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 March 31, 2001
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
------------------------------
ASANTE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0200286
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
821 Fox Lane
San Jose, California 95131
(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 March 31, 2001, the Registrant had 9,968,963 shares of Common Stock
outstanding.
1
ASANTE TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements:
Unaudited Condensed Balance Sheets
March 31, 2001 and September 30, 2000 3
Unaudited Condensed Statements of Operations
Three and six months ended March 31, 2001 and April 1, 2000 4
Unaudited Condensed Statements of Cash Flows
Three and six months ended March 31, 2001 and April 1, 2000 5
Notes to Unaudited Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASANTE TECHNOLOGIES, INC.
unaudited condensed BALANCE SHEETS
(In thousands)
March 31, September 30,
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 6,309 $ 6,433
Accounts receivable, net 1,694 3,233
Inventory 3,079 2,605
Prepaid expenses and other current assets 548 523
---------- ----------
Total current assets 11,630 12,794
---------- ----------
Property and equipment, net 168 261
Other assets 179 167
---------- ----------
Total assets $ 11,977 $ 13,222
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,325 $ 3,776
Accrued expenses 4,807 5,437
Payable to stockholder 389 330
---------- ----------
Total current liabilities 8,521 9,543
---------- ----------
Stockholders' equity:
Common stock 28,414 28,371
Accumulated deficit (24,958) (24,692)
---------- ----------
Total stockholders' equity 3,456 3,679
---------- ----------
Total liabilities and stockholders'
equity $ 11,977 $ 13,222
========== ==========
The accompanying notes are an integral part of these unaudited condensed
financial statements.
3
ASANTE TECHNOLOGIES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------------ -----------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
---------- ---------- --------- ----------
Net sales $ 5,016 $ 5,987 $ 11,968 $15,052
Cost of sales 3,215 3,739 7,637 9,274
---------- ---------- --------- ----------
Gross margin 1,801 2,248 4,331 5,778
---------- ---------- --------- ----------
Operating expenses:
Sales and marketing 1,331 1,347 2,575 3,411
Research and development 651 732 1,347 1,565
General and administrative 384 370 760 856
---------- ---------- --------- ----------
Total operating expenses 2,366 2,449 4,682 5,832
---------- ---------- --------- ----------
Loss from operations (565) (201) (351) (54)
Interest and other income (expense), net 67 53 85 94
---------- ---------- --------- ----------
Income (loss) before income taxes (498) (148) (266) 40
Provision for income taxes - - - -
----------- ---------- --------- ----------
Net income (loss) $ (498) $ (148) $ (266) $ 40
=========== ========== ========= ==========
Basic net income (loss) per share $ (0.05) $ (0.02) $ (0.03) $ (0.00)
=========== ========== ========= ==========
Diluted net income (loss) per share $ (0.05) $ (0.02) $ (0.03) $ (0.00)
=========== ========== ========= ==========
Weighted average common shares
and equivalents outstanding:
Basic 9,932 9,400 9,923 9,351
=========== ========== ========= ==========
Diluted 9,932 9,400 9,923 9,757
=========== ========== ========= ==========
The accompanying notes are an integral part of these unaudited condensed
financial statements.
4
ASANTE TECHNOLOGIES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
------------------------------
March 31, April 1,
2001 2000
---------- ----------
Cash flows from operating activities:
Net income (loss) $ (266) $ 40
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 115 344
Provision for doubtful accounts receivable 48 182
Changes in operating assets and liabilities:
Accounts receivable 1,491 2,576
Inventory (474) (1,989)
Prepaid expenses and other current assets (25) (96)
Accounts payable (451) (2,357)
Accrued expenses and other (630) (72)
Payable to stockholder 59 91
---------- ----------
Net cash used in operating activities (133) (1,281)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (22) (58)
Other (12) 29
----------- ----------
Net cash used in investing activities (34) (29)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 43 1,546
---------- ----------
Net cash provided by financing activities 43 1,546
---------- ----------
Net increase (decrease) in cash and cash equivalents (124) 236
Cash and cash equivalent at beginning of period 6,433 4,808
---------- ----------
Cash and cash equivalent at end of period $ 6,309 $ 5,044
========== ==========
The accompanying notes are an integral part of these unaudited condensed
financial statements.
5
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 September 30, 2000, included in the Company's 2000 Annual Report on Form
10-K.
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.
