UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission file number: 0-22632
ASANTE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0200286
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
821 Fox Lane
San Jose, CA 95131
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (408) 435-8388
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
As of April 3, 1999 there were 9,218,993 shares of the Registrant's Common Stock
outstanding.
<PAGE>2
ASANTE TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
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PART I. FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements:
Unaudited Condensed Balance Sheets -
April 3, 1999, and October 3, 1998 3
Unaudited Condensed Statements of Operations - Three
and six months ended April 3, 1999
and April 4, 1998 4
UnauditedCondensed Statements of Cash Flows - Three and six months ended
April 3, 1999 and
April 4, 1998 5
Notes to Unaudited Condensed Financial Statements 6-8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item3: Quantitative and Qualitative Disclosures about
Market Risk 14
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 4: Submission of Matters to a Vote of
Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 17
Signature 18
</TABLE>
<PAGE>3
PART I. Financial Information
Item 1. Financial Statements
Asante Technologies, Inc.
Unaudited Condensed Balance Sheets
(in thousands)
<TABLE>
<S> <C> <C>
April 3, October 3,
1999 1998
----------------- ------------------
Assets
Current assets:
Cash and cash equivalents $4,121 $8,852
Accounts receivable, net 6,334 8,328
Inventory 6,374 7,673
Other current assets 2,565 3,301
----------------- ------------------
Total current assets 19,394 28,154
Property and equipment, net 1,085 2,004
Other assets 203 201
----------------- ------------------
Total assets $20,682 $30,359
================= ==================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $8,720 $9,710
Accrued expenses 5,227 4,799
----------------- ------------------
Total current liabilities 13,947 14,509
----------------- ------------------
Stockholders' equity:
Common stock 26,745 26,772
Accumulated deficit (20,010) (10,922)
----------------- ------------------
Total stockholders' equity 6,735 15,850
----------------- ------------------
Total liabilities and stockholders' equity $20,682 $30,359
================= ==================
</TABLE>
The accompanying notes are an integral part of these Unaudited Condensed
Financial Statements.
<PAGE>4
Asante Technologies, Inc.
Unaudited Condensed Statements of Operations
(in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Three months ended Six months ended
-------------------------------- --------------------------------
April 3, April 4, April 3, April 4,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Net sales $8,867 $10,083 $20,472 $27,603
Cost of sales 7,867 7,469 18,020 17,855
-------------- -------------- -------------- --------------
Gross profit 1,000 2,614 2,452 9,748
-------------- -------------- -------------- --------------
Operating expenses:
Sales and marketing 4,416 5,141 8,069 9,660
Research and development 721 2,104 1,729 3,723
General and administrative 558 1,026 1,405 1,917
-------------- -------------- -------------- --------------
Total operating expenses 5,695 8,271 11,203 15,300
-------------- -------------- -------------- --------------
Loss from operations (4,695) (5,657) (8,751) (5,552)
Interest & other income (expense), net 25 150 (337) 303
-------------- -------------- -------------- --------------
Loss before income taxes (4,670) (5,507) (9,088) (5,249)
Provision for income taxes - - - 88
-------------- -------------- -------------- --------------
Net loss ($4,670) ($5,507) ($9,088) ($5,337)
============== ============== ============== ==============
Net loss per share ($0.50) ($0.60) ($0.98) ($0.58)
============== ============== ============== ==============
Weighted average common shares
and equivalents:
Basic and diluted 9,260 9,194 9,248 9,168
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these Unaudited Condensed
Financial Statements.
<PAGE>5
Asante Technologies, Inc.
Unaudited Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<S> <C> <C>
Six months ended
------------------------------------------
April 3, April 4,
1999 1998
---------------- ----------------
Cash flows from operating activities:
Net loss $ (9,088) $ (5,337)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 474 582
Write-off of idle assets 445 -
Changes in operating assets and liabilities:
Accounts receivable, net 1,994 3,225
Inventory 1,299 831
Prepaid and other assets 736 (807)
Accounts payable (990) 957
Accrued expenses 428 (277)
---------------- ----------------
Net cash used in operating activities (4,702) (826)
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment - (395)
Other assets (2) 148
---------------- ----------------
Net cash used in investing activities (2) (247)
---------------- ----------------
Cash flows from financing activities:
Net proceeds (uses) from issuance (repurchases) of common stock (27) 337
---------------- ----------------
Net cash provided (used) by financing activities (27) 337
---------------- ----------------
Net decrease in cash and and cash equivalents (4,731) (736)
Cash and cash equivalents, beginning of period 8,852 12,931
---------------- ----------------
Cash and cash equivalents, end of period $ 4,121 $ 12,195
================ ================
</TABLE>
The accompanying notes are an integral part of these Unaudited Condensed
Financial Statements.
