UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-QSB
(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 27, 2003
[ ] 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 March 19, 2004 there were 10,163,302 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 27, 2003 and September 27, 2003 3
Unaudited Condensed Statements of Operations -
Three months ended December 27, 2003
and December 28, 2002 4
Unaudited Condensed Statements of Cash Flows -
Three months ended December 27, 2003 and
December 28, 2002 5
Notes to Unaudited Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis or
Plan of Operations 13
Item 3: Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 22
Item 5: Other Information 22
Item 6: Exhibits and Reports on Form 8-K 22
Signature 23
2
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
Asante Technologies, Inc.
Unaudited Condensed Balance Sheets
(in thousands)
December 27, September 27,
2003 2003
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 1,097 $ 1,723
Accounts receivable, net 1,537 1,759
Inventory 891 930
Prepaid expenses and other current assets 169 27
-------- --------
Total current assets 3,694 4,439
Property and equipment, net 39 51
Other assets 173 172
-------- --------
Total assets $ 3,906 $ 4,662
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,214 $ 1,050
Accrued expenses 1,710 1,779
-------- --------
Total current liabilities 2,924 2,829
-------- --------
Stockholders' equity (deficit):
Common Stock 28,428 28,427
Accumulated deficit (27,446) (26,594)
-------- --------
Total stockholders' equity 982 1,833
-------- --------
Total liabilities and stockholders' equity $ 3,906 $ 4,662
======== ========
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 date)
Three months ended
-----------------------------
December 27, December 28,
2003 2002
-------- --------
Net sales $ 2,063 $ 3,834
Cost of sales 1,433 2,387
-------- --------
Gross profit 630 1,447
-------- --------
Operating expenses:
Sales and marketing 713 898
Research and development 481 555
General and administrative 281 295
-------- --------
Total operating expenses 1,475 1,748
-------- --------
Loss from operations (845) (301)
Interest and other income (expense), net (7) (8)
-------- --------
Loss before income taxes (852) (309)
Provision for income taxes -- --
-------- --------
Net loss ($ 852) ($ 309)
======== ========
Basic and diluted net loss per share ($ 0.08) ($ 0.03)
======== ========
Shares used in per share calculation:
Basic and diluted 10,150 10,066
======== ========
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)
Three months ended
------------------------
December 27, December 28,
2003 2002
------- -------
Cash flows from operating activities:
Net loss $ (852) $ (309)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 12 18
Provision for doubtful accounts receivable 16 48
Changes in operating assets and liabilities:
Accounts receivable 206 (582)
Inventory 39 392
Prepaid expenses and other assets (143) (9)
Accounts payable 164 47
Accrued expenses (69) 151
------- -------
Net cash used in operating activities (627) (244)
------- -------
Cash flows from investing activities:
Purchases of property and equipment -- (17)
------- -------
Net cash used by investing activities -- (17)
------- -------
Cash flows from financing activities
Exercise of stock options 1 0
------- -------
Net cash provided by financing activities 1 0
------- -------
Net decrease in cash and and cash equivalents (626) (261)
Cash and cash equivalents, beginning of period 1,723 3,282
------- -------
Cash and cash equivalents, end of period $ 1,097 $ 3,021
======= =======
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 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 presentation 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 fiscal year ended September 27, 2003,
included in the Company's 2003 Annual Report on Form 10-K. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for the entire year.
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 additional cost saving initiatives in
order to preserve cash. If the Company experiences a continued decrease in
demand for its products from the level experienced during fiscal year 2003,
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 achieve its intended
business objectives.
For the quarter ended December 27, 2003, the Company incurred a loss from
operations of $852,000 and cash used in operating activities was $627,000. In
fiscal years 2003 and 2002, the Company also incurred substantial operating
losses and negative cash flows from operations. As of December 27, 2003, the
Company had an accumulated deficit of $27.4 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 2004.
At December 27, 2003, the Company had cash and cash equivalents of $1.1 million
compared to $1.7 million at September 27, 2003, which represents a 35% decline.
Working capital was $0.8 million at December 27, 2003, compared to $1.6 million
at September 27, 2003. On February 11, 2004, the Company renewed its bank line
of credit agreement which provides for borrowings of up to $2.0 million. The
renewed line of credit expires on January 30, 2005. However,
6
borrowings under the line of credit are subject to compliance with certain
financial covenants and are limited to a specified percentage of eligible
accounts receivable.
