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 1, 2000
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
821 Fox Lane
San Jose, CA 95131
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(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 1, 2000 there were 9,873,208 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.
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Item 1: Financial Statements:
Unaudited Condensed Balance Sheets -
July 1, 2000 and October 2, 1999 3
UnauditedCondensed Statements of Operations Three and nine months ended
July 1, 2000 and July 3, 1999 4
UnauditedCondensed Statements of Cash Flows Nine months ended July 1,
2000, and July 3, 1999 5
Notes to Unaudited Condensed Financial Statements 6-9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Item 3: Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
Signature 18
</TABLE>
<PAGE>3
PART I. Financial Information
Item 1. Financial Statements
Asante Technologies, Inc.
Unaudited Condensed Balance Sheets
(in thousands)
<TABLE>
<S> <C> <C>
July 1, October 2,
2000 1999
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Assets
Current assets:
Cash and cash equivalents $ 5,332 $ 4,808
Accounts receivable, net 2,399 4,414
Inventory 3,482 2,663
Prepaid expenses and other current assets 404 529
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Total current assets 11,617 12,414
Property and equipment, net 334 713
Other assets 179 218
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Total assets $ 12,130 $ 13,345
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,584 $ 5,027
Accrued expenses 5,790 5,705
Payable to stockholder 544 931
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Total current liabilities 8,918 11,663
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Stockholders' equity:
Common stock 28,315 26,765
Accumulated deficit (25,103) (25,083)
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Total stockholders' equity 3,212 1,682
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Total liabilities and stockholders' equity $ 12,130 $ 13,345
============= =============
</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)
<TABLE>
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Three months ended Nine months ended
------------------------------- -------------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
-------------- -------------- --------------- --------------
Net sales $ 6,688 $ 7,914 $ 21,740 $ 28,386
Cost of sales 4,225 8,543 13,499 26,563
-------------- -------------- --------------- --------------
Gross profit (loss) 2,463 (629) 8,241 1,823
-------------- -------------- --------------- --------------
Operating expenses:
Sales and marketing 1,447 2,787 4,858 10,856
Research and development 735 765 2,300 2,494
General and administrative 365 462 1,221 1,867
-------------- -------------- --------------- --------------
Total operating expenses 2,547 4,014 8,379 15,217
-------------- -------------- --------------- --------------
Loss from operations (84) (4,643) (138) (13,394)
Interest & other income (expense), net 24 2 118 (335)
-------------- -------------- --------------- --------------
Loss before income taxes (60) (4,641) (20) (13,729)
Provision for income taxes - - - -
-------------- -------------- --------------- --------------
Net loss ($60) ($4,641) ($20) ($13,729)
============== ============== =============== ==============
Basic and diluted net loss per share ($0.01) ($0.50) ($0.00) ($1.48)
============== ============== =============== ==============
Weighted average common shares
and equivalents outstanding:
Basic and diluted 9,877 9,278 9,526 9,278
============== ============== =============== ==============
</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>
Nine months ended
------------------------------
July 1, July 3,
2000 1999
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Cash flows from operating activities:
Net loss $ (20) $ (13,729)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 468 778
Provision for doubtful accounts receivable 147 225
Loss due to write-off of idle assets 1 425
Changes in operating assets and liabilities:
Accounts receivable 1,868 3,698
Inventory (819) 4,491
Prepaid expenses and other current assets 125 2,255
Accounts payable (2,443) (3,380)
Payable to stockholder (384) 343
Accrued expenses 85 589
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Net cash used in operating activities (972) (4,305)
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Cash flows from investing activities:
Purchases of property and equipment, net (93) (79)
Other assets 39 9
--------- ----------
Net cash used by investing activities (54) (70)
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Cash flows from financing activities:
Issuance of common stock 1,550 62
Repurchase of common stock 0 (89)
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Net cash provided (used) by financing activities 1,550 (27)
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Net increase (decrease in) cash and and cash equivalents 524 (4,402)
Cash and cash equivalents, beginning of period 4,808 8,852
--------- ----------
Cash and cash equivalents, end of period $ 5,332 $ 4,450
========= ==========
</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 the 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 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.