<PAGE>6
ASANTE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. INTERIM CONDENSED FINANCIAL STATEMENTS
The Unaudited Condensed Financial Statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the financial position, operating results and cash flows for those
periods presented. These unaudited condensed financial statements should be read
in conjunction with the financial statements and notes thereto for the year
ended October 3, 1998, included in the Company's 1998 Annual Report on Form
10-K. Certain prior period balances have been reclassified to conform with
current period presentation.
The results of operations for interim periods are not necessarily indicative of
the results that may be expected for the entire year.
2. EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Due to the Company's net operating loss for the
quarter ended April 3, 1999, and April 4, 1998, options to purchase common
shares are excluded from the computation since their effect is antidilutive.
As of April 3, 1999, the Company had repurchased 67,000 shares of its own common
stock under a stock repurchase plan approved September 16, 1998. Under the plan,
the Company may purchase up to 500,000 shares of its common stock from time to
time on the open market.
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting comprehensive income and
its components in a financial statement. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gains/losses on available for sale securities. During the six months
ended April 3, 1999 and April 4, 1998, the Company had no changes in equity from
non-owner sources.
<PAGE>7
4. INVENTORY
Inventory is stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis) or market, and consisted of the following
at:
<TABLE>
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April 3, October 3,
1999 1998
----------------- -----------------
(in thousands)
Raw materials and component parts $ 1,536 $2,727
Work-in-process 692 604
Finished goods 4,146 4,342
--------- ---------
$6,374 $7,673
========= =========
</TABLE>
5. BANK BORROWINGS
The Company had a bank line of credit that provided for maximum borrowings of $5
million, limited to a certain percentage of eligible accounts receivable, and
bore interest at the bank's base rate. Covenants under the line required the
Company to maintain certain minimum levels of liquidity, net worth and financial
ratios, restricted amounts of capital spending, dividends and stock repurchases,
and required the Company to maintain certain levels of quarterly profitability.
No borrowings were made under the line of credit agreement in fiscal year 1998,
or in the first or second quarter of fiscal 1999. This line of credit expired
February 15, 1999.
6. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
On September 13, 1996, a complaint was filed by Datapoint Corporation against
the Company and six other companies individually and as purported
representatives of a defendant class of all manufacturers, vendors and users of
Fast Ethernet-compliant, dual protocol local-area network products, for alleged
infringement of United States letters Patent Nos. 5,077,732 and 5,008,879. The
complaint seeks unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company has filed a response to the complaint denying
liability. The case has been consolidated, for purposes of claim interpretation
only, with similar cases filed against several other defendants, which include,
among others, Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks,
and Sun Microsystems. Plaintiff has served claim charts purporting to set forth
its basis for its claims that products compliant with an IEEE standard infringe
its patents. On April 16, 1998, the Special Master appointed by the court issued
a report agreeing in most material respects, with the defendants' interpretation
of the alleged patent claims. Subsequently, and by order dated November 23,
1998, the District Court adopted without modification the findings of the
Special Master and the recommendations of the Magistrate Judge regarding claim
interpretation of the patents-in-suit. The Court noted that plaintiff Datapoint
had conceded that the Special Master's claim interpretation would result in a
finding of no infringement for the accused products, and therefore ordered the
case dismissed on the merits effective December 30, 1998. The Plaintiff has
appealed such order.
On October 16, 1998, the Company received a collection letter from Dunn and
Bradstreet, Receivable Management Services, on behalf of Plaintree Systems
Corporation ("Plaintree"). The letter claims that the Company owes Plaintree
$197,400 and demands immediate payment. The Company believes Plaintree's claim
stems from the OEM Purchase and Manufacturing License Agreement between
Plaintree and the Company, dated June 1, 1996. Pursuant to the Agreement, the
Company purchased certain products from Plaintree. The Company has determined
the Plaintree products were defective and has demanded arbitration against
Plaintree pursuant to the Agreement, for monies already paid to Plaintree, a
minimum of $300,000. The time to respond to the Company's demand has not yet
passed. On May 17, 1999, the Company will attend a mediation hearing in
Massachusetts to determine the merits of both parties' cases and to determine
whether a preliminary determination can be reached. Management believes the
ultimate resolution of this matter will not have a material effect on the
Company's financial position or cash flows.