The recurring losses, accumulated deficit and expected continued negative cash
flows from operations raise substantial doubt about the Company's ability to
continue as a going concern.
On December 18, 2003, the Company signed a Letter of Intent with UNETEK, for the
private investment of funds with the Company for approximately $3.0 million.
Additionally, on December 23, 2003, the Company entered into a non-binding
Letter of Intent to merge with Oblique, Inc. The merger is conditioned upon,
among other things, an expedited due diligence period, and several other
factors, including an expedited process to arrive at a Definitive Merger
Agreement with certain minimum acceptable terms including a bridge funding of
approximately $1.0 million. The Company plans on proceeding with only one of
these transactions, however, and the Board of Directors is currently evaluating
each of these proposals.
Should the Company be unable to complete the merger or to obtain the $3 million
private investment of funds in the Company, it will need to raise additional
capital, secure other sources of financing or enter into a corporate transaction
in order to finance its operations through fiscal 2004. If required, the Company
may not be able to complete any of these alternative transactions on acceptable
terms, or at all.
Note 2. Basic and Diluted Net Loss Per Share
Basic net loss per share is computed by dividing net loss (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 (in
thousands, except per share data):
Three Months Ended
----------------------
December 27, December 28,
2003 2002
-------- --------
Net loss $ (852) $ (309)
======== ========
Weighted average common stock outstanding (basic) 10,150 10,066
Effect of dilutive warrants and options -- --
-------- --------
Weighted average common stock outstanding (diluted) 10,150 10,066
======== ========
Net loss per share:
Basic and diluted $ (0.08) $ (0.03)
======== ========
7
For the three months ended December 27, 2003, and December 28, 2002, options and
warrants outstanding of 1,633,318 and 1,715,936, 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 27, September 27,
2003 2003
---- ----
Raw materials and component parts $ 47 $ 39
Work-in-process 13 23
Finished goods 831 868
---- ----
$891 $930
==== ====
Note 5. Warranties
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 "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
8
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 Sheets, during the period are as follows (in
thousands):
Balance as of September 27, 2003 $ 430
Provision for warranty liability for sales made during
the three month period ended December 27, 2003 76
Settlements made during the three month period ended December 27, 2003 (76)
-----
Balance as of December 27, 2003 $ 430
-----
Note 6. Bank Borrowings
On February 11, 2004, the Company renewed its bank line of credit which provides
for maximum borrowings of $2.0 million, and is limited to a certain percentage
(60%) of eligible accounts receivable. The line of credit expires on January 30,
2005. The line of credit is subject to certain covenant requirements, including
maintaining certain net tangible worth amounts. As of March 15, 2004,
approximately $200,000 was available on this line of credit and the Company was
in compliance with the covenants of the line of credit agreement. During March
2004 the Company had drawn down $150,000 on this line of credit which amount was
subsequently repaid on March 19, 2004.
Note 7. Income Taxes
The Company has recorded no provision or benefit for federal and state income
taxes for the three month periods ended December 27, 2003 and December 28, 2002,
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.
9
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
patents, trademarks and other intellectual property rights.
As of December 27, 2003, the Company was unaware of any asserted claims which
would have a material impact on its business, or results of operations.
Note 9. Recently Issued Accounting Pronouncements
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 adoption of this
standard did not have a material impact on the Company's financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. In particular, this
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. This Statement is generally effective for contracts entered into
or modified after June 30, 2003 and did not have a material impact on the
Company's financial statements.
In May 2003, the FASB has issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The new Statement requires that
those instruments be classified as liabilities in statements of financial
position. This statement is effective for interim periods beginning after June
15, 2003. The adoption of SFAS 150 did not have a material effect on the
Company's financial statements.
In December 2003, the Financial Accounting Standard Board issued SFAS No. 132
(Revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits. This Statement amends Statements No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions. However,
the Statement does not change the recognition and measurement requirements of
those Statements. This Statement retains the disclosure requirements contained
in SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces and requires additional disclosure. Additional new
disclosure includes actual mix of plan assets by category, a description of
investment strategies and policies used, a narrative description of the basis
for determining the overall expected long-term rate of return on asset
assumption and aggregate expected contributions. The Company does not expect
that the adoption of SFAS 132 will have a material affect on its financial
statements.
