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 June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-22632
ASANTE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0200286
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
821 Fox Lane
San Jose, CA 95131
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (408) 435-8388
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of July 30, 2001 there were 9,968,963 shares of the Registrant's Common Stock
outstanding.
ASANTE TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements:
Unaudited Condensed Balance Sheets -
June 30, 2001 and September 30, 2000 3
Unaudited Condensed Statements of Operations -
Three and nine months ended June 30, 2001
and July 1, 2000 4
Unaudited Condensed Statements of Cash Flows -
Nine months ended June 30, 2001, and
July 1, 2000 5
Notes to Unaudited Condensed Financial Statements 6-9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 4: Submission of Matters to a Vote of
Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
Signature 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASANTE TECHNOLOGIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands)
June 30, September 30,
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 4,684 $ 6,433
Accounts receivable, net 2,024 3,233
Inventory 2,377 2,605
Prepaid expenses and other current assets 650 523
-------- --------
Total current assets 9,735 12,794
Property and equipment, net 139 261
Other assets 172 167
-------- --------
Total assets $ 10,046 $ 13,222
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,160 $ 3,776
Accrued expenses 4,716 5,437
Payable to stockholder 271 330
-------- --------
Total current liabilities 7,147 9,543
-------- --------
Stockholders' equity:
Common stock 28,413 28,370
Accumulated deficit (25,514) (24,691)
-------- --------
Total stockholders' equity 2,899 3,679
-------- --------
Total liabilities and stockholders' equity $ 10,046 $ 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 Nine months ended
--------------------- ---------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $ 4,919 $ 6,688 $ 16,887 $ 21,740
Cost of sales 3,221 4,225 10,858 13,499
-------- -------- -------- --------
Gross profit 1,698 2,463 6,029 8,241
-------- -------- -------- --------
Operating expenses:
Sales and marketing 1,234 1,447 3,809 4,858
Research and development 703 735 2,050 2,300
General and administrative 359 365 1,119 1,221
-------- -------- -------- --------
Total operating expenses 2,296 2,547 6,978 8,379
-------- -------- -------- --------
Loss from operations (598) (84) (949) (138)
Interest and other income (expense), net 41 24 126 118
-------- -------- -------- --------
Loss before income taxes (557) (60) (823) (20)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss ($ 557) ($ 60) ($ 823) ($ 20)
======== ======== ======== ========
Basic and diluted net loss per share ($ 0.06) ($ 0.01) ($ 0.08) ($ 0.00)
======== ======== ======== ========
Weighted average common shares
and equivalents outstanding:
Basic and diluted 9,969 9,877 9,938 9,526
======== ======== ======== ========
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)
Nine months ended
------------------
June 30, July 1,
2001 2000
------- -------
Cash flows from operating activities:
Net loss $ (823) $ (20)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 156 469
Provision for doubtful accounts receivable 48 147
Changes in operating assets and liabilities:
Accounts receivable 1,161 1,868
Inventory 228 (819)
Prepaid expenses and other current assets (128) 125
Accounts payable (1,616) (2,443)
Payable to stockholder (59) (384)
Accrued expenses (721) 85
------- -------
NET CASH USED IN OPERATING ACTIVITIES (1,754) (972)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (34) (93)
Other assets (4) 39
------- -------
NET CASH USED BY INVESTING ACTIVITIES (38) (54)
------- -------
Cash flows from financing activities:
Issuance of common stock 43 1,550
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 43 1,550
------- -------
Net increase (decrease) in cash and and cash equivalents (1,749) 524
Cash and cash equivalents, beginning of period 6,433 4,808
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,684 $ 5,332
======= =======
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 accounting principles generally
accepted in the United States 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.
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.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations for the periods presented
below (in thousands, except per share data):
6
Three Months Ended Nine Months Ended
----------------- ------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
------ ------ ------ -------
Net loss $ (557) $ (60) $ (823) $ (20)
====== ====== ====== =======
Weighted average common stock outstanding (basic) 9,969 9,877 9,938 9,526
Dilutive effect of warrants and options -- -- -- --
------ ------ ------ -------
Weighted average common stock outstanding (diluted) 9,969 9,877 9,938 9,526
====== ====== ====== =======
Net income (loss) per share:
Basic $(0.06) $(0.01) $(0.08) $ (0.00)
====== ====== ====== =======
Diluted $(0.06) $(0.01) $(0.08) $ (0.00)
====== ====== ====== =======
For the three months ended June 30, 2001, and July 1, 2000, options and warrants
outstanding of 1,624,816 and 1,520,617, respectively, were excluded since their
effect was antidilutive.
For the nine months ended June 30, 2001, and July 1, 2000, options and warrants
outstanding of 1,622,804 and 1,412,143, respectively, were excluded since their
effect was anti-dilutive.
