell and deploy our
products into is characterized as being highly regulated and industry
standards intensive, with many standards evolving as new technologies are
deployed. In the United States, our products must comply with various
regulations defined by the Federal Communications Commission and standards
established Underwriters Laboratories. In addition, there are industry
standards established by various organizations such as Fibre Channel
Industry Association, American National Standards Institute, and Internet
Engineering Task Force. We design our products to comply with those
industry standards so that each particular product can be accepted by its
intended customers and we are not aware of any standards based product
modifications currently required. To the extent non-compliance with such
standards has a detrimental effect on customer acceptance, we must address
such non-compliance in the design of our products. Standards for new
services and network management are still evolving. We are a member of
several standards committees, which enables us to participate in the
development of standards for emerging technologies. However, as the
standards evolve, we will be required to modify our products or develop and
support new versions of ours products. The failure of our products to
comply or delays in compliance, with the various existing and evolving
industry
8
standards could delay introduction and acceptance of our products, which
could materially and adversely affect the our business, operating results
and financial condition.
In foreign countries, our products may be subject to a wide variety of
governmental review and certification requirements. If we fail to conform
our products to these regulatory requirements, we could lose sales and our
business could be seriously harmed. Additionally, any failure of our
products to comply with relevant regulations could delay their introduction
and require costly and time-consuming engineering changes.
o We are subject to various risks associated with international sales and
operations. We expect that we will eventually have international sales.
These sales will be subject to a number of risks, including: changes in
foreign government regulations and telecommunications standards, import and
export license requirements, tariffs, taxes and other trade barriers,
fluctuations in currency exchange rates, difficulty in collecting accounts
receivable, the burden of complying with a wide variety of foreign laws,
treaties and technical standards, difficulty in staffing and managing
foreign operations, and political and economic instability.
All of our sales have been denominated in U.S. dollars. All of our expenses
are denominated in the U.S. dollar, however in the future a portion of our
sales could also be denominated in non-U.S. currencies. As a result,
currency fluctuations between the U.S. dollar and the currencies in which
we would do business could cause foreign currency translation gains or
losses that we would recognize in the period incurred. We cannot predict
the effect of exchange rate fluctuations on our future operating results
because of the number of currencies involved, the variability of currency
exposure and the potential volatility of currency exchange rates. We do not
currently engage in foreign exchange hedging transactions to manage our
foreign currency exposure.
o Our future revenues are unpredictable and our financial results may
fluctuate. Our revenue and operating results could fluctuate substantially
from quarter to quarter and from year to year. This could result from any
one or a combination of factors such as the cancellation or postponement of
orders, the timing and amount of significant orders from our largest
customers, our success in developing, introducing and shipping product
enhancements and new products, the mix of products we sell, new product
introductions by competitors, pricing actions taken by us or our
competitors, the timing of delivery and availability of components from
suppliers, changes in material costs and general economic conditions.
o Our backlog at any point may not be a good indicator of expected revenues.
Our backlog at the beginning of each quarter typically is not sufficient to
achieve expected sales for the quarter. To achieve our sales objective, we
are dependent upon obtaining orders during each quarter for shipment during
that quarter. Furthermore, our agreements with our customers typically
provide that they may change delivery schedules and cancel orders within
specified time frames, typically 30 days or more prior to the scheduled
shipment date, without significant penalty. Our customers have in the past
built, and may in the future, build significant inventory in order to
facilitate more rapid deployment of anticipated major projects or for other
reasons. Decisions by such customers to reduce their inventory levels have
led and could lead to reductions in purchases from us. These reductions, in
turn, have and could cause fluctuations in our operating results and have
had and could have an adverse effect on our business, financial condition
and results of operations in periods in which the inventory is reduced.
Our backlog on January 31, 2001 was approximately $2.7 million, compared
with a backlog of $3.1 million at January 31, 2000. We include in our
backlog only orders confirmed with a purchase order for products to be
shipped within twelve months to customers with approved credit status.
o Seasonality. Our sales are impacted by the buying patterns of our
customers, including but not limited to cultural and religious holidays in
Asia, Europe and the United States, and other factors. Our sales have
historically been weaker in the first half of a fiscal year and stronger in
the second half.
o Our business may be adversely affected by competitive pressures, which we
must react to. The industry we compete in is characterized by declining
prices of existing products, therefore continual improvements of
manufacturing efficiencies and introduction of new products and
enhancements to existing products are required
9
to maintain gross margins. In response to customer demands or competitive
pressures, or to pursue new product or market opportunities, we may take
certain pricing or marketing actions, such as price reductions, volume
discounts, or provisions of services at below market rates. These actions
could materially and adversely affect our business, operating results and
financial condition.
o If we do not effectively manage our growth, we may not be able to
successfully expand our business. Growth of our business will place a
significant strain on our management systems and resources. Our ability to
successfully offer our products and implement our business plan in a
rapidly evolving market requires an effective planning and management
process. We will need to continue to improve our financial, managerial and
manufacturing process and reporting systems, and will need to continue to
expand, train and manage our workforce worldwide. Failure to effectively
manage our growth and address the above requirements, it could affect our
ability to pursue business opportunities and expand our business.
o We have incurred net losses over the last five years and may experience
future losses. We have incurred losses from continuing operation during the
years ended January 31, 2001, 2000 and 1999 of $10.6 million, $3.4 million
and $3.7 million, respectively. We have financed these losses through a
combination of debt issuances, bank lines of credit and security
placements. We believe we have sufficient working capital to meet our
planned level of operations in the future. However, there can be no
assurance that our working capital requirements will not exceed our ability
to generate sufficient cash internally to support our requirements and the
needed capital will have to be obtained from external sources. We cannot
give any assurances that sufficient working capital, at terms acceptable to
us, will be available when needed.
o A substantial number of our ordinary shares are eligible for future sale.
No prediction can be made as to the effect, if any, that future sales of
common stock that we may make, or the availability of common stock for
future sales, will have on the market price of common stock prevailing from
time to time. Sales of a substantial number of shares of common stock in
the public market could adversely affect the market price for our common
stock and reported earnings per share.
o Availability of Raw Materials. Many of our products require components that
may not be readily available. These include microprocessors, custom
integrated circuits and other electronic components. To minimize the risks
of component or product shortages, we attempt to maintain multiple supply
sources. However, there can be no assurance that such sources will be
adequate to meet our needs.
o Patents, Trademarks and Licenses. We currently hold nine patents. Although
we attempt to protect our intellectual property rights through patents,
trademarks, and copyrights, by maintaining certain technology as trade
secrets and by other measures, we cannot assure you that any patent,
trademark, copyright or other intellectual property rights owned by us will
not be invalidated, circumvented or challenged; that such intellectual
property rights will provide competitive advantages to us; or that any of
our future patent applications, if any, will be issued with the scope of
the claims sought by us, if at all. We cannot assure you that others will
not develop technologies that are similar or superior to our technology, or
that our competitors will not duplicate our technology or "design around"
the patents that we own. In addition, effective patent, copyright and trade
secret protection may be unavailable or limited in certain foreign
countries in which we do business or intend to do business in the future.
We believe that the future success of our business will depend on our
ability to translate the technological expertise and innovation of our
personnel into new and enhanced products. We cannot assure you that the
steps taken by us will prevent misappropriation of our technology. In the
future, we may take legal action to enforce its patents and other
intellectual property rights, to protect its trade secrets, to determine
the validity and scope of the proprietary rights of others, or to defend
against claims of infringement or invalidity. Such litigation could result
in substantial costs and diversion of resources and could harm our business
and operating results.
As is common in our industry, we have from time to time received
notification from other companies claiming that certain of our products may
infringe intellectual property rights held by such companies. Any claim or
litigation, with or without merit, could be costly, time consuming and
could result in a diversion of
10
management's attention, which could harm our business. If we were found to
be infringing the intellectual property rights of any third party, we could
be subject to liabilities for such infringement, which could be material,
and could be required to seek licenses from other companies or to refrain
from using, manufacturing or selling certain products or using certain
processes. Although holders of patents and other intellectual property
rights often offer licenses to their patent or other intellectual property
rights, no assurance can be given that licenses would be offered, that the
terms of any offered license would be acceptable to us or that failure to
obtain a license would not cause its operating results to suffer.
o Environmental Compliance. Our operations are subject to various federal,
state and local laws and regulations with respect to environmental matters.
We believe that we are in material compliance with all such federal, state
and local laws and regulations.
o Employees. As of January 31, 2001 we employed 142 full-time employees and
independent contractors, including 43 in engineering, 48 in manufacturing
and quality assurance, 24 in sales and marketing, 26 in administration, and
1 executive. None of our employees are represented by a collective
bargaining agreement, and the Company believes that relations with its
employees are good.
o Fluctuations in Revenue and Operating Results. The industries we operate in
are subject to fluctuation. Our operating results may fluctuate as a result
of a number of factors, including the timing of orders from, and shipments
to, customers; the timing of new product introductions and the market
acceptance of those products; increased competition; changes in
manufacturing costs; availability of parts; changes in the mix of product
sales; the rate of end-user adoption and carrier and private network
deployment of SAN solutions; factors associated with international
operations; and changes in world economic conditions.
11
Definitions
As used in this Annual Report on Form 10-K, the following terms have the
meanings indicated:
"Broadband" means a set of technologies that provide several paths for
transmitting text, graphics, voice or video data so that different types of data
can be transmitted simultaneously and, depending on the technology deployed, at
different speeds and protocols.
"CWDM" means Coarse Wave Division Multiplexing, which is a sophisticated
optoelectronics technology that uses multiple wavelengths of light very
efficiently to greatly increase the number of video, data or voice channels of
information that can be sent on a single optical fiber in a transmission system.
CWDM has a wider wavelength range than DWDM and permits the use of lower cost
lasers and components.
"DWDM" means Dense Wavelength Division Multiplexing, which is a sophisticated
optoelectronics technology that uses multiple wavelengths of light very
efficiently to greatly increase the number of video, data or voice channels of
information that can be sent on a single optical fiber in a transmission system.
"ESCON" means Enterprise System CONnection, a protocol for 200 Mbps signal
transmission speed over fiber optic cable.
"Ethernet" means a 10 Mbps speed network that runs over thick coaxial cable
(10BASE5), thin coaxial cable (10BASE2), twisted-pair (10BASE-T), and
fiber-optic cable. It is the most widely used LAN technology and the most
popular form of Ethernet is 10BASE-T. Ethernet is network specification that was
developed at Xerox Corp's Palo Alto Research Center, and made into a network
standard by Digital, Intel, and Xerox.
"Fast Ethernet" means a 100 Mbps speed network that runs over thick coax,
twisted-pair, and fiber-optic cable. Fast Ethernet is 10 times faster than
Ethernet.
