UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2000
or
[ ] 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
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ASANTE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0200286
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
821 Fox Lane
San Jose, California 95131
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(Address of principal executive offices)
Registrant's telephone number, 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 as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. YES X NO __
As of April 1, 2000, the Registrant had 9,857,043 shares of Common Stock
outstanding.
<PAGE>2
ASANTE TECHNOLOGIES, INC.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements:
Unaudited Condensed Balance Sheets
April 1, 2000 and October 2, 1999 3
Unaudited Condensed Statements of Operations
Three and six months ended April 1, 2000 and April 3, 1999 4
Unaudited Condensed Statements of Cash Flows
Three and six months ended April 1, 2000 and April 3, 1999 5
Notes to Unaudited Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
</TABLE>
<PAGE>3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASANTE TECHNOLOGIES, INC.
unaudited condensed BALANCE SHEETS
(In thousands)
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April 1, October 2,
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 5,044 $ 4,808
Accounts receivable, net 1,656 4,414
Inventory 4,652 2,663
Prepaid expenses and other current assets 625 529
----------- -----------
Total current assets 11,977 12,414
----------- -----------
Property and equipment, net 427 713
Other assets 189 218
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Total assets $ 12,593 $ 13,345
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,670 $ 5,027
Accrued expenses 5,633 5,705
Payable to stockholder 1,022 931
----------- -----------
Total current liabilities 9,325 11,663
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Stockholders' equity:
Common stock 28,311 26,765
Accumulated deficit (25,043) (25,083)
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Total stockholders' equity 3,268 1,682
----------- -----------
Total liabilities and stockholders' equity $ 12,593 $ 13,345
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</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 amounts)
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Three Months Ended Six Months Ended
------------------------- ------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
----------- ----------- ---------- -----------
Net sales $ 5,987 $ 8,867 $ 15,052 $ 20,472
Cost of sales 3,739 7,867 9,274 18,020
----------- ----------- ---------- -----------
Gross margin 2,248 1,000 5,778 2,452
----------- ----------- ---------- -----------
Operating expenses:
Sales and marketing 1,347 4,167 3,411 7,634
Research and development 732 970 1,565 2,164
General and administrative 370 558 856 1,405
----------- ----------- ---------- -----------
Total operating expenses 2,449 5,695 5,831 11,203
----------- ----------- ---------- -----------
Loss from operations (201) (4,695) (54) (8,751)
Interest and other income (expense), net 53 25 94 (337)
----------- ----------- ---------- -----------
Income (loss) before income taxes (148) (4,670) 40 (9,088)
Provision for income taxes - - - -
----------- ----------- ---------- -----------
Net income (loss) $ (148) $ (4,670) $ 40 $ (9,088)
=========== =========== ========== ===========
Basic net income (loss) per share $ (0.02) $ (0.50) $ 0.00 $ (0.98)
=========== =========== ========== ===========
Diluted net income (loss) per share $ (0.02) $ (0.50) $ 0.00 $ (0.98)
=========== =========== ========== ===========
Weighted average common shares and equivalents outstanding:
Basic 9,400 9,260 9,351 9,248
=========== =========== ========== ===========
Diluted 9,400 9,260 9,757 9,248
=========== =========== ========== ===========
</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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Six Months Ended
--------------------------------
April 1, April 3,
2000 1999
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Cash flows from operating activities:
Net income (loss) $ 40 $ (9,088)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 343 543
Provision for doubtful accounts receivable 182 78
Loss due to write-off of assets 1 425
Changes in operating assets and liabilities:
Accounts receivable 2,576 1,916
Inventory (1,989) 1,299
Prepaid expenses and other current assets (96) 736
Accounts payable (2,357) (3,031)
Accrued expenses and other (72) 428
Payable to stockholder 91 2,041
----------- ------------
Net cash used in operating activities (1,281) (4,653)
----------- ------------
Cash flows from investing activities:
Purchases of property and equipment (58) (48)
Other 29 (3)
----------- ------------
Net cash used in investing activities (29) (51)
----------- ------------
Cash flows from financing activities:
Issuance of common stock 1,546 62
Repurchase of common stock - (89)
Net cash provided by (used in) financing activities 1,546 (27)
----------- ------------
Net increase (decrease) in cash and cash equivalents 236 (4,731)
Cash and cash equivalent at beginning of year 4,808 8,852
----------- ------------
Cash and cash equivalent at end of year $ 5,044 $ 4,121
=========== ============
</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
Note 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
("SEC"). 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 financial statements and notes thereto for the year
ended October 2, 1999, included in the Company's 1999 Annual Report on Form
10-K. Certain prior period balances have been reclassified to conform to the
current period presentation.
