UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 28, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to _______
COMMISSION FILE NUMBER 0-22632
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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, California 95131
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 435-8388
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on November
29, 2002, as reported on the OTC (Over-the-Counter) Bulletin Board, was
approximately $603,961. Shares of Common Stock held by officers and directors
and their affiliated entities and related persons have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily conclusive for other purposes.
As of November 29, 2002, the Registrant had 10,066,020 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the 2002
Annual Meeting of Stockholders to be held on February 20, 2003 is incorporated
by reference in Part III of this Form 10-K to the extent stated herein.
TABLE OF CONTENTS
Page of
Report
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EXECUTIVE OFFICERS OF THE COMPANY 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 16
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 47
ITEM 11. EXECUTIVE COMPENSATION 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 48
SIGNATURES 51
Asante, FriendlyNET, IntraCore, IntraStack, IntraSwitch, NetStacker,
AsanteTalk, AsantePrint, FriendlyStack, AsanteFAST, GigaNix, and OpenView are
registered trademarks of Asante Technologies, Inc. Other product and brand names
may be trademarks or registered trademarks of their respective owners.
This discussion, other than the historical financial information, may consist of
forward-looking statements that involve risks and uncertainties, including
quarterly and yearly 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.
These forward-looking statements speak only as of the date hereof 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.
PART I
ITEM 1. BUSINESS
Founded in 1988, Asante Technologies, Inc. ("Asante" or the "Company") is a
leading provider of network connectivity products for Apple Macintosh and PCs.
The Company believes that it is one of the largest third party providers of
networking solutions for the Apple platform.
The majority of the Company's products are designed for Ethernet networks.
Ethernet is a type of network topology that determines how packets, or message
units, are handled and sent across the network. Ethernet is the most widely used
communication standard in Local Area Networks ("LAN"). Although many of these
Ethernet products were originally designed to function at speeds of 10 Mbps, the
majority of these Ethernet products sold today are designed to function at
speeds of 10/100 Mbps (known as "Fast Ethernet", or 100BASE-T). Gigabit Ethernet
(an Ethernet technology that raises transmission speed to 1 Gbps) has also been
increasingly adopted in the industry due to higher bandwidth requirements needed
in the network brought about by the standardization of 10/100 Fast Ethernet at
the user level, and by the convergence of voice, data, and video traffic usage
across the same network infrastructure.
In fiscal 2002, the Company continued to focus its products and services on
providing high-speed local area network and Internet access solutions. The
Company sells to distributors and resellers who serve several primary customer
markets: educational, digital design, the Multiple Tenant Unit/Multiple Dwelling
Unit (MTU/MDU) market, and the medium and small business markets or Small
Office/Home Office (SOHO).
During fiscal 2002, the high-tech industry, and in particular the networking
sector, continued to experience a significant slowdown in sales. This slowdown
in sales was originally caused by the failure of a significant number of large
service providers, who had been responsible for the purchase of a large portion
of mid-range switches, and large scale network switches and routers, broadband
routers and modems. Additionally, a large portion of the Internet based
companies have also gone out of business causing a further decrease in purchases
of network systems products and services. This market-wide reduction in demand
had several effects including excess new and used inventories in the market,
excess inventories at global manufacturers, and reduced demand for
semi-conductors and electronic components causing component prices to drop
significantly and certain manufacturers to sell their products at extremely low
margins in an attempt to reduce inventory levels and increase inventory
turnovers. This slowdown has now affected a large number of other market
sectors. This slowdown has been prolonged by the recent economic downturn that
has affected many industries including the Company's.
1
The slowdown in revenues has had global effects on corporate spending and has
significantly affected both larger and smaller enterprises' expenditures for
purchasing/upgrading network and Internet systems. As such, the economy has
found itself in its first recession in more than eleven years. According to a
recent report by Zurich Financial Services, "Despite the resilience of consumer
spending, there are still powerful negative forces apparent in the economy.
Corporate profits have fallen sharply during the past nine months. The decline
in profits will encourage firms to further reduce both employment and capital
spending."
However, there are opportunities in the networking market even in a recession.
The demand for Storage Area Network product appears positive, as does the global
Metropolitan network and MTU/MDU market. The emergence and increasing adoption
of broadband technologies will continue to create demand for specific products
in these markets. Additionally, opportunities exist for providers offering
alternative value priced, easy to use, feature rich networking solutions as
compared with higher priced switch providers.
As the Internet and market for networking products continues to evolve and grow,
management believes several trends will create business opportunities which the
Company is in a good position to take advantage of. These opportunities include:
o Increasing demand to receive digital content (information, graphics, video,
music, voice);
o Rapid acceptance and deployment of high-speed local area networks;
o Increasing demand for broadband (high speed / high bandwidth) Internet
access for small offices, home businesses, shared business complexes,
schools, consumers; and
o Integration of high speed networks using Ethernet into many existing
technologies.