Note 2. Basic and Diluted Net Loss Per Share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards Statement No. 128, "Earnings per Share" (SFAS No.
128). Basic net loss per share is computed by dividing net loss available to
common stockholders (numerator) by the weighted-average number of common shares
outstanding (denominator) during the period. Diluted net 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 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 nine months ended July 1, 2000,
excludes all dilutive potential common shares as their effect is antidilutive.
For the three months ended July 1, 2000, and July 3, 1999, options and warrants
outstanding of 1,520,617 and 895,861, respectively, were excluded since their
effect was antidilutive. For the nine months ended July 1, 2000, and July 3,
1999, options and warrants outstanding of 1,412,143 and 1,101,680, respectively,
were excluded since their effect was anti-dilutive.
Note 3. Comprehensive Income
The Company had no items of other comprehensive income during any of the periods
presented, and, accordingly, net loss was equal to comprehensive 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. In
August 2000, the Company received a request from Delta Networks, Inc., and
subsequently from Delta International Holdings Limited, requesting registration
of their shares. As such, the Company plans on filing an S-3 registration
statement within the time specified.
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):
July 1, October 2,
2000 1999
---------- ---------
Raw materials and component parts $ 73 $ 177
Work-in-process 308 173
Finished goods 3,101 2,313
---------- ---------
$ 3,482 $ 2,663
========== =========
Note 6. Income Taxes
The Company recorded no provision for federal and state income taxes in fiscal
2000 and fiscal 1999, due to a valuation allowance on deferred tax assets
established. The deferred tax assets consist primarily of 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.
<PAGE>8
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.
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 has
not yet received a reply to its request.
<PAGE>9
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
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 fourth 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 other provisions cover specific
events that occur after either December 15, 1998, or January 12, 2000. The
adoption of certain other provisions of FIN 44 did not have a material effect on
the financial position, or results of the Company. Management does not expect
that the adoption of the remaining provisions of FIN 44 will have a material
effect on the financial position or results of operations of the Company.
Note 9. Segment Information
Sales as a percent of total sales by geographic region for the first nine months
of the year are as follows:
2000 1999
----- ----
United States 74% 75%
Europe 19% 20%
Other 7% 5%
<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,
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 three and nine months ended July 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
significantly 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 third quarter of fiscal 2000 were approximately $6.7 million,
a decrease of $1.2 million, or 15%, from net sales of $7.9 million for the third
quarter of fiscal 1999. Sales of the Company's unmanaged hub and switching
products were down $0.7 million, from $2.6 million to $1.9 million due to
primarily significantly decreased average selling prices. Sales of the Company's
adapter card products decreased $0.5 million, from $2.4 million to $1.9 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. OEM (Original
Equipment Manufacturer) sales for the third quarter of fiscal 2000, remained
approximately flat compared to the third quarter of fiscal 1999.
Net sales for the first nine months of fiscal 2000 decreased by approximately
23% to $21.7 million compared to $28.4 million for the first nine months of
fiscal 1999. This decrease was due to several factors including a decrease of
$3.0 million in the sales of older adapter due primarily to Apple Computer's
continuing incorporation of Ethernet onto the motherboard of its newer products,
and the decrease of $1.7 million, from $9.2 million, to $7.5 million, in sales
revenues of the Company's unmanaged hubs and switches due primarily to sharp
pricing declines for the first nine months of fiscal 2000, compared to the first
nine months of fiscal 1999. In addition, the Company experienced a continuing
reduction in sales of its older managed switches and a delay in introduction of
the Company's new high-end managed switch products during the quarter due to
delays in receiving certain key components. For the nine months ended July 1,
2000, OEM sales declined $0.6 million, from $1.3 million to $0.8 million,
however this decline was offset by increases in sales of the Company's USB and
print router products.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 23% of net sales for the third quarter of fiscal
2000 and were approximately 26% for the first nine months of fiscal 2000. These
percentages compare to 23% and 25% for the third quarter and first nine months
of fiscal 1999, respectively. The percentage increase in international sales for
the first nine 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 (loss) as a percentage of net sales increased to
36.8% for the third quarter of fiscal 2000 as compared to (7.9%) for the same
<PAGE>11
period in fiscal 1999. The Company's gross profit as a percentage of net sales
increased to 37.9% for the first nine months of fiscal 2000 as compared to 6.4%
for the same period in fiscal 1999. These improvements 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 nine
months 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 by introducing lower cost product lines.
