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UNITED STATES
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, 2003
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 (IRS Employer
incorporation or organization) Identification Number)
12 Morgan
Irvine, California 92618
(Address of principal executive offices) (Zip Code)
(949) 588-2070
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 OTCBB
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.[_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [_] No [X]
The Registrant's revenues for its recent fiscal year were $13,630,900.
The aggregate market value of voting stock based upon the closing sale price
held by non-affiliates of the Registrant on July 31, 2002 was $1,651,541.
The aggregate market value of voting stock based upon the closing sale price
held by non-affiliates of the Registrant on March 31, 2003 was $2,503,452.
Number of shares outstanding of the Registrant's only class of common stock as
of March 31, 2003 (the latest practicable date): 12,936,774.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
TABLE OF CONTENTS
PART I
Item 1. Description of Business................................................................ 1
Understanding Our Market............................................................ 1
Our Strategic Plan.................................................................. 1
Markets for Our Products............................................................ 2
Storage Area Networking Market...................................................... 2
Sales and Marketing................................................................. 3
Customers and Markets............................................................... 3
Customer Service and Support........................................................ 3
Engineering, Research and Development............................................... 3
Manufacturing and Quality........................................................... 3
Working Capital Practices........................................................... 4
Forward-Looking Statements--Cautionary Statement.................................... 5
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................................. 14
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, 2003 and 2002...... 18
Results of Operations: Comparison of the Years Ended January 31, 2002 and 2001...... 19
Liquidity and Capital Resources..................................................... 22
Effects of Inflation and Currency Exchange Rates.................................... 23
New Accounting Standards............................................................ 23
Critical Accounting Policies and Estimates.......................................... 24
Other Matters....................................................................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 24
Item 8. Financial Statements and Supplementary Data............................................ 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 25
PART III
Item 10. Directors and Executive Officers of the Company........................................ 26
Item 11. Executive Compensation................................................................. 28
Compliance with Section 16(a) of the Exchange Act................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 30
Item 13. Certain Relationships and Related Transactions......................................... 31
PART IV
Item 14 Controls and Procedures................................................................ 32
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 32
SIGNATURES...................................................................................... 35
Certification Pursuant To Rule 13-A-14 Of The Securities Act Of 1934 As Adopted Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002 for Kanwar J. S. Chadha, PhD. 36
Certification Pursuant To Rule 13-A-14 Of The Securities Act Of 1934 As Adopted Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002 for Davinder Sethi, PhD. 37
Index to Consolidated Financial Statements F-1
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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., through its three wholly owned subsidiaries, is in the
business of developing, marketing and selling products for network connectivity.
Our Torrey Pines Networks ("Torrey Pines") segment is currently in the design,
development and product introduction phase and we are working toward the
manufacture, marketing and selling of storage area network ("SAN") transport
products.
Our Rixon Networks ("Rixon") segment designs, manufactures, markets and sells a
line of fast and gigabit Ethernet products that are incorporated into the remote
access and other server products of Original Equipment Manufacturers ("OEM"). In
addition, some of its products are deployed by telecommunications network
operators, applications service providers, internet service providers, and the
operators of corporate local area and wide area networks for the purpose of
providing access to and transport within their networks.
Our Sync Research ("Sync") segment designs, manufactures, markets, sells and
services frame relay products for some of the major financial institutions in
the U.S. and abroad.
In September 2000, our Board of Directors concluded that the operations of our
frame relay business 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 the Sync business. On September 6, 2001, we announced a
restructuring plan creating three separate wholly owned subsidiaries. The
discontinued frame relay business was retained as Sync Research, Inc. as one of
the three subsidiaries. Sync Research, Inc. continues to serve its current frame
relay customers and provide manufacturing, service and repair facilities for the
other subsidiaries. On September 18, 2001 our Board of Directors approved a plan
to reclassify Sync Research as an operating unit. In this capacity, Sync
Research, Inc. became an integral part of Entrada Networks.
Our financial statements reflect the retained financial position of the frame
relay business. Prior financial periods have been reclassified to reflect the
Sync retention. Unless otherwise specifically noted, this Annual Report refers
to the Entrada business that includes our Rixon Networks, Sync Research, and
Torrey Pines subsidiaries.
Understanding Our Market
(A glossary can be found beginning on page 12 for technical terms used
throughout this document.)
Our Strategic Plan
o Develop Storage over Light Transport Products. Torrey Pines has been engaged
in developing the next generation products that extend the range of the storage
area networks. We have received certifications for our first Silverline'TM'-CWDM
product line, and are in the process of introducing it into the market. Designed
to interconnect geographically separate data centers, the Silverline'TM'-CWDM is
our first fully optical Linux based 8-channel/4-port coarse wave division
multiplexing ("CWDM") product line that is based on our patent-pending
technology. It is a multi-protocol aggregation device that supports Fibre
Channel, Gigabit Ethernet, fibre connectivity ("FICON") or enterprise system
connection ("ESCON") to a mainframe and SONET, on one fully customized system.
o Continue Providing Network Connectivity Products. Rixon continues providing
products including 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 OEM's of server and other network products.
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o Continue Providing Services to Business Critical Applications Needing
Packetized Frame Relay Devices. Sync develops, manufactures, markets, supports
and sells wide-area network ("WAN") access and management products and services
designed to economically and reliably support business critical applications
across carrier provided packetized transmission services, such as frame relay.
Frame relay is a low-latency frame-switched WAN protocol recognized for, its
deployment flexibility and its ability to combine incompatible "protocols," such
as International Business Machines Corporation's mainframe Systems Network
Architecture ("SNA") and client/server Transmission Control Protocol/Internet
Protocol ("TCP/IP"), onto a single telecommunications circuit. Frame relay
represents a cost-effective and stable technology that provides a smooth
migration to asynchronous transfer mode and other broadband services generally
used in the backbone of many of these service providers.
Sync's strategy is to produce reliable and value-added network access devices
and management software applications that are engineered to support
mission-critical applications over frame relay and other digital services at a
favorable cost of ownership. Sync's FrameNode'TM'- line of frame relay access
devices and frame relay access routers converge business critical SNA, IP/IPX
and voice/fax branch applications across frame relay. Sync's circuit management
solutions consist of WAN probes and application software that improve the
availability and performance of frame relay networks by providing extensive
problem isolation and troubleshooting capabilities and proactive performance and
service-level management. Sync's TyLink'TM'- line of digital transmission
products including data service units and channel service units ("DSU/CSU") and
Integrated Services Digital Network ("ISDN") termination products, are the basic
elements that provide low cost connectivity to a digital WAN.
Today, many mainframe or similarly hosted data networks use expensive leased
lines to connect remote sites to central computing facilities or data centers.
Due to favorable carrier pricing and technical suitability, frame relay is a
less expensive, more efficient, direct substitute for such traditional leased
line connections and due to its maturity, is stable as compared to other
technology based alternatives, including the internet or other IP based
services.
Sync sells to resellers, distributors, OEM partners and a number of Regional
Bell Operating Companies and Inter-exchange Carriers. Current partners include,
AT&T, MCI WorldCom, Electronic Data Systems and Geico. Sync believes that its
relationships provide sufficient alternative channels of fulfillment to serve
the needs of middle and upper market customers. Also, Sync utilizes a
distribution and value-added reseller ("VAR") channel as a primary distribution
channels for its digital transmission products.
Markets for Our 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 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 the prospects for growth cited in the following discussion
regarding the 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.
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
may likely become the standard way of accessing stored information.
2
Sales and Marketing
Rixon's current sales and marketing activities are concentrated on increasing
market and account penetration for the existing fast and gigabit Ethernet
network connectivity product lines whose customers are primarily OEM server,
computer and peripheral vendors. Torrey Pines' is concentrating on gaining
customer acceptance of the Silverline'TM'-CWDM product line by large OEMs.
Sync's sales and marketing strategy focuses on developing relationships with
end-user middle market enterprises through its existing customer base and
promote Sync's products and drive demand for its products and services. The
primary roles of Sync's sales efforts are (i) to assist end user customers in
addressing complex network problems; (ii) to differentiate the features and
capabilities of Sync's products from competitive offerings; and (iii) provide
support to channel partners.
Our sales and marketing organization for the three subsidiaries at January 31,
2003 consisted of six (6) individuals, including managers, sales
representatives, and support personnel. The current channel mix is approximately
63.4% OEM, 7% indirect and 29.6% other. We support our customers by providing
product training, regular mailing of promotional and technical material,
telephone and other technical support.
Customers and Markets
Rixon's sales and marketing strategy is focused on communicating key benefits of
our server class fast & gigabit Ethernet adapter cards to our OEM customer base
and the end-user market that the OEMs service.
Torrey Pines' 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.
Sync follows a sales strategy relying primarily on leveraging resellers,
distributors, and a number of Service Providers as delivery channels for its
products, including several partners serving the international market. Sync
utilizes a distribution and value-added reseller channel as its primary
distribution channel for the digital transmission products. Sync has from time
to time entered into OEM relationships with selected internetworking companies
and will continue to develop such relationships as appropriate.
For fiscal 2003, Cisco accounted for 56.9% of our net revenues. Cisco
accounted for 19.6% and Solectron accounted for 11.3% of our net revenue for
the year ended January 31, 2002, and CISCO accounted for 40.0% and Solectron
accounted for 25.2% of our net revenue for the year ended January 31, 2001.
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. As of January 31, 2003 there were
three (3) employees working in customer service and support.
Engineering, Research and Development
As of January 31, 2003, there were eight (8) employees working in our
engineering, research and development area. Our research and development
expenditures were $1.2 million for the fiscal year ended January 31, 2003. Our
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 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 while
simultaneously focusing on our customers' strategic requirements.
Manufacturing and Quality
Our products are manufactured on an outsourced basis from various contract
manufacturers. Final assembly, test and quality assurance are performed by us at
our Irvine, California facility.
3
Our manufacturing strategy is to outsource all repetitive operations to
top-tier, third party contract 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 Irvine, California
facility.
We actively manage our components supply chain. Network connectivity and frame
relay 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.
As of January 31, 2003, there were ten (10) employees working in our
manufacturing, repair, test, shipping, receiving, purchasing, inventory control.
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, 2003, we had 183 days of inventory on hand.
Between fiscal 2001 and Fiscal 2002, we changed our inventory strategy to better
support our customers. Our inventory turnover ratio (cost of sales/average net
inventory) was 1.8 in fiscal 2002 compared to 4.0 in fiscal 2001. The drop in
turnover ratio or the relatively high level of inventory reflects the drop in
sales from fiscal 2001 to fiscal 2002 and the retention of the Sync Research
inventories. We have made significant increases to our reserves as shown below
in our inventory recap from the form 10-K from January 31, 2002 with the
increase in reserves from 41.9% on January 31, 2001 to 57.1% on January 31,
2002. The inventory we carry allows us to have resources available to anticipate
a market upswing. Many of our products require custom parts with longer than
average lead times and our inventory levels support our ability to provide fast
response to increased customer needs at the same time recognizing the need for
conservative inventory valuations. We have continued this strategy during fiscal
year 2003. During fiscal year 2003, $2.4 million in raw material parts was
disposed of and written off against the valuation reserve.
