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 27, 1997
[ ] 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
ASANT<E'> 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 December 27, 1997 there were 9,149,579 shares of the Registrant's
Common Stock outstanding.
2
ASANT<E'> TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements:
Unaudited Condensed Balance Sheets -
December 27, 1997 and September 27, 1997 3
Unaudited Condensed Statements of Operations -
Three months ended December 27, 1997
and December 28, 1996 4
Unaudited Condensed Statements of Cash Flows -
Three months ended December 27, 1997, and
December 28, 1996 5
Notes to Unaudited Condensed Financial Statements 6-7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 12
Item 4: Submission of Matters to a Vote of
Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits and Reports on Form 8-K 13
Signature 13
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASANT<e'> TECHNOLOGIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands)
December 27, September 27,
1997 1997
Assets
Current assets:
Cash and cash equivalents $ 8,562 $ 12,931
Marketable securities 4,953 0
Accounts receivable, net 8,422 8,313
Inventory 10,685 12,080
Prepaid expenses and other 4,718 4,096
--------- ---------
Total current assets 37,340 37,420
Property and equipment, net 2,757 2,768
Other assets 393 379
--------- ---------
Total assets $ 40,490 $ 40,567
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 5,133 $ 5,835
Accrued expenses 5,184 4,858
--------- ---------
Total current liabilities 10,317 10,693
--------- ---------
Stockholders' equity:
Common stock 26,490 26,361
Retained earnings 3,683 3,513
--------- ---------
Total stockholders' equity 30,173 29,874
--------- ---------
Total liabilities and stockholders'
equity $ 40,490 $ 40,567
========= =========
The accompanying notes are an integral part of these Unaudited Condensed
Financial Statements
4
ASANTE TECHNOLOGIES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three months ended
December 27, December 28,
1997 1996
Net sales $ 17,520 $ 17,480
Cost of sales 10,386 10,723
--------- ---------
Gross profit 7,134 6,757
--------- ---------
Operating expenses:
Sales and marketing 4,519 4,126
Research and development 1,619 1,757
General and administrative 891 769
--------- ---------
Total operating expenses 7,029 6,652
--------- ---------
Income from operations 105 105
Interest & other income, net 153 138
--------- ---------
Income before income taxes 258 243
Provision for income taxes 88 92
--------- ---------
Net income $ 170 $ 151
--------- ---------
--------- ---------
Basic and diluted earnings per share $ 0.02 $ 0.02
========= =========
Weighted average common
shares and equivalents:
Basic 9,142 8,683
========= =========
Diluted 9,220 8,917
========= =========
The accompanying notes are an integral part of these Unaudited Condensed
Financial Statements
5
ASANTE TECHNOLOGIES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended
December 27, December 28,
1997 1996
Cash flows from operating activities:
Net income $ 170 $ 151
Adjustments to reconcile net income to
cash
provided by operating
activities:
Depreciation and amortization 383 264
Changes in operating assets and
liabilities:
Accounts receivable (109) 2,224
Receivable from stockholder 0 0
Inventory 1,395 2,638
Prepaid and other assets (636) (310)
Accounts payable (702) (4,155)
Payable to stockholder 0 0
Accrued expenses 326 (348)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 827 464
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (372) (225)
Purchases/maturities of marketable securities (4,953) 0
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (5,325) (225)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 129 154
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 129 154
--------- ---------
Net increase (decrease) in cash and cash equivalents (4,369) 393
Cash and cash equivalents, beginning of period 12,931 12,693
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,562 $ 13,086
========= =========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 2 $ 2
========= =========
Income taxes $ 60 $ 163
========= =========
The accompanying notes are an integral part of these Unaudited Condensed
Financial Statements
6
ASANT<E'> TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
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. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the
financial statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary for the fair
statement of the financial position, operating results and cash
flows for those periods presented. These unaudited condensed
financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended
September 27, 1997, included in the Company's 1997 Annual
Report on Form 10-K. Certain prior period balances have been
reclassified to conform with current period presentation.
The results of operations for interim periods are not
necessarily indicative of the results that may be expected for
the entire year.