NOTE 3. COMPREHENSIVE INCOME
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):
June 30, September 30,
2001 2000
------- -------
Raw materials and component parts $ 362 $ 449
Work-in-process 74 154
Finished goods 1,941 2,002
------- -------
$ 2,377 $ 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. As of June 30,
2001, the Company was not in compliance with the net worth requirement.
7
NOTE 6. INCOME TAXES
The Company has recorded no provision or benefit for federal and state income
taxes for the periods ended June 30, 2001 and July 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 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 retail 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. Despite a recent federal case which upheld the US. Customs
authority to seize and penalize for improper use of the UL certification mark,
the U.S. Attorney recently stated that he would still consider settlement of the
Company's case in the near future due to factual differences.
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 believes that the
adoption of SFAS No. 133 will not have a material impact on its financial
statements.
8
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.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company believes that the adoption of SFAS 141 will not have a significant
impact on the Company's financial position, results of operations and cash
flows.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment only approach. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on the Company's financial position, results of operations and cash flows.
In June 2001, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-25 ("EITF 00-25"), "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products." EITF 00-25 establishes the
treatment in the income statement of vendor consideration to resellers of a
vendor's products. EITF 00-25 is effective for the interim and year end periods
beginning after December 15, 2001. The Company has not yet determined the impact
that adoption of this issue will have on the Company's financial position,
results of operations and cash flows.
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 nine months
of each fiscal year are as follows:
2001 2000
---- ----
United States 76% 74%
Europe 14% 19%
Other 10% 7%
Substantially all of the Company's assets are located in the United States.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion, other than the historical financial information, may consist of
forward-looking statements that involve risks and uncertainties, including
quarterly fluctuations in results, the timely availability of new products,
including new switch products, the impact of competitive products and pricing,
and the other risks set forth from time to time in the Company's SEC filings,
including this report on Form 10-Q for the three and nine months ended June 30,
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
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 2001 were approximately $4.9 million,
a decrease of $1.8 million, or 27%, from net sales of $6.7 million for the third
quarter of fiscal 2000. Sales during the quarter continued to be affected by the
continued economic slowdown which caused reduced demand and increased
competitive pressures within the networking sector and high tech market in
general. Sales of the Company's unmanaged hubs were down $0.5 million, from $1.0
million, to $0.5 million; sales of the Company's adapter cards were down $1.3
million, from $1.9 million, to $0.6 million due primarily to a reduction in
sales to one large customer and to declines in sales of legacy adapters as Apple
Computer continues to incorporate Ethernet onto the motherboard of most of its
new computers. Sales of managed systems products were down $0.6 million compared
to the prior year, from $1..5 million to $0.9 million, reflecting reduced demand
for higher priced equipment due to the economic downturn, and delayed
educational sales. During the same period, sales of the Company's unmanaged
switching products increased $0.3 million, from $0.9 million to $1.2 million due
primarily to increased sales of the Company's low port count 5 and 8-port
switches, and sales of the Company's FriendlyNET router products were up $0.7
million from $42,000 to $0.8 million. OEM (Original Equipment Manufacturer)
sales for the third quarter of fiscal 2001, remained approximately flat compared
to the third quarter of fiscal 2000.
Net sales for the first nine months of fiscal 2001 decreased by approximately
22% to $16.9 million compared to $21.7 million for the first nine months of
fiscal 2000. This decrease was due to several factors including a decrease of
$2.7 million, from $6.0 million to $3.3 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 reduced direct sales to one of the
Company's larger customers; a decrease of $2.3 million, from $4.5 million to
$2.2 million, in sales of the Company's unmanaged hubs due primarily to sharp
pricing declines and a gradual transition to switching and routing products from
shared hub products; and a decrease of $1.7 million in sales of print routers
from $3.3 million to $1.6 million for the first nine months of fiscal 2001,
compared to the first nine months of fiscal 2000. Additionally, the Company
experienced a small reduction in sales of its 10/100 managed switches due
primarily to poorer economic conditions. For the nine months ended June 30,
2001, OEM sales declined $0.3 million, from $0.8 million to $0.5 million. These
declines were offset by increased sales of the Company's Internet Router
products of $2.3 million, unmanaged switches of $0.5 million, and Gigabit
managed switches of $0.7 million.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 21% of net sales for the third quarter of fiscal
2001 and were approximately 19% for the first nine months of fiscal 2001. These
percentages compare to 23% and 26% for the third quarter and first nine months
of fiscal 2000, respectively. The decrease in international sales for the first
nine months of fiscal 2001 as compared to fiscal 2000 was due primarily to the
economic downturn in the market.
The Company's gross profit as a percentage of net sales decreased to 34.5% for
the third quarter of fiscal 2001 as compared to 36.8% for the same period in
fiscal 2000. The Company's gross profit as a percentage of net sales decreased
to 35.7% for the first nine months of fiscal 2001 as compared to 37.9% for the
same period in fiscal 2000. These decreases were due primarily to intense
competitive pricing pressures caused by the economic downturn.