Fiscal Year 2002
-----------------------------------------
Fiscal Year 2003
Consolidated Consolidated Less Sync Net comparable Fiscal Year 2001
---------------- ------------ --------- -------------- ----------------
Raw material $ 3,736 $ 6,599 $ 1,172 $ 5,427 $ 5,659
Work in process 163 27 -- 27 672
Finished goods 3,486 2,932 1,790 1,142 1,645
------- ------- ------- ------- -------
7,385 9,558 2,962 6,596 7,976
Less: Valuation reserve (3,809) (5,459) (2,432) (3,027) (3,340)
------- ------- ------- ------- -------
$ 3,576 $ 4,099 $ 530 $ 3,569 $ 4,636
======= ======= ======= ======= =======
We perform ongoing credit evaluations of each of our customers' financial
condition and we extend unsecured credit related to the sales of various
products. For fiscal 2003, Cisco accounted for 45.9%, MCI Worldcom accounted
for 31.9% and Ingram Micro accounted for 10.9% of our net receivables. Cisco
accounted for 47.0%, Wells Fargo Bank accounted for 14.2%, and Solectron
accounted for 11.7% of net receivables at January 31, 2002. Our days sales
outstanding ("DSO") was at 36 days at January 31, 2003 and 53 days at
January 31, 2002
4
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 our 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, reliance on
vendors and product lines, competition, performance of new products, performance
of affiliates and their future operating results, our 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
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
Litigation 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 network connectivity
products and services and SAN transport equipment is extremely competitive
and we expect competition to continue to intensify in the future. Our
primary sources of competition include Adaptec, Intel Corporation,
Interphase, CNT, 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 MCI Worldcomase 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 revenue.
We operate in a market 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. Our next generation of
network management products as well as our wavelength division multiplexing
products are currently
5
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 that
adequate supplies of new products can be delivered to meet anticipated
Wells Fargo Bankemand. Any failure to effectively manage this transition
may cause us to lose current and prospective customers.
o Concentration of revenue and accounts receivables. We have a limited
number of customers which account for a significant proportion of our
net revenues and accounts receivables. The loss of one or more major
customers, or their inability to pay, could materially and adversely
effect our business, operating results and financial condition.
o Prior to the fiscal year 2003, ending January 31, 2003, we incurred net
losses over the previous three years and may experience future losses. We
have incurred losses from continuing operation during the years ended
January 31, 2002, 2001, and 2000 and of $10.7 million, $17.7 million, and
$3.4 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 credit lines and 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 to support our requirements and the
needed capital will have to be obtained from additional external sources.
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 our network connectivity and
storage area products for integrated deployment in larger systems. There
are a limited number of potential customers for our products. If we are not
selected by a potential Solectronor 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 Wells Fargo Bankemands. 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 CISCOnd 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' build out 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. 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.
6
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 establish and successfully maintain strategic alliances, our
business may be harmed. Strategic alliances are an important part of our
effort to expand our revenue 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 domestically and 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 emerging business for storage area networking products may be seriously
harmed if the market for storage area networking products does not develop
as we expect. Our planned 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
7
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 and Dr. Davinder Sethi,
our Chief Financial Officer would 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..
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 by 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 CISCOcceptance, we must address
such non-compliance in the design of our products. Standards for new
services and network management are still
8
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 our products. The failure
of our products to comply or delays in compliance, with the various
existing and evolving industry standards could delay introduction and
acceptance of our products, which could materially and adversely affect 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 revenue 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 revenue for the quarter. To achieve our revenue 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 product backlog on January 31, 2003 was approximately $2.5 million,
compared with a backlog of $1.9million at January 31, 2002. In addition to
this our service backlog on January 31, 2003 was approximately $0.6
million. We include in our backlog only orders confirmed with a purchase
order for products and services to be shipped or provided to our customers
with approved credit status within twelve months.
o Seasonality. Our revenues 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 revenue 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
9
manufacturing efficiencies and introduction of new products and
enhancements to existing products are required to maintain gross margins.
In response to Wells Fargo Bankemands 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 A substantial number of our common 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 and have
two patents pending for our Silverline'TM'product design. 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 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.
10
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, 2003 we had 35 employees and independent
contractors, including eight (8) in engineering, ten (10) in manufacturing,
test, repair and quality assurance, six (6) in sales, sales support and
marketing, three (3) in customer service and support, seven (7) in
administration, and one (1) executive. None of our employees are
represented by a collective bargaining agreement, and we believe that
relations with our employees are good, but we could be at risk if one or
more employees choose to leave.
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 our 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:
"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 OSI (Open Systems Interconnection), a
standardized architecture for designing networks.
"ISP" means an Internet Service Provider.
"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.
"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).
"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
12
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.
"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 58,000 square feet of office, manufacturing and distribution space as
detailed below.
Our facilities under lease include:
Location Square Footage Facility Type Expiration Date
- ---------------------------- -------------- ------------------------- ----------------
Annapolis Junction, Maryland 35,000 Unoccupied Office/Labs/Manufacturing October 31, 2004
Irvine, California 23,000 Office/Labs/Manufacturing August 14, 2004
We believe that our existing facilities are and will remain adequate for the
foreseeable future. We have consolidated all of our operations at our Irvine,
California facility. Our Annapolis Junction, Maryland facility is unoccupied. We
are actively marketing our Maryland facility.
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., plans to hold its next annual meeting in the near future
this fiscal year.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Our common stock was traded on Nasdaq under the symbol ESAN until October 30,
2002, when our securities started trading on the OTCBB continuing under the
symbol ESAN. Prior to August 31, 2000, we traded under the ticker symbol SYNX.
14
The following table sets forth the high and low closing prices for our common
stock as reported in the Nasdaq SmallCap and the OTCBB Market for the periods
indicated.
Fiscal 2001 High Low
- ----------- ----- -----
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
Fiscal 2002
- -----------
Quarter from February 1, 2001 to April 30, 2001 $3.88 $0.75
Quarter from May 1, 2001 to July 31, 2001 $1.32 $0.20
Quarter from August 1, 2001 to October 31, 2001 $0.28 $0.09
Quarter from November 1, 2001 to January 31, 2002 $0.22 $0.09
Fiscal 2003
- -----------
Quarter from February 1, 2002 to April 30, 2002 $0.25 $0.09
Quarter from May 1, 2002 to July 31, 2002 $0.35 $0.16
Quarter from August 1, 2002 to October 31, 2002 $0.19 $0.06
Quarter from November 1, 2002 to January 31, 2003 $0.05 $0.26
Equity Compensation Plan Information as of January 31, 2003:
Number of Securities
Remaining Available for
Number of Securities to be Weighted-Average Future Issuance under
Issued Upon Exercise of Exercise price of Equity Compensation Plans
Outstanding Options, Outstanding Options, (Excluding Securities
Warrants and Rights Warrants and Rights Reflected in Column (a))
-------------------------- -------------------- -------------------------
(a) (b) (c)
Plan category
Equity Compensation
Plans Approved by
Security Holders 1,506,742 $2.65 2,169,292
Equity Compensation
Plans Not Approved by
Security Holders 1,998,834* $0.25 --
--------- ----- ---------
Total 3,505,576 $1.28 2,169,292
* Represents 1,923,077 warrants issued to HandsOn Ventures, LLC. and 75,757
warrants issued to Silicon Valley Bank to acquire our common stock.
See Note K to the Consolidated Financial Statements for information regarding
the material features of the above plans approved by security holders.
On March 31, 2003, the closing sale price for our common stock was $0.27 per
share. There is no assurance that a market in our common stock will continue.
15
As of March 31, 2003 (the latest practicable date) there were approximately 927
shareholders of record, including brokerage firms and nominees, of our common
stock, and more than 10,200 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, 2003. The selected
consolidated statement of operations data set forth below for each of our five
most recent fiscal years, and the selected consolidated balance sheet data set
forth at January 31, 2003 and 2002, 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 the fiscal year ended January 31, 2000 and 1999, and the
consolidated balance sheet data set forth below at January 31, 2001, 2000 and
1999 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. The
historical financial information for fiscal 2001 has been restated to reflect
the retention of Sync Research, Inc. as a subsidiary of Entrada Networks
effective July 2001. The historical figures for net income (loss) did not
change.
Fiscal Year Ended January 31,
---------------------------------------------------
2003 2002 2001 2000 1999
------- -------- -------- -------- --------
Statement of Operations Data:
Net revenue $13,631 $ 13,263 $ 25,657 $ 28,771 $ 29,007
Net income (loss) from continuing operations $ 1,742 $(10,650) $(17,728) $ (3,387) $ (3,716)
Net income (loss) per share:
Basic $ 0.14 $ (0.66) $ (2.98) $ (0.80) $ (0.88)
Diluted $ 0.14 $ (0.66) $ (2.98) $ (0.80) $ (0.88)
Balance Sheet Data:
Cash & cash equivalents $ 808 $ 698 $ 9,953 $ 112 $ 198
Short- term investments 45 -- -- -- --
Restricted cash 300 300 300 -- --
Working capital 3,506 1,127 7,815 4,209 1,066
Total assets 7,671 9,439 22,012 16,544 16,750
Total debt (including capital leases) 542 828 4,093 2,878 4,825
Stockholders' equity (deficit) 4,910 3,238 10,136 (14,706) (11,319)
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". Our subsidiaries operate in different business
segments. Revenue and gross profit information for the subsidiaries is
provided, we plan to provide additional financial information on the
subsidiaries as it becomes formalized in future form 10-Q's and form 10-K's.
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.
In September 2000, our Board of Directors concluded that the operations of our
frame relay business 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 operated by Sync. On September 6, 2001, we
announced our restructuring plan creating three separate wholly owned
subsidiaries. The discontinued frame relay business was retained as Sync
Research, Inc. as one of the three subsidiaries. Sync Research, Inc. will
continue to serve its current frame relay customers and provide manufacturing,
service and repair facilities for the other subsidiaries. On September 18, 2001
our Board of Directors approved a plan to reclassify Sync Research as an
operating unit. In this capacity, Sync Research, Inc. became an integral part of
the Entrada Networks. Our financial statements reflect the operations and
financial position of the frame relay business as a discontinued operation for
some of the 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, 2003 and
January 31, 2002
Net revenue. Our consolidated net revenue from continuing operations was $13.6
million for fiscal 2003, compared with $13.3 million for fiscal 2002. Product
revenues increased to $12.2 million for fiscal 2003 from $10.1 million in fiscal
2002. The increase in product revenue for fiscal 2003 resulted primarily from
increased revenue from OEMs and end users of networking adapter card products.
Service revenue decreased from $3.1 million in fiscal 2002 to $1.4 million in
fiscal 2003. The decrease was due primarily to a decline in major frame relay
service customer renewals.
Our Sync Research net revenues from the frame relay and service business
declined 63.9% to $1.9 million for the fiscal year ended January 31, 2003
compared to $5.5 million net revenues for the fiscal year ended January 31,
2002. The largest portion of the drop for the fiscal year ended January 31,
2003 came from a 75.6% drop in frame relay product net revenues from $2.2
million in the fiscal year ended January 31, 2002 to $0.5 million for the fiscal
year ended January 31, 2003. This drop was due to several large one-time orders
in fiscal year 2002 and market impact of the discontinuance of the business
prior to it being retained.
Our Sync Research service revenue declined $1.8 million or 55% compared to
fiscal year 2002 primarily due to the loss of several major service customers.