6
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the periods
presented below (in thousands, except per share data):
Three Months Ended Six Months Ended
------------------------ ---------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
--------- --------- --------- --------
Net income (loss) $ (498) $ (148) $ (266) $ 40
========= ========= ========= ========
Weighted average common stock outstanding (basic) 9,932 9,400 9,923 9,351
Dilutive effect of warrants and options -- -- -- 406
--------- --------- --------- --------
Weighted average common stock outstanding (diluted) 9,932 9,400 9,923 9,757
========= ========= ========= ========
Net income (loss) per share:
Basic $ (0.05) $ (0.02) $ 0.03 $ 0.00
========= ========= ========= ========
Diluted $ (0.05) $ (0.02) $ 0.03 $ 0.00
========= ========= ========= ========
For the quarters ended March 31, 2001 and April 1, 2000, and for the six months
ended March 31, 2001, options and warrants outstanding were excluded from the
calculation since their effect was antidilutive.
At April 1, 2000, options and warrants outstanding of 1,115,728 were excluded
since their effect was antidilutive.
Note 3. Comprehensive Income (Loss)
The Company had no items of other comprehensive income (loss) during any of the
periods presented, and, accordingly, net 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):
7
March 31, September 30,
2001 2000
---------- ---------
Raw materials and component parts 520 449
Work-in-process 151 154
Finished goods 2,408 2,002
---------- ---------
$ 3,079 $ 2,605
========== =========
Note 5. Bank Borrowings
In December 2000, the Company renewed its bank line of credit that provides for
maximum borrowings of $5.0 million, and is limited to certain percentages of
eligible accounts receivable and eligible inventory. No borrowings have been
made under the line-of-credit agreement. The line of credit is available through
December 2001 and is subject to certain covenant requirements.
Note 6. Income Taxes
The Company has recorded no provision or benefit for federal and state income
taxes for the periods ended March 31, 2001 and April 1, 2000, due primarily to a
valuation allowance being established against the Company's deferred tax assets,
which consists primarily of net operating loss carryforwards and research and
development credits. The Company has recorded a full valuation allowance against
its deferred tax assets as sufficient uncertainty exists regarding their
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
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, with
similar cases filed against several other defendants, which include, among
others, Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks, and Sun
Microsystems. On April 16,1998, a Special Master appointed by the court issued a
report agreeing in most material respects with the defendants' interpretation of
the alleged patent claims. Subsequently, by order dated November 23,1998, the
District Court adopted without modification the findings of the Special Master
and the recommendations of the Magistrate
8
Judge regarding claim interpretation of the patents-in-suit. The Court ordered
dismissal of the case, and entered judgment in favor of all defendants.
Plaintiff has filed an appeal of the judgment to the Federal Circuit Court of
Appeal, which is now pending. The Federal Circuit has entered an Order staying
the appeal pending the outcome of related U. S. Patent and Trademark Office
proceedings. Datapoint's recent letter motion to lift the stay was denied by the
Federal Circuit on December 26, 2000 and so the case remains stayed.
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 UL approved, to twice the
retail value. The Company asserts this is a first time offense. For a first time
offense, the United States Customs may mitigate the 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 of the case. The Company has not yet received a reply to its
settlement proposal.
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 adopted SFAS No.
133 at the start of fiscal year 2001. This adoption did not have a material
impact on its financial statements.
In December 1999, the staff of the Securities and Exchange Commission ("SEC")
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 SEC .. In June 2000,
the SEC issued SAB 101B, which defers the implementation date of SAB 101 until
no later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. Accordingly, the Company is required to adopt SAB 101 in the fourth
quarter of its fiscal year
9
ending September 30, 2001. The Company believes that adopting SAB 101 will not
have a material impact on its financial statements.
Note 9. Segment Information
The Company determined that it does not have separately reportable operating
segments.
Sales as a percent of total sales by geographic region for the first six months
of each fiscal year are as follows:
2001 2000
---- ----
United States 75% 74%
Europe 15% 18%
Other 10% 8%
Substantially all of the Company's assets are located in the United States.
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 March 31, 2001, and the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2000. 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 2001 were approximately $5.0 million,
a decrease of approximately $1.0 million, or 16%, from net sales of
approximately $6.0 million for the second quarter of fiscal 2000. Sales of the
Company's 10/100 adapter card products were down $0.8 million, from $1.6 million
to $0.8 million, due partially to the economic slowdown occurring in the
networking sector and high technology market in general, and to the reduction in
sales to one of the Company's larger customers. Additionally, sales of the
Company's shared hubs and USB products were down $0.4 million and $0.1 million,
respectively, due primarily to the economic slowdown in the market and reduced
average selling prices. These decreases were offset partially by improved sales
of 5 and 8-port 10/100 switches and sales of the Company's Cable/DSL routers.
Original Equipment Manufacturer ("OEM") sales for the second quarter of fiscal
2001, were down $0.4 million compared to the second quarter of fiscal 2000.
Management anticipates that sales of the Company's older adapter card and
systems products will continue to decrease as a percentage of total sales, while
sales of its routers and Gigabit products are expected to increase as a
percentage of total sales in the next quarter.
Net sales for the first six months of fiscal 2001 decreased by approximately 20%
to $12.0 million compared to $15.1 million for the first half of fiscal 2000.
