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 July 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 July 3, 1999 there were 9,277,871 shares of the Registrant's Common Stock
outstanding.
<PAGE>2
ASANTE TECHNOLOGIES, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements:
Unaudited Condensed Balance Sheets -
July 3, 1999 and October 3, 1998 3
Unaudited Condensed Statements of Operations Three and nine months ended
July 3, 1999 and July 4, 1998 4
Unaudited Condensed Statements of Cash Flows Nine months ended July 3,
1999, and July 4, 1998 5
Notes to Unaudited Condensed Financial Statements 6-9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
Item 3: 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 15
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
<PAGE>3
PART I. Financial Information
Item 1. Financial Statements
Asante Technologies, Inc.
Unaudited Condensed Balance Sheets
(in thousands)
<TABLE>
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July 3, October 3,
1999 1998
----------------- ------------------
Assets
Current assets:
Cash and cash equivalents $4,450 $8,852
Accounts receivable, net 4,405 8,328
Inventory 3,182 7,673
Other current assets 1,046 3,301
----------------- ------------------
Total current assets 13,083 28,154
Property and equipment, net 880 2,004
Other assets 192 201
----------------- ------------------
Total assets $14,155 $30,359
================= ==================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $6,673 $9,710
Accrued expenses 5,388 4,799
----------------- ------------------
Total current liabilities 12,061 14,509
----------------- ------------------
Stockholders' equity:
Common stock 26,745 26,772
Accumulated deficit (24,651) (10,922)
----------------- ------------------
Total stockholders' equity 2,094 15,850
----------------- ------------------
Total liabilities and stockholders' equity $14,155 $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>
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Three months ended Nine months ended
-------------------------------- --------------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Net sales $7,914 $9,314 $28,386 $36,917
Cost of sales 8,543 8,274 26,563 26,129
-------------- -------------- -------------- --------------
Gross profit (loss) (629) 1,040 1,823 10,788
-------------- -------------- -------------- --------------
Operating expenses:
Sales and marketing 2,787 4,590 10,856 14,250
Research and development 765 1,566 2,494 5,289
General and administrative 462 1,115 1,867 3,032
Restructuring charge - 400 - 400
-------------- -------------- -------------- --------------
Total operating expenses 4,014 7,671 15,217 22,971
-------------- -------------- -------------- --------------
Loss from operations (4,643) (6,631) (13,394) (12,183)
Interest & other income (expense), net 2 145 (335) 448
-------------- -------------- -------------- --------------
Loss before income taxes (4,641) (6,486) (13,729) (11,735)
Provision for income taxes - 2,624 - 2,712
-------------- -------------- -------------- --------------
Net loss ($4,641) ($9,110) ($13,729) ($14,447)
============== ============== ============== ==============
Net loss per share ($0.50) ($0.99) ($1.48) ($1.57)
============== ============== ============== ==============
Weighted average common
shares and equivalents:
Basic and diluted 9,278 9,222 9,278 9,186
============== ============== ============== ==============
</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)
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Nine months ended
--------------------------------------------
July 3, July 4,
1999 1998
----------------- ----------------
Cash flows from operating activities:
Net loss $ (13,729) $ (14,447)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 588 1,109
Write-off of idle assets 536 -
Restructuring charge - 400
Changes in operating assets and liabilities:
Accounts receivable 3,923 3,661
Inventory 4,491 2,906
Prepaid and other assets 2,255 1,825
Accounts payable (3,037) 1,270
Accrued expenses 589 (287)
----------------- ----------------
Net cash used in operating activities (4,384) (3,563)
----------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment - (444)
Other assets 9 32
----------------- ----------------
Net cash provided (used) by investing activities 9 (412)
----------------- ----------------
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 (4,402) (3,638)
Cash and cash equivalents, beginning of period 8,852 12,931
----------------- ----------------
Cash and cash equivalents, end of period $ 4,450 $ 9,293
================= ================
</TABLE>
The accompanying notes are an integral part of these Unaudited Condensed
Financial Statements.
<PAGE>6
ASANTE TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
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 loss for the quarters
and nine months ended July 3, 1999, and July 4, 1998, options to purchase common
shares are excluded from the computation since their effect is antidilutive.
As of July 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 nine months
ended July 3, 1999 and July 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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July 3, October 3,
1999 1998
----------------- -----------------
(in thousands)
Raw materials and component parts $ 197 $2,727
Work-in-process 222 604
Finished goods 2,763 4,342
--------- ---------
$3,182 $7,673
====== ======
</TABLE>
5. BANK BORROWINGS
The Company had a bank line of credit that provided for maximum borrowings of $5
million which expired February 15, 1999. On July 30, 1999, the Company signed a
terms sheet with a financial institution for a new line of credit agreement.
