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 January 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 January 1, 2000, the Registrant had 9,303,797 shares of Common Stock
outstanding.
<PAGE>2
ASANTE TECHNOLOGIES, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements:
Unaudited Condensed Balance Sheets
January 1, 2000 and October 2, 1999 3
Unaudited Condensed Statements of Operations
Three months ended January 1, 2000 and January 2, 1999 4
Unaudited Condensed Statements of Cash Flows
Three months ended January 1, 2000 and January 2, 1999 5
Notes to Unaudited Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 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)
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January 1, October 2,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,752 $ 4,808
Accounts receivable, net 4,588 4,414
Inventory 4,140 2,663
Prepaid expenses and other current assets 568 529
---------- ----------
Total current assets 14,048 12,414
---------- ----------
Property and equipment, net 563 713
Other assets 189 218
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Total assets $ 14,800 $ 13,345
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,485 $ 5,027
Accrued expenses 5,892 5,705
Payable to stockholder 1,550 931
---------- ----------
Total current liabilities 12,927 11,663
---------- ----------
Stockholders' equity:
Common stock 26,767 26,765
Accumulated deficit (24,894) (25,083)
--------- ----------
Total stockholders' equity 1,873 1,682
---------- ----------
Total liabilities and stockholders' equity $ 14,800 $ 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)
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Three Months Ended
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January 1, January 2,
2000 1999
---------- ----------
Net sales $ 9,065 $ 11,605
Cost of sales 5,534 10,153
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Gross margin 3,531 1,452
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Operating expenses:
Sales and marketing 2,063 3,467
Research and development 833 1,194
General and administrative 486 847
---------- ----------
Total operating expenses 3,382 5,508
---------- ----------
Income (loss) from operations 149 (4,056)
Interest and other income (expense), net 40 (362)
---------- ----------
Income (loss) before income taxes 189 (4,418)
Provision for income taxes - -
---------- ----------
Net income (loss) $ 189 $ (4,418)
========== ==========
Basic net income (loss) per share $ 0.02 $ (0.48)
========== =========
Diluted net income (loss) per share $ 0.02 $ (0.48)
========== =========
Weighted average common shares and equivalents outstanding:
Basic 9,302 9,236
========== ==========
Diluted 9,482 9,236
========== ==========
The accompanying notes are an integral part of these unaudited condensed
financial statements.
</TABLE>
<PAGE>5
ASANTE TECHNOLOGIES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
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Three Months Ended
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January 1, January 2,
2000 1999
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 189 $ (4,418)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 187 282
Provision for doubtful accounts receivable 158 39
Provision for losses on inventory 500 1,700
Loss due to write-off of assets 1 425
Changes in operating assets and liabilities:
Accounts receivable (332) 572
Inventory (1,977) (2,772)
Prepaid expenses and other current assets (39) 255
Accounts payable 458 1,486
Accrued expenses and other 806 535
---------- ----------
Net cash used in operating activities (49) (1,896)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (38) (13)
Other 29 (16)
---------- ----------
Net cash used in investing activities (9) (29)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 2 -
Repurchase of common stock - (89)
Net cash provided by (used in) financing activities 2 (89)
---------- ----------
Net decrease in cash and cash equivalents (56) (2,014)
Cash and cash equivalent at beginning of year 4,808 8,852
---------- ----------
Cash and cash equivalent at end of year $ 4,752 $ 6,838
========== ==========
</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 quarter ended January 2, 1999, excludes all
dilutive potential common shares as their effect is antidilutive. At January 1,
2000, and January 2, 1999, options and warrants outstanding of 1,222,958 and
1,339,655, respectively, were excluded since their effect was antidilutive.
Note 3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components as is effective
for period beginning after December 15, 1997. The Company had no items of other
comprehensive income during any of the periods presented, and, accordingly, net
<PAGE>7
income (loss) was equal to comprehensive income (loss) for all periods
presented.
Note 4. 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):
January 1, October 2,
2000 1999
------------ -----------
Raw materials and component parts $ 227 $ 177
Work-in-process 329 173
Finished goods 3,584 2,313
---------- ---------
$ 4,140 $ 2,663
========== =========
Note 5. Bank Borrowings
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.
Note 6. 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 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.
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
<PAGE>8
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 until later this year.
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. The Company has accrued for
its estimate of the potential penalty that may be assessed by the United States
Customs.
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
<PAGE>9
financial statements, the Company believes that the effect on its financial
statements will be immaterial.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101 "Revenue
recognition" which provides the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. The SAB is
effective for the Company's quarter ending April 1, 2000. The Company has not
yet determined the impact, if any, of the SAB on its financial statements.
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 quarter ended January 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 of $9.1 million for the first quarter of fiscal 2000 was approximately
$2.5 million, or 21.9%, below net sales of $11.6 million for the first quarter
of fiscal 1999.
Sales of the Company's switching products were down $1.6 million, from $3.7
million to $2.1 million, due primarily to significantly decreased average
selling prices for the Company's managed and unmanaged 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 $1.2 million, from $3.7 million to $2.5 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 sales also decreased $0.6
million, from $0.8 to $0.2 million. These declines were offset partially by
increased sales of the Company's unmanaged hubs of $0.5 million, from $1.8
million to $2.3 million, as well as increased sales of the Company's print
routers and new USB products. 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.