"FDDI" means a Fiber Distributed Data Interface and is a fiber optic network
that supports transmission speeds up to 100 Mbps.
"FICON" means FIbre CONnectivity, a Fibre Channel based, packet switched,
channel architecture offering greater bandwidth per channel than the older
ESCON.
"IP" means Internet Protocol, the standard for communication over the Internet.
"IT" means Information Technology, the general field of managing the
transmission and storage of information.
"ISDN" means an Integrated Services Digital Network and is an all-digital
communications network that provides a wide range of services on a switched
basis. Voice, data and video can be simultaneously transmitted on one line from
a source.
"ISO" means International Standards Organization. Founded in 1946, ISO is an
international organization composed of national standards bodies from over 75
countries. ISO has defined a number of important computer standards, the most
significant of which is perhaps is OSI (Open Systems Interconnection), a
standardized architecture for designing networks.
"ISP" means an Internet Service Provider.
"ITU" means International Telecommunications Union, which is an
intergovernmental organization through which private and public organizations
develop telecommunications. The ITU was founded in 1865 and became a United
Nations agency in 1947 and it is responsible for adopting international tax
treaties, regulations and standards governing telecommunications.
"LAN" means a Local Area Network and is a high-speed communications system
designed to link computers for the purpose of sharing files, programs and
various devices such as printers and high-speed modems within a small geographic
area such as a workgroup, department or single floor of a multi-story building.
LANs may include dedicated computers or file servers that provide a centralized
source of shared files and programs.
"MAN" means a Metropolitan Area Network and is a high-speed communications
system designed to link computers within a geographic area the size of large
city.
12
"Multiplexing" means a process that combines a number of lower speed data
transmissions into one high-speed data transmission by splitting that total
available bandwidth into narrower bands (frequency division) or by allotting a
common channel to several different transmitting devices one at a time in
sequence (time division).
"OC-1, OC-3, OC-12, OC-48, OC-192" means 51.85Mbps, 155 Mbps, 622 Mbps, 2.5 Gbps
and 10Gbps transmission speeds for signals over fiber optic cables.
"OEM" means Original Equipment Manufacturer.
"Packet" means the "envelope" in which the network software places a message
being sent from one station to another station in a network. One of the key
features of a packet is that it contains the destination address in addition to
the data.
"Protocol" means a standard developed by international standards bodies,
individual equipment vendors, and ad hoc groups of interested parties to define
how to implement a group of services in one or more layers of the OSI model. The
Open Systems Interconnect ("OSI") reference model was developed by the ISO to
define all the services a LAN should provide. Ethernet and Token Ring, for
example, are both protocols that define different ways to provide the services
called for in the Physical and Data Link Layers of the OSI model.
"Router" means a network translator that reads network-addressing information
within packets to provide greater selectivity in directing traffic over multiple
network segments. It is a more complex inter-networking device.
"SAN" means Storage Area Network, a secure information infrastructure that
interconnects servers and routers to facilitate universal access to data and
systems.
"SSP" means Storage Service Provider, a service provider that manages the
storage and maintenance of its customers' data.
"Switch" means a device that allows the network operator to vary and select
connections between network nodes at very high speeds.
"TCP/IP" means Transmission Control Protocol/Internet Protocol, which is a suite
of protocols used for communications between two or more devices.
"WAN" means a Wide Area Network and is a communications network that connects
geographically dispersed users. Typically, a WAN consists of two or more LANs.
The largest WAN in existence is the Internet.
13
Item 2. Properties.
We lease 88,000 square feet of office, manufacturing and distribution space as
detailed below.
Our facilities under lease include:
Location Square Footage Facility Type Expiration Date
- -------- -------------- ------------- ---------------
San Diego, California 19,000 Office/Labs January 31, 2006
Annapolis Junction, Maryland 35,000 Office/Labs/Manufacturing October 31, 2004
Irvine, California 23,000 Office/Labs/Manufacturing August 14, 2004
Norton, Massachusetts 11,000 Office/Manufacturing July 31, 2002
We believe that our existing and planned facilities are and will remain adequate
for the foreseeable future. Our Irvine, California facility is associated with
our frame relay business unit, which is being discontinued. The Company has
recognized $0.8 million of estimated net facility costs for the remainder of the
Irvine facility lease as part of estimated loss on disposal of discontinued
segment. Our Norton, Massachusetts facility is unoccupied and is also associated
with the discontinued segment.
Item 3. Legal Proceedings.
From time to time, we are involved in various other legal proceedings and claims
incidental to the conduct of our business. Although it is impossible to predict
the outcome of any outstanding legal proceedings, we believe that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material effect on our financial position or results of operations or
cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
Entrada Networks, Inc., while it was still called Sync Research, Inc., held its
annual meeting on August 30, 2000 to vote upon the following matters:
1. Proposal to authorize the issuance of the Company's common stock under
the merger agreement with Osicom Technologies, Inc.
2. Proposal to change the Company's name to Entrada Networks, Inc.
3. Election of Directors.
4. Proposal to amend the 1995 Employee Stock Purchase Plan to increase the
number of shares reserved for issuance under the Plan by an additional
100,000 shares.
5. Proposal to ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 2000.
The following table summarizes the results of the voting at the meeting:
Votes For Votes Against Abstentions Broker
Non-Votes
1. Issuance of shares for merger 2,579,553 20,171 2,775 1,514,932
2. Approval of name change 4,096,625 18,011 2,795 0
3. Director nominees:
Gregorio Reyes 3,307,474 809,947 0 0
William K. Guerry 3,307,474 809,947 0 0
Charles A. Haggerty 3,307,474 809,947 0 0
William K. Schroeder 3,307,474 809,947 0 0
14
4. 1995 Plan amendment 4,009,099 83,021 25,311 0
5. Auditor appointment 4,093,778 15,554 8,099 0
Subsequent to the August 30, 2000 annual meeting, our shareholders voted to
adopt the Entrada Networks, Inc. 2000 Stock Incentive Plan. Our Board of
Directors approved the plan on September 29, 2000, and rather than incur the
expense of a special meeting of stockholders to approve the plan, we solicited
the consents of two stockholders who owned a majority of our outstanding common
stock. Those two stockholders, Sorrento Networks Corporation and Vision
Eventures, Inc., collectively owned 5,569,876 shares of our common stock. As of
October 12, 2000, the record date for the consent, we had 10,997,075 shares
outstanding, so those two stockholders held 50.64% of our outstanding common
stock. We are incorporated in Delaware, and the Delaware General Corporation Law
permits stockholder approval to be obtained without a meeting provided that
consents are given by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to approve the action at a
meeting at which all shares eligible to be voted were present and voted. A
majority of our outstanding shares would be sufficient to approve the plan;
thus, the consents we obtained were sufficient to satisfy the requirement for
stockholder approval.
15
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
Our common stock has traded on the Nasdaq National Market System under the
symbol ESAN since the merger on August 31, 2000. Prior to that we traded under
the ticker symbol SYNX.
The following table sets forth the high and low closing prices for our common
stock as reported in the Nasdaq National Market for the periods indicated, and
taking into account the 1-for-5 reverse split in June 1999.
Fiscal 2000 High Low
----------- ---- ---
Quarter from February 1, 1999 to April 30, 1999 $5.63 $2.34
Quarter from May 1, 1999 to July 31, 1999 $2.81 $1.88
Quarter from August 1, 1999 to October 31, 1999 $2.75 $1.94
Quarter from November 1, 1999 to January 31, 2000 $4.44 $2.38
Fiscal 2001
-----------
Quarter from February 1, 2000 to April 30, 2000 $5.41 $1.75
Quarter from May 1, 2000 to July 31, 2000 $4.75 $2.53
Quarter from August 1, 2000 to October 31, 2000 $7.31 $2.75
Quarter from November 1, 2000 to January 31, 2001 $4.44 $1.56
On March 30, 2001, the closing sale price for our common stock was $1.08 per
share. There is no assurance that a market in our common stock will continue.
As of March 30, 2001 (the latest practicable date) there were 938 shareholders
of record, including brokerage firms and nominees, of our common stock, and more
than 13,000 beneficial shareholders.
We have never paid any cash dividends on our common stock. Our present credit
facility contains covenants which preclude the payment of dividends. The present
policy of the Board of Directors is to retain all available funds to finance
the planned level of operations. In light of the anticipated cash needs of our
business, it is not anticipated that any cash dividends will be paid to the
holders of our common stock in the foreseeable future.
16
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data with respect
to our five most recent fiscal years ended January 31. The selected consolidated
statement of operations data set forth below for each of our three most recent
fiscal years, and the selected consolidated balance sheet data set forth at
January 31, 2001 and 2000, are derived from our consolidated financial
statements which have been audited by BDO Seidman, LLP, independent certified
public accountants, as indicated in their report which is included elsewhere in
this annual report. The selected consolidated statement of operations data set
forth below for each of the two fiscal years ended January 31, 1998 and 1997,
and the consolidated balance sheet data set forth below at January 31, 1999,
1998 and 1997 are derived from our audited consolidated financial statements not
included in this annual report. The selected consolidated financial data should
be read in conjunction with our consolidated financial statements, and the notes
thereto including Note A which discusses our merger and discontinued operations,
included elsewhere in this annual report, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7.
Fiscal Year Ended January 31,
-----------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 25,657 $ 28,771 $ 29,007 $ 30,624 $ 26,534
Net income (loss) from
continuing operations $(10,564) $ (3,387) $ (3,716) $ (6,954) $ (6,411)
Net income (loss) per share
from continuing operations:
Basic $ (1.49) $(0.80) $(0.88) $(1.64) $(1.51)
Diluted $ (1.49) $(0.80) $(0.88) $(1.64) $(1.51)
Balance Sheet Data:
Cash and cash equivalents $ 10,253 $ 112 $ 198 $ 246 $ 20
Working capital 7,815 4,209 1,066 (1,555) 1,275
Total assets 22,012 16,544 16,750 16,364 13,260
Total debt (including short-term debt) 4,093 2,878 4,825 5,131 2,490
Stockholders' equity 10,136 (14,706) (11,319) (7,604) (650)
17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", and words of similar import constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are referred to the "Risk Factors" section of this Annual
Report on Form 10-K contained herein, which identifies important risk factors
that could cause actual results to differ from those contained in the
forward-looking statements.
The results of operations reflect our activities and our wholly-owned
subsidiaries; this consolidated group is referred to individually and
collectively as "We" and "Our".
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated audited financial
statements and related notes thereto.