<PAGE>8
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). The Company is required to
adopt FAS 131 in the fiscal year 1999 annual financial statements. FAS 131
requires disclosure of certain information regarding operating segments,
products and services, geographic areas of operation and major customers.
Adoption of FAS 131 is expected to have no material impact on the Company's
consolidated financial position, results of operations or cash flows.
In June 1998, the FASB issued statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives will be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they qualify
for hedge accounting. The key criterion for hedging accounting is that the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. The
Company will adopt FAS 133 in fiscal year 2000 and has not yet determined the
impact, if any, that the adoption of FAS 133 will have on the consolidated
financial statements.
<PAGE>9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion, other than the historical financial information, may consist of
forward-looking statements that involve risks and uncertainties, including
quarterly fluctuations in results, the timely availability of new products,
including new switch products, the impact of competitive products and pricing,
and the other risks set forth from time to time in the Company's SEC reports,
including this report on Form 10-Q for the quarter ended April 3, 1999, and the
Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1998.
Actual results may vary significantly.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
RESULTS OF OPERATIONS
Net sales for the second quarter of fiscal 1999 were approximately $8.9 million,
a decrease of approximately $1.2 million, or 12%, from net sales of
approximately $10.1 million for the second quarter of fiscal 1998. The sales
decrease in the second quarter of fiscal 1999, was due to several factors
including a reduction in sales to OEM customers of approximately $0.5 million, a
reduction of sales into the distributor channel of approximately $1.0 million
due in part to a softness in the networking sector and the distribution channel
as a whole, and to lower than expected sales of the Company's legacy 10 Mbps
products and 10/100 switches due to heavy competitive pricing pressures. Net
sales for the first six months of fiscal 1999 decreased by approximately 26% to
$20.5 million compared to $27.6 million in the first half of fiscal 1998. The
decrease in sales for the first six months of fiscal 1999, compared to the first
six months of fiscal 1998, was due primarily to several factors including a
decrease in OEM sales of $1.8 million, from $2.8 million to $1.0 million, a
decline in adapter card sales of approximately $3.1 million due to heavy
competitive pricing pressures and the continued incorporation of Ethernet onto
the motherboard of Apple's newer computers causing a continued decline in older
adapter card sales, a reduction in sales for 10 Mbps unmanaged hubs of $1.0
million due primarily to pricing decreases, and a decrease of approximately $1.2
million due to declining sales of the Company's older 10 Mbps managed system
products.
Management anticipates sales of existing products will continue to decline as a
percent of total sales during the remainder of fiscal 1999, but sales of new
products should offset decreasing sales of the Company's existing products.
Sales outside the United States accounted for approximately 22% of net sales for
the second quarter of fiscal 1999, and was approximately 25% for the first six
months of 1999. These percentages compare to 27% and 23% for the second quarter
and first six months of fiscal 1998, respectively. The percentage increase in
sales for the first six months of fiscal 1999, compared with 1998 was due in
part to the decreased OEM sales during the first quarter of fiscal 1999, which
is reported with domestic sales.
The Company's gross profit as a percentage of net sales decreased to 11% for the
second quarter of fiscal 1999, from 26% in the second quarter of fiscal 1998.
The margin for the second quarter of fiscal 1999, was lower due primarily to
write-offs of component level inventories of approximately $1.3 million, and was
also negatively affected by the Company's reduced sales levels causing larger
inventory write-down's and higher overhead as a percentage of total sales. For
the first six months of 1999, the gross profit percentage decreased to
<PAGE>10
approximately 12% from 35% for the first six months of fiscal 1998, due
primarily to the decreased sales levels in the first and second quarter of
fiscal 1999, and to inventory write-downs made during fiscal 1999. During the
quarter, prices continued to be affected by heavy competitive pricing pressures.
In response to this, the Company plans to bring to market in the near future
lower cost replacement products and to move its manufacturing products offshore.