The increasing availability of streaming audio and video and other digital media
has driven demand in the industry towards formats with substantially larger file
sizes requiring much larger storage requirements and increased bandwidth.
MPEG-1, MPEG-2, MP-3 and TIFF files are all examples of commonly used formats,
which have dominated the industry and user demand. Each format requires faster
speeds, and greater bandwidth to transfer data in a reasonable time. This
continued demand at the business and home consumer level continues to drive
demand for high-speed access to the Internet.
As businesses and individual users continue to develop and use the Internet as a
means of communication, the need for increased speed and bandwidth is increasing
phenomenally. According to the trade publication Allied Business Intelligence,
new technologies and residential applications are driving worldwide sales of
residential gateway revenues to an estimated $3.1 billion by 2004.
This increased bandwidth created with broadband access has enabled users
previously connecting at 28.8 Kbps, or up to 56Kbps over their analog phone
lines, to access the Internet at speeds of up to 1.5 Mbps, enabling voice, data,
music, internet based multiplayer gaming and video transfers over the Internet.
Even in the current economic climate, the number of users and the use of digital
voice, video, music and graphics has continued to increase due to affordable
higher speed processors, the cost effectiveness of Fast Ethernet (10/100, or 100
Mbps) networking, the emergence of affordable Gigabit Ethernet products and the
standardization of the Internet as a form of communication for businesses and
consumers.
Many organizations are attempting to get closer to their customers by
implementing customer relationship management (CRM) applications. With the
growth of supply chain management, businesses must be able to support a diverse
user community that includes suppliers, partners and customers. Information and
knowledge management is yet another key part of understanding the customer, as
databases are consolidated and information exchanged. All of this is part of a
larger drive to increase staff efficiency and productivity. To realize the full
benefits of this movement, an organization must integrate their CRM system
together with their manufacturing system more effectively.
2
Finally, network managers are increasingly concerned about the integrity of
corporate data and how this data, their users, and devices are secured. This
problem is magnified when users are on the move and outside the controlled
corporate environment. More people are accepting the Internet as a business
tool, which has led to an expansion of e-business and the general growth of
Internet-based transactions in the commercial workplace.
The Company's strategy is to capitalize on these trends with a comprehensive
product and service portfolio encompassing innovative technologies, enhanced
strategic sales channels, and strategic partnerships. While the current economic
climate and extreme competitiveness of the SOHO market remains, the Company is
penetrating certain horizontal markets with the Company's IntraCore products,
specifically the MTU/MDU, digital delivery providers, and education markets.
Innovative technologies.
In fiscal 2002, the Company continued to invest in multi-service networks to
support converged, high-speed data, voice and video networks. The Company also
introduced a wide range of Gigabit Ethernet products for our high-end IntraCore
and workgroup-oriented FriendlyNET product lines. In fiscal 2002, the Company
introduced both IntraCore and FriendlyNET products with increased Gigabit port
density to address the needs of larger networks. Additionally, the Company
introduced numerous key features in its networking products designed to meet the
changing needs of its customers.
The greatly increased bandwidth and speed has been created primarily due to the
emergence of 10/100 Ethernet technology over the desktop as the networking
standard and to broadband technologies continuing to lead the growth in internet
connectivity. This increased bandwidth has created much greater demand and
downward pricing pressures as the telephone companies and larger networking
companies are pressured to deliver "all-in-one" Local Area Network (LAN), Wide
Area Network (WAN), phone, fax, and video communications centers at attractive
price points. With this new affordability and the continued emergence of newer
technologies such as wireless and Internet Protocol (IP) telephony, and
broadband technologies allowing easy connectivity in the home, the reality of
the true home network is occurring. Additionally, small businesses can afford to
have the same access to these resources and digital media previously available
only to large companies. The infrastructure behind this broadband access must
offer more services and quality of service (QOS) features such as strong
security features, configuration options, traffic segmentation, rate metering
and multi-cast traffic pruning.
The proliferation of affordable high-speed broadband technologies, combined with
the availability of affordable, feature rich networking products has influenced
both commercial and residential real estate and building developers to
incorporate networking and broadband infrastructure equipment at the
developmental stage of new construction. The Company's technology development
group spends substantial resources integrating many advanced features into its
products to differentiate its products and to offer features similar to those
offered by larger networking corporations. The Company pioneered integration of
Internet technology into its network products. The Company continues to
incorporate these technologies into its managed switches and Internet access
products. The Company was the first to integrate Intranet technology into its
new switches in the form of a built-in, Java-enabled HTTP server. The Company's
FriendlyNET routers, including its 3004 Cable/DSL routers and new 3002 wireless
routers have attained significant recognition, including more than 30 different
awards from PC World, Mac World, C-NET, MacHome, Practically Networked, and
Amazon.