During the six months ended March 31, 2001, the Company's sales levels were
impacted by the economic slow down occuring in the industry. Additionally, the
decrease in sales for the six months ended March 31, 2001 compared to April 1,
2000 was due to a decrease in revenues of the Company's adapter cards of $1.4
million, from $4.1 million to $2.7 million, due to the economic slowdown, Apple
Computer's incorporation of Ethernet technology into the motherboard of its
newer products, and the reduction of sales its products to one of the Company's
larger customers. The Company also experienced a decrease in sales of 10/100
shared products due to the transition of many customers to switching
technologies, and sharp pricing declines. These decreases were partially offset
by increased sales of the Company's Internet Cable/DSL router products.
11
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 21% of net sales for the second quarter of fiscal
2001 and were approximately 25% for the first six months of fiscal 2001 compared
to 30% and 26% for the second quarter and first six months of fiscal 2000,
respectively. The percentage decrease in international sales for the first six
months of fiscal 2001 as compared to fiscal 2000 was due in part to the
decreases in sales of the Company's adapter cards and the discontinuation of one
of the Company's distributors in the United Kingdom.
The Company's gross profit as a percentage of net sales decreased to 35.9% for
the second quarter of fiscal 2001 as compared to 37.5% for the same period in
fiscal 2000. The Company's gross profit as a percentage of net sales decreased
to 36.2% for the first six months of fiscal 2001 as compared to 38.4% for the
same period in fiscal 2000. These decreases were due primarily to slightly
larger write-downs of the Company's chip inventory due to market price declines
and increased competitive pressures necessitating continued pricing decreases.
Sales and marketing expenses of $1.3 million were approximately flat in the
second quarter of fiscal 2001 compared to the second quarter of fiscal 2000, and
decreased by approximately $0.8 million or 24.5% in the first six months of 2001
compared to the first six months of 2000. As a percentage of net sales, these
expenses were approximately 26.5% and 21.5% in the second quarter and the first
six months of 2001, respectively, compared with 22.5% and 22.7% in the second
quarter and first six months of fiscal 2000, respectively. The decrease in sales
and marketing expenses for the first six months of fiscal 2001, as compared to
fiscal 2000 was due primarily to decreases in Coop and Mail order advertising
activities as well as decrease in bad debt provision. The increase in sales and
marketing expenses as a percentage of sales for the second quarter of fiscal
2001 compared to fiscal 2000 is primarily attributable to the decrease in sales
of approximately 16% during these periods. The Company expects that its sales
and marketing expenses in absolute dollars will remain approximately flat for
the remainder of fiscal 2001 in comparison to fiscal 2000.
Research and development expenses decreased by approximately $0.1 million or
11.1% in the second quarter of fiscal 2001 compared to the second quarter of
fiscal 2000, and decreased by approximately $0.2 million or 13.9% in the first
six months of 2001 compared to the first six months of 2000. The decrease in
such expenses was primarily due to slightly reduced personnel costs. In
addition, depreciation expense for the first six months of fiscal 2001 was lower
than the comparable period in fiscal 2000. 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 2001 will remain flat.
General and administrative expenses remained flat in the second quarter of
fiscal 2001 compared to the second quarter of fiscal 2000, and decreased by
approximately $0.1 million, or 11.2% in the first six months of 2001 compared to
the first six month of 2000. The decrease in general and administrative expenses
in absolute dollars for the first six months of fiscal 2001 is primarily related
to reductions in personnel related costs, professional service related costs,
and 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 2001 in comparison to fiscal 2000.
12
In response to the economic slowdown, the Company has taken several cost cutting
measures during the third quarter of fiscal 2001. These actions include a freeze
on hiring and elimination of contract labor, postponement of major development,
deferment of pay increases, a temporary pay reduction, and elimination of the
vacation benefits for one quarter. The Company expects to save in the range of
$200k-$300k per quarter with these combined measures fully implemented.
Income Taxes
The Company has recorded no provision or benefit for federal and state income
taxes for the periods ended March 31, 2001 and April 1, 2000, due primarily to a
valuation allowance being established against the Company's deferred tax assets
which consists primarily of net operating loss carry-forwards and research and
development credits. The Company has recorded a full valuation allowance against
its deferred tax assets as sufficient uncertainty exists regarding their
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 job market in the San Francisco Bay
Area is characterized by fierce competition, rapidly changing salary structures,
and a shortage of the workforce in general. As of the end of the Company's
fiscal year 2000, unemployment in the Bay Area was only approximately 1.6%.
These conditions could affect the Company's ability to retain and recruit a
sufficiently qualified workforce.
13
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 networking industry and
technology markets in general have been affected by a widespread reduction in
demand for products due partially to financial problems experienced by many
Internet Service Provider's (ISP's), and the failure of many Dot.com Company's.