The Company is the product of a reverse merger completed on August 31, 2000 with
a wholly owned subsidiary of Sorrento Networks Corporation. This subsidiary was
doing business as Entrada Networks. We acquired all the outstanding capital of
Entrada Networks for 4.24 million of our common shares and issued an additional
2.43 million shares for cash of $8.0 million. Entrada Networks' obligation to
its former parent of $25.5 million was contributed to our capital as part of the
merger. As a result of the merger, the former parent of Entrada Networks held a
majority interest in the combined entity, which was renamed Entrada Networks,
Inc. from Sync Research, Inc. Accordingly, the merger has been accounted for as
a reverse merger, whereby Entrada Networks is deemed to have purchased Sync,
however Sync remains the legal entity and Registrant for Security and Exchange
Commission reporting purposes and the financial statements of the combined
entity now reflect the historical financial information of Entrada Networks
prior to August 31, 2000. Subsequent to the merger the former parent of Entrada
Networks has disposed of 4.56 million of its shares of our common stock
including those it distributed to its shareholders and currently holds
approximately 20.1% of our common shares outstanding.
Our principal business is the business formerly operated by Entrada Networks,
and in September 2000, our Board of Directors concluded that the operations of
our frame relay business segment would not contribute to our profitability or
toward our goal of entering the storage area networking market space and adopted
a formal plan to discontinue this business segment operated by Sync. Our
financial statements reflect the operations and financial position of the frame
relay business segment as a discontinued operation for all periods reported.
Unless otherwise specifically noted, this Annual Report refers to the Entrada
business and not to the former Sync business.
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", and words of similar import constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are referred to the "Other Risk Factors" section of this Annual
Report on Form 10-K, as well as the "Financial Risk Management" and "Future
Growth Subject to Risks" sections contained herein, which identify important
risk factors that could cause actual results to differ from those contained in
the forward-looking statements.
Results of Operations: Comparison of the Years Ended January 31, 2001 and
January 31, 2000
Net sales. Our consolidated net sales from continuing operations were $25.7
million for fiscal 2001, compared with $28.8 million for fiscal 2000. The
decrease in net sales for fiscal 2001 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. We expect our net sales for the first quarter of
fiscal 2002 to be approximately $1.1 million to $1.3 million. We believe that we
will have lower sales in early 2002 primarily due to adverse economic conditions
worldwide and in our market segment in particular.
Gross profit. Cost of sales consists principally of the costs of components,
subcontract assembly from outside manufacturers, and in-house system
integration, quality control, final testing and configuration costs. Gross
profit decreased to $6.8 million for the fiscal 2001 from $11.3 million for
fiscal 2000. The gross profit of $6.8 million for the fiscal 2001 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
37.6% for the fiscal year ended January 31, 2001 from 39.2% for fiscal 2000. The
decline in gross margins resulted from increased sales to OEM customers that
have lower margins than sales to distributors as well as transitions from legacy
products 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 and travel expenses. Selling and marketing expenses decreased
to $5.2 million for fiscal 2001 from $5.6 million for fiscal 2000. 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 20.3% for
fiscal 2001, from 19.6% for fiscal 2000. The increase in selling and marketing
costs as a percentage of sales is due to lower sales for fiscal 2000 compared
with the prior year. We intend to increase expenditures for sales and marketing
including the recruitment of additional sales and
18
marketing personnel, the expansion of our domestic and international
distribution channels and the establishment of strategic relationships. In
addition, we expect sales commissions to increase as we increase our sales
volume.
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. All research and development costs are expensed as
incurred. Engineering, research and development expenses increased to $6.8
million, or 26.6% of net sales, for fiscal 2001, compared with $6.2 million, or
21.6% of net sales, for fiscal 2000. 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. We
expect research and development expenses to continue to increase as we enter the
SAN market space. In addition, due to changing market conditions, we wrote off
capitalized software development costs to research and development expenses of
$1.0 million and $1.8 million during fiscal years 2001 and 2000, respectively.
Exclusive of the valuation allowance, engineering research and development
expenses were 22.8% and 15.4% of net sales in fiscal years 2001 and 2000,
respectively.
General and administrative. General and administrative expenses consist
primarily of employee compensation and related costs, legal and accounting fees,
public company costs, and allocable occupancy costs. General and administrative
expenses were $2.9 million, or 11.2% of net sales, for fiscal 2001, compared
with $2.2 million, or 7.6% of net sales, for fiscal 2000. The increase in
general and administrative expenses is primarily due to costs incurred in fiscal
2001 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 our headquarters in San Diego, we have 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 our general
and administrative costs and will continue indefinitely.
Other operating expenses. Other operating expenses for fiscal 2001 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
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 fiscal years 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. Loss from discontinued operations was $0.2 million for
fiscal 2001. This represents the operating results of the former Sync Research,
Inc. frame relay business based in Irvine, California, for the five-month period
from September 1, 2000 through January 31, 2001. On September 29, 2000, after
completion of the merger on August 31, 2000, we 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 fiscal 2001
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.
19
Results of Operations: Comparison of the Years Ended January 31, 2000 and
January 31, 1999
Net sales. Net sales decreased to $28.8 million, or by less than 1%, for fiscal
2000 from $29.0 million for fiscal 1999. While the sales to OEMs of our
LAN-adapter product lines increased, this increase was offset by the decrease in
the Remote Access and Print Server product lines during fiscal 2000 reflecting
Entrada's shift towards its new generation of products and the planned phase out
of its legacy products.
Gross profit. Gross profit decreased to $11.3 million for fiscal 2000 from $13.0
million for fiscal 1999. Gross margin decreased to 39.2% for fiscal 2000 from
44.7% for fiscal 1999. The gross margin percentage decrease was the result of
higher raw material costs associated with shipments of Entrada's LAN-adapter
products and lower margins on legacy products.
Selling and marketing. Sales and marketing expenses decreased to $5.6 million,
or 19.6% of net sales, for fiscal 2000 from $8.3 million, or 28.7% of net sales
for fiscal 1999. During fiscal 2000 Entrada completed a realignment of its sales
organization, which resulted in a reduction in these expenses as well as reduced
advertising and promotional expenses for legacy products.
Engineering, research and development. Engineering, research and development
expenses increased to $6.2 million, or 21.6% of net sales, for fiscal 2000 from
$5.5 million, or 19.0% of net sales, for fiscal 1999. The increase in
engineering, research and development expenses for fiscal 2000 was the result of
a $1.8 million reduction to the net book value of capitalized software
development costs caused by changing market conditions partially offset by cost
savings achieved through the consolidation of Entrada's facilities. Exclusive of
the valuation allowance, engineering research and development expenses for
fiscal 2000 were 15.4% of net sales.
General and administrative. General and administrative expenses decreased to
$2.2 million, or 7.6% of net sales, for fiscal 2000 from $2.3 million, or 7.8%
of net sales, for fiscal 1999. This decrease is the result of cost savings
achieved through the consolidation of Entrada's various facilities as well as
eliminating the 35,000 square feet of unused space leased at our Annapolis
Junction, Maryland facility.
Income taxes. There was no provision for income taxes for fiscal years 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, due to potential adjustments to the net operating loss carry forwards
as provided by the Internal Revenue Code with respect to ownership changes,
future availability of the tax benefits is not assured. 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.
Liquidity and Capital Resources
The amounts included in our statement of cash flows for fiscal 2001 are not
comparable to our fiscal 2000 amounts due to the inclusion of the former Sync
Research, Inc., for less than a full year. Readers should refer to Sync's annual
report on Form 10-K 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, Sorrento Networks
Corporation, a New Jersey corporation. At January 31, 2001, our working capital
was $7.8 million and cash and cash equivalents was $10.0 million.
Cash flow used in operations was $8.8 million during the fiscal year ended
January 31, 2001 compared with cash flow provided by operations of $0.1 million
for the fiscal year ended January 31, 2000. Cash flow used in operations in
fiscal 2001 reflects $3.1 million of net loss from operations after adjustment
for non-cash expenses including depreciation, amortization, and reserves, plus a
$2.7 million decrease in accounts payable, a $1.9 million increase in gross
inventories, and $2.1 million in net cash used in discontinued operations.
During fiscal 2000, our cash flow provided by operations reflected $1.2 million
of net income from operations after adjustment for non-cash expenses including
depreciation, amortization, reserves and valuation allowances, plus a $0.9
million increase in accounts payable, partially offset by a $1.4 million
increase in gross inventories.
20
To support our anticipated growth, we expect our selling and marketing, research
and development and general and administrative expenses will increase in future
periods. There can be no assurance that our available cash will be sufficient to
fund such additional expenses.
Our investing activities consist primarily of purchases of property, plant and
equipment and software development costs. We purchased $1.6 million and $0.2
million in equipment during the fiscal years ended January 31, 2001 and 2000,
respectively. During fiscal 2001 we also acquired $7.6 million of cash belonging
to Sync Research. During fiscal 2000 the investing activities also included $0.3
million in software development costs. We expect our investments in property and
equipment will increase to support the anticipated growth of our operations and
infrastructure.
Our financing activities during the fiscal year ended January 31, 2001 provided
cash flows of $12.7 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 $1.3 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 fiscal 2000 financing activities
provided cash flows of $0.3 million which included $2.3 million of net
repayments on short term borrowings, $0.3 million of proceeds net of repayments
on long term debt financing and $2.3 million of non-interest bearing advances
from our former parent, net of repayments.
We had a line of credit with Coast Business Credit totaling a maximum of $7.0
million, subject to limitations based on our receivables and inventories.
Outstanding borrowings against this line of credit were $3.6 million at January
31, 2001. Our credit line was collateralized by accounts receivable, inventory
and equipment, and is guaranteed by Sorrento Networks Corporation. Subsequent to
January 31, 2001, the Coast Business Credit credit arrangement 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 75% 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. The
credit arrangement is subject to covenants regarding our tangible net worth, and
is collateralized by accounts receivable, inventory and equipment. The Silicon
Valley Bank credit line features a lower interest rate and simpler
administration.
We anticipate that our available cash resources will be sufficient to meet our
presently anticipated capital requirements through fiscal 2002. We are 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.
Effects of Inflation and Currency Exchange Rates
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
21
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.
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 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.
In December, 1999 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. Staff Accounting
Bulletin No. 101B delayed the date of required adoption to October 1, 2000.
Management believes that adoption of this policy had no material effect on our
financial position or results of operations.
Other Matters
From time to time, we are involved in various other legal proceedings and claims
incidental to the conduct of our business. Although it is impossible to predict
the outcome of any outstanding legal proceedings, we believe that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material effect on our financial position or results of operations or
cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates
and foreign currency rates. Our exposure to interest rate risk is the result of
our need for periodic additional financing for our large operating losses and
capital expenditures. 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.
All of our sales and expenses have been 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 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.
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.