Our Rixon Networks net revenues were primarily from adapter card product
revenues. These product revenues increased $3.8 million or 47.2% to $11.7
million for the fiscal year ended January 31, 2003 over $7.9 million the fiscal
year ended January 31, 2002. This was primarily due to an increase in our
original equipment manufacturer's business.
We had no revenues in our Torrey Pines Network subsidiary.
Gross profit. Cost of revenues consists principally of the costs of components,
subcontract assembly from outside contract manufacturers, and in-house system
integration, quality control, final testing, configuration costs and outside
service costs. Gross profit increased to $6.5 million for the fiscal 2003 from
$5.5 million for fiscal 2002. Our gross margin increased to 47.8% for the fiscal
year ended January 31, 2003 from 41.5% for fiscal 2002. The increase in gross
margins resulted primarily from our cost reductions that included both facility
consolidations and personnel reductions.
Our Sync Research gross profit of $1.1 million for the fiscal year ended January
31, 2003 dropped by $2.1 million or 70.0% compared to $3.0 million for the
fiscal year ended January 31, 2002. This was primarily due to a 48% drop in
service gross profit to $1.1 million due to fewer support customers and a
frame relay product gross profit drop to $0.0 million due to close outs done
during the period.
Our Rixon Networks gross profit of $5.4 million increased by $2.9 million or
116% for the fiscal year ended January 31, 2003 over the gross profit of the
prior fiscal year of $2.5 million. Increased net revenues and personnel and
facility cost reductions during the fiscal year in combining our Annapolis
Junction, MD and our San Diego, CA facilities into our Irvine, CA facility of
$0.9 million were the major elements of the increase.
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 $0.8 million for fiscal 2003 from $3.4 million for fiscal 2002. The reduction
in selling and marketing costs reflects personnel reductions and facility
consolidations in fiscal 2002. As a percentage of revenue, selling and marketing
expenses decreased to 6.1% for fiscal 2003 from 25.9% for fiscal 2002.
Engineering, research and development. Engineering, research and development
expenses consist primarily of compensation related costs for engineering
personnel, facilities costs, and materials used in the design, development and
support of our technologies. All research and development costs are expensed as
incurred. Engineering, research and
18
development expenses decreased to $1.2 million, or 8.6% of net revenue, for
fiscal 2003, compared with $6.5 million, or 49.0% of net revenue, for fiscal
2002. The decrease in research and development expenses was primarily due to
cost savings achieved through the consolidation of facilities and personnel
reductions.
General and administrative. General and administrative expenses consist
primarily of employee compensation and related costs, legal and accounting fees,
public company costs, and occupancy costs. General and administrative expenses
were $2.1 million, or 15.7% of net revenue, for fiscal 2003, compared with $4.0
million, or 30.4% of net revenue, for fiscal 2002. The decrease in general and
administrative expenses is primarily due to the consolidation of all of our
operations in our Irvine, CA facility and organizational restructuring during
fiscal year 2003
Other operating expenses. Other operating expenses for fiscal 2003 include a
$0.5 million reserve recorded against our closed facility in Annapolis Junction,
MD. This is a decrease from the fiscal 2002 other operating expense of $1.7
million which included expenses from the staff reductions and severance through
the closure of our Annapolis Junction, MD and San Diego, CA facilities and the
reduction in our marketing, sales, and research and development.
Income taxes. There was no provision for income taxes for fiscal years 2003 and
2002. 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 had a
change of ownership in fiscal year 2001 that will limit the amount of any net
operating loss carry forward we may use in a particular year.
Discontinued operations. In September 2000, our Board of Directors had concluded
that the operations of our frame relay business 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 operated by Sync.
On September 6, 2001, we announced our restructuring plan creating three
separate wholly owned subsidiaries. The discontinued frame relay business was
retained as Sync Research, Inc. as one of the three subsidiaries. Sync Research,
Inc. will continue to serve its current frame relay customers and provide
manufacturing, service and repair facilities for the other subsidiaries. On
September 18, 2001 our Board of Directors approved a plan to reclassify Sync
Research as an operating unit. In this capacity, Sync Research, Inc. became an
integral part of the Entrada Networks. For more details on the discontinued
operation, please refer to the "Results of Operations: Comparison of the Years
Ended January 31, 2002 and January 31, 2001", Discontinued operations section.
Results of Operations: Comparison of the Years Ended January 31, 2002 and
January 31, 2001
With the reclassification of Sync Research, Inc. as an operating unit during the
third quarter of fiscal year ended January 31, 2002, the historical figures for
the "Loss from Discontinued Operations" for twelve months ended January 31,
2001, as previously reported of $(155,000), was reclassified as an adjustment to
operating expenses in cost of sales of $67,000; selling and marketing of
$18,000; engineering of $30,000; and general and administrative of $40,000. To
provide comparable financial statements, the prior period statements of
operations reflect the reclassification of the impaired inventory of $2.2
million as a charge to "cost of sales", and $4.8 million as of January 31, 2001
and 2000, respectively of the disposal to "other expenses" leaving $3.4 million
remaining as the (income) loss on discontinued operations. The $3.4 million
offsetting balances in fiscal 2001 and fiscal 2002 income statements are the
balance of the goodwill of $4.3 million reduced by the $0.9 million Sync
Research income at the interim period when Sync was retained. As a result of the
decision to discontinue and retain Sync Research, Inc., there were no material
commitments or contingencies. The historical figures for net loss did not change
for the year ended January 31, 2001 and 2000. The details of the discontinued
operation and its subsequent retention are detailed in "Discontinued
Operations" below. As a result of the decision to discontinue and then retain
Sync Research, Inc., there were no material commitments or contingencies. The
historical figures for net income (loss) did not change. There is also a
separate $2.8 million inventory impairment charge included in Cost of Revenues
that is described in more detail under the section "Gross Profit" below.
Net revenue. Our consolidated net revenue from continuing operations was $13.3
million for fiscal 2002, compared with $25.7 million for fiscal 2001. Ninety
three percent (93.0%) of the decrease in net revenue for fiscal 2002 resulted
primarily from decreased revenue of networking adapter products to our largest
OEM's which decreased by $11.5 million or 65.9% in fiscal 2002 as compared to
fiscal 2001. This was due to the significant market downturn in calendar year
2001 and to a lesser degree to distributors of remote access and print server
products.
Gross profit. Cost of sales consists principally of the costs of components,
subcontract assembly from outside contract manufacturers, and in-house system
integration, quality control, final testing and configuration costs. Gross
profit increased to $5.5 million for the fiscal 2002 from $4.5 million for
fiscal 2001. The increase in gross margins resulted primarily from the Company
returning to normal margins.
19
There were two distinct and separate inventory adjustments that occurred in
fiscal 2001. First was a $2.8 million valuation adjustment for Rixon Networks'
legacy products included in continuing operations. The second was the $2.2
million inventory impairment for the discontinuance of Sync Research. A gross
margin for fiscal 2001 that would exclude the two adjustments would have been
37.6%. The gross margin including the $2.2 million, but excluding the $2.8
million adjustment was 28.6%, and the gross margin including both adjustments is
17.7%. For fiscal 2002, the gross margin increased to 41.5% due primarily to the
retention of the Sync Research subsidiary whose products sell at a more
profitable gross margin of 54.9%.
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 $3.4 million for fiscal 2002 from $5.2 million for fiscal 2001. The reduction
in selling and marketing costs reflects personnel reductions and facility
consolidations in fiscal 2002. As a percentage of revenue, selling and marketing
expenses increased to 25.9% for fiscal 2002, from 20.4% for fiscal 2001. The
increase in selling and marketing costs as a percentage of revenue is due to
lower revenue for fiscal 2002 compared with the prior year.
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 decreased to $6.5
million, or 49.0% of net revenue, for fiscal 2002, compared with $6.9 million,
or 26.7% of net revenue, for fiscal 2001. The decrease in research and
development expenses was primarily due to cost savings achieved through the
consolidation of facilities towards the end of the fiscal year.
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 $4.0 million, or 30.4% of net revenue, for fiscal 2002, compared
with $2.9 million, or 11.4% of net revenue, for fiscal 2001. The increase in
general and administrative expenses is primarily due to costs incurred in fiscal
2002 relating to the establishment of our headquarters facility in San Diego,
CA. These additional expenses were partially offset by cost savings from the
consolidation of our facilities. As a result of the merger and establishment of
our headquarters in San Diego, CA, we added a layer of senior management and
incurred additional costs associated with operating as a public company,
including the costs of proxies, mailing, annual reports and stockholders'
meetings.
Other operating expenses. Other operating expenses for fiscal 2002 include a
$1.7 million expense recorded against the staff and facility reductions. We
reduced our staff by 107 through the closure of our Annapolis Junction, MD and
San Diego, CA facilities and the reduction in our marketing, sales, and research
and development. This is a decrease from the fiscal 2001 other operating expense
of $6.9 million which included expenses from the discontinued operation of Sync
Research, Inc.
Income taxes. There was no provision for income taxes for fiscal years 2002 and
2001. We have carry forwards of domestic federal net operating losses, which may
be available, in part, to reduce future taxable income in the United States.
However, the Internal Revenue Code limits the application of net operating loss
carry forwards in the event of ownership changes of greater than 50%. We had a
change of ownership in fiscal year 2001 that will limit the amount of any net
operating loss carry forward we may use in a particular year.
Discontinued operations. In September 2000, our Board of Directors had concluded
that the operations of our frame relay business 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 operated by Sync.
20
The $10.4 million loss on the disposal of Sync during the fiscal year ended
January 21, 2001 is as follows:
Amount
Item (millions) Description
- ---- ---------- -----------
Inventory impairment $ 2.2 This adjustment records a full reserve against the cost basis
of Sync's inventory based upon the intent to abandon the
inventory. This assumes that as a discontinued
operation, the inventory value is zero as the need to
dispose of inventory would result in minimal return.
Severance 1.1 This adjustment records the costs associated with the
termination of our employees and assumes the elimination of
all of the Sync employees: 45 people including 8 change of
control/contract personnel.
Vendor payables 1.1 We recorded an accrual for costs due and payable under
the termination provisions of an agreement with a
contract manufacturing vendor.
Lease termination accrual 0.7 We recorded an accrual for the remaining lease costs and
lease related costs for the physical location of the
discontinued operations, net of sub lease income.
Goodwill impairment 4.3 Assumes 4.2 million shares at $2.75 per share offset by
the valuation of Sync Research of $8.4 million at August
30, 2000 with the addition of $1.1 million merger
expenses.
Fixed asset impairment 1.0 This adjustment assumed that the Sync fixed asset book value
would be fully reserved as a discontinued operation due to the
abandonment of fixed assets.
-----
Total Loss $10.4
=====
On September 6, 2001, we announced our restructuring plan creating three
separate wholly owned subsidiaries. The discontinued frame relay business was
retained as Sync Research, Inc. as one of the three subsidiaries. Sync Research,
Inc. will continue to serve its current frame relay customers and provide
manufacturing, service and repair facilities for the other subsidiaries. On
September 18, 2001 our Board of Directors approved a plan to reclassify Sync
Research as an operating unit. In this capacity, Sync Research, Inc. became an
integral part of Entrada Networks.
