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 December 28, 2002
[ ] 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of December 28, 2002 there were 10,066,020 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 -
December 28, 2002 and September 28, 2002 3
Unaudited Condensed Statements of Operations -
Three months ended December 28, 2002 and
December 29, 2001 4
Unaudited Condensed Statements of Cash Flows -
Three months ended December 28, 2002 and
December 29, 2001 5
Notes to Unaudited Condensed Financial Statements 6-11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 18-19
Item 4: Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 20
Item 4: Submission of Matters to a Vote of
Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 20
Signature 21
2
PART I. Financial Information
Item 1. Financial Statements
Asante Technologies, Inc.
Condensed Balance Sheets
(in thousands)
(unaudited)
December 28, September 28,
2002 2002
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 3,021 $ 3,282
Accounts receivable, net 2,092 1,558
Inventory 1,123 1,515
Prepaid expenses and other current assets 150 141
-------- --------
Total current assets 6,386 6,496
Property and equipment, net 89 90
Other assets 172 172
-------- --------
Total assets $ 6,647 $ 6,758
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,338 $ 2,291
Accrued expenses 3,985 3,834
-------- --------
Total current liabilities 6,323 6,125
-------- --------
Stockholders' equity:
Common stock 28,422 28,422
Accumulated deficit (28,098) (27,789)
-------- --------
Total stockholders' equity 324 633
-------- --------
Total liabilities and stockholders' equity $ 6,647 $ 6,758
======== ========
The accompanying notes are an integral part of these financial statements
3
Asante Technologies, Inc.
Unaudited Condensed Statements of Operations
(in thousands, except per share data)
Asante Technologies, Inc.
Condensed Statements of Operations
(in thousands, except per share data)
(unaudited)
Three months ended,
December 28, December 29,
2002 2001
-------- --------
Net sales $ 3,834 $ 3,859
Cost of sales 2,387 2,549
-------- --------
Gross profit 1,447 1,310
-------- --------
Operating expenses:
Sales and marketing 898 1,041
Research and development 555 690
General and administrative 295 363
-------- --------
Total operating expenses 1,748 2,094
-------- --------
Loss from operations (301) (784)
Interest and other income (expense), net (8) 28
-------- --------
Loss before income taxes (309) (756)
Provision for income taxes -- --
-------- --------
Net loss $ (309) $ (756)
======== ========
Basic and diluted net loss per share $ (0.03) $ (0.08)
======== ========
Shares used in per share
calculation:
Basic 10,066 10,003
======== ========
Diluted 10,066 10,003
======== ========
The accompanying notes are an integral part of these financial statements
4
Asante Technologies, Inc.
Unaudited Condensed Statements of Cash Flows
(in thousands)
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
--------------------------------
December 28, December 29,
2002 2001
------- -------
Cash flows from operating activities:
Net loss $ (309) $ (756)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 18 26
Provision for doubtful accounts receivable 48 --
Loss due to write-off of idle assets
Changes in operating assets and liabilities:
Accounts receivable (582) 831
Inventory 392 (244)
Prepaid expenses and other current assets (9) 12
Accounts payable 47 210
Accrued expenses and other 151 53
------- -------
Net cash provided by (used in) operating activities (244) 132
------- -------
Cash flows from investing activities:
Purchases of property and equipment (17) (5)
Other -- (2)
------- -------
Net cash used in investing activities (17) (7)
------- -------
Net increase (decrease) in cash and cash equivalents (261) 125
Cash and cash equivalents at beginning of period 3,282 5,065
------- -------
Cash and cash equivalents at end of period $ 3,021 $ 5,190
======= =======
The accompanying notes are an integral part of these 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 of America have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the financial position,
operating results and cash flows for those periods presented. These unaudited
condensed financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended September 28, 2002, included in
the Company's 2002 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
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.