Note 2. Basic and Diluted Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with Statement of
Financial Accounting Standards Statement No. 128, "Earnings per Share" (SFAS No.
128). Basic net income (loss) per share is computed by dividing net income
(loss) available to common stockholders (numerator) by the weighted-average
number of common shares outstanding (denominator) during the period. Diluted net
income (loss) per share gives effect to all dilutive potential common shares
outstanding during the period including stock options, using the treasury stock
method. In computing diluted net income (loss) per share, the average stock
price for the period is used in determining the number of shares assumed to be
purchased from the exercise of stock options.
Diluted net loss per share for the three and six months ended April 3, 1999,
excludes all dilutive potential common shares as their effect is antidilutive.
For the three months ended April 1, 2000, and April 3, 1999, options and
warrants outstanding of 1,115,728 and 1,069,525, respectively, were excluded
since their effect was antidilutive.
Note 3. Comprehensive Income
The Company had no items of other comprehensive income during any of the periods
presented, and, accordingly, net income (loss) was equal to comprehensive income
(loss) for all periods presented.
<PAGE>7
Note 4. Common Stock
On March 22, 2000, the Company completed an agreement with Delta International
Holdings Limited and Delta Networks, Inc. for the private placement of 333,333
shares and 166,667 shares, respectively, of the Company's common stock at a
purchase price of $3.00 per share payable in cash, or a total of $1,500,000.
Such shares are restricted in that they may not be transferred or otherwise
disposed of within the United States or Canada or to a citizen thereof for one
year from the closing date. Thereafter the shares may not be transferred without
an effective registration thereof under the Securities Act of 1933 or compliance
with Rule 144 promulgated under such Act, unless the Company receives a legal
opinion that such registration is not required. In addition, as part of the
stock purchase agreement, the Company entered into a registration rights
agreement wherein Delta International Holdings Limited and Delta Networks, Inc.,
has the right to request registration of their stock. Upon such a request, the
Company would be required to file a form S-3 within 120 days of the request.
Note 5. Inventory
Inventory is stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis), or market. Appropriate adjustments of the
inventory values are provided for slow moving and discontinued products based
upon future expected sales and committed inventory purchases. Inventories
consisted of the following (in thousands):
April 1, October 2,
2000 1999
---------- ----------
Raw materials and component parts $ 240 $ 177
Work-in-process 243 173
Finished goods 4,169 2,313
---------- ----------
$ 4,652 $ 2,663
========== ==========
Note 6. Income Taxes
The Company recorded no provision for federal and state income taxes for each of
the two periods of fiscal 2000 to date and fiscal 1999, due principally to a
valuation allowance on deferred tax assets established, primarily net operating
loss carryforwards and research and development credits. The Company has
recorded a full valuation allowance on its deferred tax assets as the Company
believes that sufficient uncertainty exists regarding its recoverability.
Note 7. Litigation
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.
<PAGE>8
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, 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 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 for several months.
In September 1999 certain inventory having a cost of approximately $400,000 was
seized by the United States Customs for the alleged improper use of
certification marks owned by Underwriters Laboratories Inc. ("UL"). It is the
Company's position that the alleged improper use was simply a mistake or error.
