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 January 2, 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 January 2, 1999 there were 9,218,893 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 -
January 2, 1999 and October 3, 1998 3
Unaudited Condensed Statements of Operations -
Three months ended January 2, 1999
and December 27, 1997 4
UnauditedCondensed Statements of Cash Flows Three months ended January
2, 1999, and
December 27, 1997 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
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
See actual Balance sheet for update
Item 1. Financial Statements
Asante Technologies, Inc.
Unaudited Condensed Statements of Operations
(in thousands, except per share data)
See actual attached sheet for update
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
Asante Technologies, Inc.
Unaudited Condensed Balance Sheets
(in thousands)
<TABLE>
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January 2, October 3,
1999 1998
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 6,838 $ 8,852
Marketable securities - -
Accounts receivable, net 7,717 8,328
Inventory 8,745 7,673
Prepaid expenses and other 3,046 3,301
----------------- -----------------
Total current assets 26,346 28,154
Property and equipment, net 1,310 2,004
Other assets 217 201
----------------- -----------------
Total assets $ 27,873 $ 30,359
================= =================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 11,196 $ 9,710
Accrued expenses 5,335 4,799
----------------- -----------------
Total current liabilities 16,531 14,509
----------------- -----------------
Stockholders' equity:
Common stock 26,682 26,772
Retained earnings (Accumulated deficit) (15,340) (10,922)
----------------- -----------------
Total stockholders' equity 11,342 15,850
----------------- -----------------
Total liabilities and stockholders' equity $ 27,873 $ 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
----------------------------------------------
January 2, December 27,
1999 1997
----------------- -----------------
Net sales $ 11,605 $ 17,520
Cost of sales 10,153 10,386
----------------- -----------------
Gross profit 1,452 7,134
----------------- -----------------
Operating expenses:
Sales and marketing 3,653 4,519
Research and development 1,008 1,619
General and administrative 847 891
----------------- -----------------
Total operating expenses 5,508 7,029
----------------- -----------------
Income (loss) from operations (4,056) 105
Interest & other income, net (362) 153
----------------- -----------------
Income (loss) before income taxes (4,418) 258
Provision for income taxes 0 88
----------------- -----------------
Net income (loss) $ (4,418) $ 170
================= =================
Basic and diluted earnings (loss) per share $ (0.48) $ 0.02
================= =================
Weighted average common shares and equivalents:
Basic 9,236 9,142
================= =================
Diluted 9,236 9,220
================= =================
</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>
Three months ended
-------------------------------------------
January 2, December 27,
1999 1997
---------------- ----------------
Cash flows from operating activities:
Net income $ (4,418) $ 170
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 957 383
Gain/(loss) due write-off of idle assets 425
Changes in operating assets and liabilities:
Accounts receivable 611 (109)
Inventory (1,072) 1,395
Prepaid and other assets 255 (636)
Accounts payable 1,486 (702)
Accrued expenses 536 326
---------------- ----------------
Net cash provided by operating activities (1,820) 827
---------------- ----------------
Cash flows from investing activities:
Purchases (dispositions) of property and equipment (88) (372)
Purchases/maturities of marketable securities (16) (4,953)
---------------- ----------------
Net cash from (used in) investing activities (104) (5,325)
---------------- ----------------
Cash flows from financing activities:
Net proceeds (uses) from issuance (repurchases)
of common stock (90) 129
---------------- ----------------
Net cash provided by financing activities (90) 129
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (2,014) (4,369)
Cash and cash equivalents, beginning of period 8,852 12,931
---------------- ----------------
Cash and cash equivalents, end of period $ 6,838 $ 8,562
================ ================
</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 January 2, 1999, options to purchase common shares with a weighted
average exercise price of $3.97 are excluded from the computation since their
effect is antidilutive. Common equivalent shares of $78,000 for the quarter
ended December 27, 1997, consists of the incremental common shares issuable upon
the exercise of stock options (using the treasury stock method).
As of January 2, 1999, the Company had repurchased 67,000 shares of its own
common stock under a stock repurchase plan approved September 16, 1998. Under
the Company's 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
<PAGE>7
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 three
months ended January 2, 1999 and October 3, 1998, the Company had no changes in
equity from non-owner sources.
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:
January 2, October 3,
1999 1998
--------------- ------------
(in thousands)
Raw materials and component parts $ 2,671 $2,727
Work-in-process 1,289 604
Finished goods 4,785 4,342
--------- ---------
$8,745 $7,673
====== ======
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 for the first quarter of fiscal 1999. As of January 2, 1999, the Company was
not in compliance with certain covenants. 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
<PAGE>8
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.