6
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):
Three Months Ended
December 28, December 29,
2002 2001
----------- ----------
Net loss $ (309) $ (756)
=========== ==========
Weighted average common stock outstanding (basic) 10,066 10,003
Effect of dilutive warrants and options -- --
----------- ----------
Weighted average common stock outstanding (diluted) 10,066 10,003
=========== ==========
Net loss per share:
Basic $ (0.03) $ (0.08)
=========== ==========
Diluted $ (0.03) $ (0.08)
=========== ==========
At December 28, 2002, and December 29, 2001, options and warrants outstanding of
1,718,929 and 1,585,551, respectively, 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 loss was equal to comprehensive 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. 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):
December 28, September 28,
2002 2002
---------- ----------
Raw materials and component parts $ 206 $ 193
Work-in-process 27 54
Finished goods 890 1,268
---------- ----------
$ 1,123 $ 1,515
========== ==========
7
Note 5. Warranties
On product sales we provide for estimated future warranty costs upon product
shipment. The specific terms and conditions of those warranties vary depending
upon the product sold and country in which we do business. In the case of
hardware manufactured by our sub-contract manufacturers, our warranties
generally start from the delivery date and continue as follows:
Product Warranty Periods
------- ----------------
Managed switches Three to five years
Unmanaged Gigabit Switches, Gigabit Adapters One to five years
Unmanaged switches, hubs, USB hubs, routers, fiber One to five years
Other - Adapters One to five years
AsantePrint and AsanteTalk print routers, Gig cables Limited Lifetime
Longer warranty periods are provided on a limited basis including some
"lifetime" warranties on some of the Company's older legacy products.
From time to time, some of the Company's products may be manufactured to
customer specifications and their acceptance is based on meeting those
specifications. We historically have experienced minimal warranty costs related
to these products. Factors that affect our warranty liability include the number
of shipped units, historical experience and management's judgment regarding
anticipated rates of warranty claims and cost per claim. We assess the adequacy
of our recorded warranty liabilities every quarter and make adjustments to the
liability if necessary.
Changes in our warranty liability, which is included as a component of "Accrued
expenses" on the Condensed Balance Sheet, during the period are as follows (in
thousands):
Balance as of September 28, 2002 $ 469
Provision for warranty liability for sales made during the
quarter ended December 28, 2002 86
Settlements made during the quarter ended December 28, 2002 (86)
-----
Balance as of December 28, 2002 $ 469
-----
Note 6. Bank Borrowings
On December 31, 2002, the Company renewed its bank line of credit which provides
for maximum borrowings of $2.0 million, and is limited to a certain percentage
of eligible accounts receivable. No borrowings have been made under the
line-of-credit agreement. The line of credit is available through November 2003
and is subject to certain covenant requirements. As of December 28, 2002, the
Company was in compliance with the covenants under its line of credit agreement.
Note 7. Income Taxes
The Company has recorded no provision or benefit for federal and state income
taxes for the periods ended December 28, 2002 and December 29, 2001, due
primarily to a valuation allowance being established against the Company's net
deferred tax assets, which consist primarily of net operating loss carryforwards
and research and development credits. The Company has recorded a full valuation
allowance against its net deferred tax assets as sufficient uncertainty exists
regarding their recoverability.
Note 8. 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.
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
8
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 to 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. 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 has stated that he would still consider
settlement of the Company's case due to factual differences. On December 4,
2002, the Company and it's attorneys met with the Assistant United States
Attorney handling the seizure case for the Department of Justice and were
informed that a formal case of forfeiture was likely to be filed against the
products unless the U.S. Customs accepted the previously proffered settlement.
The US Attorney has offered a settlement of the dispute. The Company has
countered the offer for settlement, but has not received notification of the
final resolution. Due to the long amount of time the case has been outstanding,
the Company believes that the final settlement will not exceed $75,000.
Note 9. Recently Issued Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 ("FIN45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees that an entity has issued, including a reconciliation of
changes in the entity's product warranty liabilities. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The company believes that the adoption of this standard will
have no material impact on its financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002. The Company plans to continue to account for employee
stock options in accordance with Accounting Principles Board Opinion ("APB") No.