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
2000, but sales of new products should offset decreasing sales of the Company's
existing products.
Sales and marketing expenses decreased by $1.3 million, or 48%, in the third
quarter of fiscal 2000 compared to the third quarter of fiscal 1999, and
decreased by $6.0 million, or 55%, in the first nine months of fiscal 2000
compared to the first nine months of fiscal 1999. As a percentage of sales,
these expenses were 21% in the third quarter of fiscal 2000 and 22% in the first
nine months of fiscal 2000, compared with 35% and 38% in the third quarter and
first nine months of fiscal 1999, respectively. The decreases in sales and
marketing expenditures were due primarily to decreases in personnel and related
costs, tradeshow participation, advertising related costs, and bad debts. The
Company believes that sales and marketing expenses overall will remain flat or
increase slightly for the remainder of fiscal 2000.
Research and development expenses decreased by $30,000, or 4%, in the third
quarter of fiscal 2000 compared to the third quarter of fiscal 1999 and
decreased by $0.2 million, or 8% in the first nine months of fiscal 2000
compared with the first nine months of fiscal 1999. The decrease was due
primarily to decreased depreciation expense related to retired ASIC development
equipment, and to reduced overhead related costs. 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 $0.1 million, or 21%, in the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999 and
decreased by $0.6 million, or 35%, in the first nine months of fiscal 2000
compared with the first nine months of fiscal 1999. As a percentage of net
sales, these expenses were 5% for the third quarter of fiscal 2000, and 6% for
the first nine months of fiscal 2000, as compared with 6% and 7% for the third
quarter and first nine months of fiscal 1999, respectively. The decrease in
general and administrative expenses in absolute dollars in fiscal 2000 is
primarily related to reduced personnel related costs. The Company expects that
general and administrative spending will remain constant or increase slightly
for the remainder of fiscal 2000.
Income Taxes
The Company recorded no provision for federal and state income taxes for fiscal
2000 to date 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.
<PAGE>12
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
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 10/100BASE-T (10 Mbps)
switching and 100BASE-T switching to market in order to complement its existing
100BASE-T shared products. In addition, Gigabit Ethernet technology is
increasingly being adopted in the backbone of large enterprises, and educational
institutions. In that regard, the Company's future operating results may be
dependent on the market acceptance and the rate of adoption of these
technologies, 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.
<PAGE>13
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
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 $1.0 million for the nine months ended
July 1, 2000, compared to $4.3 million for the nine months ended July 3, 1999.
During the first nine months of fiscal 2000, the net cash utilized in operating
activities resulted primarily from the increase in inventory of $0.8 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 $0.6 million,
consisting principally of depreciation, and provision for doubtful accounts, and
the $1.8 million decrease in accounts receivable.
Net cash used in investing activities in the first nine 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
<PAGE>14
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 July 1, 2000, the Company had cash, cash equivalents and short-term
investments of approximately $5.3 million, as compared to $4.8 million at
October 2, 1999. Working capital was $2.7 million at July 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 three 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.
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, the Company's stock
has not been relisted. 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 fourth 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
<PAGE>15
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 other provisions cover specific
events that occur after either December 15, 1998, or January 12, 2000. The
adoption of certain other provisions of FIN 44 did not have a material effect on
the financial position, or results of the Company. Management does not expect
that the adoption of the remaining provisions of FIN 44 will have a material
effect on the financial position or results of operations of the Company.
Item 3A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of July 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
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>16
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 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 has not yet received a reply to its request.
<PAGE>17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
27.1 Financial Data Schedule
(b.) Reports on Form 8-K: None
<PAGE>18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 15, 2000 ASANTE TECHNOLOGIES, INC.
(Registrant)
/s/ By: ANTHONY CONTOS
---------------------------------
Anthony Contos
Vice President, Finance and
Administration
(Authorized Officer and Principal
Financial Officer)