The Company may obtain the return of the inventory through settlement
negotiations with either the United States Customs or United States Attorney's
Office, obtaining permission from UL to use the certification marks, or being
successful in trial proceedings. To contest the seizure, the Company determined
to seek a review with the United States Attorney's Office and filed a claim for
the inventory. It is now incumbent upon the United States Attorney's Office to
file in court seeking forfeiture of the inventory and allow the Company, as
claimant, to challenge such proceeding. The Company also expects that the United
States Customs may issue a penalty separate from the seizure under 19 U.S.C.
section 1526(f), which provides for a penalty ranging in amount from the retail
value of the seized inventory had the inventory been genuine, i.e., UL approved,
to twice the retail value if the United States Customs considers the violation
not a first time offense. The Company believes this is a first time offense. For
a first time offense, the United States Customs has mitigated most penalties
when challenged administratively, with such mitigation being as low as 10% of
the value of the inventory. The Company intends to contest any penalty action
through administrative and/or judicial procedures. The Company has accrued for
its estimate of the potential penalty that may be assessed by the United States
Customs. On April 28, 2000, the Company submitted a settlement proposal to the
United States Attorney's Office offering settlement to the case.
The Company does not expect a reply until late May at the earliest.
Note 8. Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". 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
<PAGE>9
derivatives will be reported in the statements 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 hedge 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 SFAS
No. 133 in fiscal year 2001. Although the Company can not determine the impact,
if any, that the adoption of SFAS No. 133 will have on its consolidated
financial statements, the Company believes that the effect on its financial
statements will be immaterial.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the second quarter of
the fiscal year beginning after December 15, 1999. We believe that adopting SAB
101 will not have a material impact on our financial position and results of
operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions involving
Stock Compensation an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. Management
believes that the impact of FIN 44 will not have a material effect on the
financial position or results of operations of the Company.
Note 9. Segment Information
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way companies report information about operating segments in the annual
financial statements. It also establishes standards for related disclosures
about products and services, geographical areas and major customers. In
accordance with provisions of SFAS No. 131, the Company determined that it does
not have separately reportable operating segments.
<PAGE>10
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, the
impact of competitive products and pricing, and the other risks detailed from
time to time in the Company's SEC reports, including this report on Form 10-Q
for the three and six months ended April 1, 2000, and the Company's Annual
Report on Form 10-K for the fiscal year ended October 2, 1999. These
forward-looking statements speak only as of the date thereof and should not be
given undue reliance. Actual results may vary materially from those projected.
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 2000 were approximately $6.0 million,
a decrease of approximately $2.9, or 32%, from net sales of approximately $8.9
million for the second quarter of fiscal 1999. Sales of the Company's switching
products were down $1.1 million, from $1.3 million to $0.2 million, due
partially to significantly decreased average selling prices for the Company's
switches. In addition, there was a temporary decrease in demand for the
Company's managed switch products due to competitive pressures and the Company's
delay in introducing new high-end managed switch products during the recent
quarter due to delays in receiving certain key components. Sales of the
Company's adapter card products were down $1.3 million, from $2.9 million to
$1.6 million, due primarily to competitive pressures and continuing decline in
sales of the Company's older legacy adapters as Apple Computer continues to
incorporate Ethernet into the motherboard of most of their new computers. These
declines were offset partially by the introduction of the Company's USB products
amounting to $0.5 million, from $0.0 in the comparative quarter of fiscal 1999.
OEM sales for the second quarter of fiscal 2000, remained approximately flat
compared to the second quarter of fiscal 1999. Management anticipates that sales
of the Company's older adapter card and systems products will continue to
decrease as a percentage of total sales, although its USB and Gigabit products
will increase as a percentage of total sales in the next quarter.
Net sales for the first six months of fiscal 2000 decreased by approximately 26%
to $15.1 million compared to $20.5 million for the first half of fiscal 1999.