22
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.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 is set forth in Item 14 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
23
PART III
Item 10. Directors and Executive Officers of the Company
On March 30, 2001, our directors and executive officers were:
Name Age Position
---- --- ---------
Kanwar J.S. Chadha 54 President, Chief Executive Officer, Director
Leonard Hecht 64 Director, Chairman (i)
Rohit Phansalkar 56 Director (i)
Davinder Sethi 54 Director (i)
Raymond Ngan 29 Director
Gilbert G. Goldbeck 41 Vice President--Finance & Operations
Anand Mehta 47 C.T.O. and Vice President--Engineering
Michael Harris 42 Vice President--Marketing
(i) member of Audit Committee and Compensation Committee
Our By-Laws provide that the members of the Board of Directors be elected
annually by the Shareholders of Entrada for one-year terms. Each director who is
not an employee of Entrada or its subsidiaries receives $1,000 for each Board of
Directors or committee meeting attended. Directors who serve as the chairman of
a committee receive an additional $500 for each committee meeting attended. Each
director who is not an employee of Entrada also receives compensation of $5,000
per quarter, except the Chairman who receives compensation of $5,000 per month.
The Board of Directors has two committees: Audit and Compensation. There are no
family relationships between any directors and officers, except as discussed
below.
None of our officers is employed for a specified term. Dr. Kanwar J.S. Chadha,
President, Chief Executive Officer and Director, has an agreement dated December
1, 2000, that provides for the immediate vesting of options, and for the
Company's loan of funds to Dr. Chadha for the purposes of exercising such
options, in the event of a change in control of Entrada.
Dr. Kanwar J.S. Chadha, has served as the President and Chief Executive Officer
of Entrada since April 2000. He was elected director on August 31, 2000. He
joined AT&T Bell Laboratories in February 1973 as a Member of Technical Staff
and served as a systems engineer & principal software designer for the AMPS
trial system. As a Supervisor at AT&T Bell Laboratories from August 1977 to
August 1980, Dr. Chadha was responsible for the development of various software
systems. As a Department Head at AT&T Bell Laboratories from August 1980 to
January 1987, he managed the development of cellular technologies, MERLIN phone
system, Applications Processor, Videotex system, and System 25 PBX. He was a
co-founder of WaterBazaar.com e-portal, that when developed will provide buyers
and suppliers of water purification products worldwide an electronic exchange
through which to conduct e-commerce. Dr. Chadha was also a founding member of
ERPL, Inc., a firm that specializes in the development of embedded software
systems, enterprise and manufacturing resource planning software systems, and
that provides business-to-business e-marketplace systems solutions &
development. Dr. Chadha holds a B.E. (Hons) in Electrical Engineering from
Thapar Institute of Technology, Punjab, India, a M.A.Sc. in Control Systems from
the University of Toronto, Ontario, Canada, and a Ph.D. in Systems Engineering
from Case Western Reserve University, Cleveland, Ohio. Dr. Chadha is a first
cousin of Dr. Davinder Sethi, one of our directors.
Leonard N. Hecht has served as one of our directors since August 31, 2000. He
was elected Chairman on September 29, 2000. Mr. Hecht has served as Executive
Vice President of Sorrento Networks, Inc. since August 2000 and as one of its
directors from June 1996 to January 2001. Since 1994, he has been President of
Chrysalis Capital Group, an investment banking company specializing in mergers,
acquisitions and financing that he founded. From 1987 to 1993, Mr. Hecht was
Managing Director of the Investment Banking Group and head of the Technology
Assessment Group of Houlihan Lokey Howard & Zukin, a financial advisory firm.
From 1984 to 1987, Mr. Hecht was the Vice
24
Chairman of the Board and Chief Executive Officer of Quantech Electronics Corp.,
a diversified publicly held electronics company. Prior to joining Quantech, Mr.
Hecht was a founding principal of Xerox Development Corporation, a wholly owned
subsidiary of the Xerox Corporation. Xerox Development Corporation was active in
strategic planning, mergers and acquisition, divestitures, licensing, joint
ventures and venture investing for the Xerox Corporation.
Rohit Phansalkar has served as one of our directors since August 31, 2000. Mr.
Phansalkar has been the Chairman and CEO of Sorrento Networks Corporation. Prior
to that, he was a partner of Andersen Weinroth & Co. LP. Prior to joining
Andersen Weinroth, Mr. Phansalkar was the co-founder, Vice Chairman and CEO of
Newbridge Capital, a firm dedicated to making private equity investments in
India. From 1993 to 1996 Mr. Phansalkar was a Managing Director of Oppenheimer &
Co., where he was the head of the Energy Finance Group. Mr. Phansalkar was the
founding Chairman of The India Fund, a $510 mm closed-end fund listed on the
NYSE. Prior to joining Oppenheimer, Mr. Phansalkar was a Managing Director of
Bear Stearns & Co. He is a director of Zip Global Networks. Mr. Phansalkar
received a BS in engineering from Michigan Technological University and a MBA
from Harvard Graduate School of Business.
Dr. Davinder Sethi has been a director of Entrada since September 2000. Dr.
Sethi is an independent advisor in the fields of information technology and
finance. His is the former Chairman and Chief Executive Officer of iPing, Inc.,
and a former Director and Senior Advisor to Barclays de Zoete Wedd. In addition,
Dr. Sethi spent seven years at Bell Laboratories in operations research and
communications network planning and seven years in corporate finance at AT&T.
Dr. Sethi holds a Ph.D. and M.S. in Operations Research, Economics and
Statistics from the University of California, Berkeley, and is a graduate of the
Executive Management Program at Penn State. Dr. Sethi also serves on the Board
of Directors of Aperian, Inc., Pamet Systems, Inc. and WorldWater Corporation.
Dr. Sethi is a first cousin of Dr. Chadha, our President and Chief Executive
Officer.
Dr. Raymond Ngan has been a director of Entrada since November 2000. Dr Ngan has
been guiding technology and telecommunications companies for many years, most
recently as Principal at Hikari Capital International. He previously served as
Senior Vice President, Morgan Stanley Dean Witter, and as a Senior Associate at
Chase Capital Partners. Dr. Ngan holds a bachelors, masters and Ph.D. from
Oxford University, Oxford, UK, and an MBA from The Wharton School at the
University of Pennsylvania.
Gilbert G. (Gil) Goldbeck was appointed Vice President of Finance and Operations
for Entrada Networks in August 2000. Prior to that, he served as Chief Operating
Officer and was also formerly Vice President of Finance and Operations. He was
the Controller for Cray Communications from 1992 to 1998 and held various
financial management positions with Cray from 1986 to 1992. From 1985 to 1986 he
was a financial analyst with Kiplinger Editors. From 1983 to 1985 he was an
internal auditor with Dyn Corp. He is a Certified Public Accountant and holds a
B.S. degree in Accounting from the University of Maryland.
Anand (Andy) Mehta, Chief Technology Officer and Vice President, Engineering,
who joined Entrada Networks in May 2000, has 22 years of technical and
management experience in Fortune 500 corporations and startup ventures. As a
founder and President of Intelec Technologies, Inc., a company specializing in
embedded systems, he managed the development of several products over a span of
10 years in cellular technology, handheld devices, embedded PCs, IBM 3270/SNA
products, industrial controls, and information processing systems. Prior to
that, he was with Motorola, Inc., for approximately 9 years in various technical
and management positions. Mr. Mehta has extensive experience in communications,
Fibre Channel, FPGAs, ASICs, embedded systems, and software development. Mr.
Mehta earned an MSEE in 1978 from Illinois Institute of Technology, Chicago,
Illinois and a BSEE in Electronics & Communications from University of Jodhpur,
India in 1976. He also has a Certificate Diploma in Artificial Intelligence from
DePaul University, Chicago.
Michael Harris joined Entrada in August 2000 as Vice President of Marketing and
is responsible for both marketing and investor relations. He joined Entrada from
Emag, LLC, a global data storage solutions and software firm (formerly a
division of Anacomp, Inc.) where he served as senior vice president, marketing
and business development before and after the company's spinoff from Anacomp and
subsequent relocation. At Emag and Anacomp, Harris was responsible for starting
a number of initiatives to address the burgeoning data storage market. Prior to
Emag, he spent six years with Philips NV, (now Royal Philips Electronics) first
as an international marketing
25
manager and later as the director of marketing and product management of a
consumer products division. Prior to Philips he was a management consultant with
Coopers & Lybrand, working primarily on telecommunications engagements. He holds
an MBA from Vanderbilt University and a B.S. in Communications from The
University of Tennessee.
Item 11. Executive Compensation
The following tables set forth the annual compensation for both individuals who
served as our Chief Executive Officer ("CEO") for the fiscal year ended January
31, 2001, for our three most highly compensated executive officers, other than
the CEO, who were serving as executive officers at the end of our fiscal year
and whose salary and bonus exceeded $100,000, and for one person who served as
an executive officer during a portion of fiscal 2001 but is no longer an
executive officer as of January 31, 2001.
Summary Compensation Table
Annual Compensation Long-Term Compensation
---------------------------------- ------------------------------------
Other Restricted Securities Long-Term All
Annual Stock Underlying Incentive Other
Salary (A) Bonus Compensation Award(s) Options Plan Compensation
Name and Principal Position Year ($) ($) ($) ($) (#) Payouts ($)
- --------------------------- ---- ----------- ------- ------------- --------- ------------ ------------ ------------
Kanwar J.S. Chadha, 2001 141,038 92,625 - - 500,000 - -
Chief Executive Officer,
President, Director
Gilbert G. Goldbeck, VP 2001 144,005 50,400 - - 100,000 - -
Finance and Operations 2000 121,771 - - - - - -
Anand Mehta, Chief 2001 120,582 43,313 - - 280,000 - -
Technical Officer,
VP Engineering
Michael Harris, VP 2001 62,597 25,995 - - 150,000 - -
Marketing
William K. Guerry, 2001 159,846 - 66,667 - 809 - -
Former President, 2000 158,333 - - - 105,000 - -
CEO and CFO 1999 130,000 - - - 32,000 - -
(A) Dr. Chadha, Mr. Mehta and Mr. Harris were employed by us for only a
portion of fiscal 2001. The annual salary of Dr. Chadha is $195,000,
of Mr. Mehta is $165,000, and of Mr. Harris is $155,000.
Long-Term Incentive Plans
We have no long-term incentive plans other than the 1991, 1996 and 2000
Stock Option Plans and the 1995 Directors' Stock Option Plan.