Sales and marketing expenses decreased by $0.2 million, or 15%, in the third
quarter of fiscal 2001 compared to the third quarter of fiscal 2000, and
decreased by $1.0 million, or 22%, in the first nine months of fiscal 2001
compared to the first nine months of fiscal 2000. As a percentage of sales,
these expenses were 25% in the third quarter of fiscal 2001 and 23% in the first
10
nine months of fiscal 2001, compared with 21% and 22% in the third quarter and
first nine months of fiscal 2000, respectively. The decreases in sales and
marketing expenditures were due primarily to decreases in personnel and related
costs, tradeshow participation, advertising related costs, and reduced reserves
for bad debts. The Company believes that sales and marketing expenses overall
will remain flat or increase slightly for the remainder of fiscal 2001.
Research and development expenses decreased by $30,000, or 4%, in the third
quarter of fiscal 2001 compared to the third quarter of fiscal 2000 and
decreased by $0.2 million, or 11% in the first nine months of fiscal 2001
compared with the first nine months of fiscal 2000. The decreases were due
primarily to lower depreciation and prototype 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 2001.
General and administrative expenses remained approximately flat in the third
quarter of fiscal 2001 compared to the third quarter of fiscal 2000 and
decreased by $0.1 million, or 8%, in the first nine months of fiscal 2001
compared with the first nine months of fiscal 2000. As a percentage of net
sales, these expenses were 7% for the third quarter of fiscal 2001, and 7% for
the first nine months of fiscal 2001, as compared with 5% and 6% for the third
quarter and first nine months of fiscal 2000, respectively. The Company expects
that general and administrative spending will remain constant for the remainder
of fiscal 2001.
INCOME TAXES
The Company has recorded no provision or benefit for federal and state income
taxes for the periods ended June 30, 2001 and July 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1.8 million for the nine months ended
June 30, 2001, compared to cash used of $1.0 million for the nine months ended
July 1, 2000. During the first nine months of fiscal 2001, the net cash used by
operating activities resulted primarily from the Company's net loss, decreased
accounts payable of $1.6 million, and decreased accrued expenses of $0.7
million. These cash outflows were partially offset by net cash inflows from
accounts receivable of $1.2 million and reduced inventory of $0.2 million.
Net cash used in investing activities for the nine 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. The line of credit is available through December 2001
and is subject to certain covenant requirements. As of June 30, 2001, the
Company was not in compliance with the net worth requirement.
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 operates in a highly competitive market characterized by rapidly
changing technology, together with competitors and distributors that have
significantly greater financial resources than Asante. The Company intends to
incur significant expenses to develop and promote new products as well as to
support existing product sales. Failure to generate sufficient revenues from new
and existing products, raise additional capital or reduce discretionary
expenditures would have a material adverse effect on the Company's ability to
continue as a going concern and achieve its intended business objectives.
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 the
next twelve months. However, the Company has incurred substantial operating
11
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. At June 30, 2001, the
Company was not in compliance with one of covenants on a line of credit
agreement, related to a net worth requirement and as a result the line of credit
may not be available to the Company.
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. These conditions could affect the
Company's ability to retain and recruit a sufficiently qualified workforce.
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.
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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.
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.
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 believes that the
adoption of SFAS No. 133 will 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.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company believes that the adoption of SFAS 141 will not have a significant
impact on the Company's financial position, results of operations and cash
flows.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment only approach. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on the Company's financial position, results of operations and cash flows.
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In June 2001, the FASB Emerging Issues Task Force ("EITF 00-25") issued EITF
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products." EITF 00-25 establishes the treatment in
the income statement of vendor consideration to resellers of a vendor's
products. EITF 00-25 is effective for the interim and year end periods beginning
after December 15, 2001. The Company has not yet determined the impact that
adoption of this issue will have on the Company's consolidated financial
position, results of operations and cash flows.
ITEM 3A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. As of June 30, 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 impacted 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 United States Attorney's Office offering
settlement of the case. The Company has not yet received a reply to its
settlement proposal. Despite a recent federal case which upheld the US. Customs
authority to seize and penalize for improper use of the UL certification mark,
the U.S. Attorney recently stated that he would still consider settlement of the
Company's case in the near future due to factual differences.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Subsequent to the end of the fiscal quarter for which this 10-Q relates, the
Company received a request from two private placement investors, pursuant to
certain registration rights held by such investors, to file a registration
statement for the reale of up to 500,000 shares of the Company's common stock.
As a result, the Company plans to file a registration statement relating to the
resale of these shares. The Company will pay the costs of preparing and filing
this registration statement.
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: August 13, 2001 ASANTE TECHNOLOGIES, INC.
(Registrant)
By: ANTHONY CONTOS
Anthony Contos
Vice President, Finance and Administration
(Authorized Officer and Principal Financial Officer)
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