This line of credit agreement will be secured by applicable receivables and
inventories of the Company and will provide for maximum borrowings of $5.0
million. The final agreement has not yet been signed, pending audit and final
approval by the financial institution.
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 sought unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company filed a response to the complaint denying
liability. The case was 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. On April 16, 1998, a Special Master appointed by the court issued
a report agreeing in most material respects with the defendants' interpretation
<PAGE>8
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 ordered dismissal of the case,
and entered judgment in favor of the defendants. Plaintiff has filed an appeal
of the judgment to the Federal Circuit Court of Appeal, which is now pending. A
ruling on the appeal is not expected until the year 2000.
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 attended a mediation hearing with
Plaintree, whereby an agreement for settlement was made. As of July 3, 1999, all
terms of the mediation settlement had been performed, and the settlement amount
was not material to the Company.
On April 13, 1999 and May 10, 1999, the Company received notices from NASDAQ
that the Company's stock had failed to maintain a market value of public float
greater than or equal to $5,000,000, and had also failed to maintain a closing
bid price of $1.00 in accordance with NASDAQ National Market Maintenance
Standards. The Company filed an appeal with NASDAQ and has a hearing scheduled
for August 19, 1999. The Company is unable to determine the ultimate outcome of
this matter.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("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 2001 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 July 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 third quarter of fiscal 1999 were approximately $7.9 million,
a decrease of $1.4 million, or 15%, from net sales of $9.3 million for the third
quarter of fiscal 1998. The sales decrease in the third quarter of fiscal 1999,
was due to several factors including a reduction in 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 nine months of
fiscal 1999 decreased by $8.5 million, or 23% to $28.4 million compared to $36.9
million in the first nine months of fiscal 1998. This decrease was due to
several factors including a decrease in OEM sales of $2.0 million, from $3.3
million to $1.3 million, a decline in connectivity product sales of
approximately $4.7 million due to heavy competitive pricing pressures, 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 $1.6 million due primarily to pricing
decreases, the reduction of approximately $2.0 million of sales into the
distributor channel, and a decrease of approximately $1.6 million due to
declining sales of the Company's older 10 Mbps managed system products. These
decreases were partially offset by increases in sales of the Company's 10/100
hubs and switches of approximately $2.6 million.
Management anticipates sales of older managed products and adapter cards 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 26% of net sales for
the third quarter of fiscal 1999, and were approximately 26% for the first nine
months of fiscal 1999. These percentages compare with approximately 22% and 24%
for the third quarter and first nine months of fiscal 1998, respectively. The
percentage increase in sales for the first nine months of fiscal 1999, compared
with 1998 was due primarily to the decreased OEM sales during the nine months of
fiscal 1999, which is reported with domestic sales.
The Company's gross profit as a percentage of net sales (gross margin) decreased
to a negative 8% for the third quarter of fiscal 1999 from 11% in the third
quarter of fiscal 1998. The margin for the third quarter of fiscal 1999, was
lower due primarily to write-offs of the Company's older legacy adapter cards,
<PAGE>10
managed system products and component level inventories, of approximately $3.1
million. For the first nine months of 1999, the gross profit percentage
decreased to approximately 6% from 29% for the first nine months of fiscal 1998,
due primarily to the decreased sales levels in the first nine months 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 has brought to market and plans to continue to
bring to market lower cost replacement products and to move its manufacturing
offshore. As a result, the Company took a significant write-down to its
inventories, and although the Company believes it is in a competitive position
at present, the Company will take additional measures going forward as necessary
to maintain its competitiveness in the market place.
Sales and marketing expenses decreased by $1.8 million, or 39%, in the third
quarter of fiscal 1999 compared to the third quarter of fiscal 1998, and
decreased by $3.4 million, or 24%, in the first nine months of fiscal 1999
compared to the first nine months of fiscal 1998. As a percentage of sales,
these expenses were 35% in the third quarter of fiscal 1999 and 38% in the first
nine months of fiscal 1999, compared with 49% and 39% in the third quarter and
first nine months of fiscal 1998, respectively. The decreases in sales and
marketing expenditures were due primarily to decreases in personnel and related
costs, tradeshow participation, outside service related costs, and were 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 $0.8 million, or 51%, in the
third quarter of fiscal 1999 compared to the third quarter of fiscal 1998 and
decreased by $2.8 million, or 53% in the first nine months of fiscal 1999
compared with the first nine 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, 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 $0.7 million, or 59%, in the
third quarter of fiscal 1999 compared to the third quarter of fiscal 1998 and
decreased by $1.2 million, or 38%, in the first nine months of fiscal 1999
compared with the first nine months of fiscal 1998. As a percentage of net
sales, these expenses were 6% for the third quarter of fiscal 1999, and 7% for
the first nine months of fiscal 1999, as compared with 12% and 8% for the third
quarter and first nine months of fiscal 1998, respectively. The decrease in
general and administrative expenses in absolute dollars in fiscal 1999 is
primarily related to reduced consulting, legal, outside service related
expenditures, and personnel related costs. Due to the Company's restructuring
efforts, the Company expects that general and administrative spending will
remain constant for the remainder of fiscal 1999.