This decrease was due primarily to several factors including a decrease in the
sales of older adapter cards of $2.5 million due primarily to Apple Computer's
continuing incorporation of Ethernet onto the motherboard of its newer products,
and the decrease in sales revenues of the Company's managed and unmanaged
switches of 2.7 million, from $5.9 million, to $3.2 million, due primarily to
sharp pricing declines for the first six months of fiscal 2000, compared to the
first six months of fiscal 1999. In addition, the Company experienced a
reduction in sales of their older managed switches due to the delay in
introducing new high-end managed switch products during the recent quarter due
to delays in receiving certain key components. For the six months ended April 1,
2000, OEM sales declined $0.5 million, from $1.0 million to $0.5 million,
<PAGE>11
however this decline was offset by increases in sales of the Company's USB and
print routers.
The Company operates as one segment. International sales, primarily to customers
in Europe, Canada and Asia Pacific, accounted for approximately 30% of net sales
for the second quarter of fiscal 2000 and were approximately 26% for the first
six months of fiscal 2000. These percentages compare to 22% and 25% for the
second quarter and first six months of fiscal 1999, respectively. The percentage
increase in international sales for the first six months of fiscal 2000 as
compared to fiscal 1999 was due in part to the decreases in sales domestically
of the Company's adapter cards, and managed switch products.
The Company's gross profit as a percentage of net sales increased to 37.5% for
the second quarter of fiscal 2000 as compared to 11.3% for the same period in
fiscal 1999. The Company's gross profit as a percentage of net sales increased
to 38.4% for the first six months of fiscal 2000 as compared to 12.0% for the
same period in fiscal 1999. These improvement were due primarily to significant
lower of cost or market write-downs and obsolescence adjustments for inventory
in fiscal 1999. In addition, manufacturing costs for the first and second
quarters of fiscal 2000 were significantly lower than the same periods in fiscal
1999, as the Company addressed the need to reduce such costs as a result of
continued pricing pressures experienced by the Company by introducing lower cost
product lines.
Sales and marketing expenses decreased by approximately $2.8 million or 67.2% in
the second quarter of fiscal 2000 compared to the second quarter of fiscal 1999,
and decreased by approximately $4.2 million or 55.3% in the first six months of
2000 compared to the first six month of 1999. As a percentage of net sales,
these expenses were approximately 23% in the second quarter and the first six
months of 2000 compared with 47% and 37% in the second quarter and first six
months of fiscal 1999, respectively. The decrease in sales and marketing
expenses as compared to fiscal 2000 was due primarily to decreases in personnel
and related costs including travel, advertising and product collateral related
costs, tradeshow participation, and outside sales representative costs. Such
reductions were partially offset by increased bad debt expense. The Company
expects that its sales and marketing expenses in absolute dollars will decrease
further in fiscal 2000 in comparison to fiscal 1999.
Research and development expenses decreased by approximately $0.2 million or
24.5% in the second quarter of fiscal 2000 compared to the second quarter of
fiscal 1999, and decreased by approximately $0.6 million or 27.7% in the first
six months of 2000 compared to the first six month of 1999. The decrease in such
expenses was primarily due to reduced personnel costs as a continuing result of
the Company's strategic direction to leverage the engineering expertise of
certain of its key suppliers. In addition, depreciation expense for the six
months of fiscal 2000 was lower than the comparable fiscal 1999 period due to
the write-off at the end of the first quarter of fiscal 1999 of certain idle
fixed assets related to its research and development activities. Such reductions
in expenses were partially offset by increased costs related to product
<PAGE>12
development activities. The Company expects that spending on research and
development for the remainder of fiscal 2000 will increase slightly in
comparison to fiscal 1999.
General and administrative expenses decreased by approximately $0.2 million or
33.7% in the second quarter of fiscal 2000 compared to the second quarter of
fiscal 1999, and decreased by approximately $0.6 million or 39.1% in the first
six months of 2000 compared to the first six month of 1999. The decrease in
general and administrative expenses in absolute dollars for the first six months
of fiscal 2000 is primarily related to reduced personnel related costs, lower
professional service related expenditures, and lower business development costs.