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:
2004 2003
---- ----
United States 79% 83%
Europe 15% 11%
Other 6% 6%
10
Substantially all of the Company's assets are located in the United States of
America.
Note 11. Stock Based Compensation
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure," which amends SFAS No. 123. SFAS No.
148 requires more prominent and frequent disclosures about the effects of
stock-based compensation. The Company accounts for its stock-based compensation
plans using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost
for stock options, if any, is measured by the excess of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair-value based
method of accounting for stock-based employee compensation plans. Had
compensation expense for the Plans been determined consistent with SFAS No. 123,
the Company's net loss and basic and diluted net loss per share would have
increased to the following pro forma amounts (in thousands, except per share
amounts):
Three Months Ended
--------------------
December 27, December 28,
(In thousands, except per share data) 2003 2002
------ ------
Net loss as reported $(852) $(309)
------ ------
Employee stock-based compensation expense
determined under the fair value method $ 11 $ 41
------ ------
Pro forma net loss $(863) $(350)
====== ======
Net loss per share:
As reported
Basic and diluted $(0.08) $(0.03)
====== ======
Pro forma
Basic and diluted $(0.09) $(0.03)
====== ======
Note 12. Guarantees
Officer and Director Indemnifications
As permitted and/or required under Delaware law and to the maximum
extent allowable under that law, the Company has agreements whereby the Company
indemnifies its current and former officers and directors for certain events or
occurrences while the officer or director is, or was serving, at the Company's
request in such capacity. These indemnifications are
11
valid as long as the director or officer acted in good faith and in a manner
that a reasonable person believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his or her conduct was unlawful. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited; however, the Company has a
director and officer insurance policy that limits the Company's exposure and
enables the Company to recover a portion of any future amounts paid. As a result
of the Company's insurance policy coverage, the Company believes the estimated
fair value of these indemnification obligations is minimal.
Other Indemnifications
As is customary in the Company's industry, the Company's standard
contracts provide remedies to its customers, such as defense, settlement, or
payment of judgment for intellectual property claims related to the use of the
Company's products. From time to time, the Company indemnifies customers against
combinations of loss, expense, or liability arising from various trigger events
related to the sale and the use of its products. In the Company's experience,
claims made under such indemnifications are rare and the associated estimated
fair value of the liability is not material.
12
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-QSB
for the three months ended December 27, 2003, the Company's Annual Report on
Form 10-K for the fiscal year ended September 27, 2003, and the Company's
recently filed 10-K/A 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 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
Net sales for the first quarter of fiscal 2004 were $2.1 million, a decrease of
$1.7 million, or 46%, from net sales of $3.8 million for the first quarter of
fiscal 2003. Sales of the Company's products continued to be negatively impacted
by the ongoing economic slowdown affecting the industry, a reduction in revenues
in the distribution channel due to several factors including, heavy competitive
pressures negatively impacting selling prices of networking products, and to
some extent, delayed spending in the education channel due to budget cuts
causing a reduction in managed systems sales during the quarter. Management
anticipates that revenues of the Company's managed systems and Gigabit products
will improve compared to the first quarter, while sales of adapters will remain
flat, or decrease somewhat due to lower selling prices and continued
incorporation of Ethernet onto the motherboard of many newer computers.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 21% of net sales for the first quarter of fiscal
2004 compared to 17% for the first quarter of fiscal 2003. The increase in
international sales in percentage terms for the first three months of fiscal
2004 as compared to the same period of fiscal 2003 was due in part to increased
revenues as a percentage of sales to Canada and Europe.
Cost of Sales and Gross Profit
Cost of sales for the quarter ended December 27, 2003 decreased 40% to $1.4
million, compared to $2.4 million reported in the same quarter of fiscal 2003.
The lower cost of sales was due primarily to reduced sales for the first quarter
of fiscal 2004. Gross profit for the quarter ended December 27, 2003 declined
57% to $0.6 million compared to $1.4 million for the quarter ended December 28,
2002. The decrease in gross profit for the quarter is consistent with the
decrease in net sales and cost of sales experienced during the first quarter of
fiscal year 2004.