Option Grants in Last Fiscal Year
Individual Grants
-------------------------------------------------------------
Number of Percent of Market Potential Realizable Value at
Securities Total Options Exercise Price on Assumed Annual Rates of Stock Price
Underlying Granted to or Base Date Appreciation for Option Term (A)
Options Employees in Price Granted Expiration --------------------------------
Name Granted (#) Fiscal Year ($/Share) ($/Share) Date 0% ($) 5% ($) 10% ($)
------------ ----------- ------------- ----------- ---------- ----------- ------- ---------- ----------
Kanwar J.S. Chadha 420,000 13.7% $ 4.38 $ 4.38 8/31/2010 - $1,155,594 $2,928,502
80,000 2.6 $ 3.19 $ 4.38 8/31/2010 $94,800 314,913 652,610
Gilbert G. Goldbeck 70,000 2.3 $ 4.38 $ 4.38 8/31/2010 - 192,599 488,084
30,000 1.0 $ 3.19 $ 4.38 8/31/2010 35,550 118,092 244,729
Anand Mehta 250,000 8.2 $ 4.38 $ 4.38 8/31/2010 - 687,853 1,743,156
26
30,000 1.0 $ 3.19 $ 4.38 8/31/2010 35,550 118,092 244,729
Michael Harris 150,000 4.9 $ 4.38 $ 4.38 8/31/2010 - 412,712 1,045,893
William K. Guerry 809 - $ 1.70 $ 3.88 2/3/2010 1,760 3,731 6,756
(A) In accordance with Securities and Exchange Commission rules, these
columns show gains that might exist for the respective options,
assuming that the market price of our common stock appreciates from
the date of the grant over the term of the option at rates of 5% and
10%, respectively.
Aggregated Option Exercises in Fiscal Year 2001 and
January 31, 2001 Option Values
Number of
Shares Securities Underlying Value of Unexercised
Acquired Unexercised Options In-the-Money Options
On Value at Fiscal Year-End (#) at Fiscal Year-End ($) (A)
Exercise Realized ---------------------------- -------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
--------- ----------- ----------- ---------------------------- ------------- ---------------
Kanwar J.S. Chadha - - - 500,000 - $44,800
Gilbert G. Goldbeck - - - 100,000 - 16,800
Anand Mehta - - - 280,000 - 16,800
Michael Harris - - - 150,000 - -
(A) Options are "in-the-money" if, on January 31, 2001, the market price
of the Common Stock ($3.75) exceeded the exercise price of such
options. The value of such options is calculated by determining the
difference between the aggregate market price of the Common Stock
covered by such options on January 31, 2001, and the aggregate
exercise price of such options.
Employment Agreements
None of our officers is employed for a specified term. Dr. Kanwar J.S.
Chadha, President, Chief Executive Officer and Director, has an agreement dated
December 1, 2000, that provides for the immediate vesting of options, and for
Entrada to loan funds to Dr. Chadha for the purposes of exercising such options,
in the event of a change in control of Entrada.
Compliance with Section 16(a) of the Exchange Act
The Securities Exchange Act of 1934 requires our directors and
executive officers and persons who own more than ten percent of a registered
class of our equity securities to file reports of beneficial ownership and
changes in beneficial ownership with the Securities and Exchange Commission. To
our knowledge, all filing requirements by our officers and directors were
complied with during the year ended January 31, 2001.
27
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 30,
2001, regarding the ownership of the Common Stock by (i) each Director of the
Company; (ii) each of the executive officers named in the Summary Compensation
Table, above; (iii) each person known by us to beneficially own 5% or more of
Common Stock; and (iv) all Directors and executive officers of Entrada as a
group. Except as indicated, all persons named as beneficial owners of Common
Stock have sole voting and investment power with respect to the shares indicated
as beneficially owned by them.
Common Stock
------------
Number of Percentage of
Name of Beneficial Owner (A) Shares Outstanding (F)
---------------------------- --------- ---------------
Kanwar J.S. Chadha - *
Leonard N. Hecht 112,083 (B) 1.0%
Rohit Phansalkar 103,490 (C) *
Davinder Sethi 100,000 (D) *
Raymond Ngan 100,000 (E) *
Gilbert Goldbeck - *
Anand Mehta 2,000 *
Michael Harris - *
Sorrento Networks Corporation 2,231,734 20.3%
Springboard-Harper Technology Fund (Cayman) Ltd 741,249 6.7%
Entrada Holdings LLC 700,000 6.4%
Steel Partners II, L.P. 549,980 5.0%
All Directors and Executive Officers as a group 417,573 3.7%
- --------------
* Less than 1%
(A) All information with respect to beneficial ownership of the shares is
based upon filings made by the respective beneficial owners with the
Securities and Exchange Commission or information provided by such
beneficial owners to us. Except as noted the addresses for each
beneficial owner is 10070 Mesa Rim Road, San Diego, CA 92121.
(B) Includes exercisable options held by Mr. Hecht to acquire 100,000
shares of common stock, and 12,083 shares indirectly owned by him. In
addition, Mr. Hecht holds options to purchase 90,000 shares of our
common stock currently owned by Sorrento Networks Corporation, which
are not considered to be beneficially owned by Mr. Hecht.
(C) Includes exercisable options held by Mr. Phansalkar to acquire 100,000
shares of common stock, and 3,490 shares owned directly or indirectly
by him. In addition, Mr. Phansalkar holds options to purchase 50,000
shares of our common stock currently owned by Sorrento Networks
Corporation, which are not considered to be beneficially owned by Mr.
Phansalkar. Mr. Phansalkar also owns approximately 3,500 shares of the
common stock of Sorrento Networks Corporation. Mr. Phansalkar was a
manager, member or partner of entities that hold 700,000 shares of
common stock including Andersen Weinroth & Co., LP, Andersen Weinroth
Capital Corporation, and Entrada Holdings, LLC. Mr. Phansalkar's
beneficial ownership of these shares is not determinable at the date
of this Form 10-K due to a dispute between Mr. Phansalkar and these
entities.
(D) Includes exercisable options held by Mr. Sethi to acquire 100,000
shares of common stock.
28
(E) Includes exercisable options held by Dr. Ngan to acquire 100,000
shares of common stock.
(F) For each beneficial owner, the "Percentage of Outstanding" equals each
owner's actual holdings of shares plus shares represented by
unexercised options and warrants held, divided by the total of our
outstanding shares at March 30, 2001 plus the unexercised options and
warrants detailed above for the referenced holder only. In other
words, individual percentages of the listed holders will not add to
the group total because the calculations are made separately for each
holder.
Item 13. Certain Relationships and Related Transactions.
We are subleasing a portion for our San Diego facility on a
month-to-month basis to a subsidiary of our former parent. During the five
months ended January 31, 2001 we received rent payments of approximately
$15,000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits and Consolidated Financial Statement Schedules
1. Financial Statements: (see index to financial statements at page F-1)
Independent Certified Public Accountants' Report
Consolidated Balance Sheets at January 31, 2001 and 2000
Consolidated Statements of Operations for the Years Ended
January 31, 2001, 2000 and 1999
Consolidated Statement of Stockholders' Equity for the Years Ended
January 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Exhibits:
2 Amended and Restated Agreement and Plan of Merger between Sync Research, Inc, a
Delaware Corporation, and Osicom Technologies, Inc., a New Jersey Corporation - (A)
3.1 Amended and Restated Certificate of Incorporation dated June 25, 1999 - (B)
3.2 Amended and Restated By-Laws of Registrant - (C)
3.3 Series A Preferred Stock Certificate of Designation dated May 11, 2000 - (D)
3.4 Certificate of Amendment to the Certificate of Incorporation dated August 31, 2000 -
filed herewith
4.1 Amended and Restated 1991 Stock Plan (amended as of June 12, 1998) and form of Option
Agreement - (E)
4.2 Amended 1995 Employee Stock Purchase Plan (amended as of September 27, 1996) and form
of Subscription Agreement - (F)
4.3 Amended and Restated 1995 Directors' Option Plan (amended as of June 12, 1998) and form of Option
Agreement - (E)
4.4 Amended and Restated 1996 Non-Executive Stock Option Plan (amended as of August 21, 1998) - (G)
29
4.5 2000 Stock Incentive Plan dated October 12, 2000 - (H)
9.1 Amended and Restated Shareholders' Agreement dated April 25, 1994 - (I)
10.1 401(k) Plan - (I)
10.2 Third Amendment to Lease for 10C Commerce Way, Norton, MA dated July 28, 1999 - (J)
10.3 Lease for 10070 Mesa Rim Road, San Diego, CA dated May 25, 2000 - filed herewith
10.4 Amended lease for 9020 Junction Drive, Annapolis Junction, MD dated April 22, 1999 -
filed herewith
10.5 Standard Industrial Lease for 12 Morgan, Irvine, CA dated July 19, 1999 - (J)
10.6 Form of Amended and Restated Severance Agreement between the Company and William
Guerry, dated October 8, 1999 - (C)
10.7 Form of Noncompetition agreement between Entrada and Sorrento Networks Corporation
dated August 30, 2000 - filed herewith
21 Subsidiaries of the Registrant - filed herewith
23 Consent of BDO Seidman LLP - filed herewith
----------------
The foregoing are incorporated by reference from the Registrant's
filings as indicated:
A Form S-4/A filed August 3, 2000.
B Form 10-Q for the fiscal quarter ended June 30, 1999, filed August 16, 1999.
C Form 10-K for the year ended December 31, 1999, filed March 24, 2000.
D Form 8-K filed May 19, 2000.
E Form 10-Q for the fiscal quarter ended June 30, 1998, filed August 14, 1998.
F Form 10-Q for the fiscal quarter ended September 30, 1996, filed November 14, 1996.
G Form 10-Q for the fiscal quarter ended September 30, 1998, filed November 16, 1998.
H Form 14C filed November 6, 2000.
I Form S-1, as amended, which became effective on November 9, 1995.
J Form 10-Q for the fiscal quarter ended September 30, 1999, filed November 15, 1999.
--------------------
NOTE: Certain previously filed exhibits are no longer being
incorporated by reference (and therefore not numerically listed)
as the underlying documents have either expired or are no longer
material or relevant.
(b) Report on Form 8-K
November 2, 2000 Change in Registrant's certifying accountant
November 13, 2000 Form 8-K/A reporting Item 7, Financial Statements and Exhibits, with
pro forma condensed consolidated financial information of Sync
Research, Inc., and Entrada Networks
30
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----------
Independent Certified Public Accountant's Report F-2
Consolidated Balance Sheets as of January 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the years ended
January 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Shareholders' Equity for the years ended
January 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7 to F-18
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholders of
Entrada Networks, Inc.
We have audited the accompanying consolidated balance sheets Entrada Networks,
Inc. (a Delaware corporation) and subsidiaries (the "Company") as of January 31,
2001 and 2000 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years ended January 31,
2001, 2000 and 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries as of January 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the years ended January 31,
2001, 2000 and 1999 in conformity with accounting principles generally accepted
in the United States of America.