<PAGE>10
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 24% of net sales for the first quarter of fiscal
2000, compared to 28% for the first quarter of fiscal 1999, with Europe being
the primary area of the sales reduction in terms of percent of net sales and
absolute dollars.
The Company's gross profit as a percentage of net sales increased to 39.0% for
the first quarter of fiscal 2000 as compared to 12.5% for the same period in
fiscal 1999. This improvement was due primarily to significant lower of cost or
market write-downs and obsolescence adjustments for inventory in the first
quarter of fiscal 1999. In addition, manufacturing costs for the first quarter
of fiscal 2000 were significantly lower than the same period in fiscal 1999, as
the Company addressed the need to reduce such costs as a result of continued
pricing pressures experienced by the Company and industry in general over last
year.
Sales and marketing expenses were at $2.1 million for the first quarter of
fiscal 2000 (22.8% of net sales) compared to $3.5 million for the same period in
fiscal 1999 (29.9% of net sales), or a decrease of 40.5%. The decrease in sales
and marketing expenses as compared to the first quarter of fiscal 1999 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 30.2% to $0.8 million for the
first quarter of fiscal 2000 from $1.2 million for the first quarter of fiscal
1999. As a percentage of net sales, these expenses were 9.2% for the first
quarter of fiscal 2000 and 10.3% for the first quarter of fiscal 1999. The
decease 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 first quarter 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 development activities. The Company expects that spending on
research and development for the remainder of fiscal 2000 will remain flat or
decrease slightly in comparison to fiscal 1999.
General and administrative expenses decreased to $0.5 million for the first
quarter of fiscal 2000 from $0.8 million for the first quarter of fiscal 1999.
As a percentage of net sales, general and administrative expenses were 5.4% and
7.3% for the first quarter of fiscal years 2000 and 1999, respectively. The
decrease in general and administrative expenses in absolute dollars for the
first quarter 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. Since similar charges were not incurred for the
first quarter of fiscal 2000, this represents the primary difference between the
two comparative periods.
<PAGE>11
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
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
<PAGE>12
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
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 $49,000 for the quarter ended January
1, 2000, compared to $1.9 million for the quarter ended January 2, 1999. During
the first quarter of fiscal 2000, the net cash utilized in operating activities
<PAGE>13
resulted primarily from the increases in inventory and accounts receivable of
$2.0 million and $0.3 million, respectively. Such uses were partially offset by
cash provided by total net income adjustments of $0.8 million, consisting
principally of provision for losses on inventory, depreciation, and provision
for doubtful accounts. Cash was also provided by increases in accounts payable
and accrued expenses of $0.5 million and $0.8 million, respectively.
Net cash used in investing activities in the first quarter of fiscal 2000 and
fiscal 1999 was insignificant. 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.
At January 1, 2000 and October 2, 1999, the Company had cash, cash equivalents
and short-term investments of approximately $4.8 million. Working capital was
$1.1 million at January 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. However, the Company has incurred operating losses over the last
two fiscal years and may seek additional financing which could include
additional capital from business partners and other sources. If additional funds
are required 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 will
review the Company's position in April 2000. 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.
Year 2000 Issue
Computer programs and systems that make use of dates represented by only two
digits (99 rather than 1999) may not operate properly starting in 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 established a formal program to address this issue and achieve Year
2000 (Y2K) readiness. The program focused on four key readiness areas: 1)
Product readiness - addressing product functionality; 2) Supplier readiness -
<PAGE>14
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 systematically performed an enterprise-wide risk assessment
and developed contingency plans to mitigate risks. The Company also communicated
with its customers, suppliers, employees to reinforce awareness and 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
accomplished this through a variety of media, including updates to the Y2K area
of the Company's web site.
The Company's Y2K program is comprised of 3 phases; Awareness and Assessment,
Renovation, and Product Readiness, which were all completed by November 1999.
Regarding Product Readiness, the Company 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. To
date, no significant Y2K issues have arisen.
Internal Infrastructure Readiness: The Company has completed an assessment of
its IT and non-IT applications and its business processes. Most applications and
processes have already been made Y2K compliant, while remaining applications
have been prioritized and assigned resources based upon their importance to the
Company's ability to conduct business. All mission critical implementations were
completed by November 1999. To date, no significant Y2K issues have arisen.
The Company estimates that costs related to Y2K issues will not be significant,
which was the case for the first quarter of fiscal 2000. The Company is
continuing its assessment and developing alternatives that will result in a
further refinement of this estimate through the end of the fiscal year. Although
the Company is fairly certain it will achieve its goals of minimizing costs,
there can be no assurance that actual costs will not differ materially from the
current estimate due to potentially unforeseen circumstances. 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.
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
<PAGE>15
financial statements, the Company believes that the effect on its financial
statements will be immaterial.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101 "Revenue
recognition" which provides the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. The SAB is
effective for the Company's quarter ending April 1, 2000. The Company has not
yet determined the impact, if any, of the SAB on its financial statements.
Item 3A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of January 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 until later this year.
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. The Company has accrued for
its estimate of the potential penalty that may be assessed by the United States
Customs.
<PAGE>17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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: February 14, 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)
<TABLE> <S> <C>
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<LEGEND>
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 JANUARY 1, 2000 AND FOR THE THREE
MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> OCT-2-1999
<PERIOD-END> JAN-1-2000
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