As a result, the Company took a significant write-down to its component
inventories, and intends to take additional measures going forward as necessary
to maintain its competitiveness in the market place.
Sales and marketing expenses decreased by approximately $0.7 million, or 14% in
the second quarter of fiscal 1999 compared to the second quarter of fiscal 1998,
and decreased by approximately $1.6 million in the first six months of 1999,
compared to the first six months of 1998. As a percentage of sales, these
expenses were 50% in the second quarter of fiscal 1999 and 39% in the first six
months of 1999, compared with 51% and 35% in the second quarter and first six
months of fiscal 1998, respectively. The decreases in sales and marketing
expenditures were due primarily to decreases in personnel and related costs,
tradeshows, outside service related costs, and was offset partially by increases
in outside representative, advertising and product collateral related costs. The
Company believes that sales and marketing expenses overall will decrease for the
remainder of fiscal 1999, although certain components related to selling
activities will remain constant, or increase slightly.
Research and development expenses decreased by approximately $1.4 million, or
66%, in the second quarter of fiscal 1999 compared to the second quarter of
fiscal 1998 and decreased by approximately $2.0 million in the first six months
of fiscal 1999 compared with the first six months of fiscal 1998. The decrease
was due to decreases in prototype materials, personnel, and outside consulting
services primarily related to the Company's strategic direction to leverage the
engineering expertise of certain of its key suppliers. The reduced spending in
these areas resulted from decreased product development activities for the
Company's proprietary 10/100 switch ASIC, lower software related development
expenses, and reduced recruitment related expenses, partially offset by the
Company's write-off of certain idle fixed assets related to its research and
development activities in the first quarter of fiscal 1999. The Company expects
that future spending on research and development will remain flat or increase
slightly in absolute dollars for the remainder of fiscal 1999.
General and administrative expenses decreased by approximately $0.5 million, or
46%, in the second quarter of fiscal 1999 compared to the second quarter of
fiscal 1998 and decreased by approximately $0.5 million in the first six months
of fiscal 1999 compared with the first six months of fiscal 1998. As a
percentage of net sales, these expenses were 6% for the second quarter of fiscal
1999 and were 7% for the first six months of fiscal 1999, as compared with 10%,
and 7%, for the second quarter and first six months of fiscal 1998,
respectively. The decrease in general and administrative expenses in absolute
dollars in fiscal 1999 is primarily related to reduced accounting, legal, and
outside consulting services, and personnel related costs. The Company expects
that future spending will decrease slightly in absolute dollars during the
remainder of fiscal 1999.
As a result of the Company's operating loss in the quarter ended April 3, 1999,
and expected operating loss for fiscal 1999, the Company expects to have no
provision for income taxes in fiscal 1999.
<PAGE>11
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $4.7 for the first six months of
fiscal 1999, compared to net cash used by operating activities of $0.8 million
in the six months ended April 4, 1998.
Net cash used by operating activities is largely attributable to the Company's
net operating loss of $9.1 million, a decrease in accounts payable of $1.0
million, and was partially offset by decreases in inventory levels of $1.3
million, accounts receivable of $2.0 million, prepaid expenses of $0.7 million
and increases in accrued liabilities of $0.4 million.
The Company had a bank line of credit that expired in February 1999.
At April 3, 1999, the Company had approximately $4.1 million of cash and cash
equivalents, and working capital of approximately $5.4 million. The Company
believes that current cash and cash equivalents are sufficient to fund its
operations and meet anticipated capital requirements for the remainder of fiscal
1999. However, a further decline in revenues or costs in excess of current
planned expenditures could result in the need for additional financing not
currently in place.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company operates in a rapidly changing and growing industry, which is
characterized by vigorous competition from both established companies and
start-up companies. The market for the Company's products is extremely
competitive both as to price and capabilities. The Company's success depends in
part on its ability to enhance existing products and introduce new high
technology products. The Company must also bring its products to market at
competitive price levels. Unexpected changes in technological standards,
customer demand and pricing of competitive products could adversely affect the
Company's operating results if the Company is unable to effectively and timely
respond to such changes. The industry is also dependent to a large extent on
proprietary intellectual property rights. From time to time the Company is
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of patents, trademarks and other
intellectual property rights. Consequently, from time to time, the Company will
be required to prosecute or defend against alleged infringements of such rights.