13
The Company's gross profit as a percentage of net sales decreased to 30% for the
first quarter of fiscal 2004 as compared to 37.7% for the same period in fiscal
2003. This decrease was due primarily to competitive pricing pressures which had
the effect of reducing overall profit margins.
Sales and Marketing
Sales and marketing expenses decreased by $184,000, or 21%, to $713,000 in the
first quarter of fiscal 2004 compared to $898,000 for the first quarter of
fiscal 2003. As a percentage of sales, these expenses were 34.6% in the first
quarter of fiscal 2004 compared with 23.4% in the first quarter of fiscal 2003.
The lower sales and marketing expenditures were due primarily to decreases in
personnel and related costs, and advertising related costs. The Company believes
that sales and marketing expenses overall will remain approximately flat for the
remainder of fiscal 2004.
Research and Development
Research and development expenses decreased by $74,000, or 13% to $481,000 in
the first quarter of fiscal 2004 compared to $555,000 reported in the first
quarter of fiscal 2003. The decrease was due primarily to lower depreciation,
prototype and personnel related costs. The Company expects that future spending
on research and development will decrease slightly in absolute dollars for the
remainder of fiscal 2004.
General and Administrative
General and administrative expenses decreased by $14,000 in the first quarter of
fiscal 2004 to $281,000 compared to $295,000 in the first quarter of fiscal
2003. As a percentage of net sales, these expenses were 14% for the first
quarter of fiscal 2004, as compared with 8% in the first quarter of fiscal 2003.
The decrease during the first quarter of 2004 reflects a decrease in personnel
related costs as the Company continues its cost cutting programs. The Company
expects that general and administrative spending will be reduced for the
remainder of fiscal 2004, except for expenses associated with financing,
professional fees and related activities.
Off Balance Sheet Arrangements
During the first quarter of fiscal year 2004, the Company did not engage in any
off-balance sheet arrangements as defined in Item 303(c) of the SEC's Regulation
S-B.
Income Taxes
The Company has recorded no provision or benefit for federal and state income
taxes for the periods ended December 27, 2003 and December 28, 2002, 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.
14
Liquidity and Capital Resources
Net cash used in operating activities was $627,000 for the three months ended
December 27, 2003, compared to cash used of $244,000 for the three months ended
December 28, 2002. During the first three months of fiscal 2004, the net cash
used in operating activities resulted primarily from the Company's net loss and
an increase in prepaid expenses of $143,000. These cash outflows were partially
offset by net cash inflows from accounts receivable of $206,000 and an increase
in accounts payable of $164,000.
Net cash used in investing activities and provided by financing activities for
the first three months of fiscal 2004 and fiscal 2003 was insignificant.
The Company has a bank line of credit that provides for maximum borrowings of up
to $2.0 million and is limited to a certain percentage (60%) of eligible
accounts receivable. The line of credit is subject to certain covenant
requirements, including maintaining certain net tangible worth amounts. The line
of credit agreement expired in November 2003. However, the parties entered into
an amendment to extend the line of credit term to January 31, 2004, during which
time the Company negotiated a renewal of the line of credit with the bank. On
February 11, 2004, the line of credit was renewed with a new maturity date of
January 30, 2005. As of March 15, 2004, approximately $200,000 was available on
this line of credit and the Company was in compliance with the covenants of the
line of credit agreement. During March 2004 the Company has drawn down $150,000
on this line of credit which amount was subsequently repaid on March 19, 2004.
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 27, 2003
are as follows (in thousands):
Fiscal year ended October 2, 2004 $ 654
In the first three months of fiscal 2004, and fiscal years 2003 and 2002, the
Company incurred net losses and negative cash flows from operations and as of
December 27, 2003, the Company had an accumulated deficit of $27.4 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 2004. The Company anticipates that its existing cash and its ability
to borrow under its line of credit may not be sufficient to meet its working
capital and operating expense requirements through the end of fiscal year 2004.