The Company expects that general and administrative expenses in absolute dollars
will remain flat or increase marginally for the remainder of fiscal 2000.
Interest and other income (expense), net for the first quarter of fiscal 1999
includes a $0.4 million write off of certain idle assets related to its research
and development activities. Similar charges were not incurred for other periods
presented, and other changes were insignificant. The reduction in the Company's
net operating loss for the three and six months ended April 1, 2000, compared to
the three and six months ended April 2, 1999, was due primarily to improved
margins in the prior year due to the Company's legacy 10 Mbps product lines, and
to the Company's reduced operating expenses and its 1999 reorganization plan.
Income Taxes
The Company recorded no provision for federal and state income taxes for fiscal
2000 and fiscal 1999 due principally to a valuation allowance on deferred tax
assets established primarily for net operating loss carryforwards and research
and development credits. The Company has recorded a full valuation allowance on
its deferred tax assets as the Company believes that sufficient uncertainty
exists regarding its recoverability.
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 respond effectively and
timely 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 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
<PAGE>13
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's current manufacturing and sales structure is particularly 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 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 more 10BASE-T (10 Mbps)
switching and 100BASE-T switching to market in order to complement its existing
100BASE-T shared products. 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, as well as 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 commits to expense levels, including manufacturing costs and
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.
The Company's target markets include end-users, value-added resellers, systems
integrators, retailers, 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.
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 that 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.
Liquidity and Capital Resources
Net cash used in operating activities was $1.3 million for the six months ended
April 1, 2000, compared to $4.7 million for the six months ended April 3, 1999.
During the first six months of fiscal 2000, the net cash utilized in operating
activities resulted primarily from the increase in inventory of $2.0 million and
the decrease in accounts payable of $2.4 million. Such uses were partially
offset by cash provided by total net income adjustments of $0.5 million,
consisting principally of depreciation, and provision for doubtful accounts, and
the $2.6 million decrease in accounts receivable.
Net cash used in investing activities in the first six months of fiscal 2000 and
fiscal 1999 was insignificant. Regarding the Company's financing activities, in
September 1998, the Company's Board of Directors approved a stock repurchase
program whereby up to 500,000 shares of the Company's outstanding common stock
may be repurchased in the open market from time to time. As a result of such
repurchase program the Company repurchased 51,500 shares for $89,000 in the
first quarter of fiscal 1999. No shares were repurchased in fiscal 2000, and the
program has been discontinued. In the second quarter of fiscal 2000 the Company
completed the private placement of 500,000 shares of its common stock for $3.00
per share, or $1.5 million.
At April 1, 2000, the Company had cash, cash equivalents and short-term
investments of approximately $5.0 million, as compared to $4.8 million at
October 2, 1999. Working capital was $2.7 million at April 1, 2000, compared to
$0.8 million at October 2, 1999. In October 1999, the Company obtained a bank
line of credit that provides for maximum borrowings of $5.0 million, primarily
limited to a certain percentage of eligible accounts receivable and eligible
inventory. No borrowings have been made under the line of credit agreement.
The Company believes that its current cash and cash equivalents, together with
cash expected to be generated by operations and existing credit facilities, will
be sufficient to fund its operations and meet capital requirements through
fiscal 2000, and for the first two quarters of fiscal 2001. If the Company
continues to incur losses or requires additional funds for other purposes, there
can be no assurance that such funds will be available at all or on terms
favorable to the Company and its stockholders.