The duration, or long-term effect on the Company's operations is difficult to
measure, but the inability to alter its structure, or react properly to this
slowdown could have an adverse effect on the Company's financial position.
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.
The Company's success will depend in part on its ability to accurately forecast
its future sales due to the lead time required to order components and assemble
products. If the Company's product sales forecasts are below actual product
demand, there may be delays in fulfilling product orders; consequently, the
Company could lose current and future sales to competitors. Alternatively, if
the Company's product sales forecasts are above actual product demand, this may
result in excess orders of components or assembled products and a build-up of
inventory that would adversely affect working capital.
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,
14
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.
In addition to the above, the Company is also susceptible to 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 $133,000 for the six months ended
March 31, 2001, compared to cash used of $1.3 million for the six months ended
April 1, 2000. During the first six months of fiscal 2001, the net cash used by
operating activities resulted primarily from the Company's net loss, increased
inventory of $0.5 million, decreased accounts payables of $0.5 million, and
decreases in accrued expenses of $0.6 million. These cash outflows were offset
by net cash inflows from accounts receivable of $1.5 million.
Net cash used in investing activities for the six months of fiscal 2001 and
fiscal 2000 was insignificant.
In December 2000, the Company renewed its bank line of credit that provides for
maximum borrowings of $5.0 million, and is limited to certain percentages of
eligible accounts receivable and eligible inventory. The Company has not drawn
on this line of credit.
On September 30, 1999, the Company's stock ceased to be traded on the NASDAQ
National Market System and was moved to the Over-The-Counter (OTC) Bulletin
Board. During the fiscal year 2000, the Company successfully completed a $1.5
million private placement of 500,000 shares of common stock, however the
Company's access to further equity financing could be effected by the level of
the Company's share price and the Company's listing status.
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 2001. However, the Company has incurred
15
substantial operating losses in the past and may seek additional financing. If
additional funds are required there can be no assurance that such funds will be
available and/or on terms favorable to the Company and its stockholders.
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 adopted SFAS No.
133 at the start of fiscal year 2000. This adoption did not have a material
impact on its financial statements.
In December 1999, the staff of the Securities and Exchange Commission ("SEC")
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 SEC . In June 2000,
the SEC issued SAB 101B, which defers the implementation date of SAB 101 until
no later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. Accordingly, the Company is required to adopt SAB 101 in the fourth
quarter of its fiscal year ending September 30, 2001. The Company believes that
adopting SAB 101 will not have a material impact on its financial statements.
Item 3A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of March 31, 2001, 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.
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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, with
similar cases filed against several other defendants, which include, among
others, Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks, and Sun
Microsystems. On April 16,1998, a Special Master appointed by the court issued a
report agreeing in most material respects with the defendants' interpretation of
the alleged patent claims. Subsequently, 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 all defendants. Plaintiff has filed an appeal of the
judgment to the Federal Circuit Court of Appeal, which is now pending. The
Federal Circuit has entered an Order staying the appeal pending the outcome of
related U. S. Patent and Trademark Office proceedings. Datapoint's recent letter
motion to lift the stay was denied by the Federal Circuit on December 26, 2000
and so the case remains stayed.
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 UL approved, to twice the
retail value. The Company asserts this is a first time offense. For a first time
offense, the United States Customs may mitigate the 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
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United States Attorney's Office offering settlement of the case. The Company has
not yet received a reply to its settlement proposal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of the Company, held February 22, 2001 in
San Jose, California, the stockholders (i) elected four directors to serve on
the Company's Board of Directors, (ii) approved the Company's 2001 Stock Plan,
(iii) approved an increase of 500,000 in the number of shares authorized under
the Company's 1993 Employee Stock Purchase Plan, and (iv) ratified the Company's
appointment of PricewaterhouseCoopers, LLP as independent accountants.
The vote for nominated directors was as follows:
Nominee For Against Abstain
------- --- ------- -------
Wilson Wong 4,830,124 405,115 0
Jeff Yuan-Kai Lin 4,830,124 405,115 0
Michael D. Kaufman 4,830,124 405,115 0
Edmond Y. Tseng 4,830,124 405,115 0
The vote to approve the Company's 2001 Stock Option Plan was as follows:
For Against Abstain
--- ------- -------
1,467,300 449,475 8,758
The vote to approve an increase in the number of shares authorized under the
Company's 1993 Employee Stock Purchase Plan was as follows:
For Against Abstain
--- ------- -------
1,811,125 99,250 15,158
The vote for ratifying the appointment of PricewaterhouseCoopers, LLP was as
follows:
For Against Abstain
--- ------- -------
5,224,156 7,125 3,958
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
None
(b.) Reports on Form 8-K:
None
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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 11, 2001 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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