The 10/100 Mbps and 100 Mbps Ethernet technology (100BASE-T, or "Fast-Ethernet")
has become a standard networking topology in the networking and computer
industries. This standard has been adopted widely by end-user customers because
of its ability to increase the efficiency of LANs and because of its ease of
integration into existing 10BASE-T networks. Because of the importance of this
standard, the Company has focused its ongoing research and development
activities on introducing future products incorporating 100BASE-T technology.
The Company realizes the importance of bringing additional 100BASE-T switching
to market in order to complement its existing 100BASE-T shared products and to
introduce new Gigabit (1,000 Mbps) solutions for those customers requiring
increased bandwidth for their network backbones. In that regard, the Company's
future operating results may be dependent on the market acceptance and the rate
of adoption of this new technology, and on timely product release. There can be
<PAGE>12
no assurance that the market will accept and adopt this new technology or that
the Company can meet market demand in a timely manner.
The Company's target markets include end-users, value-added resellers (VARs),
systems integrators, retailers, the SOHO (Small Office/Home Office), educational
customers, and OEMs. Due to the relative size of the customers in some of these
markets, particularly the OEM market, sales in any one market could fluctuate
dramatically on a quarter to quarter basis. Fluctuations in the OEM market could
materially adversely affect the Company's business, financial condition and
results of operations.
The Company's success also depends to a significant extent upon the
contributions of key sales, marketing, engineering, manufacturing, and
administrative employees, and on the Company's ability to attract and retain
highly qualified personnel, who are in great demand. None of the Company's key
employees are subject to a non-competition agreement with the Company. Unless
vacancies are promptly filled, the loss of current key employees or the
Company's inability to attract and retain other qualified employees in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is subject to various risks associated with international operations
including currency exchange rate fluctuations, changes in costs of labor and
material, reliability of sources of supply and general economic conditions in
foreign countries. Unexpected changes in foreign manufacturing or sources of
supply, fluctuations in monetary exchange rates and changes in the availability,
capability or pricing of foreign suppliers could adversely affect the Company's
business, financial condition and results of operations.
The Company commits to expense levels, including manufacturing costs and
investing in advertising and promotional programs, based in part on expectations
of future net sales levels. If future net sales levels in a particular quarter
do not meet the Company's expectations or the Company does not bring new
products timely to market, the Company may not be able to reduce or reallocate
such expense levels on a timely basis, which could adversely affect the
Company's operating results. There can be no assurance that the Company will be
able to achieve profitability on a quarterly or annual basis in the future.
In summary, the Company's net sales and operating results in any particular
quarter may fluctuate as a result of a number of factors, including competition
in the markets for the Company's products, delays in new product introductions
by the Company, market acceptance of new products incorporating 100BASE-T by the
Company or its competitors, changes in product pricing, material costs or
customer discounts, the size and timing of customer orders, distributor and
end-user purchasing cycles, variations in the mix of product sales,
manufacturing delays or disruptions in sources of supply, and economic
conditions and seasonal purchasing patterns specific to the computer and
networking industries as discussed above. The Company's future operating results
will depend, to a large extent, on its ability to anticipate and successfully
react to these and other factors. Failure to anticipate and successfully react
to these and other factors could adversely affect the Company's business,
financial condition and results of operations.
Successfully addressing the factors discussed above is subject to various risks
discussed in this report, as well as other factors which generally affect the
market for stocks of high technology companies. These factors could affect the
<PAGE>13
price of the Company's stock and could cause such stock prices to fluctuate over
relatively short periods of time.
Computer programs and systems that make use of dates represented by only two
digits (98 rather than 1998) may not operate properly after the year 2000.
Two-digit fields can cause problems with sorting, mathematical calculations and
comparisons when working with years outside the range of 1900 through 1999. The
problem also potentially extends to any systems or devices that include embedded
technology, such as microchips.
The Company has established a formal project with a project team to address this
issue and achieve Year 2000 (Y2K) readiness. The project focuses on four key
readiness areas: 1) Product readiness, addressing product functionality; 2)
Supplier readiness, addressing the preparedness of the Company's key suppliers;
3) Internal infrastructure readiness, addressing mission-critical internal
information technology (IT) and non-IT systems; and 4) Customer readiness,
addressing customer preparedness and the Company's customer support. For each
readiness area, the Company is systematically performing an enterprise-wide risk
assessment, and developing contingency plans to mitigate unknown risk. The
Company is also communicating with its customers, suppliers, and employees to
reinforce awareness and to inform them of its progress toward Year 2000
readiness and to gather information as to the Year 2000 product readiness of its
customers, and suppliers. The Company is doing this through a variety of media,
including updates to the Y2K area of the corporate web site.