<PAGE>15
On September 30, 1999, the Company's stock ceased being traded on the NASDAQ
National Market System and was moved to the OTC (Over The Counter) Bulletin
Board. The Company has appealed this action, and the NASD Appeal Committee
reviewed the Company's position on April 20, 2000, however, a decision has not
yet been given. At present Company cannot determine the effect this will have on
the Company's ability to raise additional funding or investment, though at the
present time, the Company believes the effect will be minimal.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". 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 statements 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 hedge 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 SFAS
No. 133 in fiscal year 2001. Although the Company can not determine the impact,
if any, that the adoption of SFAS No. 133 will have on its consolidated
financial statements, the Company believes that the effect on its financial
statements will be immaterial.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the second quarter of
the fiscal year beginning after December 15, 1999. We believe that adopting SAB
101 will not have a material impact on our financial position and results of
operations
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions involving
Stock Compensation an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. Management
believes that the impact of FIN 44 will not have a material effect on t he
financial position or results of operations of the Company.
Item 3A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of April 1, 2000, the Company's cash and investment
portfolio did not include fixed-income securities. Due to the short-term nature
of the Company's investment portfolio, an immediate 10% increase in interest
<PAGE>16
rates would not have a material effect on the fair market value of the Company's
portfolio. Since the Company has the ability to liquidate this portfolio, it
does 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 investment 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>17
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, 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 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 for several months.
In September 1999 certain inventory having a cost of approximately $400,000 was
seized by the United States Customs for the alleged improper use of
certification marks owned by Underwriters Laboratories Inc. ("UL"). It is the
Company's position that the alleged improper use was simply a mistake or error.
The Company may obtain the return of the inventory through settlement
negotiations with either the United States Customs or United States Attorney's
Office, obtaining permission from UL to use the certification marks, or being
successful in trial proceedings. To contest the seizure, the Company determined
to seek a review with the United States Attorney's Office and filed a claim for
the inventory. It is now incumbent upon the United States Attorney's Office to
file in court seeking forfeiture of the inventory and allow the Company, as
claimant, to challenge such proceeding. The Company also expects the United
States Customs to issue a penalty separate from the seizure under 19 U.S.C.
section 1526(f), which provides for a penalty ranging in amount from the retail
value of the seized inventory had the inventory been genuine, i.e., UL approved,
to twice the retail value if the United States Customs considers the violation
not a first time offense. The Company believes this is a first time offense. For
a first time offense, the United States Customs has mitigated most penalties
when challenged administratively, with such mitigation being as low as 10% of
the value of the inventory. The Company intends to contest any penalty action
through administrative and/or judicial procedures. On April 28, 2000, the
Company submitted a settlement proposal to the United States Attorney's Office
offering settlement to the case. The Company does not expect a reply until late
May at the earliest.
<PAGE>18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of the Company, held February 24, 2000 in
San Jose, California, the stockholders (i) elected four directors to serve on
the Company's Board of Directors, and (ii) ratified the Company's appointment of
PricewaterhouseCoopers, LLP as independent accountants.
The vote for nominated directors was as follows:
Nominee For Against
------------------- --------- -------
Wilson Wong 7,278,413 7,150
Jeff Yuan-Kai Lin 7,278,413 7,150
Michael D. Kaufman 7,278,413 7,150
Edmond Y. Tseng 7,278,413 7,150
The vote for ratifying the appointment of PricewaterhouseCoopers, LLP was as
follows:
For Against Abstain
--------- -------- --------
7,277,263 2,600 5,700
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
27.1 Financial Data Schedule
(b.) Reports on Form 8-K:
Report Item
-------------- ----------------
Date Number
March 20, 2000 5 - Other Events
In this report on Form 8-K the Company announced the completion of a
private placement of 500,000 shares of the Company's common stock at $3.00 per
share, or $1,500,000.
<PAGE>19
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 15, 2000 ASANTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ ANTHONY CONTOS
------------------------
Anthony Contos
Vice President of Finance
and Administration, and
Secretary
(Authorized Officer and
Principal Financial
Officer)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEETS AND UNAUDITED CONDENSED STATEMENT OF
OPERATIONS OF ASANTE TECHNOLOGIES, INC. AS OF APRIL 1, 2000 AND FOR THE SIX
MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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