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. The arbitration will take place in Massachusetts. Management believes
the ultimate resolution of this matter will not have a material effect on the
Company's financial position or cash flows.
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 January 2, 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 reverse any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
RESULTS OF OPERATIONS
Net sales of $11.6 million for the first quarter of fiscal 1999, was
approximately $5.9 million, or 34% below net sales of $17.5 million for the
first quarter of fiscal 1998.
Sales of the Company's switching products increased by $1.2 million to $3.7
million in the first quarter of fiscal 1999, compared with $2.5 million for the
first quarter of fiscal 1998. These increases in sales were due primarily to
sales Company's 10/100 family of unmanaged switching products introduced in the
fourth quarter of fiscal 1998. The increases in switching product sales the
Company experienced was offset by year-to-year decreases in many of its product
lines including decreases in sales of $1.7 million the Company's 10 Mbps adapter
card products and declines in sales the Company's 10 Mbps system products and
older 100MB shared system of approximately $2.4 million. Their decreases were
due to several factors including the transition of many customers to 10/100 dual
speed products, heavy competitive pressures causing significant pricing
reductions, Apple's continued incorporation of Ethernet capability into the
motherboard of many of its computer products, and to the gradual obsolesence of
many of the Company's older and more established 10 Mbps adapter card and
transceiver products. Although unit sales of the Company's 10/100 adapter card
products have increased year-to-year, revenues from such sales also declined to
$2.0 million in the first quarter of fiscal 1999, from $3.6 million in the first
quarter of fiscal 1998 due primarily to significant pricing declines during the
year. In the first quarter of fiscal 1999, OEM sales accounted for approximately
$0.8 million, or 7% of total sales. This compares to approximately $2.1 million,
or 12% of total sales, for the first quarter of fiscal 1998. Management
anticipates that OEM sales will remain flat, or decrease slightly as a
percentage of total sales in the next quarter.
The Company is affected by the seasonal purchasing patterns of many of its
customers, namely its educational customers, which purchase the majority of
their products during the Company's third and fourth quarters. Decreases in
sales of the Company's products during the first quarter of fiscal 1999,
compared with the fourth quarter of fiscal 1998, were due partially to lower
expected sales to educational customers and to late introduction of several new
products for the Company.
Management anticipates that sales of existing products to customers will remain
approximately flat or decline, but new products sales will constitute a greater
portion of the Company's revenues for the second and third quarters of fiscal
1999.
<PAGE>10
Sales outside the United States accounted for approximately 28% of net sales for
the first quarter of fiscal 1999, compared to 21% for the first quarter of
fiscal 1998. This increase was due primarily to increased sales in Europe and
lower than anticipated sales of the Company's products to educational customers.
The Company's gross profit as a percentage of net sales decreased to 13% for the
first quarter of fiscal 1999, from 41% in the first quarter of fiscal 1998. This
decrease was due primarily to several factors including lower of cost or market
write-downs and obsolesence of many of the Company's older product lines during
the quarter, lower sales volumes, and heavy pricing competitive pressures
experienced by the Company and industry in general over the last year. It is
expected that in the near future, margins will increase as a percentage of sales
due to the Company's ongoing restructuring efforts and to new product shipments
expected to be made at the beginning of the second quarter of fiscal 1999. The
Company continues to reduce both operating and manufacturing costs to offset the
effect of lower prices caused by competitive pressures in the industry and plans
further steps as necessary to reduce its manufacturing costs.
Sales and marketing expenses decreased by $0.9 million, or 19%, in the first
quarter of fiscal 1999 compared to the first quarter of fiscal 1998. As a
percentage of net sales, these expenses were 32% in the first quarter of fiscal
1999, compared to 26% in the first quarter of 1998. The decreases in sales and
marketing expenditures were due primarily to decreased personnel and travel
related expenditures due primarily to the Company's restructuring efforts as
well as decreased trade show and direct mail expenditures. These decreases were
offset partially by increases in advertising, promotions, outside representative
commissions, and cooperative advertising activities. The Company believes that
sales and marketing expenses will decrease slightly in absolute dollars in the
second quarter of fiscal 1999.
Research and development expenses decreased by $0.6 million, or 38%, in the
first quarter of fiscal 1999 compared to the first quarter of fiscal 1998. As a
percentage of net sales, these expenses represented 8% in the first quarter of
fiscal 1999, compared with 9% in the first quarter of fiscal 1998. The decrease
was due to decreased prototype material expenses, NRE, recruitment, and lower
compensation and consulting related expenses related primarily to the Company's
restructuring efforts in the third quarter of fiscal 1998. The Company expects
that future spending on research and development will decrease slightly in
absolute dollars for the remainder of fiscal 1999.