With the reclassification of Sync Research, Inc. as an operating unit during the
third quarter of fiscal year ended January 31, 2002, the historical figures for
the "Loss from Discontinued Operations" for twelve months ended January 31,
2001, as previously reported of $(155,000), was reclassified as an adjustment to
operating expenses in cost of sales of $67,000; selling and marketing of
$18,000; engineering of $30,000; and general and administrative of $40,000. To
provide comparable financial statements, the prior period statements of
operations reflect the reclassification of the impaired inventory of $2.2
million as a charge to "cost of sales", and $4.8 million as of January 31, 2001
and 2000, respectively of the disposal to "other expenses" leaving $3.4 million
remaining as the (income) loss on discontinued operations. The $3.4 million
offsetting balances in fiscal 2001 and fiscal 2002 income statements are the
balance of the goodwill of $4.3 million reduced by the $0.9 million Sync
Research income at the interim period when Sync was retained. As a result of the
decision to discontinue and retain Sync Research, Inc., there were no material
commitments or contingencies. The historical figures for net loss did not change
for the year ended January 31, 2001 and 2000.
21
The following table presents, at January 31, 2003, our obligations and
commitments to make future payments under contracts and contingent commitments.
Payment Due by Period as of January 31, 2003
Less After
(In thousands) than 1-3 4-5 5
Contractual Obligations Total 1Year Years Years Years
- ---------------------------------------------------------------------------------
Short Term Debt $ 474 $ 474 $ -- $-- $--
Capital Lease Obligations 68 68 -- -- --
Operating Leases 1,482 632 850 -- --
------ ------ ---- --- ---
Total Contractual Cash Obligations $2,024 $1,174 $850 $ $
Liquidity and Capital Resources
At January 31, 2003, our working capital was $3.5 million and cash and cash
equivalents and short-term investments were $0.9 million. At January 31, 2002,
our working capital was $1.1 million and cash and cash equivalents were $0.7
million.
Cash flow provided by operations was $0.8 million during the fiscal year ended
January 31, 2003 compared with cash flow used by operations of $4.2 million for
the fiscal year ended January 31, 2002. Cash flow provided by operations in
fiscal 2003 reflects $1.7 million of net profit from operations, adjustments for
non-cash expenses including depreciation, amortization, and reserves, less a
$1.7 million decrease in accounts payable, less a $1.5 million decrease in
accrued expenses, plus a $0.6 million decrease in accounts receivable and a $0.5
million decrease in inventories. During fiscal 2002, our cash flow used in
operations reflects $7.2 million of net loss from operations including
adjustment for non-cash expenses including depreciation, amortization, and
reserves, plus a $0.7 million decrease in accounts payable, a $1.6 million
increase in gross inventories and a $2.6 million decrease in accrued expenses
and a $2.7 million decrease in accounts receivable.
Our investing activities consist primarily of purchases of property, plant and
equipment a. We purchased $25,500 and $2.0 million in equipment during the
fiscal years ended January 31, 2003 and 2002, respectively.
Our financing activities during the fiscal year ended January 31, 2003 included
repayments on our bank loan of $0.2 million and the repayment of the $250,000
senior convertible debenture with its beneficial conversion feature.
Our Silicon Valley Bank credit facility has a maximum limit of $2.0 million,
subject to a limitation equal to 65% of our eligible receivables plus the lesser
of $1.0 million or 40% of the liquidation value of our eligible inventory.
Borrowings under the credit line bear interest at the bank's prime rate plus
2.5% (10.7% at January 31, 2003). 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. These warrants were valued at $54,000. The
$54,000 deferred interest was amortized as interest expense over the
twelve-month term of the credit arrangement in the previous fiscal year of
2002. The credit arrangement is subject to covenants regarding our tangible
net worth, and is collateralized by accounts receivable, inventory and
equipment. The credit facility will expire on October 31, 2003. In March 2003
the bank increased our eligible receivables limit to 80% of eligible accounts
receivable. We are in compliance with our bank line of credit covenants as of
January 31, 2003.
We anticipate that our available cash resources will be sufficient to meet our
presently anticipated capital requirements through fiscal 2004. We are always
pursuing external equity financing arrangements that could enhance our liquidity
position in the coming years. Nonetheless, our future capital requirements may
vary materially from those now planned
22
including the need for additional working capital to accommodate infrastructure
needs. There can be no assurances that our working capital requirements will not
exceed our ability to generate sufficient cash internally to support our
requirements and that external financing will be available or that, if
available, such financing can be obtained on terms favorable to us and our
shareholders.
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 revenue 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 revenue 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
revenue in that country. In addition, inflation in such countries could increase
our expenses. In the future, we may engage in foreign currency denominated
revenue 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.
New Accounting Standards
In June 2001, Financial Accounting Standards Board (FASB) issued Statement No.
143 (SFAS No. 143), "Accounting for Asset Retirement Obligations," effective for
fiscal years beginning after June 15, 2002. The Statement requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
entity capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. The
adoption of SFAS No. 143 did not have a material effect on our financial
position or results of operations.
In April 2002, FASB issued Statement No. 145 (SFAS No. 145), "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" effective on or after May 15, 2002. This Statement rescinds SFAS
No. 4 and an amendment of that Statement, and SFAS No. 64. This Statement also
rescinds SFAS No. 44. SFAS No. 145 prevents gains or losses on the
extinguishment of debt that do not meet the criteria of APB 30 to be treated as
extraordinary. This Statement amends SFAS No. 13, to eliminate an inconsistency
between the required accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. This Statement
also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The adoption of SFAS No. 145 did not have a material effect
on our financial position or results of operations.
In June 2002, FASB issued Statement No. 146 (SFAS No. 146), "Accounting for
Costs Associated with Exit or Disposal Activities," effective for activities
that are initiated after December 31, 2002, with early application encouraged.
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The adoption of SFAS No. 146 did not have a material effect on
our financial position or results of operations.
In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company is required to follow the prescribed format and provide the additional
disclosures required by SFAS No. 148 in its annual financial statements for the
year ended December 31, 2002 and must also provide the disclosures in its
quarterly reports containing condensed financial statements for interim periods
beginning
23
with the quarterly period ended March 31, 2003 (April 30, 2003 for us). The
adoption of SFAS No. 148 did not have a material effect on our financial
position or results of operations. The adoption of SFAS No. 148 did result in a
modification of disclosure in our financial statements included in this Annual
Report on Form 10-K and will result in modified disclosure in our quarterly
financial statements included in future quarterly reports on Form 10-Q.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." In the course of business the Company
has contractual guarantees in the form of warranties. However, these warranties
are limited and do not represent significant commitments or contingent
liabilities of the indebtedness of others. This pronouncement is effective for
financial statements issued after December 15, 2002 and is not expected to
have a material impact on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements." This pronouncement requires the
consolidation of variable interest entities, as defined, and is effective
immediately for variable interest entities created after January 31, 2002, and
for variable interest entities in which an enterprise obtains an interest after
that date. We have no variable interest entities and thus this interpretation
is not expected to have a material impact on our financial statements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to our valuation of inventory and our allowance for uncollectable
accounts receivable. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may materially differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
o Inventory is evaluated on a continual basis and reserve
adjustments are made based on management's estimate of future
sales value, if any, of specific inventory items. Reserve
adjustments are made for the difference between the cost of the
inventory and the estimated market value and charged to
operations in the period in which the facts that give rise to the
adjustments become known.
o Accounts receivable balances are evaluated on a continual basis
and allowances are provided for potentially uncollectable
accounts based on management's estimate of the collectability of
CISCOccounts. If the financial condition of a customer were
to deteriorate, resulting in an impairment of their ability to
make payments, an additional allowance may be required. Allowance
adjustments are charged to operations in the period in which the
facts that give rise to the adjustments become known.
Other Matters
From time to time, we are involved in various 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.
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 revenues 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
revenue in that country. In addition, inflation in such countries could increase
our expenses. In the future, we may engage in foreign currency denominated
revenue 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.
24
We do not hold or issue derivative, derivative commodity instruments or other
financial instruments for trading purposes. Investments held for other than
trading purposes do not impose a material market risk.
We believe that the relatively moderate rate of inflation in the United States
over the past few years and the relatively stable interest rates incurred on
short-term financing have not had a significant impact on our revenue, 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.
25
PART III
Item 10. Directors and Executive Officers of the Company
On March 31, 2003, our directors and executive officers were:
Name Age Position
---- --- --------
Kanwar J.S. Chadha 57 Chairman, President, Chief Executive Officer, Director
Davinder Sethi 56 Vice Chairman, Chief Financial Officer, Director (i)
Leonard Hecht 66 Director (ii)(iii)
Raymond Ngan 30 Director (ii)
Rohit Phansalkar 58 Director (ii)(iv)
(i) Member of Compensation Committee, (ii) Member of Audit and Compensation
Committees, (iii) Chairman of Audit Committee, (iv) Chairman of Compensation
Committee
The Board of Directors met twelve times in fiscal 2003. Since June 2002, Raymond
Ngan has not participated in any of the board or corporate matters. Furthermore,
our board recently voted not to nominate Raymond Ngan for reelection as a
director at the next shareholders meeting.
Our By-Laws provide that the members of the Board of Directors shall be elected
at each annual meeting of stockholders and to hold office until the next annual
shareholder meeting. 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 except for the chairman of
the Audit Committee who receives $2,500 per day for the Audit Committee meeting.
The Board of Directors has two committees: Audit and Compensation. There are no
family relationships between any directors and officers, except as discussed
below.
Dr. Kanwar J.S. Chadha, Chairman, 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. We also have employment agreements with Dr. Chadha that runs through
April 14, 2004 and with Dr. Davinder Sethi, our Chief Financial Officer that
runs through October 31, 2005.
Dr. Kanwar J.S. Chadha, 57, has served as the President and Chief Executive
Officer of Entrada since April 2000. He was elected as a director on August 31,
2000 and elected Chairman on September 28, 2001. He joined AT&T Bell
Laboratories in February 1973 as a Member of Technical Staff and served as a
systems engineer and 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 and development. From 1988
to 1999, he ran his own private businesses in the graphic arts arena. 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, 66, has served as one of our directors since August 31, 2000
and as our Chairman from September 2000 until August 2001. 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
26
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 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 acquisitions, divestitures,
licensing, joint ventures and venture investing for the Xerox Corporation. Mr.
Hecht has served on the board of many private and public companies.
Dr. Raymond Ngan, 30, 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.
Rohit Phansalkar, 58, has served as one of our directors since August 31, 2000.
Mr. Phansalkar was the Chairman and CEO of Sorrento Networks Corporation from
July to September 2000. He was a partner of Anderson Weinroth & Co. LP from
February 1998 to June 2000. Prior to that, 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, Xius Technologies and Vyvos, Inc. Mr. Phansalkar received a BS in
engineering from Michigan Technological University and a MBA from Harvard
Graduate School of Business.
Dr. Davinder Sethi, 56, has served as our Chief Financial Officer since November
1, 2001. He has been a director of Entrada since September 2000. He was elected
our Vice Chairman on November 19, 2001. Dr. Sethi is an independent advisor in
the fields of information technology and finance. He 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 Pamet Systems, Inc. and
WorldWater Corporation. Dr. Sethi is a first cousin of Dr. Chadha, our Chairman.
27
Item 11. Executive Compensation
The following tables set forth the annual compensation for both individuals who
served as our Chairman and Chief Executive Officer ("CEO") for the fiscal year
ended January 31, 2003 and for our Vice Chairman and Chief Financial Officer
("CFO"). There were no other executive officers at the end of the fiscal year
who served the company during the year and whose salary and bonus exceeded
$100,000.