/s/ BDO Seidman, LLP
- ---------------------------
BDO Seidman, LLP
Los Angeles, California
March 2, 2001
F-2
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
January 31, 2001 January 31, 2000
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 9,953 $ 112
Restricted cash (Note B) 300 -
Accounts receivable, net (Notes D and P) 4,373 5,919
Inventory, net (Notes B, D and P) 4,636 6,041
Due from affiliates - 753
Prepaid expenses and other current assets 298 563
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 19,560 13,388
- ----------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET (Notes C, D and E) 2,452 1,384
- ----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Capitalized software, net (Note B) - 1,772
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 0 1,772
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 22,012 $ 16,544
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt (Note D) $ 3,568 $ 2,264
Current maturities of long term debt (Note E) 394 312
Accounts payable 1,725 4,381
Net liabilities of discontinued operations (Note A) 3,892 -
Other current and accrued liabilities 2,166 2,222
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 11,745 9,179
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations (Notes E and F) 131 302
Due to former parent company - 21,769
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 11,876 31,250
- ----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes F and G)
STOCKHOLDERS' EQUITY (Note H)
Common stock, $.001 par value; 50,000 shares authorized; 10,993 shares
issued and outstanding at January 31, 2001; 3,544 shares issued
and outstanding at January 31, 2000 11 1
Additional paid-in capital 51,722 5,761
Accumulated deficit (41,597) (20,468)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 10,136 (14,706)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,012 $ 16,544
============================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
Twelve Months Ended
January 31
----------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
NET SALES $ 25,657 $ 28,771 $ 29,007
COST OF SALES 18,820 17,498 16,043
- -------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 6,837 11,273 12,964
- -------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 5,221 5,647 8,329
Engineering, research and development 6,830 6,223 5,503
General and administrative 2,873 2,177 2,270
Other operating expenses (Note A) 2,093 - -
- -------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 17,017 14,047 16,102
- -------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (10,180) (2,774) (3,138)
- -------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (CHARGES)
Interest expense (384) (613) (578)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (CHARGES) (384) (613) (578)
- -------------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (10,564) (3,387) (3,716)
PROVISION FOR INCOME TAXES (Note J) - - -
- -------------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (10,564) (3,387) (3,716)
LOSS FROM DISCONTINUED OPERATIONS (Note A) (155) - -
ESTIMATED LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (10,410) - -
- -------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (21,129) $ (3,387) $ (3,716)
=========================================================================================================================
LOSS PER COMMON SHARE (Note K):
BASIC AND DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (IN THOUSANDS) 7,083 4,244 4,244
NET LOSS PER COMMON SHARE:
Continuing operations $ (1.49) $ (0.80) $ (0.88)
Discontinued operations (1.49) 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (2.98) $ (0.80) $ (0.88)
=========================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
For the Years Ended January 31, 2001, 2000 and 1999
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
- -------------------------------------------------------------------------------------------------------------------------
COMMON ADDITIONAL TOTAL
STOCK PAID IN ACCUMULATED STOCKHOLDERS'
Shares Amount CAPITAL DEFICIT EQUITY
- -------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 1 $ 1 $ 5,761 $(13,365) $ (7,603)
Net loss - - - (3,716) (3,716)
- -------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1999 1 $ 1 $ 5,761 $(17,081) $(11,319)
Net loss - - - (3,387) (3,387)
- -------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2000 1 $ 1 $ 5,761 $(20,468) $(14,706)
Stock option exercises (Notes I) 73 - 169 - 169
Private placement of
common stock (Note A) 2,432 2 8,023 - 8,025
Reverse acquisition of
Entrada (Note A) 8,487 8 12,300 - 12,308
Amount due to former parent
contributed in merger (Note A) - - 25,469 - 25,469
Net loss - - - (21,129) (21,129)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 31, 2001 10,993 $ 11 $ 51,722 $(41,597) $ 10,136
=========================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-----------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (10,564) $ (3,387) $ (3,716)
- --------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Intangible assets valuation allowances (Note B) 985 1,818 -
Depreciation and amortization 1,642 1,796 1,501
Accounts receivable and inventory reserves (Note P) 4,816 979 1,826
Changes in assets and liabilities net of effects of business entity
acquisition:
(Increase) decrease in accounts receivable 17 366 (1,528)
(Increase) decrease in due from affiliates 753 (278) (457)
(Increase) decrease in inventories (1,884) (1,442) 588
(Increase) decrease in other current assets 266 (413) 95
Increase (decrease) in accounts payable (2,656) 923 (490)
Increase (decrease) in due to affiliates - (186) 159
Increase (decrease) in accrued expenses 191 426 (812)
Increase (decrease) in other current liabilities (247) (468) 74
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATING ACTIVITIES (6,681) 134 (2,760)
NET CASH USED IN DISCONTINUED OPERATIONS (2,143) - -
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (8,824) 134 (2,760)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (1,627) (239) (567)
Cash acquired in merger 7,636 - -
Software development costs (Note B) - (318) (1,297)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6,009 (557) (1,864)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from former parent company, net of repayments 3,700 2,285 4,882
Proceeds from issuances of common stock (Note I) 8,025 - -
Proceeds from short-term debt, net of repayments (Note D) 1,304 (2,286) (476)
Proceeds from long-term debt (Note E) - 600 285
Repayment of capital lease obligations (Note E) (384) (262) (115)
Net change in restricted cash (300) - -
Proceeds from exercise of stock options (Note I) 169 - -
Financing activities of discontinued operations (Note A) 142 - -
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,656 337 4,576
- --------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,841 (86) (48)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 112 198 246
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 9,953 $ 112 $ 198
==========================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Entrada Networks, Inc., (formerly Sync Research, Inc.) the Company,
we, our or us, designs, manufactures and markets products that enable the
transport of data from storage area networks over internet protocol and light to
metro and wide area networks. We also design, manufacture and market fast and
gigabit Ethernet products that are incorporated into the remote access and other
server products of original equipment manufacturers, OEMs. In addition, some of
our 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. We operate in one business segment, with our
primary facility in San Diego, California and additional facilities in
Annapolis Junction, Maryland and Irvine, California.
The accompanying consolidated financial statements are the
responsibility of our management.
A. THE COMPANY, BASIS OF PRESENTATION AND DISCONTINUED OPERATIONS
The Company, incorporated in Delaware as Sync Research, Inc.,
is the product of a reverse merger completed on August 31, 2000 with a
wholly-owned subsidiary of Sorrento Networks Corporation. This subsidiary was
doing business as Entrada Networks. We acquired all the outstanding capital of
Entrada Networks for 4,244,155 of our common shares and issued on additional
2,431,818 shares for cash of $8,025. Entrada Networks' obligation to its
former parent of $25,469 was contributed to our capital as part of the merger.
As a result of the merger, 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 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 and the
financial statements of the combined entity now reflect the historical
information of Entrada Networks prior to August 31, 2000. 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. 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
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
entered into a plan to discontinue the operations of 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.
F-7
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
During the year ended January 31, 2001, we recorded a reduction to the
estimated realizable value of the net assets of this discontinued operation of
$10,410, which has been separately presented as the estimated loss on the
disposal of discontinued operations in the accompanying income statement. Net
liabilities of discontinued operations at January 31, 2001 consist of:
2001
-------
Accounts receivable, net $ 608
Other current assets 294
Other non-current assets 31
-------
Total assets 933
-------
Accounts payable and other current liabilities 4,825
-------
Total liabilities 4,825
-------
Net liabilities of discontinued operations $ 3,892
=======
Operating results of this discontinued operation for the four months
ended January 31, 2001 are shown separately in the accompanying statement of
operations. The operating results of this discontinued operation included in our
results for the year ended January 31, 2001 consist of:
2001
-------
Net sales $ 3,157
Gross profit 1,377
Income (loss) from operations (155)
Net income (loss) (155)
Cash flows of this discontinued operation for the year ended January
31, 2001 are shown separately in the accompanying statement of cash flows. The
cash flows provided by (used in) this discontinued operation for the year ended
January 31, 2001 consist of:
2001
-------
Operating activities $ (2,143)
Investing activities -
Financing activities 142
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All references to a fiscal year refer to the fiscal year ending on
the January 31 of that year. For example, references to fiscal 2001 refer to
the fiscal year beginning on February 1, 2000 and ending on January 31, 2001.
Principles of Consolidation - The balance sheets as of the years ended
January 31, 2001 and 2000 and the consolidated statement of operations for
the years ended January 31, 2001, 2000 and 1999 reflect our accounts and all
subsidiaries controlled by us after the elimination of significant intercompany
transactions and balances. The consolidated statement of operations for the
year ended January 31, 2001 include the results of operations of Sync from
September 1, 2000.
Use of Estimates - 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, the values
of purchased assets and assumed liabilities in acquisitions and the loss on
disposal of discontinued operations. Actual results could differ from these
estimates.
Cash and Cash Equivalents - All cash on hand and in banks, certificates
of deposit and other highly-liquid investments with original maturities of three
months or less, when purchased are considered to be cash equivalents.
F-8
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Restricted Cash - Restricted cash represents amounts pledged as
collateral for remaining lease payments on the facility occupied by our
discontinued business segment in Irvine, California.
Accounts Receivable - In the normal course of business, we extend
unsecured credit to our customers related to the sales of various products.
Typically, credit terms require payment within thirty days from the date of
shipment. We evaluate and monitor the creditworthiness of each customer on a
case-by-case basis.
Allowance for Doubtful Accounts - We provide an allowance for doubtful
accounts based on our continuing evaluation of our customers' credit risk. We
generally do not require collateral from our customers.
Inventory - Inventories, comprised of raw materials, work in process,
finished goods and spare parts, are stated at the lower of cost (first-in,
first-out method) or market. Inventories at January 31, 2001 and 2000 consist
of:
2001 2000
-------- --------
Raw material $ 5,659 $ 4,740
Work in process 672 1,958
Spare parts - 141
Finished goods 1,645 1,228
------- -------
7,976 8,067
Less: Valuation reserve (3,340) (2,026)
------- -------
$ 4,636 $ 6,041
======= =======
Fair Value of Financial Instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. We believe that there are no material
differences between the recorded book values of our financial instruments and
their estimated fair value
Property and Equipment - Property and equipment are recorded at
historical cost. Depreciation and amortization are provided over the estimated
useful lives of the individual assets or the terms of the leases, if shorter,
using accelerated and straight-line methods. Useful lives for property and
equipment range from 3 to 7 years.
Capitalized leases are initially recorded at the present value of the
minimum payments at the inception of the contracts, with an equivalent liability
categorized as appropriate under current or non-current liabilities. Such assets
are depreciated on the same basis as described above. Interest expense, which
represents the difference between the minimum payments and the present value of
the minimum payments at the inception of the lease, is allocated to accounting
periods using a constant rate of interest over the lease.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are not
sufficient to recover its carrying amount. We measure impairment loss by
comparing the fair market value, calculated as the present value of expected
future cash flows, to its net book value. Impairment losses, if any, are
recorded currently.