The Company's Y2K project is comprised of 3 phases; Awareness and assessment,
Renovation, and Product Readiness. The Awareness and Assessment phases of the
project have been substantially completed and the Renovation phase commenced in
May 1998. Product Readiness: The Company has made a thorough evaluation of its
products and believes its products do not cause Year 2000 issues to arise and,
therefore, feels that its year 2000 product readiness phase is complete. The
Company has communicated to its customers the current status of its products.
Customer Readiness: The Company commenced making Year 2000 compliant updates to
its customers' systems through a standard Service Update Plan process in January
1999, with completion estimated by June 1999. A Monitoring phase of the program
is planned as well, which provides for the contingency of customers experiencing
issues with the validation and implementation phases of the Supplier Readiness
project. Supplier Readiness: This aspect of the program is focused on minimizing
risk associated with the Company's suppliers in two areas: first, the supplier's
capability to provide Y2K compliant products and second, the supplier's business
capability to continue to provide the required products and services. The
Company has corresponded with its suppliers to receive assurance as to the Y2K
readiness of each key supplier. A supplier action list and contingency plans are
being developed based upon this assessment. Supplier issues that potentially
affect the Company's products are targeted to be resolved by June 1999.
Internal Infrastructure Readiness: The Company has completed an assessment of
its IT and non-IT applications and its business processes. Some applications and
processes have already been made Y2K compliant, while others are being
prioritized and assigned resources based upon their importance to the Company's
ability to conduct business. All implementations are scheduled to be completed
no later than July 1999. The Company estimates that the total Year 2000 costs
will not be material, with the majority of costs to be incurred over the next
three fiscal quarters. The Company is continuing its assessment and developing
alternatives that will result in a further refinement of this estimate over
<PAGE>14
time. There can be no assurance that actual costs will not differ materially
from the current estimate. If computer systems used by the Company or its
suppliers, or the software applications used in systems manufactured and sold by
the Company, fail or experience significant difficulties, the Company's results
of operations could be materially affected.
Item 3A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of April 3, 1999, the Company's cash and investment
portfolio includes fixed-income securities. These securities are subject to
interest rate risk and will decline in value if interest rates increase. Due to
the short-term nature of the Company's investment portfolio, an immediate 10%
increase in interest rates would not have a material effect on the fair market
value of the Company's portfolio. The Company has the ability to liquidate this
portfolio or hold its fixed income investments until maturity, and therefore the
Company would not expect its operating results or cash flows to be materially
affected to any significant degree by the effect of a sudden change in market
interest rates on its securities portfolio.
Foreign Currency Exchange Risk. All of the Company's sales are denominated in
U.S. dollars and as a result, the Company has little exposure to foreign
currency exchange risk. The effect of an immediate 10% change in exchange rates
would not have a material impact on the Company's future operating results or
cash flows.
<PAGE>15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
On September 13, 1996, a complaint was filed by Datapoint Corporation against
the Company and six other companies individually and as purported
representatives of a defendant class of all manufacturers, vendors and users of
Fast Ethernet-compliant, dual protocol local-area network products, for alleged
infringement of United States letters Patent Nos. 5,077,732 and 5,008,879. The
complaint seeks unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company has filed a response to the complaint denying
liability. The case has been consolidated, for purposes of claim interpretation
only, with similar cases filed against several other defendants, which include,
among others, Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks,
and Sun Microsystems. Plaintiff has served claim charts purporting to set forth
its basis for its claims that products compliant with an IEEE standard infringe
its patents. On April 16, 1998, the Special Master appointed by the court issued
a report agreeing in most material respects, with the defendants' interpretation
of the alleged patent claims. Subsequently, and by order dated November 23,
1998, the District Court adopted without modification the findings of the
Special Master and the recommendations of the Magistrate Judge regarding claim
interpretation of the patents-in-suit. The Court noted that plaintiff Datapoint
had conceded that the Special Master's claim interpretation would result in a
finding of no infringement for the accused products, and therefore ordered the
case dismissed on the merits effective December 30, 1998. The Plaintiff has
appealed such order.