25, "Accounting For Stock Issued To Employees". The company believes that the
adoption of this standard will have no material impact on its financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The company believes
that the adoption of this standard will have no material impact on its financial
statements.
9
Note 10. Segment Information
The Company has determined that it does not have separately reportable operating
segments.
Sales as a percent of total sales by geographic region for the first three
months of each fiscal year are as follows:
2002 2001
---- ----
United States 83% 78%
Europe 11% 14%
Other 6% 8%
Substantially all of the Company's assets are located in the United States of
America.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion, other than the historical financial information, may consist of
forward-looking statements that involve risks and uncertainties, including
quarterly fluctuations in results, the timely availability of new products,
including new switch products, the impact of competitive products and pricing,
and the other risks set forth from time to time in the Company's SEC filings,
including this report on Form 10-Q for the three months ended December 28, 2002,
and the Company's Annual Report on Form 10-K for the fiscal year ended September
28, 2002. 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 first quarter of fiscal 2003 were $3.8 million, a decrease of
$0.1 million, or 1%, from net sales of $3.9 million for the first quarter of
fiscal 2002. Sales of the Company's products continued to be negatively impacted
by the ongoing economic slowdown affecting the industry, a continued reduction
in unit volume sales of network adapter products to Apple Computer specific
platforms due to Apple's continued incorporation of Ethernet onto the
motherboard of their new systems, and heavy competitive pressures negatively
impacting selling prices of networking products.
Sales continued to be negatively affected across substantially all of the
Company's product lines, however, these declines were partially offset by an
increase in sales of the Company's IntraCore(TM) managed products and sales of
original equipment manufacturers (OEM) products. During the quarter, the Company
introduced several products including a new Internet router, and its new
16-port, Layer 2/4 Gigabit switch. OEM sales for the first quarter of fiscal
2003 were approximately $0.4 million, compared to OEM sales in the first quarter
of fiscal 2002 of $0.3 million. One customer, a distributor, accounted for 48%
and 40% of the Company's total sales in the first quarter of fiscal 2003 and
2002, respectively.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 17% of net sales for the first quarter of fiscal
2003. This percentage compares to 22% for the first quarter of fiscal 2002. The
decrease in international sales for the first quarter of fiscal 2003 as compared
to fiscal 2002 was due primarily to the continuing economic downturn in the
international market, the discontinuation of one of the Company's primary
distributors in Canada, and increased pricing pressures from Asian networking
companies.
The Company's gross profit as a percentage of net sales increased to 38% for the
first quarter of fiscal 2003 as compared to 34% for the same period in fiscal
2002. This increase was due primarily to increased sales of the Company's
managed switches and reduced reserves for inventory obsolescence.
Sales and marketing expenses decreased by $0.1 million, or 14%, to $0.9 million
in the first quarter of fiscal 2003 compared to $1.0 million in the first
quarter of fiscal 2002. As a percentage of sales, these expenses were 23% in the
first quarter of fiscal 2003, compared with 27% in the first quarter of fiscal
2002, respectively. The lower sales and marketing expenditures were due
primarily to decreases in personnel and related costs, and reduced reserves for
bad debts. The Company believes that sales and marketing expenses overall will
remain approximately flat for the remainder of fiscal 2003.
Research and development expenses decreased by $0.1 million, or 19%, to $0.6
million in the first quarter of fiscal 2003 compared to $0.7 million in the
first quarter of fiscal 2002. As a percentage of sales, these expenses were 14%
in the first quarter of fiscal 2003, compared with 18% in the first quarter of
fiscal 2002. The decreases were due primarily to lower non-recurring engineering
related costs, and reduced overhead and personnel related costs. The Company
expects that future spending on research and development will remain flat in
absolute dollars for the remainder of fiscal 2003.
General and administrative expenses decreased by $0.1 million, or 19%, to $0.3
million in the first quarter of fiscal 2003 compared to $0.4 million in the
first quarter of fiscal 2002. As a percentage of net sales, these expenses were
8% for the first quarter of fiscal 2003, as compared with 9% for the first
quarter of fiscal 2002. The decrease was primarily due to the Company continuing
its executive salary reduction program during this quarter. The Company expects
that general and administrative spending will remain constant or decrease
slightly for the remainder of fiscal 2003.