Software Development - Software development costs where technological
feasibility has not been established are expensed in the period in which they
occurred. Otherwise, development costs that will become an integral part of our
products are deferred in accordance with Statement of Financial Accounting
Standards Nos. 2 and 86. The deferred costs are amortized using the
straight-line method over the remaining estimated economic life of the product
or the ratio that current revenues for the product bear to the total of current
and anticipated future revenues for that product. Amortization expense for the
years ended January 31, 2001, 2000 and 1999 was $787, $1,043 and $668,
respectively, over 3 to 5 years. Accumulated amortization was $727 and $675
as of January 31, 2000 and January 31, 1999, respectively.
The recoverability of capitalized software costs are reviewed on an
ongoing basis primarily based upon projections of discounted future operating
cash flows from each software product line. The excess amount, if any, of the
F-9
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
remaining net book value over the calculated amount is fully reserved. We
recorded reductions to the net book value of our capitalized software
development costs of $985 and $1,818 during fiscal years 2001 and 2000,
respectively. These reductions were recorded as engineering expense to reflect
the decline in the net realizable value of these assets as a result of changing
market conditions.
Research and Development - We expense research and development costs as
incurred in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 2, "Accounting for Research and Development Costs". Research and development
costs are costs associated with products or processes for which technological
feasibility has not been proven and future benefits are uncertain. In-process
research and development purchased by us includes the value of products and
processes in the development stage and have not reached technological
feasibility; this amount is expensed at the date of purchase.
Revenue Recognition - We generally recognize product revenue when the
products are shipped, all substantial contractual obligations, if any, have been
satisfied, and the collection of the resulting receivable is reasonably assured.
Revenue from installation is recognized as the services are performed to the
extent of the direct costs incurred. To date, installation revenue has not been
material. Revenue from service obligations, if any, is deferred and recognized
over the life of the contract. Inventory or demonstration equipment shipped to
potential customers for field trials is not recorded as revenue. We accrue for
warranty costs, sales returns and other allowances at the time of shipment.
Although our products contain a software component, the software is not sold
separately and we are not contractually obligated to provide software upgrades
to our customers.
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 fiscal
quarter of years beginning after December 31, 1999. The adoption of this policy
had no effect on our financial position or results of operations.
Warranty and Customer Support - We typically warrant our products
against defects in materials and workmanship for a period of one to five years
from the date of sale and a provision for estimated future warranty and customer
support costs is recorded when revenue is recognized. To date, warranty and
customer support costs have not been material.
Income Taxes - Income taxes are accounted for in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes." The statement employs an asset and liability approach for financial
accounting and reporting of deferred income taxes generally allowing for
recognition of deferred tax assets in the current period for future benefit of
net operating loss and research credit carryforwards as well as items for which
expenses have been recognized for financial statement purposes but will be
deductible in future periods. A valuation allowance is recognized if, on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. (See Note J).
Advertising - We expense advertising expenditures as incurred.
Advertising expenses consist of allowances given to customers as well as direct
expenditures. Advertising expenses for fiscal 2001, 2000 and 1999 were $30, $11
and $536, respectively.
Income and Loss Per Common Share - Basic income and loss per common
share is computed by dividing net income or loss available to common
shareholders by the weighted average number of common shares outstanding during
each period presented. Diluted EPS is based on the weighted average number of
common shares outstanding as well as dilutive potential common shares, which in
our case consist of shares issuable under stock option plans. Potential common
shares would not be included in the diluted loss per share computation for
fiscal 2001, 2000 and 1999 as they would be anti-dilutive. (See Note K).
Stock-Based Compensation - We account for employee-based stock
compensation utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation cost for stock options issued to employees is measured
as the excess, if any, of the fair market price of our common stock at the date
of grant over the amount an employee must pay to acquire the stock. For
non-employees, we compute the fair value of stock-based compensation in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for stock-Based Compensation," and Emerging Issues Tax Force (EITF) 96-18,
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
The FASB 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 was 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.
Derivative Instruments - 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 statement establishes standards for
accounting for derivatives and hedging instruments of which we currently have
none. We do not expect the adoption of SFAS No. 133 to have a material effect,
if any, on our financial position or results of
F-10
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
operations.
Computer Software for Internal Use - 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," is effective for
financial statements with fiscal years beginning after December 15, 1998. The
SOP provides guidance on accounting for the costs of computer software developed
or obtained for internal use. The SOP requires that we continue to capitalize
certain costs of software developed for internal use once certain criteria are
met. The adoption of SOP 98-1 had no effect on our financial position or results
of operations.
Start-up Costs - Statement of Opinion 98-5, "Reporting on the Costs of
Start-up Activities," is effective for financial statements for fiscal years
beginning after December 31, 1998. The SOP provides guidance and examples of the
types of expenses associated with one-time (start-up) activities that under this
SOP must be expensed as incurred. The adoption of SOP 98-5 had no effect on our
financial position or results of operations.
C. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following components as of
January 31, 2001 and 2000:
2001 2000
-------- --------
Manufacturing, engineering and plant equipment and software $ 6,723 $ 14,674
Office furniture and fixtures 239 916
Leasehold and building improvements 352 459
------- --------
Total property and equipment 7,314 16,049
Less: Accumulated depreciation (4,862) (14,665)
------- --------
Net book value $ 2,452 $ 1,384
======= ========
Depreciation expense for fiscal 2001, 2000 and 1999 was $855,$751 and
$834, respectively.
D. SHORT TERM DEBT
Short term debt at January 31, 2001 and 2000 consisted of the
following:
2001 2000
-------- --------
Floating interest rate loan (2.5% over lender's prime rate)
secured by all of our tangible assets; weighted average
interest rate for the year ended January 31, 2001 was 12.2% $ 3,568 $ 2,264
======= =======
We had a line of credit of $7,000 from Coast Business Credit which was
collateralized by substantially all our assets and was guaranteed by the former
parent of Entrada. Advances were limited to 75% of eligible receivables and 30%
of eligible inventory. The loan bore interest at 2.5% over the lender's prime
rate but not less than 8%; the interest rate on the line of credit was 12.0% at
January 31, 2001. The highest amount outstanding was $4,011 and $5,283 during
fiscal years 2001 and 2000, respectively. The average amount outstanding was
$2,694 and $4,156 during fiscal years 2000 and 1999, respectively. Subsequent to
January 31, 2001, the Coast Business Credit credit facility was replaced with a
credit facility with Silicon Valley Bank. See Note N.
We were in compliance with our debt covenants at January 31, 2001.
F-11
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
E. LONG TERM DEBT
Long term debt at January 31, 2001 and 2000 consisted of the following:
2001 2000
-------- --------
Floating interest rate term loans (2.5% over Lender's prime
rate) secured by our machinery and equipment;
interest rate for year ended January 31, 2001 was 11.0% $ 186 $ 345
Obligations under finance leases (See Note F) 339 269
------- -------
525 614
Less: Current portion 394 312
------- -------
$ 131 $ 302
======= =======
Long term debt including capitalized leases at January 31, 2001 is
payable by year as follows:
2002 $ 394
2003 127
2004 4
------
$ 525
======
F. LEASES AND OTHER COMMITMENTS
Rental expense under operating leases was $542, $672 and $1,147 for the
years ended January 31, 2001, 2000 and 1999, respectively. The table below sets
forth minimum payments under capital and operating leases with remaining terms
in excess of one year, at January 31, 2001:
Capital Operating
Leases Leases
------- ------
2002 $ 317 $ 622
2003 53 625
2004 4 636
2005 - 550
2006 - 124
------- -------
374 $ 2,557
=======
Less: Amount representing interest (35)
-------
Present value of minimum annual rentals $ 339
=======
The net book value of equipment under capital leases was $384 and $331
at January 31, 2001 and 2000, respectively.
G. LITIGATION
From time to time we are involved in various litigation and proceedings
incidental to the normal conduct of our business. Although it is impossible to
predict the outcome of any outstanding legal proceedings, we believe that such
legal proceedings and claims, individually and in the aggregate, are not likely
to have a material effect on our financial position, the results of operations
or cash flows.
F-12
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
H. STOCKHOLDERS' EQUITY
We are authorized to issue the following shares of stock:
50,000,000 shares of Common Stock ($.001 par value)
2,000,000 shares of Preferred Stock ($.001 par value)
None of our preferred stock was outstanding during the years ended
January 31, 2001, 2000 and 1999.
I. STOCK OPTION PLANS AND STOCK AWARD PLAN
We have four stock options plans in effect: The 1991 Stock Option
Plan, the 1996 Stock Option Plan, the 1999 Stock Option Plan and the 2000 Stock
Option Plan. The plans provide for the granting of incentive or non-statutory
stock options to certain key employees, non-employee members of the Board of
Directors, consultants and independent contractors. Options are granted at a
price equal to 100% of the fair market value of our common stock at the date of
grant. Options typically vest at a rate of 25% of the shares on the first
anniversary of the vesting commencement date and 1/36th of the remaining shares
at the end of each month and expire not later than 10 years from the date of
grant at January 31, 2001. The purpose of these plans is to attract, retain,
motivate and reward our officers, directors, employees and consultants to
maximize their contribution toward our success.