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------------------- -----------------------------------
Other Restricted Securities Long-Term All
Annual Stock Underlying Incentive Other
Fiscal Salary Bonus Compensation Award(s) Options Plan Compensation
Name and Principal Position Year ($) ($) ($) ($) (#) Payouts ($)
- --------------------------- ------ ------- ------ ------------ ---------- ---------- --------- ------------
Kanwar J.S. Chadha, 2003 257,942 -- -- 100,000 -- -- --
Chairman, CEO, 2002 211,110 -- -- 160,000 --
President, 2001 141,038 92,625 -- -- 500,000 -- --
Director
Davinder Sethi,
Vice Chairman, CFO, 2003 180,000 -- -- 50,000 -- -- --
Director 2002 35,805 -- -- -- 500,000 --
2001 -- -- -- -- 100,000 -- --
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% ($)
---- ----------- ------------- --------- --------- ---------- ------ ------ -------
Kanwar J.S. Chadha None (B)
Davinder Sethi None (B)
(A) In accordance with Securities and Exchange Commission rules, these
columns s how gains that might exist for the respective options,
assuming that the market price of our common stock appreciates from
the date of t he grant over the term of the option at rates of 5% and
10%, respectively.
(B) Neither officer received any grants during the fiscal year 2003
28
Aggregated Option Exercises in Fiscal Year 2003 and
January 31, 2003 Option Values
Number of
Shares Securities Underlying Value of Unexercised
Acquired Unexercised Options In-the-Money Options
On Value at Fiscal Year-End (#) at Fiscal Year-End ($) (A)
Exercise Realized --------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
Kanwar J. S. Chadha None None
Davinder Sethi -- 225,000 275,000 13,250 $13,750
(A) Options are "in-the-money" if, on January 31, 2003, the market price
of the Common Stock ($0.12) 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, 2003, and the aggregate
exercise price of such options.
(B) During fiscal 2003 a tender offer was made to all employees, directors
and consultants holding options at a strike price of $1.18 or greater
to surrender their current options in exchange for new options granted
by the Board of Directors six months and a day after the cancellation
July 31, 2002 of the existing options. Both Dr. Chadha and Dr. Sethi
voluntarily participated in this program. Dr. Chadha had no active
options at January 31, 2003. Details of the program are provided in SC
TO filings with the Security and Exchange commission dated June 24,
2002, June 28, 2002, July 30, 2002 and August 2, 2002
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, 2003.
29
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 31, 2003,
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 (H)
- ---------------------------- --------- ---------------
Kanwar J.S. Chadha 1,406,384(B) 10.9%
Leonard N. Hecht 261,621(C) 2.0%
Rohit Phansalkar 363,619(D) 2.8%
Davinder Sethi 1,137,823(E) 8.4%
Raymond Ngan 311,534(F) 2.4%
All Directors and Executive Officers as a group 3,480,981 23.8%
HandsOn Ventures, LLC 2,171,482(G) 14.1%
Sorrento Networks Corporation 1,152,500 8.9%
Springboard-Harper Technology Fund (Cayman) Ltd 741,249 5.7%
- ----------
(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 12
Morgan, Irvine, California 92618.
(B) Includes exercisable options held by Dr. Chadha to acquire 660,000 shares
of common stock and shares directly owned by Dr. Chadha of 746,384 shares.
On February 5, 2002 the board of directors approved payment of $50,000 of
Dr. Chadha's salary for fiscal year 2003 in stock at the price of the stock
on January 29, 2002 as reported by Nasdaq at the close of business. On
January 29, 2002, the price was $0.13 per common share with the $50,000
payable by issuing 384,615 shares to him. On April 23, 2002 the board of
directors approved payment of $50,000 of Dr. Chadha's salary for fiscal
year 2004 in stock at the price of the stock on May 20, 2002 as reported by
Nasdaq at the close of business. On May 20, 2002, the price was $0.16 per
common share with the $50,000 payable by issuing 361,769 shares to him. On
February 3, 2003 Dr. Chadha was issued options at a price of $0.22 per
share for 660,000 shares replacing the like amount of options cancelled
July 31, 2002 as part of our employee Tender Offer filed with the
Securities and Exchange Commission in June, 2002.
(C) Includes exercisable options held by Mr. Hecht to acquire 150,000 shares of
common stock and 116,621 shares indirectly owned by him. On April 23, 2002
the board of directors approved payment of $3,500 of Mr. Hecht's past board
fees in stock at the price of the stock on May 20, 2002 as reported by
Nasdaq at the close of business. On May 20, 2002, the price was $0.16 per
common share with the $3,500 payable by issuing 21,875 shares to 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. On February 3, 2003 Mr.
Hecht was issued options at a price of $0.22 per share for 100,000 shares
replacing the like amount of options cancelled July 31, 2002 as part of our
employee Tender Offer filed with the Securities
30
and Exchange Commission in June, 2002.
(D) Includes exercisable options held by Mr. Phansalkar to acquire 150,000
shares of common stock and 213,619 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. On May 20,
2002 Mr. Phansalkar received 18,750 shares of common stock for his unpaid
past board fees in the amount of $3,000 at the market price of May 20, 2002
which was at $0.16 per share. Mr. Phansalkar also owns approximately 3,500
shares of the common stock of Sorrento Networks Corporation. On February 3,
2003 Mr. Phansalkar was issued options at a price of $0.22 per share for
100,000 shares replacing the like amount of options cancelled July 31, 2002
as part of our employee Tender Offer filed with the Securities and Exchange
Commission in June, 2002.
(E) Includes exercisable options held by Dr. Sethi to acquire 600,000 shares of
common stock and 537,823 shares owned directly or indirectly by him. On
February 5, 2002 the board of directors approved payment of $50,000 of Dr.
Sethi's salary for fiscal year 2002 into stock at the price of the stock on
January 29, 2002 as reported by Nasdaq at the close of business. On January
29, 2002 the price was $0.13 per common share with the $50,000 resulting in
384,615 shares being issued to him. On May 20, 2002 Dr. Sethi received
25,000 shares of common stock for his payment of $4,000 at the price of
$0.16 per share. On February 3, 2003 Dr. Sethi was issued options at a
price of $0.22 per share for 100,000 shares replacing the like amount of
options cancelled July 31, 2002 as part of our employee Tender Offer filed
with the Securities and Exchange Commission in June, 2002.
(F) Includes exercisable options held by Dr. Ngan to acquire 150,000 shares of
common stock and 161,538 shares owned directly or indirectly by him. On
February 5, 2002 Dr. Ngan received 161,538 shares of common stock for his
unpaid past board fees in the amount of $21,000 at the market price of
January 29,2002 which was at $0.13 per share.
(G) Includes shares beneficially owned by HandsOn Ventures, LLC including
48,405 shares, options that are currently exercisable or exercisable within
60 days after February 18, 2003 for 200,000 shares per HandsOn Ventures 13G
filing with the SEC, and rights to acquire 1,923,077 shares under currently
exercisable warrants.
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 31, 2003
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
Effective October 12, 2001, our subsidiary Torrey Pines Network, Inc. sold, on a
non-exclusive basis, rights relating to the Silverline'TM' -WDM product to Meret
Communications, Inc. for $200,000, which was paid in full at that time. We have
no further obligations to Meret regarding this technology. Meret is a subsidiary
of Sorrento Networks Corporation, the owner of approximately 8.9% of our
outstanding shares of common stock.
Dr. Chadha's brother is the managing partner of HandsOn Ventures, LLC purchaser
of the $250,000 senior convertible debenture and warrants referred to in Item
7under the section titled "Liquidity and Capital Resources" above. The debenture
was fully paid off and retired on January 7, 2003. The warrants received by
HandsOn Ventures for 1,923,077 shares of Entrada stock expire January 15, 2007
31
PART IV
Item 14 Controls and Procedures
(a) Disclosure Controls and Procedures. We maintain controls and
procedures designed to ensure that we are able to collect the
information required to disclose in the reports we file with the SEC,
and to process, summarize and disclose this information within the
time periods specified in the rules of the SEC. Our Chief Executive
and Chief Financial Officers are responsible for establishing and
maintaining these procedures and, as required by the rules of the SEC,
evaluate their effectiveness. Based on their evaluation of our
controls and procedures which took place as of a date within 90 days
prior to the filing date of this report, Chief Executive and Chief
Financial Officers believe that these procedures are effective to
ensure that Entrada Networks is able to collect, process and disclose
the information we are required to disclose in the reports it files
with the SEC within the required time periods.
(b) Changes in Internal Controls. We maintain a system of internal
controls designed to provide reasonable assurance that: transactions
are executed in accordance with our management's general or specific
authorization; transactions are recorded as necessary to (1) to permit
preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America, and
(2) to maintain accountability for assets; access to assets is
permitted only in accordance with our management's general or specific
authorization; and the recorded accountability for assets is compared
with the exiting assets at reasonable intervals and appropriate action
is take with respect to any difference.
Since the date of the most recent evaluation of our internal controls
by the Chief Executive and Chief Financial Officers, there have been
no significant changes in such controls or in other factors that could
have significantly affected those controls, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Item 15. 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)
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at January 31, 2003 and 2002
Consolidated Statements of Operations for the Years Ended
January 31, 2003, 2002 and 2001
Consolidated Statement of Stockholders' Equity for the Years Ended
January 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2003, 2002 and 2001
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)
32
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
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)
4.5 2000 Stock Incentive Plan dated October 12, 2000 - (H)
4.6 Securities Purchase Agreement dated January 15, 2002-(K)
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
10.4 Amended lease for 9020 Junction Drive, Annapolis Junction, MD
dated April 22, 1999
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
10.8 Silicon Valley Bank Subordination Agreement dated January 22,
2002
10.9 Form of Employment Agreement Between Entrada and Kanwar J.S.
Chadha dated May 10, 2001
10.10 Form of Employment Agreement Between Entrada and Davinder Sethi
dated June 15, 2002 - filed herewith
10.11 Silicon Valley Bank Amendment to Loan Agreement dated March 20,
2003 - filed herewith
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP dated May 4, 2001
99.1 Statement Under Oath for Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act - filed herewith
99.2 Statement Under Oath for Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act - filed herewith
- ----------
The foregoing are incorporated by reference from the Registrant's
filings as indicated:
33
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.
K Form 8-K filed January 25, 2002
L Form S-8 filed December 14, 2000
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) Reports on Form 8-K
Our Form 8-K/A filed November 25, 2002 amending the terms of the
merger.
Our Form 8-K filed January 16, 2003 describing the termination of our
merger agreement.
Our Form 8-K filed January 22, 2003, covering our paying off the
$250,000 convertible debenture.
34
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/ Davinder Sethi Date: April 29, 2003
-----------------------------------------------
Davinder Sethi, Ph.D.
Chief Financial Officer
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: April 29, 2003
-----------------------------------------------
Kanwar J.S. Chadha, Ph.D.
Chairman, President, Director,
Chief Executive Officer
By: /s/ Leonard Hecht Date: April 29, 2003
-----------------------------------------------
Leonard Hecht
Director
By: /s/ Rohit Phansalkar Date: April 29, 2003
-----------------------------------------------
Rohit Phansalkar
Director
By: /s/ Davinder Sethi Date: April 29, 2003
-----------------------------------------------
Davinder Sethi, Ph.D.