In the third quarter of fiscal 1998, the Company recorded a $0.4 million
restructuring charge in connection with a strategic redirection of the Company's
business to a lower cost model with a new focus on the retail marketplace. This
restructuring charge was predominately related to severance costs as well as
other personnel related realignment costs associated with the restructuring. As
<PAGE>11
of July 3, 1999, the Company had paid out all amounts related to this
restructuring charge.
As a result of the Company's operating loss in the quarter ended July 3, 1999,
and expected operating loss for fiscal 1999, the Company expects to have no
provision for income taxes in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $4.4 for the first nine months of
fiscal 1999, compared to net cash used by operating activities of $3.6 million
in the first nine months of fiscal 1998.
Net cash used by operating activities is largely attributable to the Company's
net operating loss of $13.7 million, a decrease in accounts payable of $3.0
million, and was partially offset by decreases in inventory levels of $4.5
million, accounts receivable of $3.9 million, prepaid expenses of $2.3 million
and increases in accrued liabilities of $0.6 million.
The Company had a bank line of credit that provided for maximum borrowings of $5
million which expired February 15, 1999. On July 30, 1999, the Company signed a
terms sheet with a financial institution for a new line of credit agreement.
This line of credit agreement will be secured by applicable receivables and
inventories of the Company and will provide for maximum borrowings of $5.0
million. The final agreement has not yet been signed, pending audit and final
approval by the financial institution.
At July 3, 1999, the Company had approximately $4.5 million of cash and cash
equivalents, and working capital of approximately $1.0 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 to utilize the new line of credit
agreement as discussed above. There is no assurance that this line of credit
will be available to the Company or other financing will be available at terms
acceptable to the Company to fund its remaining 1999 and 2000 operations.
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.
<PAGE>12
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
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
<PAGE>14
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
price of the Company's stock and could cause such stock prices to fluctuate over
relatively short periods of time.
Year 2000
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 and is expected to be completed by October 1999. 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 estimated completion
by September 1999. As of July 1999, the Company had made updates to its internal
applications and systems considered mission critical. 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,
<PAGE>14
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 October 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 September 1999, although the Company has updated its mission
critical applications and systems as of 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 two fiscal quarters. The Company is continuing its
assessment and developing alternatives that will result in a further refinement
of this estimate over 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 July 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 sought unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company filed a response to the complaint denying
liability. The case was 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. On April 16, 1998, a 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 ordered dismissal of the case,
and entered judgment in favor of the defendants. Plaintiff has filed an appeal
of the judgment to the Federal Circuit Court of Appeal, which is now pending. A
ruling on the appeal is not expected until the year 2000.
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 attended a mediation hearing with Plaintree
systems, whereby an agreement for settlement was made. On May 17, 1999, the
Company attended a mediation hearing with Plaintree systems, whereby an
agreement for settlement was made. As of July 3, 1999, all terms of the
mediation settlement had been performed, and the settlement amount was not
material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>16
ITEM 5. OTHER INFORMATION
On May 31, 1999, Mr. William Fenley resigned from his position as the Company's
Vice President Product Marketing and OEM Sales to pursue other opportunities.
On July 6, 1999, Mr. Don Miller joined the Company as General Manager, Advanced
Systems Products. In this position, Mr. Miller will be responsible for the sales
and product marketing activities related to the Company's managed systems.
On August 6, 1999, Mr. Richard Strong resigned from his position as Vice
President of Worldwide Sales with the Company.
On April 13, 1999 and May 10, 1999, the Company received notices from NASDAQ
that the Company's stock had failed to maintain a market value of public float
greater than or equal to $5,000,000, and had also failed to maintain a closing
bid price of $1.00 in accordance with NASDAQ National Market Maintenance
Standards. The Company filed an appeal with NASDAQ and has a hearing scheduled
for August 19, 1999. The Company is unable to determine the ultimate outcome of
this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
27.1 Financial Data Schedule
(b.) Reports on Form 8-K: None
<PAGE>17
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: August 16, 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)
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STATEMENTS.
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