11
For the first quarter ended December 28, 2002, the Company recorded a loss from
operations of $309,000, compared to a loss of $756,000 for the first quarter of
fiscal 2002. While net sales were similar, a reduction of $346,000, or 17%, in
total operating expenses for the first quarter of fiscal 2003 resulted in the
reduced loss for the current quarter as compared to the first quarter of fiscal
2002.
Income Taxes
The Company has recorded no provision or benefit for federal and state income
taxes for the periods ended December 28, 2002 and December 29, 2001, due
primarily to a valuation allowance being established against the Company's net
deferred tax assets which consist primarily of net operating loss carry-forwards
and research and development credits. The Company has recorded a full valuation
allowance against its net deferred tax assets as sufficient uncertainty exists
regarding their recoverability.
Liquidity and Capital Resources
Net cash used in operating activities was $0.2 million for the three months
ended December 28, 2002, compared to cash provided of $0.1 million for the three
months ended December 29, 2001. During the first three months of fiscal 2003,
the net cash used in operating activities resulted primarily from the Company's
net loss and an increase in accounts receivable of $0.6 million. These cash
outflows were partially offset by net cash inflows from reduced inventory of
approximately $0.4 million, and increased accrued expenses of $0.2 million.
Net cash used in investing activities for the first three months of fiscal 2003
and fiscal 2002 was insignificant.
In December 2002, the Company renewed its bank line of credit that provides for
maximum borrowings of $2.0 million, and is limited to a certain percentage of
eligible accounts receivable. The Company has not drawn on this line of credit.
The line of credit is available through November 2003 and is subject to certain
covenant requirements. As of December 28, 2002, the Company was in compliance
with the covenants under its line of credit agreement.
The Company has an operating lease for its main facility that expires on August
31, 2004. Future minimum lease payments under this lease at December 28, 2002
are as follows (in thousands):
Year
----
2003 749
2004 909
--------
$ 1,658
========
In the first quarter of fiscal 2003, fiscal years 2002 and 2001, the Company
incurred net losses and negative cash flows from operations and as of December
28, 2002, the Company had an accumulated deficit of $28 million. Based upon the
Company's operating budget and cash flow projections the Company expects to
continue to experience negative cash flows from operations through fiscal year
2003. The Company anticipates that its existing cash and its ability to borrow
under its line of credit will be sufficient to meet its working capital and
operating expense requirements at least through September 30, 2003.
The Company's expectations as to its cash flows, and as to future cash balances,
are subject to a number of assumptions, including assumptions regarding
anticipated revenues, customer purchasing and payment patterns, and improvements
in general economic conditions, many of which are beyond the Company's control.
If revenues do not match projections and if losses exceed the Company's
expectations, the Company will implement cost saving initiatives in order to
preserve cash. If the Company experiences a decrease in demand for it's products
from the level experienced during fiscal year 2002, then it would need to reduce
expenditures to a greater degree than anticipated, or raise additional funds if
possible.
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 the Company. 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, 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.
12
Factors Affecting Future Operating Results
The Company operates in a rapidly changing industry, which is characterized by
intense 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 technology products. This requires the
Company to accurately predict future technology trends and preferences. 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. High
employee turnover in the technology industry is typical. Although the Company
has reduced its workforce during fiscal 2002 and in the first quarter of fiscal
2003, vacancies in the workforce must be promptly filled, because 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 significant
competition, rapidly changing salary structures, and a need for very specialized
experience. These conditions could affect the Company's ability to retain and
recruit a sufficiently qualified workforce.