3
Based on its technological expertise, the Company is well positioned to take
advantage of growing markets for all-in-one products to answer the needs of the
converged network for homes and small businesses. Additionally, the Company's
products are differentiated through its strong software expertise.
Strategic sales channels.
By expanding its international distribution channels to meet the needs of
emerging Internet consumers, Asante expects to grow its sales through strategic
partners and businesses that sell products and services on the Internet, while
continuing to service traditional retail channels that provide revenue and
profit opportunities. In fiscal 2002, the Company continued its Value Added
Reseller (VAR) program aimed at attracting additional resellers to carry the
Company's products both focusing on the Company's IntraCore products and SOHO
products. The Company re-entered the superstore retail market in fiscal 2001.
The Company is in discussion with several national retail chains for its SOHO
products and will continue to focus on strengthening its retail presence. Also,
the Company added a number of IntraCore and fiber VARs specializing in the
Company's key focus markets including education, MTU/MDU, digital design and
Internet Service Providers (ISPs).
During fiscal 2002, the Company was successful in negotiating business terms
with several key business partners. These business partners have included
Original Equipment Manufacturer (OEM), Original Design Manufacturer (ODM),
direct integration, and contracts for the sale of switching products to certain
large digital media providers. The Company plans to seek additional business
partners and alternative sales channels to increase its market share in its
areas of expertise and will leverage these relationships to expand the markets
for its new products and services going forward.
Strategic Partnerships.
In fiscal 2002, the Company successfully continued its process of seeking
strategic partnerships designed to place the Company in a leadership position in
several areas. The Company's relationship with Apple Computer, Inc. continued
during fiscal 2002. In fiscal 2001, the Company announced several customers and
relationships in the MTU/MDU market with well-known service providers such as
Novus Telecommunications and Solutions, Inc. In fiscal 2002, the Company
partnered with several additional strategic partners including Shoreline
Communications, a provider of IP telephony, Maxtor, Siemens, and AVID Video. The
Company has continued its focus on Gigabit Ethernet switching with other
technological partners including National Semiconductor, Switchcore, and
Broadcom, enabling the Company to be early to market with several of its switch
products, and has also worked with several large Internet Service Providers
(ISP's), and corporations to leverage its sales channels.
4
In addition, the Company is focusing its efforts on certain strategic business
and technical relationships to increase its strength and presence in the market
and to continue to introduce cutting edge technologies.
Products
The Company offers both advanced, or managed, systems products (hubs and
switches) and simple, easy to use unmanaged systems products. The Company's
advanced switches and hubs allow more sophisticated users the ability for
increased administration, system analysis, identification of network
communication problems, and security among other functions. Many of these
products offer advanced management features designed to allow service providers
and other entities differentiated software features not generally available on
most larger competitor's products at similar price points. The Company's
unmanaged products feature easy to use, Plug-and-Play operation for the customer
needing convenient connectivity at a cost-effective price, or just needing to
extend an existing network. The Company's unmanaged, or SOHO products include
Internet connectivity products (routers), hubs, switches, and adapter cards.
Internet Gateway Products (Routers)
The Company manufactures a series of Cable/DSL routers designed for any user to
affordably connect to the Internet while at home or in a small office, and to
communicate with the enterprise easily and securely. The Company manufactures a
rich family of Cable/DSL routers including an Internet secured firewall router,
a family of Virtual Private Network (VPN) routers, and two feature rich internet
secured routers offering powerful, yet reliable switching and Internet
connectivity.
Wireless Internet Gateways (802.11b Products)
In fiscal 2002, the Company manufactured a series of 802.11 compatible wireless
products that enable users to stay connected to information while at their desk,
within an enterprise, or at home. Due to the ease of access to the Internet,
and/or enterprise network, the productivity increase has convinced many
corporations and retail businesses to deploy wireless technologies. Due to the
proprietary drivers needed to support different vendor chipsets, the Company
markets various PC cards including standard range PCMCIA (a credit-card sized,
removable module for portable computers standardized by Personal Computer Memory
Card International Association), an extended range card, and 802.11b USB
modules. In fiscal 2003, the Company plans to introduce additional products to
support various wireless technologies. The Company plans to focus on
strengthening its channels to sell branded products.
LAN Infrastructure Switches
Asante's comprehensive line of switches includes multiple families of switches
designed to meet the needs of both its vertical and horizontal market customers.
Asante's IntraCore Series Switches were introduced during fiscal 2000, and
currrently consist of four new families of advanced managed multi-service
10/100/1000 Mbps switches. Each product offers Asante's built-in HTTP management
server software featuring Java-enabled features as well as other advanced
features.