General and administrative expenses remained flat in the first quarter of fiscal
1999, compared to the first quarter of fiscal 1998. As a percentage of net
sales, these expenses were 7% and 5% for both the first quarter of fiscal 1999
and 1998, respectively. Although the Company's personnel and travel related
expenditures decreased by approximately $0.2 million due to the Company's
ongoing efforts to reduce costs, the Company experienced higher consulting
related expenditures associated with the Company's operations. The Company
expects that future spending for general and administrative expenses will
decrease in absolute dollars during the remainder of fiscal 1999.
During the quarter, the Company wrote off certain idle assets related to its R&D
activities. This charge amounted to approximately $0.4 million and is reflected
as a loss on disposal of equipment on the Company's financial statements under
the caption "Interest and other income/(loss), net".
<PAGE>11
Based on the current estimate of its expected operating results, and the net
operating loss experienced by the Company in the first quarter of fiscal 1999,
the Company expects its effective tax rate to be 0% through fiscal 1999. The
Company's estimated rate could be higher based on actual results for the year
including the impact of the mix of income, available credits, and other
estimates of the impact of certain future events.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $1.8 million in the three months ended
January 2, 1999, compared to net cash provided by operating activities of $0.8
million in the three months ended December 27, 1997.
The decrease is largely attributable to the Company's net operating loss of $4.1
million, increases in inventory levels of $1.0 million, and was partially offset
by decreases in accounts receivable of $0.6 million and increases in accounts
payable and accrued expenses of $1.5 million and $0.5 million, respectively.
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 for the first quarter of fiscal 1999. As of January 2, 1999, the Company was
not in compliance with certain covenants. This line of credit expired February
15, 1999.
At January 2, 1999, the Company had approximately $6.8 million of cash, cash
equivalents, and short-term investments, and working capital of approximately
$9.8 million. During the quarter ended January 2, 1999, the Company utilized
$93,000 to repurchase shares of the Company's outstanding Common Stock pursuant
to its previously announced stock repurchase program. The Company believes that
current cash and cash equivalents are sufficient to fund its operations and meet
anticipated capital requirements for second quarter of fiscal 1999.
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
<PAGE>13
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
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 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 perform an enterprise-wide risk
assessment, and developing contingency plans to mitigate unknown risk. The
Company is also communicating with its customers, suppliers, 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 plans to commence making Year 2000 compliant
updates to its customers' systems through a standard Service Update Plan process
by 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: 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
<PAGE>14
being developed based upon this assessment. Supplier issues that potentially
affect the Company's products are targeted to be resolved by February 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
six 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.
<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.
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. The arbitration will take place in Massachusetts. Management believes
the ultimate resolution of this matter will not have a material effect on the
Company's financial position or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>16
ITEM 5. OTHER INFORMATION
On December 7, 1998, Mr. William Leung resigned as Vice President of Operations.
His responsibilities were assumed by Mr. John Jeng who joined the Company in
December 1998.
On December 17, 1998, Mr. Jeff Lin resigned his positions as President and Chief
Executive Officer of the Company. Mr. Lin will retain his position as a member
of the Company's Board of Directors. Mr. Lin's officer duties were assumed by
Mr. Wilson Wong.
On January 14, 1999, Mr. Richard Strong was promoted to Vice President of Sales
and Marketing, following Mr. Ronald Volkmar's termination of employment with the
Company. In this position, Mr. Strong will have primary responsibility for the
Company's Sales and Marketing Communications activities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
27. Financial Data Schedule - Attached
(b.) Reports on Form 8-K:
A Form 8-K dated December 17, 1998 was filed during the fiscal quarter
covered by this Form 10-Q. The Form 8-K reported an Item 5 event and
included one exhibit pursuant to Item 7.
<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: February 16, 1999 ASANTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ RAJ MATTHEW
---------------------
Raj Matthew
Vice President, Finance and
Administration
(Authorized Officer and
Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCED SHEETS AND UNAUDITED CONDENSED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> JAN-02-1999
<CASH> 6,838
<SECURITIES> 0
<RECEIVABLES> 12,685
<ALLOWANCES> 4,968
<INVENTORY> 8,745
<CURRENT-ASSETS> 23,346
<PP&E> 8,383
<DEPRECIATION> 7,072
<TOTAL-ASSETS> 27,873
<CURRENT-LIABILITIES> 16,531
<BONDS> 0
0
0
<COMMON> 26,682
<OTHER-SE> (15,340)
<TOTAL-LIABILITY-AND-EQUITY> 27,873
<SALES> 11,605
<TOTAL-REVENUES> 11,605
<CGS> 10,153
<TOTAL-COSTS> 10,153
<OTHER-EXPENSES> 5,508
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,418)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,418)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,418)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
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