2. BASIC AND DILUTED NET INCOME PER SHARE
The Company adopted SFAS 128, "Earnings per Share", during the
quarter ended December 27, 1997, and retroactively restated all
prior periods. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the
weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares
of 78 and 234 for the quarters ended December 27, 1997 and December
28, 1996, respectively, consist of the incremental common shares
issuable upon the exercise of stock options (using the treasury
stock method). Common equivalent shares are excluded from the
computation if their effect is antidilutive.
3. INVENTORY
Inventory is stated at the lower of standard cost, which
approximates actual cost (on a first-in, first-out basis) or
market, and consisted of the following at:
December 27, September 27,
1997 1997
----------------- -------------
(in thousands)
--------------------
Raw materials and component parts $ 3,645 $ 3,065
Work-in-process 1,760 2,220
Finished goods 5,280 6,795
--------- ---------
$ 10,685 $ 12,080
========= =========
7
4. BANK BORROWINGS
The Company had a bank line of credit that provided for maximum
borrowings of $5 million, limited to a certain percentage of
eligible accounts receivable, and bears interest at the bank's
base rate. This line of credit expired January 31, 1998.
Covenants under the line require the Company to maintain
certain minimum levels of liquidity, net worth and financial
ratios, restrict amounts of capital spending, dividends and
stock repurchases, and require the Company to maintain certain
levels of quarterly profitability. No borrowings were made
under the line of credit agreement in fiscal year 1997 or in
the first quarter of fiscal year 1998. The Company expects to
renew its line of credit with the bank in the near future.
5. INCOME TAXES
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", for all periods. Under this
method, deferred assets and liabilities are determined based on
differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are
expected to reverse. Based on the current estimate of expected
operating results and certain other factors, the Company
expects its effective rate to be 34% through fiscal 1998.
6. LEGAL PROCEEDINGS
On September 13, 1996, a complaint was filed by Datapoint
Corporation against the Company and six other companies
individually and as purported representatives of a defendant
class of all manufacturers, vendors and users of Fast
Ethernet-compliant, dual protocol local-area network products,
for alleged infringement of United States letters Patent Nos.
5,077,732 and 5,008,879. The complaint seeks unspecified
damages in excess of $75,000 and permanent injunctive relief.
The Company has filed a response to the complaint denying
liability. The case has been consolidated, for purposes of
claim interpretation only, with similar cases filed against
several other defendants, which include, among others, Intel
Corporation, IBM Corporation, Cisco Systems, Bay Networks, and
Standard Microsystems. To date, only minimal discovery has
been taken. Plaintiff has served claim charts purporting to
set forth its basis for its claims that products compliant with
an IEEE standard infringe its patents. A ruling on various
claim interpretations is not expected until early 1998. The
Company intends to defend the action vigorously.
8
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 reports, including this
report on Form 10-Q for the quarter ended December 27, 1997,
and the Company's Annual Report on Form 10-K for the fiscal
year ended September 27, 1997. Actual results may vary
significantly.
The Company undertakes no obligation to publicly update or
reverse any forward-looking statements, whether as a result of
new information, future events or otherwise.
RESULTS OF OPERATIONS
Net sales of $17.5 million for the first quarter of fiscal 1998
were approximately the same as net sales for the first quarter
of fiscal 1997.
Sales of both the Company's switching products and 10/100 (100
Mbps) adapter card products increased approximately $1.6
million, and sales of products to OEM customers increased
approximately $0.5 million. These increases were partially
offset by a $2.1 million decline in sales of the Company's 10T
adapter card products due to the continuing incorporation of
Ethernet connectivity into the motherboard of high performance
products by OEM's, and by a $0.6 million decline in sales of
certain of the Company's 100 Mbps shared system products due to
competitive pricing pressures and lower than expected unit
sales. In the first quarter of fiscal 1998, OEM sales accounted
for approximately $2.1 million, or 12% of total sales. This
compares to approximately $1.6 million, or 9% of total sales,
for the first quarter of fiscal 1997. Management anticipates
that sales of 10/100 Fast Ethernet adapter card and switching
products will increase as a percentage of total sales, and OEM
sales will decrease as a percentage of total sales in the next
quarter.
Sales outside the United States accounted for approximately 20%
of net sales for the first quarter of fiscal 1998 compared to
28% for the first quarter of fiscal 1997. This decrease was due
primarily to weaknesses in demand in Asia. Management
anticipates that product sales to OEM customers will decrease as
a percentage of total sales for the near future. For the longer term,
there is no assurance that the Company will have levels of sales to OEM
customers comparable to previous levels experienced. In the event
that such OEM customers reduce their level of purchases, the
Company could experience an adverse impact on its financial
position and results of operations.