During the first quarter, the Company continued implementing several cost
savings measures aimed at reducing its cash usage rate, including a reduction in
personnel and other operating expenses. 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 or if losses exceed the Company's expectations, the Company
will implement additional cost saving initiatives in order to preserve cash. If
the Company experiences a continued decrease in demand for it's products from
the level experienced during fiscal year 2003, then it would need to reduce
expenditures to a greater degree than anticipated, or raise additional funds if
possible.
15
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 achieve its intended
business objectives.
Factors Affecting Future Operating Results
The development and marketing of products requires significant amounts of
capital. A decline in future orders and revenues might require the Company to
seek additional capital to meet it's working capital needs during or beyond the
next twelve months if it is unable to reduce expenses to the degree necessary to
avoid incurring losses. If the Company needs additional capital resources, it
may be required to sell additional equity or debt securities, secure additional
lines of credit or obtain other third party financing. The timing and amount of
such capital requirements cannot be determined at this time and will depend on a
number of factors, including demand for our existing and new products and
changes in technology in the networking industry. There can be no assurance that
additional financing will be available on satisfactory terms when needed, if at
all. Failure to raise additional capital, secure other sources of financing or
enter into a corporate transaction would have a material adverse effect on the
Company's ability to achieve its intended business objectives which raises
substantial doubt about the Company's ability to continue as a going concern.
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 employment or non-competition agreements with the
Company. High employee turnover in the technology industry is typical. Although
the Company has reduced its workforce during fiscal 2003 and in the first
quarter of fiscal 2004, 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
16
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, along with the
Company's reduced financial resources, 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
17
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 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 depressed economy 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, the product stage
18
relative to 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 its
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 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 adoption of this
standard did not have a material impact on the Company's financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. In particular, this
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and when a derivative
contains a financing
19
component that warrants special reporting in the statement of cash flows. This
Statement is generally effective for contracts entered into or modified after
June 30, 2003 and did not have a material impact on the Company's financial
statements.
In May 2003, the FASB has issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The new Statement requires that
those instruments be classified as liabilities in statements of financial
position. This statement is effective for interim periods beginning after June
15, 2003. The adoption of SFAS 150 did not have a material effect on the
Company's financial statements.
In December 2003, the Financial Accounting Standard Board issued SFAS No. 132
(Revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits. This Statement amends Statements No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions. However,
the Statement does not change the recognition and measurement requirements of
those Statements. This Statement retains the disclosure requirements contained
in SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces and requires additional disclosure. Additional new
disclosure includes actual mix of plan assets by category, a description of
investment strategies and policies used, a narrative description of the basis
for determining the overall expected long-term rate of return on asset
assumption and aggregate expected contributions. The Company does not expect
that the adoption of SFAS 132 will have a material affect on its financial
statements.
ITEM 3. CONTROLS AND PROCEDURES
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 as of the end of the period
covered by this report. 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 to
ensure the information required to be disclosed by the Company in reports filed
or submitted under the Exchange Act were timely recorded, processed and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms.
There have been no significant changes in the Company's internal controls over
financial reporting or in other factors, which occurred during the quarter
covered by this report, which could materially affect or are reasonably likely
to materially affect the Company's internal controls over financial reporting.
20
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
patents, trademarks and other intellectual property rights.
As of December 27, 2003, the Company was unaware of any asserted claims which
would have a material impact on its business or results of operations.
ITEM 5. OTHER INFORMATION
On December 18, 2003, the Company signed a Letter of Intent with UNETEK, for the
private investment of funds with the Company for approximately $3.0 million.
Additionally, on December 23, 2003, the Company entered into a new, non-binding,
Letter of Intent to merge with Oblique, Inc. The Merger is conditioned upon,
among other things, an expedited due diligence period, and several other
factors, including an expedited process to arrive at a Definitive Merger
Agreement with certain minimum acceptable terms including a bridge funding of
approximately $1.0 million. The Company plans on proceeding with only one of
these transactions however, and the Board of Directors is currently evaluating
each of these proposals.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1 - CERTIFICATION BY CEO PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
(b) Reports on Form 8-K during the quarter reported: None
21
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: April 1, 2004 ASANTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ Wilson Wong
----------------------------------
Wilson Wong, President
(Authorized Officer and
Chief Executive Officer)
22