On October 16, 1998, the Company received a collection letter from Dunn and
Bradstreet, Receivable Management Services, on behalf of Plaintree Systems
Corporation ("Plaintree"). The letter claims that the Company owes Plaintree
$197,400 and demands immediate payment. The Company believes Plaintree's claim
stems from the OEM Purchase and Manufacturing License Agreement between
Plaintree and the Company, dated June 1, 1996. Pursuant to the Agreement, the
Company purchased certain products from Plaintree. The Company has determined
the Plaintree products were defective and has demanded arbitration against
Plaintree pursuant to the Agreement, for monies already paid to Plaintree, a
minimum of $300,000. The time to respond to the Company's demand has not yet
passed. On May 17, 1999, the Company will attend a mediation hearing in
Massachusetts to determine the merits of both parties' cases and to determine
whether a preliminary determination can be reached. Management believes the
ultimate resolution of this matter will not have a material effect on the
Company's financial position or cash flows.
<PAGE>16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of the Company, held February 26, 1999 in
San Jose, California, the stockholders (i) elected four directors to serve on
the Company's Board of Directors, (ii) ratified an increase of 100,000 shares
allocated to the Company's 1993 Employee Stock Purchase Plan, and (iii) ratified
the Company's appointment of PricewaterhouseCoopers, LLP as independent
accountants.
The vote for nominated directors was as follows:
<TABLE>
<S> <C> <C>
Nominee For Against
------- --- -------
Wilson Wong 8,012,645 34,797
Jeff Yuan-Kai Lin 7,991,077 56,365
Michael D. Kaufman 8,011,865 35,577
Edmond Y. Tseng 7,992,286 55,156
</TABLE>
The vote to approve setting aside shares for the Company's Stock Purchase Plan
was as follows:
For Against Abstain
7,967,118 49,866 30,458
The vote for ratifying the appointment of PricewaterhouseCoopers, LLP was as
follows:
For Against Abstain
8,031,709 14,700 1,033
ITEM 5. OTHER INFORMATION
On March 15, 1999, Mr. Douglas Gans joined the Company as the Vice President of
Finance and Administration and Chief Financial Officer, a position vacated by
the resignation of Rajiv Matthew. Mr. Gans will have primary responsibility for
the Company's financial and administrative activities.
On January 18, 1999, Mr. Richard Strong was appointed Vice President of Sales
and Marketing with the Company, upon Mr. Volkmar's termination of employment
with the Company. Mr. Strong, who was previously Senior Director of
International Sales, will have primary responsibility for the Company's
worldwide sales and marketing communications activities.
Subsequent to the end of the fiscal quarter, the Company received letters
dated April 13, 1999 and May 10, 1999 in which the NASDAQ notified the
Company that it was not in compliance with the standards required to maintain
its common stock listing on the NASDAQ-National Market System ("NMS"). The
Company has until July 13, 1999 to comply with the maintenance standards of
the NMS. At this time, the Company believes it is unlikely that it will be
able to achieve full compliance with the NMS listing standards in the time
period allowed. Consequently, the Company may seek to move its share trading
to the NASDAQ Small Cap Market. A final decision is expected by the end of June.
<PAGE>17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
27.1 Financial Data Schedule - Attached
(b.) Reports on Form 8-K: None
<PAGE>18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 18, 1999 ASANTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ DOUGLAS E. GANS
-----------------------------------
Douglas E. Gans
Vice President, Finance and
Administration, and Chief Financial
Officer
(Authorized Officer and Principal
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-2-1999
<PERIOD-END> APR-3-1999
<CASH> 4,121
<SECURITIES> 0
<RECEIVABLES> 11,657
<ALLOWANCES> (5,323)
<INVENTORY> 6,374
<CURRENT-ASSETS> 19,394
<PP&E> 8,417
<DEPRECIATION> (7,332)
<TOTAL-ASSETS> 20,682
<CURRENT-LIABILITIES> 13,947
<BONDS> 0
0
0
<COMMON> 26,745
<OTHER-SE> (20,010)
<TOTAL-LIABILITY-AND-EQUITY> 6,735
<SALES> 8,867
<TOTAL-REVENUES> 8,867
<CGS> 7,867
<TOTAL-COSTS> 7,867
<OTHER-EXPENSES> 5,695
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,670)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,670)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