Vice Chairman, Director
By: ----------------------------------------------- Date: April 29, 2003
Raymond Ngan
Director
35
ENTRADA NETWORKS, INC.
CERTIFICATION PURSUANT TO
RULE 13-A-14 OF THE SECURITIES ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Kanwar J.S. Chadha, Ph. D., certify that;
1. I have reviewed this report on Form 10-K of Entrada Networks, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based upon
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 18, 2003
/s/ Kanwar J.S. Chadha,
- --------------------------
Kanwar J.S. Chadha, Ph. D.
Chief Executive Officer
36
ENTRADA NETWORKS, INC.
CERTIFICATION PURSUANT TO
RULE 13-A-14 OF THE SECURITIES ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Davinder Sethi, Ph. D., certify that:
1. I have reviewed this report on Form 10-K of Entrada Networks, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based upon
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 18, 2003
/s/ Davinder Sethi
- --------------------------
Davinder Sethi, Ph. D.
Chief Financial Officer
37
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----------
Report of Independent Certified Public Accountant F-2
Consolidated Balance Sheets as of January 31, 2003 and 2002 F-3
Consolidated Statements of Operations for the years ended
January 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Stockholders' Equity for the years ended
January 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7 to F-19
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholders and Board of Directors
Entrada Networks, Inc.
Irvine, California
We have audited the accompanying consolidated balance sheets of Entrada
Networks, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
January 31, 2003 and 2002 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended January 31, 2003. 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 that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of January 31, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years in the period ended January 31, 2003,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ BDO Seidman, LLP
- --------------------------
BDO Seidman, LLP
Los Angeles, California
March 28, 2003
F-2
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
================================================================================
January 31, 2003 January 31, 2002
---------------- ----------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 808 $ 698
Short-term investments 45 --
Accounts receivable, net (Note R) 1,329 1,977
Inventory, net (Notes B, and R) 3,576 4,099
Prepaid expenses and other current assets 509 527
-------- --------
TOTAL CURRENT ASSETS 6,267 7,301
-------- --------
PROPERTY AND EQUIPMENT, NET (Note C) 1,073 1,807
-------- --------
OTHER ASSETS
Deposits 31 31
Restricted Cash 300 300
-------- --------
TOTAL OTHER ASSETS 331 331
-------- --------
TOTAL ASSETS $ 7,671 $ 9,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 810 2,713
Other current and accrued liabilities (Note E) 1,409 2,660
Short-term debt (Note D) $ 474 $ 686
Current maturities of long term debt and capital leases (Note G) 68 115
-------- --------
TOTAL CURRENT LIABILITIES 2,761 6,174
-------- --------
Long-term debt and capital lease obligations (Notes G and H) -- 27
TOTAL LIABILITIES 2,761 6,201
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes H and I)
STOCKHOLDERS' EQUITY (Note J)
Common stock, $.001 par value; 50,000 shares authorized; 12,937 shares
issued and outstanding at January 31, 2003; 11,579 shares issued
and outstanding at January 31, 2002 13 12
Additional paid-in capital 52,001 52,072
Accumulated deficit (47,104) (48,846)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 4,910 3,238
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,671 $ 9,439
======== ========
See accompanying notes to consolidated financial statements.
F-3
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts)
================================================================================
Years Ended
January 31
-----------------------------
2003 2002 2001
------- -------- --------
NET REVENUES
PRODUCT $12,243 $ 10,125 $ 24,606
SERVICES 1,388 3,138 1,051
------- -------- --------
TOTAL NET REVENUES 13,631 13,263 25,657
COST OF REVENUE
PRODUCT 6,909 6,868 20,812
SERVICES 206 889 302
------- -------- --------
TOTAL COST OF REVENUE 7,115 7,757 21,114
------- -------- --------
GROSS PROFIT 6,516 5,506 4,543
------- -------- --------
OPERATING EXPENSES
Selling and marketing 830 3,438 5,239
Engineering, research and development 1,172 6,499 6,860
General and administrative 2,139 4,035 2,913
Other operating expenses 480 1,741 6,875
Non-recurring one-time charges (Note F) -- 248 --
------- -------- --------
TOTAL OPERATING EXPENSES 4,621 15,961 21,887
------- -------- --------
INCOME (LOSS) FROM OPERATIONS 1,895 (10,455) (17,344)
------- -------- --------
OTHER CHARGES
Interest expense, net (69) (195) (384)
Other expense (84) -- --
------- -------- --------
TOTAL OTHER CHARGES (153) (195) (384)
------- -------- --------
INCOME (LOSS) FROMCONTINUING OPERATIONS 1,742 (10,650) (17,728)
INCOME (LOSS) ON DISCONTINUED
OPERATIONS (Note A) -- 3,401 (3,401)
------- -------- --------
NET INCOME (LOSS) $ 1,742 $ (7,249) $(21,129)
======= ======== ========
INCOME (LOSS) PER COMMON SHARE (Note M):
BASIC AND DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 12,801 10,994 7,083
NET INCOME (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.14 $ (0.97) $ (2.50)
DISCONTINUED OPERATIONS -- 0.31 (0.48)
------- -------- --------
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ 0.14 $ (0.66) $ (2.98)
======= ======== ========
F-4
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
For the Years Ended January 31, 2003, 2002 and 2001
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
================================================================================
COMMON
STOCK ADDITIONAL TOTAL
--------------- PAID IN ACCUMULATED STOCKHOLDERS'
Shares Amount CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
Balance at January 31, 2000 1 $ 1 $ 5,761 $(20,468) $(14,706)
------ --- ------- -------- --------
Stock option exercises (Note K) 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
------ --- ------- -------- --------
Silicon Valley Bank Warrants -- -- 42 -- 42
Beneficial conversion feature of
convertible note (Note G) -- -- 229 -- 229
Stock issuance program 586 11 79 -- 80
Net Loss (7,249) (7,249)
------ --- ------- -------- --------
BALANCE AT JANUARY 31, 2002 11,579 $12 $52,072 $(48,846) $ 3,238
------ --- ------- -------- --------
Stock issuance program 1,358 1 188 -- 189
Acquisition of beneficial conversion
feature (Note G) -- -- (259) -- (259)
Net income -- -- -- 1,742 1,742
------ --- ------- -------- --------
BALANCE AT JANUARY 31, 2003 12,937 $13 $52,001 $(47,104) $ 4,910
====== === ======= ======== ========
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,
----------------------------
2003 2002 2001
------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,742 $(7,249) $(21,129)
------- ------- --------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Long-lived asset valuation allowances (Note B) -- -- 6,550
Depreciation and amortization 606 2,700 1,642
Non cash write off 1,062 -- --
Non cash interest 104 -- --
Write off of fixed assets 153 -- --
Accounts receivable and inventory impairment (Note R) -- 2,412 4,816
Warrants issued in conjunction with credit facility -- 42 --
Gain on extinguishment of convertible note (134)
Issuance of common stock in payment of liabilities 100 80 --
Changes in assets and liabilities net of effects of business entity
acquisition:
(Increase) decrease in accounts receivable 648 2,720 911
(Increase) decrease in due from affiliates -- -- 753
(Increase) decrease in inventories (538) (1,582) 317
(Increase) decrease in prepaid and other current assets 17 65 390
Increase (decrease) in accounts payable (1,722) (722) (2,246)
Increase (decrease) in accrued expenses (1,474) (2,620) 1,231
Increase (decrease) in other current liabilities 196 -- (1,917)
------- ------- --------
NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATING ACTIVITIES 760 (4,154) (8,682)
------- ------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from (purchase of) property and equipment (26) (2,055) (1,627)
Net assets acquired in merger -- -- 7,636
Short-term investments (45) -- --
------- ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (71) (2,055) 6,009
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of beneficial conversion feature (Note 6) (259) -- --
Advances from former parent company, net of repayments -- -- 3,700
Proceeds from issuances of common stock (Note J) 4 -- 8,025
Net proceeds from short-term debt (Note D) (211) (2,882) 1,304
Proceeds (repayment) from long-term debt, net (Note G) 30 250 --
Repayment of capital lease obligations (Note H) (143) (414) (384)
Net change in restricted cash -- -- (300)
Proceeds from exercise of stock options (Note K) -- -- 169
------- ------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (579) (3,046) 12,514
------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 110 (9,255) 9,841
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 698 9,953 112
CASH AND CASH EQUIVALENTS - END OF YEAR $ 808 $ 698 $ 9,953
======= ======= ========
See accompanying notes to consolidated financial statements.
F-6
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
A. THE COMPANY, BASIS OF PRESENTATION AND DISCONTINUED OPERATIONS
Entrada Networks, Inc., through its wholly owned subsidiaries, (the
"Company", "we", "our" or "us"), is in the business of developing, marketing and
selling products for the network connectivity segments. Our Torrey Pines
Networks ("Torrey Pines") subsidiary's product line is currently in the design,
development and product introduction phase and we are working toward the
manufacture, marketing and selling of storage area network ("SAN") transport
products. Our Rixon Networks ("Rixon") subsidiary designs, manufactures,
markets and sells a line of fast and gigabit Ethernet products that are
incorporated into the remote access and other server products of Original
Equipment Manufacturers ("OEM"). In addition, some of its products are
deployed by telecommunications network operators, applications service
providers, internet service providers, and the operators of corporate
local area and wide area networks for the purpose of providing access to and
transport within their networks. And, our Sync Research ("Sync") subsidiary
designs, manufactures, markets, sells and services frame relay products for
some of the major financial institutions in the U.S. and abroad.
We operate from our facility in Irvine, California.
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 shares of our common stock, and the issuance of an 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.
Subsequent to the merger, the former parent of Entrada Networks disposed of
5,517,500 of its shares of our common stock and holds approximately 1,152,500 or
8.9% of our common shares outstanding as of January 31, 2003.
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. Accounting principles generally accepted in the
United States of America 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 was accounted for as a "reverse merger," whereby Entrada Networks was
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
was written off in 2001 as a component of other operating expense. We had also
changed our year-end to that of Entrada Networks.
For the fiscal year ended January 31, 2003, we began to formally quantify
subsidiary financial information. We will provide additional detailed financial
information in future form 10-Q and 10-K reports as appropriate.
Discontinued operations. In September 2000, our Board of Directors had concluded
that the operations of our frame relay business 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 operated by Sync.
F-7
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
The $10.4 million loss on the disposal of Sync during the fiscal year ended
January 21, 2001 is as follows:
Amount
Item (millions) Description
- ---- ---------- -----------
Inventory impairment $ 2.2 This adjustment records a full reserve against the cost basis
of Sync's inventory based upon the intent to abandon the
inventory. This assumes that as a discontinued
operation, the inventory value is zero as the need to
dispose of inventory would result in minimal return.
Severance 1.1 This adjustment records the costs associated with the
termination of our employees and assumes the elimination of
all of the Sync employees: 45 people including 8 change of
control/contract personnel.
Vendor payables 1.1 We recorded an accrual for costs due and payable under
the termination provisions of an agreement with a
contract manufacturing vendor.
Lease termination accrual 0.7 We recorded an accrual for the remaining lease costs and
lease related costs for the physical location of the
discontinued operations, net of sub lease income.