The Company's current manufacturing structure is particularly subject to various
risks associated with its use of offshore contract manufacturers including
changes in costs of labor and materials, reliability of sources of supply and
general economic conditions in foreign countries. Unexpected changes in foreign
manufacturing or sources of supply, 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 continue to adjust to a widespread reduction in
demand for products due to financial problems experienced by many Internet
Service Provider's (ISP's), and the failure of many Internet companies. The
duration, or long-term effect on the Company's operations is difficult to
measure, but the inability to alter its strategic markets, 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 (1000BASE-T, or 1000Mbps)
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 releases. There can be
no assurance that the market will accept, adopt, or continue to use 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
and cash position. 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, education, Multiple Tenant Unit/Multiple Dwelling Unit
(MTU/MDU) providers, 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
13
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. Additionally, the Company's revenues and results of
operations could be adversely affected, if the Company were to lose certain key
distribution partners.
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, fluctuations in channel inventory levels, variations
in the mix of product sales, manufacturing delays or disruptions in sources of
supply, the current economic downturn and seasonal purchasing patterns specific
to the computer and networking industries. 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 technology companies. These factors
could affect the price of the Company's stock and could cause such stock price
to fluctuate over relatively short periods of time.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon Asante Technologies, Inc. financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management bases estimates and judgments on historical experience and on various
other factors that are believed to be reasonable under the circumstances; the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from these estimates under
different assumptions or conditions. Management believes the following critical
accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its financial statements.
Revenue Recognition. The Company recognizes revenue net of estimated product
returns, expected payments to resellers for customer programs including
cooperative advertising and marketing development funds, volume rebates, and
special pricing programs. Product returns are provided for at the time revenue
is recognized, based on historical return rates, at what stage the product is in
its expected life cycle, and assumptions regarding the rate of sell-through to
end users from our various channels, which is based on historical sell-through
rates. Should these product lives vary significantly from our estimates, or
should a particular selling channel experience a higher than estimated return
rate, or a slower sell-through rate causing inventory build-up, then our
estimated returns, which net against revenue, may need to be revised. Reductions
to revenue for expected and actual payments to resellers for volume rebates and
pricing protection are based on actual expenses incurred during the period and
on estimates for what is due to resellers for estimated credits earned during
the period. If market conditions were to decline, the Company may take action to
increase promotional programs resulting in incremental reductions in revenue at
the time the incentive is offered based on our estimate of inventory in the
channel that is subject to such pricing actions.
Accounts Receivable. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from our
customers. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of our customers should deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Inventory. The Company maintains reserves for estimated excess and obsolete
inventory based on projected future shipments using historical selling rates,
and taking into account market conditions, inventory on-hand, purchase
commitments, product development plans and life expectancy, and competitive
factors. If markets for the Company's products and corresponding demand were to
decline, then additional reserves may be deemed necessary.
Warranty. The Company provides for the estimated cost of warranties at the time
revenue is recognized. Should actual failure rates and material usage differ
from our estimates, revisions to the warranty obligation may be required.
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 ("FIN45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance
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of a guarantee. In addition, FIN 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company believes that the adoption of this standard will have no material impact
on its financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002. The Company plans to continue to account for employee
stock options in accordance with Accounting Principles Board Opinion ("APB") No.
25, "Accounting For Stock Issued To Employees". The Company believes that the
adoption of this standard will have no material impact on its financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company believes
that the adoption of this standard will have no material impact on its financial
statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of December 28, 2002, 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 or decrease 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.
Item 4. Controls and Producedures
Within 90 days prior to the date of this Form 10-Q, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in this Form 10-Q.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect the internal controls subsequent
to the date the Company carried out its evaluation.
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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.
Information regarding current litigation is set forth in Note 8 of the Notes to
Unaudited Condensed Financial Statements included in Part I, Item 1 of this
report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
Exhibit 99.1 - CERTIFICATION OF CEO
Exhibit 99.2 - CERTIFICATION OF CFO
Exhibit 99.3 - CERTIFICATION PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
(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: February 11, 2003 ASANTE TECHNOLOGIES, INC.
(Registrant)
By: ANTHONY CONTOS
Anthony Contos
Vice President, Finance and Administration
(Authorized Officer and Principal Financial Officer)
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