As a result of the accounting for our reverse merger with Entrada
Networks (see Note A), we are considered as having no options to acquire our
common stock outstanding prior to the August 31, 2000 merger date. The
following table summarizes the activity in our plans:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
Shares under option at January 31, 2000 - $ -
Deemed granted due to merger (Note A) 646,902 $ 3.65
Granted 2,974,350 $ 4.08
Exercised (72,506) $ 2.24
Canceled (141,399) $ 3.06
---------
Shares under option at January 31, 2001 3,407,347 $ 4.08
=========
Additional information relating to stock options outstanding and
exercisable at January 31, 2001 summarized by exercise price is as follows:
Outstanding Exercisable
------------------------------ -----------------------------
Weighted Average
Exercise Price --------------------- Weighted Average
Per Share Shares Life (Years) Exercise Price Shares Exercise Price
--------- ------ ------------ -------------- ------ --------------
$0.40 - $3.19 1,035,742 9.33 $2.86 274,530 $2.59
$3.28 - $4.28 452,600 9.53 $4.05 232,912 $3.87
$4.37 1,599,500 9.58 $4.38 319,500 $4.38
$4.38 - $24.38 317,505 8.90 $6.03 273,542 $5.91
$91.25 2,000 5.32 $91.25 2,000 $91.25
--------- ---------
$0.40 - $91.25 3,407,347 9.43 $4.08 1,102,484 $4.36
========= =========
F-13
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
All stock options issued to employees have an exercise price not less
than the fair market value of our common stock on the date of grant, and in
accordance with the accounting for such options utilizing the intrinsic value
method there is no related compensation expense recorded in our financial
statements. Options which were granted prior to our August 31, 2000 merger were
valued as part of the consideration for the merger. Had compensation cost for
stock-based compensation been determined based on the fair value at the grant
dates in accordance with the method delineated in Statement of Accounting
Standards No. 123, our net loss and loss per share for the years ended
January 31, 2001, 2000 and 1999, would have been increased to the pro forma
amounts presented below:
2001 2000 1999
-------- -------- --------
Net loss:
As reported $(21,129) $ (3,387) $ (3,716)
Pro forma (21,416) (3,387) (3,716)
Loss per share:
Basic and diluted EPS as reported $ (2.98) $ (0.80) $ (0.88)
Pro forma basic and diluted EPS (3.02) (0.80) (0.88)
The fair value of option grants is estimated on the date of grant
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions:
2001
----
Risk free interest rate 6.0%
Stock volatility factor 0.45
Weighted average expected option life 5 years
Expected dividend yield 0%
Fair value of options granted $0.01 to $2.19
Weighted average fair value of options granted $0.48
F-14
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
J. INCOME TAXES
Our provision for taxes on income for the years ended January 31, 2001,
2000 and 1999, all of which are U.S. taxes, consist of:
Continuing Discontinued
Operations Operations Total
---------- ----------- -----
Year ended January 31, 2001:
Current $ - $ - $ -
Deferred - - -
------ ------ ------
Total $ - $ - $ -
====== ====== ======
Year ended January 31, 2000:
Current $ - $ n/a $ -
Deferred - n/a -
------ ------ ------
Total $ - $ n/a $ -
====== ====== ======
Year ended January 31, 1999:
Current $ - $ n/a $ -
Deferred - n/a -
------ ------ ------
Total $ - $ n/a $ -
====== ====== ======
Our operations generate permanent and temporary differences for
depreciation, amortization, valuation allowances and expense reserves. We have
recorded a 100% valuation allowance against our deferred tax assets, including
net operating loss carryforwards, in accordance with the provisions of Statement
of Financial Accounting Standards No. 109. Such allowance is recognized if,
based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
2001 2000
-------- --------
Deferred tax assets:
Valuation allowances $ 3,582 $ 990
Tax loss carryforwards 23,531 8,604
Depreciable assets 184 -
Expense reserves 1,975 172
-------- ---------
Gross deferred tax assets 29,272 9,766
Less: valuation allowance (29,272) (8,737)
-------- ---------
Deferred tax asset - 1,029
-------- ---------
Deferred tax liabilities:
Depreciable assets - 320
Software development costs - 709
-------- ---------
Deferred tax liabilities - 1,029
-------- ---------
Net deferred tax liability $ - $ -
======== =========
At January 31, 2001, we had federal net operating losses which may be
available to reduce future taxable income. Among potential adjustments which may
reduce available loss carryforwards, the Internal Revenue Code of 1986, as
amended, (IRC), reduces the extent to which net operating loss carryforwards may
be utilized in the event there has been an "ownership change" of a company as
defined by applicable IRC provisions. We believe that the issuances of our
equity securities and transfers of ownership of outstanding equity securities
resulted in such an ownership change on August 31, 2001. Further ownership
changes in the future, as defined by the IRC, may reduce the extent to which any
net operating losses may be utilized.
Our federal NOL carryforwards, after application of the change of
control limitation provided by the IRC, expire as follows:
2009 $ 1,497
2010 1
2011 13,688
2012 15,474
2018 12,962
2019 6,580
2020 12,149
--------
$ 62,351
========
The reconciliation between income tax expense and a theoretical United
States tax computed by applying a rate of 35% for the years ended January 31,
2001, 2000 and 1999, is as follows:
2001 2000 1999
-------- ---------- --------
Income (loss) from continuing operations
before income taxes $ (10,564) $ (3,387) $ (3,716)
========== ========= ========
Theoretical tax (benefit) at 35% $ (3,697) $ (1,185) $ (1,301)
Change in valuation allowance 3,697 1,185 1,301
---------- --------- --------
$ - $ - $ -
========== ========= ========
F-15
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
K. EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic and
diluted earnings per share.
2001 2000 1999
-------- -------- --------
Net loss available to common shareholders
used in basic EPS $ (21,129) $ (3,387) $ (3,716)
========== ========= ==========
Average number of common shares used in basic EPS 7,082,659 4,244,155 4,244,155
========== ========== ==========
We incurred a net loss from continuing operations for the years ending
January 31, 2001, 2000 and 1999. 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
share of dilutive potential common stock.
2001 2000 1999
-------- -------- --------
Net loss available to common shareholders
used in basic EPS $ (21,129) $ (3,387) $ (3,716)
========== ========== ==========
Average number of common shares used in basic EPS 7,082,659 4,244,155 4,244,155
Effect of dilutive securities: stock benefit plans 92,065 - -
---------- ---------- ----------
Average number of common shares and dilutive
potential common stock used in diluted EPS 7,174,724 4,244,155 4,244,155
========== ========== ==========
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 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 fiscal years ended January 31, 2000 and
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 2,214,000 for the fiscal year
ended January 31, 2001.
L. SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest expense and taxes paid approximated the related expenses for
the years ended January 31, 2001, 2000 and 1999.
The contribution by our former parent of our obligation to it of
$25,469 neither provided nor used cash. Accordingly, this transaction has been
excluded from the statement of cash flows.
New capital lease obligations for equipment incurred during the year
ended January 31, 2001 of $296 neither provided nor used cash. Accordingly,
this amount has been excluded from the statement of cash flows.
M. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to concentrations 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. One of our short-term investment accounts at a single institution
accounted for approximately 26% of current assets at January 31, 2001.
F-16
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Concentrations of credit risk with respect to trade receivables are
limited because there is a large number of customers in our customer base spread
across many industries and geographic areas. Two customers each accounted for
40.0%, and 25.2% of net sales for the year ended January 31, 2001. Three
customers each accounted for 19.4%, 18.7%, and 13.7% of net sales for the year
ended January 31, 2000. One customer accounted for 16.3% of fiscal 1999 net
sales. At January 31, 2001 three customers each accounted for 37.0%, 12.6%, and
12.1% of net receivables. At January 31, 2000 one customer accounted for 39.4%
of net receivables.
N. SUBSEQUENT EVENTS
Subsequent to January 31, 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 75% 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. The credit arrangement is subject to covenants regarding
our tangible net worth, and is collateralized by accounts receivable,
inventory and equipment.
O. RELATED PARTY TRANSACTIONS
We are subleasing a portion of our San Diego facility on a month-
to-month basis to a subsidiary of our former parent. During the five months
ended January 31, 2001 we received rent payments of $15.
P. VALUATION AND QUALIFYING ACCOUNTS
Changes in the inventory valuation reserve were as follows:
Balance at February 1, 1998 $ 3,149
Additions charged to costs and expenses 1,416
Amounts used during year (3,027)
--------
Balance at January 31, 1999 1,538
Additions charged to costs and expenses 936
Amounts used during year (448)
--------
Balance at January 31, 2000 2,026
Additions charged to costs and expenses 3,288
Amounts used during year (1,974)
--------
Balance at January 31, 2001 $ 3,340
========
Changes in the accounts receivable valuation reserve were as follows:
Balance at February 1, 1998 $ 470
Additions charged to costs and expenses 410
Amounts used during year (270)
-------
Balance at January 31, 1999 610
Additions charged to costs and expenses 43
Amounts used during year (204)
-------
Balance at January 31, 2000 449
Additions charged to costs and expenses 1,528
Amounts used during year (1,577)
-------
Balance at January 31, 2001 $ 400
=======
F-17
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Q. UNAUDITED QUARTERLY FINANCIAL DATA
Amounts in thousands, except per share amounts.
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Year ended January 31, 2001:
Net sales $ 3,710 $ 6,041 $ 7,890 $ 8,016 $ 25,657
Gross profit (1,688) 2,343 2,780 3,402 6,837
Income (loss) from
continuing operations (7,067) (750) (1,766) (981) (10,564)
Provision for income taxes - - - - -
Income (loss) from
discontinued operations - - (426) 271 (155)
Loss on disposal
of discontinued operations - - (10,410) - (10,410)
Net income (loss) (7,067) (750) (12,602) (710) (21,129)
Net income (loss) per share:
Basic (1.67) (0.18) (1.43) (0.06) (2.98)
Diluted (1.67) (0.18) (1.43) (0.06) (2.98)
Year ended January 31, 2000:
Net sales $ 6,418 $ 6,587 $ 8,030 $ 7,736 $ 28,771
Gross profit 2,527 2,928 3,571 2,247 11,273
Income (loss) from
continuing operations (705) (109) 313 (2,886) (3,387)
Provision for income taxes - - - - -
Net income (loss) (705) (109) 313 (2,886) (3,387)
Net income (loss) per share:
Basic (0.17) (0.03) (0.07) (0.68) (0.80)
Diluted (0.17) (0.03) (0.07) (0.68) (0.80)
Year ended January 31, 1999:
Net sales $ 6,287 $ 8,512 $ 7,204 $ 7,004 $ 29,007
Gross profit 3,007 3,900 3,204 2,853 12,964
Income (loss) from
continuing operations (1,972) (2,605) (582) 1,443 (3,716)
Provision for income taxes - - - - -
Net income (loss) (1,972) (2,605) (582) 1,443 (3,716)
Net income (loss) per share:
Basic (0.47) (0.61) (0.14) 0.34 (0.88)
Diluted (0.47) (0.61) (0.14) 0.34 (0.88)
F-18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we have duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENTRADA NETWORKS, INC.
By: /s/ Gilbert G. Goldbeck Date: May 4, 2001
--------------------------------------
Gilbert G. Goldbeck
Vice President Finance and Operations
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on our behalf and in the
capacities and on the dates indicated.
By: /s/ Kanwar J.S. Chadha Date: May 4, 2001
--------------------------------------
Kanwar J.S. Chadha
President, Director,
Chief Executive Officer
By: /s/ Leonard Hecht Date: May 4, 2001
--------------------------------------
Leonard Hecht
Director, Chairman
By: /s/ Rohit Phansalkar Date: May 4, 2001
--------------------------------------
Rohit Phansalkar
Director
By: /s/ Davinder Sethi Date: May 4, 2001
--------------------------------------
Davinder Sethi
Director
By: /s/ Raymond Ngan Date: May 4, 2001
--------------------------------------
Raymond Ngan
Director
31
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as ........................... 'TM'