Goodwill impairment 4.3 Assumes 4.2 million shares at $2.75 per share offset by
the valuation of Sync Research of $8.4 million at August
30, 2000 with the addition of $1.1 million merger
expenses.
Fixed asset impairment 1.0 This adjustment assumed that the Sync fixed asset book value
would be fully reserved as a discontinued operation due to the
abandonment of fixed assets.
-----
Total Loss $10.4
=====
On September 6, 2001, we announced our restructuring plan creating three
separate wholly owned subsidiaries. The discontinued frame relay business was
retained as Sync Research, Inc. as one of the three subsidiaries. Sync Research,
Inc. will continue to serve its current frame relay customers and provide
manufacturing, service and repair facilities for the other subsidiaries. On
September 18, 2001 our Board of Directors approved a plan to reclassify Sync
Research as an operating unit. In this capacity, Sync Research, Inc. became an
integral part of Entrada Networks.
With the reclassification of Sync Research, Inc. as an operating unit
during the third quarter of fiscal year ended January 31, 2002, the historical
figures for the "Loss from Discontinued Operations" for twelve months ended
January 31, 2001, as previously reported of $(155,000), was reclassified as an
adjustment to operating expenses in cost of sales of $67,000; selling and
marketing of $18,000; engineering of $30,000; and general and administrative of
$40,000. To provide comparable financial statements, the prior period statements
of operations reflect the reclassification of the impaired inventory of $2.2
million as a charge to "cost of sales", and $4.8 million as of January 31, 2001
and 2000, respectively of the disposal to "other expenses" leaving $3.4 million
remaining as the (income) loss on discontinued operations. The $3.4 million
offsetting balances in fiscal 2001 and fiscal 2002 income statements are the
balance of the goodwill of $4.3 million reduced by the $0.9 million Sync
Research income at the interim period when Sync was retained. As a result of the
decision to discontinue and retain Sync Research, Inc.,
F-8
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
there were no material commitments or contingencies. The historical figures for
net loss did not change for the year ended January 31, 2001 and 2000.
For the year ended January 31, 2001, Sync had net accounts receivables of
$0.6 million, net inventory of $0.5 million, and prepaid expenses of $0.2
million offset by current liabilities of $2.0 million. The net increase in
shareholder equity from the retention of Sync increased $3.4 million at January
31, 2001.
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 2003 refer to the
fiscal year beginning on February 1, 2002 and ending on January 31, 2003.
Principles of Consolidation - The balance sheets as of January 31, 2003 and
2002 and the consolidated statement of operations for the years ended January
31, 2003, 2002 and 2001 reflect our accounts and all subsidiaries controlled by
us after the elimination of significant inter-company transactions and balances.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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 materially 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.
Restricted Cash - Restricted cash represents amounts pledged as collateral
for remaining lease payments on the facility occupied by us 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. 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, 2003 and 2002 consist
of:
2003 2002
------- -------
Raw material $ 3,736 $ 6,599
Work in process 163 27
Finished goods 3,486 2,932
------- -----
7,385 9,558
Less: Valuation reserve (3,809) (5,459)
------ ------
$ 3,576 $ 4,099
======= =======
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.
F-9
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
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. Internal software development costs are capitalized in accordance with
Statement of Position 98-1. Otherwise, development costs that will become an
integral part of our products are deferred in accordance with Statement of
Financial Accounting Standards No. 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. Internal software that
was terminated and expensed for the years ended January 31, 2003, 2002 and 2001
was $0, $0, and $787, respectively.
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. Revenue from service obligations 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 estimated sales returns and other allowances
at the time of shipment. Although some of 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.
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 carry forwards 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 direct expenditures. Advertising expenses for fiscal 2003,
2002, and 2001 were $0, $184, and $30, 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
F-10
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
and warrants. Potential common shares would not be included in the diluted loss
per share computation for fiscal 2002 and 2001, as they would be anti-dilutive.
(See Note K).
Stock-Based Compensation - In December 2002, FASB issued Statement No. 148
(SFAS No. 148), "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- An Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company is required to follow the prescribed
format and provide the additional disclosures required by SFAS No. 148 in its
annual financial statements for the year ended December 31, 2002 and must also
provide the disclosures in its quarterly reports containing condensed financial
statements for interim periods beginning with the quarterly period ended March
31, 2003. The adoption of SFAS No. 148 did not have a material effect on our
financial position or results of operations. The adoption of SFAS No. 148 did
result in a modification of disclosure in our financial statements included in
this Annual Report on Form 10-K and will result in modified disclosure in our
quarterly financial statements included in future quarterly reports on Form
10-Q.
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 income and income per share for the year ended January
31, 2003 would decrease and our net loss and loss per share for the years ended
January 31, 2002 and 2001, would have been increased to the pro forma amounts
presented below:
Fiscal Year
---------------------------
2003 2002 2001
------ ------- --------
Net income (loss):
As reported $1,742 $(7,249) $(21,129)
Add: Stock based employee compensation expense -- -- --
Deduct: Total stock based employee compensation
expense determined under fair value method (15) (836) (287)
Pro forma 1,727 (8,085) (21,416)
Income (loss) per share:
Basic and diluted EPS as reported $ 0.14 $ (0.66)) $ (2.98)
Pro forma basic and diluted EPS 0.13 (0.74) (3.02)
New Accounting Pronouncements
Accounting for Asset Retirement Obligations - In June 2001, Financial
Accounting Standards Board (FASB) issued Statement No. 143 (SFAS No. 143),
"Accounting for Asset Retirement Obligations," effective for fiscal years
beginning after June 15, 2002. The Statement requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The adoption
of SFAS No. 143 will not have a material effect on our financial position or
results of operations.
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections - In April 2002, FASB issued Statement No. 145
(SFAS No. 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" effective on or after May 15,
2002. This Statement rescinds SFAS No. 4 and an amendment of that Statement, and
SFAS No. 64. This Statement also rescinds SFAS No. 44. SFAS No. 145 prevents
gains or losses on the extinguishment of debt that do not meet
F-11
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
the criteria of APB 30 to be treated as extraordinary. This Statement amends
SFAS No. 13, to eliminate an inconsistency between the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The adoption
of SFAS No. 145 did not have a material effect on our financial position or
results of operations.
Accounting for Costs Associated with Exit or Disposal Activities - In June
2002, FASB issued Statement No. 146 (SFAS No. 146), "Accounting for Costs
Associated with Exit or Disposal Activities," effective for activities that are
initiated after December 31, 2002, with early application encouraged. This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The adoption of SFAS No. 146 did not have a material effect on
our financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." In the course of business the Company
has contractual guarantees in the form of warranties. However, these warranties
are limited and do not represent significant commitments or contingent
liabilities of the indebtedness of others. This pronouncement is effective for
financial statements issued after December 15, 2002 and is not expected to
have a material impact on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities," an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." This pronouncement
requires the consolidation of variable interest entities, as defined, and is
effective immediately for variable interest entities created after January 31,
2002, and for variable interest entities in which an enterprise obtains an
interest after that date. We have no variable interest entities and thus this
interpretation is not expected to have a material impact on our financial
statements.
C. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following components as of January
31, 2003 and 2002:
2003 2002
------- ------
Manufacturing, engineering and plant equipment and software $ 8,471 $8,547
Office furniture and fixtures 275 299
Leasehold and building improvements 249 523
------- ------
Total property and equipment 8,995 9,369
Less: Accumulated depreciation and amortization (7,922) (7,562
------- ------
Net book value $ 1,073 $1,807
======= ======
Depreciation expense for fiscal 2003, 2002, and 2001 was $606, $2,700, and
$1642, respectively.
D. SHORT TERM DEBT
Short term debt at January 31, 2003 and 2002 consisted of the following:
2003 2002
---- ----
Floating interest rate loan based on 2.5% over lender's
prime rate secured by all of our tangible assets $474 $686
==== ====
F-12
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Our Silicon Valley Bank credit facility has a maximum limit of $2.0
million, subject to a limitation equal to 65% of our eligible receivables plus
the lesser of $1.0 million or 40% of the liquidation value of our eligible
inventory. Borrowings under the credit line bear interest at the bank's prime
rate plus 2.5% (10.7% Interest at January 31, 2003). 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 warrants were valued
at $54,000 at the time of issuance. The $54,000 of deferred interest was
amortized as interest expense over the twelve month term of the credit
arrangement in the fiscal year 2002. The credit arrangement is subject to
covenants regarding our tangible net worth, and is collateralized by accounts
receivable, inventory and equipment. The credit facility will expire on
October 31, 2003. In March 2003 the bank increased our eligible receivables
limit to 80% of eligible accounts receivable. We are in compliance with our
bank line of credit covenants as of January 31, 2003.
We were in compliance with our debt covenants at January 31, 2003.
E. OTHER CURRENT AND ACCRUED LIABILITIES
Fiscal Year
---------------
2003 2002
------ ------
Payroll and employee benefits $ 202 $ 765
Severance -- 150
Deferred revenue -- 325
Deferred maintenance 559 336
Legal -- 125
Office lease 257 386
Other 391 573
------ ------
$1,409 $2,660
====== ======
F. NON-RECURRING ONE-TIME CHARGES
In fiscal 2002 we settled the San Diego, CA building lease for $168 and resolved
several restructuring issues for $60.
G. LONG-TERM DEBT
Long-term debt at January 31, 2003 and 2002 consisted of the following:
2003 2002
---- ----
$250 senior convertible note bearing interest at
10% per annum due January 29, 2004. Monthly interest payments
with principal due upon maturity. The note was convertible
into 1,923,077 shares of our common stock at $0.13 per share.
The issuance of warrants with the debt which are convertible
into 1,923,077 shares of our common stock at $0.13 per share
expiring January 29, 2007 resulted in a beneficial conversion
feature to the note holder. We recorded the debt net of a
discount of $229 resulting from the value attributed to the
warrants issued with the note and the beneficial conversion
feature. We repaid the note on January 17,2003. -- 21
Obligations under finance leases (See Note H) 68 121
--- ----
68 142
68 115
Less: Current portion --- ----
$-- $ 27
=== ====
F-13
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
H. LEASES AND OTHER COMMITMENTS
Rental expense under operating leases was $686, $911, and $542 for the
years ended January 31, 2003, 2002 and 2001, respectively. The table below sets
forth minimum payments under capital and operating leases with remaining terms
in excess of one year, at January 31, 2003:
Capital Operating
Leases Leases
------- ---------
2004 $68 $ 632
---
2005 -- 544
---
2006 -- 306
---
Thereafter -- --
------
-- $1,482
--- ======
Less: Amount representing interest 1
---
Present value of minimum annual rentals $67
===
The net book value of equipment under capital leases was $100 and $121 at
January 31, 2003 and 2002, respectively.
In the merger agreement between Sync Research and our former parent, Sorrento
Networks Corporation, Sorrento agreed to indemnify and hold us harmless against
any liability arising after the merger in connection with the termination of a
certain pension plan maintained by Entrada. A consultant retained by Sorrento
and by the successor corporation to the entity from whom Sorrento originally
purchased the company that became Entrada, has advised them that the cost of
termination of the pension plan in question is in excess of $3 million. Our
obligation is to oversee the administration of the plan.
I. LITIGATION
From time to time we are involved in various litigation and proceedings
incidental to the normal conduct of our business. Although it is impossible to
predict the outcome of any outstanding legal proceedings, we believe that such
legal proceedings and claims, individually and in the aggregate, are not likely
to have a material effect on our financial position, the results of operations
or cash flows.