9
The Company's gross profit as a percentage of net sales
increased to 41% for the first quarter of fiscal 1998 from 39%
in the first quarter of fiscal 1997. This increase was due
primarily to increased shipments of the Company's 10/100 adapter
cards and the Company's newer switching products at higher
margins. It is expected that in the near future , margins will
remain flat or decrease slightly as a percentage of sales as the
Company reduces pricing on its products due to competitive
pricing pressures.
Sales and marketing expenses increased by $0.4 million, or 10%,
in the first quarter of fiscal 1998 compared to the first
quarter of fiscal 1997. As a percentage of net sales, these
expenses were 26% in the first quarter of fiscal 1998, compared
to 24% in the first quarter of 1997. The increases in sales and
marketing expenditures were due primarily to increased
advertising, promotional, direct mail, and cooperative
advertising activities. The Company believes that sales and
marketing expenses will remain flat or increase slightly in the
second quarter of fiscal 1998.
Research and development expenses decreased by $0.1 million, or
8%, in the first quarter of fiscal 1998 compared to the first
quarter of fiscal 1997. As a percentage of net sales, these
expenses represented 9% in the first quarter of fiscal 1998,
compared with 10% in the first quarter of fiscal 1997. The year-
over-year decrease was due to decreased prototype material
expenses and, to some extent, lower compensation and consulting
related expenses. These decreases were partially offset by
increased asset and recruitment related expenses. The Company
expects that future spending on research and development will
increase in absolute dollars for the remainder of fiscal 1998.
General and administrative expenses increased by $0.1 million,
or 16%, in the first quarter of 1998 compared to the first
quarter of fiscal 1997. As a percentage of net sales, these
expenses were 5% and 4% for the first quarter of fiscal 1998 and
1997, respectively. The increase in general and administrative
expenses were due primarily to increased salaries and travel
related expenses. The Company expects that future spending for
general and administrative expenses will increase in absolute
dollars during the remainder of fiscal 1998.
Based on the current estimate of its expected operating results,
and certain other factors, the Company expects its effective tax
rate to be 34% through fiscal 1998. The Company's estimated
rate could be higher based on actual results for the year
including the impact of mix of income, available credits, and
other estimates of the impact of certain future events.
10
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company operates in a rapidly changing and growing
industry, which is characterized by vigorous competition from
both established companies and start-up companies. The market
for the Company's products is extremely competitive both as to
price and capabilities. The Company's success depends in part
on its ability to enhance existing products and introduce new
high technology products. The Company must also bring its
products to market at competitive price levels. Unexpected
changes in technological standards, customer demand and pricing
of competitive products could adversely affect the Company's
operating results if the Company is unable to effectively and
timely respond 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 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 is dependent upon information systems for all
phases of its operations including production, distribution and
accounting. Since some of the Company's older programs
recognize only the last two digits of the year in any date
(e.g. "98" for "1998"), some software may fail to operate in
1999 or 2000 if the software is not reprogrammed or replaced
(the "Year 2000 Problem"). The Company believes that its
suppliers, distributors, and customers also have Year 2000
Problems which could affect the Company. The Company is in
process of developing a plan to determine the impact of the
Year 2000 Problem on its operations. It is not possible, at
present, to quantify the overall cost of this work, or the
financial effect of the Year 2000 Problem if it is not resolved
on a timely basis. However, the Company believes at present
that the cost of addressing the Year 2000 Problem will not have
a material effect on the Company's financial position,
liquidity, or results of operations.
The Company's success also depends to a significant extent upon
the contributions of key sales, marketing, engineering,
manufacturing, and administrative employees, and on the
Company's ability to attract and retain highly qualified
personnel, who are in great demand. None of the Company's key
employees are subject to a non-competition agreement with the
Company. Unless vacancies are promptly filled, the loss of
current key employees or the Company's inability to attract and
retain other qualified employees in the future could have a
material adverse effect on the Company's business, financial
condition and results of operations.
Successfully addressing these factors is subject to various
risks discussed in this report and other factors.