J. STOCKHOLDERS' EQUITY
We are authorized to issue the following shares of stock:
50,000,000 shares of Common Stock ($.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, 2003 and 2002.
K. STOCK OPTION PLANS AND STOCK AWARD PLAN
We have four stock options plans: The 1991 Stock Option Plan, the 1996
Stock Option Plan, the 1999 Stock Option Plan and the 2000 Stock Option Plan.
Only the 2000 Stock Option Plan is in effect. This plan provides 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. The purpose of this plan 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:
F-14
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
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
Granted 1,376,400 $0.61
Canceled (1,777,981) $3.39
----------
Shares under option at January 31, 2002 3,005,766 $2.89
Granted 85,500 $0.14
Cancelled (1,584,524) $3.59
----------
Shares under option at January 31, 2003 1,506,742 $2.65
========== =====
Additional information relating to stock options outstanding and
exercisable at January 31, 2003 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
- -------------- --------- ------------ -------------- --------- ----------------
$0.10 - $ 0.11 263,250 8.67 $0.11 219,532 $0.11
$0.15 - $ 0.15 450,000 8.75 $0.15 175,000 $0.15
$0.17 - $ 3.19 302,692 7.79 $1.53 237,276 $1.87
$4.00 - $ 5.00 439,300 7.60 $4.57 439,263 $4.57
$5.63 - $20.00 51,500 4.87 $9.24 51,500 $9.24
--------- ---------
$0.10 - $20.00 1,506,742 8.07 $2.02 1,122,571 $2.65
========= =========
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:
2003 2002
-------------- --------------
Risk free interest rate 4.1% 5.0%
Stock volatility factor 196% 190%
Weighted average expected option life 8.07 years 8.82 years
Expected dividend yield 0.0% 0.0%
Fair value of options granted $0.01 to $0.16 $0.01 to $2.94
Weighted average fair value of options granted $0.13 $0.61
On May 20, 2002, the board authorized the conversion of unpaid past due
board fees, contributed capital, and compensation to be paid in stock. $189 was
converted into 1,358,162 shares at between $0.13-$0.16 per share, the fair value
of our common stock on the date of grant.
L. INCOME TAXES
At January 31, 2003, our deferred income tax assets consists of net
operating loss carry forwards.
At December 31, 2002 the Company had available federal and state net
operating loss carry forwards of approximately $76 million and $26.8 million,
respectively, for income tax purposes. The federal and state losses will expire
in varying amounts through 2021 and 2007, respectively. As of January 2003, 2002
and 2001 our effective income tax rate differs from the federal statutory income
tax rate due to state taxes net of federal benefit, and other items.
The utilization of the loss carry forwards as an offset to future taxable
income is subject to limitations under U.S. federal income tax laws. One such
limitation is imposed when there is a greater than 50% ownership change. We
believe that such an ownership change occurred on August 31, 2000. Of the
approximately $76 million and $26.8 million NOL for federal and state taxes,
approximately $64 million and $20.6 million will be subject to such limitation,
respectively. At January 31, 2003 and 2002, a we recorded a valuation allowance
to reduce the deferred
F-15
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
tax asset to zero because the recognizition of the tax benefit could not be
assured.
M. EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic and diluted
earnings per share.
2003 2002 2001
----------- ----------- ----------
Net income (loss) available to common shareholders
used in basic EPS $ 1,742 $ (7,249) $ (21,129)
=========== =========== ==========
Average number of common shares used in basic EPS 12,800,555 10,994,240 7,082,659
=========== =========== ==========
We incurred a net loss from continuing operations for the years ending
January 31, 2002 and 2001. Accordingly, the effect of dilutive securities
including vested and non-vested stock options, warrants, and convertible debt,
to acquire common stock are not included in the calculation of EPS because their
effect would be antidilutive. The following data shows the effect on income and
the weighted average number of shares of dilutive potential common stock.
2003 2002 2001
----------- ----------- ----------
Net income (loss) available to common shareholders
used in basic EPS $ 1,742 $ (7,249) $ (21,129)
=========== =========== ==========
Average number of common shares used in basic EPS 12,800,555 10,994,240 7,082,659
Effect of dilutive securities: stock benefit plans 84,134 -- --
----------- ----------- ----------
Average number of common shares and dilutive
potential common stock used in diluted EPS 12,884,689 10,994,240 7,082,659
=========== =========== ==========
For the fiscal years ended January 31, 2002 and January 31, 2001, 148,495
and 92,065 options, respectively, were not included in the computation of
diluted earnings per shares because their exercise price was greater than the
average market price of the common shares for the period.
N. SUPPLEMENTAL CASH FLOW DISCLOSURES
On May 20, 2002, the board authorized the conversion of unpaid past due
board fees, contributed capital, and compensation to be paid in stock. $189 of
unpaid expenses were converted into 1,358,162 shares at prices between
$0.13-$0.16 per share, the fair market value of our common stock at the date of
grant.
O. 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 and limit. At times such amounts may exceed
F.D.I.C. limits.
F-16
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Customers greater than 10% of our net revenues and net receivables in the given
fiscal years are as follows:
Percent net revenues Percent net receivables
Description Fiscal years ended January 31, Fiscal years ended January 31,
- ----------- ------------------------------ ------------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Cisco 56.9% 19.6% 40.0% 45.9% 47.0% 37.0%
MCI Worldcom -- -- -- 31.9 -- --
Ingram Micro -- -- -- 10.9 -- --
Wells Fargo Bank -- -- -- -- 14.2 --
Solectron -- 11.3 25.2 -- 11.7 --
Avnet -- -- -- -- -- 12.6
Motorola -- -- -- -- -- 12.1
P. SUBSEQUENT EVENTS
On April 7, 2003 HandsOn Ventures, LLC. partially exercised their warrant
for 240,000 shares of common stock in a cashless exercise that netted to 125,294
shares. The unexercised warrant balance is now 1,683,077 shares of common stock.
The warrants expire on January 16, 2007.
Cisco has advised that it will discontinue purchasing from us an adapter
card starting from the third quarter of the current fiscal year. This will have
a major impact on our future revenues and there can be no assurance that the
sales of this legacy product line could be restored to its current levels. This
adapter card was scheduled to go out of production last year but had been kept
in production at Cisco's request while it qualified a replacement card.
Q. RELATED PARTY TRANSACTIONS
Effective October 12, 2001, our subsidiary Torrey Pines Network, Inc. sold
on a non-exclusive basis rights relating to the Silverline'TM' -WDM product to
Meret Communications, Inc. for $200, which was paid in full at that time. We
have no further obligations to Meret regarding this technology. Meret is a
subsidiary of Sorrento Networks Corporation, the owner of approximately 8.9% of
our outstanding shares of common stock.
Dr. Chadha's brother is the managing member of HandsOn Ventures, LLC, which
had purchased the $250 senior convertible debenture due January 2004 and
warrants due January 2007. The debenture was fully paid and retired in January
2003.
R. VALUATION AND QUALIFYING ACCOUNTS
Changes in the inventory valuation reserve were as follows:
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
Additions charged to costs and expenses 2,200
Amounts used during year (81)
-------
Balance at January 31, 2002 5,459
Additions charged to costs and expenses 1,062
Amounts used during year (2712)
-------
Balance at January 31, 2003 $ 3,809
=======
F-17
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Changes in the accounts receivable valuation reserve were as follows:
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
Additions charged to costs and expenses 692
Amounts used during year (335)
-------
Balance at January 31, 2002 757
Additions charged to costs and expenses 16
Amounts used during year (561)
-------
Balance at January 31, 2003 $ 212
=======
S. UNAUDITED QUARTERLY FINANCIAL DATA
Amounts in thousands, except per share amounts.
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Year ended January 31, 2003:
Net revenue $3,223 $3,366 $4,059 $2,983 13,631
Gross profit 1,317 1,541 2,188 1,470 6,516
Net income 152 349 866 375 1,742
Net income per share:
Basic $ 0.01 $ 0.03 $ 0.07 $ 0.03 $ 0.14
Diluted $ 0.01 $ 0.03 $ 0.07 $ 0.03 $ 0.14
First Second Third Fourth
Quarter* Quarter* Quarter Quarter
-------- -------- ------- -------
Year ended January 31, 2002:
Net revenue $ 1,321 $ 2,164 $ 3,078 $3,400
Gross profit 67 596 1,013 1,562
Income from
discontinued operations 1,265 909 -- --
Loss from
continuing operations (4,680) (3,734) (3,297) (21)
Income on disposal
of discontinued operations -- -- 3,401 --
Net loss (3,415) (2,825) (988) (21)
Net loss per share:
Basic (0.31) (0.26) (0.09) (0.00)
Diluted (0.31) (0.26) (0.09) (0.00)
o Note: Figures are as published and are not reclassified for the
retention of the Sync Research, Inc subsidiary in July, 2001. Because
of this, the quarterly figures will not sum into the year.
F-18
ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
T. FISCAL YEAR SEGMENT INFORMATION
Geographical Information
The table below presents external revenues based on the locations of the
customer:
2003 2002
------- -------
Net Revenues:
United States..................... $12,638 $11,770
Europe............................ 993 1,493
Other ............................ -- --
-------- -------
Total net revenues.............. $13,631 $13,263
======= =======
Products and Service Revenue
The table below presents external revenues for groups of similar products and
services:
2003 2002
------- -------
Net Revenues:
Network adapter cards ......... $11,715 $ 7,960
Frame relay network products .. 528 2,165
Service and support............ 1,388 3,138
------- -------
Total net revenues ........ $13,631 $13,263
======= =======
Supplemental Financial Information
There were no material intersegment revenues.
FISCAL YEAR SEGMENT FINANCIAL INFORMATION ENDED JANUARY 31, 2003
Torrey
Rixon Sync Pines
Networks Research Networks Total
-------- -------- -------- -------
Fiscal year ended January 31, 2003
----------------------------------------
Revenue from External Customers $11,718 $1,913 -- $13,631
Inter-Company Revenues -- -- -- --
------- ------ ----- -------
Total Revenues 11,718 1,913 -- $13,631
======= ====== ===== =======
Net income (loss) from continuing
operations 1,603 429 (290) 1,742
Depreciation and amortization expense 379 66 161 606
Inventory reserve additions 1,066 (4) -- 1,062
Capital asset additions 117 -- 11 128
Total Assets $ 5,828 $1,414 $ 429 $ 7,671
FISCAL YEAR SEGMENT FINANCIAL INFORMATION ENDED JANUARY 31, 2002
Torrey
Rixon Sync Pines
Networks Research Networks Total
-------- -------- -------- -------
Fiscal year ended January 31, 2002
----------------------------------------
Revenue from External Customers $ 7,962 $5,301 -- $13,263
Inter-Company Revenues -- -- -- --
------- ------ ---- -------
Total Revenues 7,962 5,301 -- 13,263
======= ====== ==== =======
Net income (loss) from continuing
operations (11,700) 1,122 (72) (10,650)
Depreciation and amortization expense 2,561 72 67 2,700
Inventory reserve 2,200 -- -- 2,200
Capital asset additions 2,055 -- -- 2,055
Total Assets $ 7,466 $1,366 $607 $ 9,439
F-19
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'