The Company is subject to various risks associated with
international operations including currency exchange rate
fluctuations, changes in costs of labor and material,
reliability of sources of supply and general economic
conditions in foreign countries. Unexpected changes in foreign
manufacturing or sources of supply, fluctuations in monetary
exchange rates and changes in the availability, capability or
pricing of foreign suppliers could affect the results of the
Company's operations.
11
In 1995, a coalition of more than one hundred companies
(including Asant<e'>) supplying adapters, hubs, and other
networking equipment developed a new standard for increasing
the data transmission speed over Ethernet networks by ten-fold.
This standard (100BASE-T, or "Fast Ethernet") 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 research and
development activities on introducing future products
incorporating 100BASE-T technology. The Company realizes the
importance of bringing more 10BASE-T (10 Mbps) switching and
100BASE-T switching to market in order to complement its
existing 100BASE-T shared products. In that regard, the
Company's future operating results may be dependent on the
market acceptance and the rate of adoption of this new
technology.
The Company commits to expense levels, including investing in
advertising and promotional programs, based in part on
expectations as to future net sales levels. If future net
sales levels in a particular quarter do not meet the Company's
expectations or the Company does not bring new products timely
to market, the Company may not be able to reduce or reallocate
such expense levels on a timely basis, which could adversely
affect the Company's operating results. There can be no
assurance that the Company will be able to maintain
profitability on a quarterly or annual basis in the future.
The Company's target markets include end-users, value-added
resellers (VARs), systems integrators 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.
In summary, the Company's net sales and operating results in
any particular quarter may fluctuate as a result of a number of
factors, including competition in the markets for the Company's
products, delays in new product introductions by the Company,
market acceptance of new products incorporating 100BASE-T by
the Company or its competitors, changes in product pricing,
material costs or customer discounts, the size and timing of
customer orders, distributor and end-user purchasing cycles,
variations in the mix of product sales, manufacturing delays or
disruptions in sources of supply, and economic conditions and
seasonal purchasing patterns specific to the computer and
networking industries. 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.
The factors discussed above, as well as other factors which
generally affect the market for stocks of high technology
companies, will affect the price of the Company's stock and
could cause such stock prices to fluctuate over relatively
short periods of time.
LIQUIDITY AND CAPITAL RESOURCES
At December 27, 1997, the Company had approximately $13.5
million of cash , cash equivalents, and short-term investments,
and working capital of approximately $27.0 million. Covenants
under the Company's previous line of credit, which expired
January 31, 1998, required the Company to maintain certain
minimum levels of liquidity, net worth and financial ratios,
restrict amounts of capital spending, dividends and stock
repurchases, and required the Company to maintain certain
levels of quarterly profitability. No borrowings have been made
under the line of credit agreement in fiscal year 1997 or in
the first quarter of fiscal year 1998. As of December 27,
1997, the Company was in compliance with all such covenants. The Company
expects to renew its line of credit with the bank in the near
future.
The Company believes that current cash and cash equivalents are
sufficient to fund its operations and meet anticipated capital requirments
for fiscal 1998.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings
and claims in the ordinary course of business, including claims
of alleged infringement of trademarks and other intellectual
property rights.
On September 13, 1996, a complaint was filed by Datapoint
Corporation against the Company and six other companies
individually and as purported representatives of a defendant
class of all manufacturers, vendors and users of Fast
Ethernet-compliant, dual protocol local-area network products,
for alleged infringement of United States letters Patent Nos.
5,077,732 and 5,008,879. The complaint seeks unspecified
damages in excess of $75,000 and permanent injunctive relief.
The Company has filed a response to the complaint denying
liability. The case has been consolidated, for purposes of
claim interpretation only, with similar cases filed against
several other defendants, which include, among others, Intel
Corporation, IBM Corporation, Cisco Systems, Bay Networks, and
Standard Microsystems. To date, only minimal discovery has
been taken. Plaintiff has served claim charts purporting to
set forth its basis for its claims that products compliant with
an IEEE standard infringe its patents. A ruling on various
claim interpretations is not expected until early 1998. The
Company intends to defend the action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
None
(b.) Reports on Form 8-K: During the fiscal quarter covered
by this report, the Company filed a Form 8-K dated November 24,
1997 reporting Mr. Tommy Leung's death. This was reported
under Item 5.
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 6, 1998 ASANT<E'> TECHNOLOGIES, INC.
(Registrant)
/s/: ROBERT A. SHEFFIELD
_____________________________
Robert A. Sheffield
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)