5
Core Switching. The Company recently introduced a new line of feature rich
products which support Layer 2/4 features. These products, such as the IntraCore
35160 offer advanced features such as multi-layer packet classification designed
to enhance network control, improve efficiency, and automatically prioritize
real-time traffic such as LAN telephony, an important feature for converged
voice/data networks.
Edge Switching. The Company offers a full range of Layer 2 IntraCore (IC)
managed switches. These switches include several families of IntraCore switches
including the 65120, 3548, 3524, the 9000 and the 8000. These cost effective,
feature rich products, offer advanced management capabilities including
Independent Print Media Group (IPMG) multicast pruning which allows Information
System (IS) managers to filter out unwanted Internet broadcast messages and
unwanted data, Virtual Local Area Network (VLAN ), Remote Monitoring and
Management of the Network (RMON), Simple Network Management Protocol (SNMP)
management, as well as prioritization. For those customers who don't wish to
deal with network management, the Company offers one of the industry's largest
assortment of Gigabit switches designed to offer maximum power and cost
effective simplicity.
Small Business. The Company offers many products in its FriendlyNET(R) family of
products, including a complete line of easy to use gateways, firewalls,
switches, hubs, USB hubs and print routers. These products are designed
specifically for cost-sensitive users operating in smaller networking
environments. The Company's wireless and wired gateways bring economical, secure
Internet sharing to small offices. Many of the Company's Gigabit switch products
meet the most demanding needs of small business including those in businesses
such as digital graphics/prepress and media designers, a primary vertical market
of the Company.
Fiber Switch Solutions. The Company features several Fiber switches designed to
meet the needs of many customers. Fiber offers several advantages over copper
including longer ranges and lack of grounding issues. Due to these advantages,
they are highly demanded in distributed network environments, MTU/MDU
applications, and education.
Media Converters. The Company's media converters allow customers with existing
copper Ethernet equipment to convert to fiber without the need to purchase all
new equipment. The Company's Fiber Converter (FC) series of products provide
existing 10/100/1000 copper connected devices with distribution over copper or
fiber to remote buildings, workgroups and desktops. With a range of
Ethernet/Fast Ethernet and Gigabit Ethernet media converters the FriendlyNET FC
series offers extensive mixed media infrastructure provisioning. The FC series
is interoperable with all independent and Asante copper and fiber switches and
provides instant upgrade into a 16-port chassis concentrator
Business and Personal Connectivity and Access Products
The Company offers a wide range of products in its FriendlyNET family of
products which support its large enterprise customers as well as the Company's
SOHO and personal use customers. These products include fiber and copper Gigabit
adapter cards, 10/100 adapters, USB and USB 2.0 products, a family of local talk
to Ethernet converters, and several Macintosh platform compatible adapter
products. The Company is commited to supporting Mac OS, Windows, and Linux
operating systems.
Technology
The Company is a provider of leading edge products in the Ethernet networking
industry. The Company introduced the first 100 Mbps stackable hub system
products in 1995 and has continued to bring new technology to the market ahead
of competition. In addition, the Company has continued to ship products based on
its proprietary 10/100 ASIC chip allowing the Company to offer high performance
switches at competitive prices. The Company is continuing its development of new
and enhanced products for connecting to the Internet and corporate Intranets.
The Company has and will continue to focus efforts to expand its Gigabit product
line. Additionally, the Company currently focuses a significant portion of its
research and development efforts in bringing to market more advanced Layer 3
switches, and in differentiating its Layer 3 and Layer 2 switches with features
demanded in its vertical markets.
6
The Company was one of the first to ship fully integrated management software
with its products, providing powerful capabilities only found in much costlier
third party software products. The Company will continue to emphasize security
and firewall designs for its products.
Marketing and Distribution
The Company markets its products in three main channels: first, through a two
tier distribution channel which sells primarily to commercial and corporate
users; second, the Company sells to a significant number of educational
institutions; and third, through a number of Original Equipment Manufacturer
(OEM) customers and several large corporate customers.
Asante's major distributors are leading wholesale distributors of computer
products in North America. To supplement the efforts of these distributors
overseas, the Company has appointed international distributors for specific
territories. All of the Company's distributors are generally appointed on a
non-exclusive basis, however, the Company has appointed a master distributor in
China on an exclusive basis in order to build the Company's channel in China.
Fulfillment of products to e-commerce customers are typically handled through
the Company's distribution channel, or directly from the Company to customers
within the United States.
Asante also sells its products directly to major universities and educational
institutions to take advantage of the significant penetration of the Company's
products in these markets.
From time to time, the Company pursues OEM opportunities which it believes make
sense based on the Company's current business plan. These relationships may
typically cause fluctuations in the Company's business based on the Company's
ability to locate, or maintain various OEM opportunities and the ability of the
Company to offer cutting edge, cost effective technology of interest to its OEM
customers. The Company will continue to focus resources on obtaining additional,
cost effective agreements with larger OEM customers, although there can be no
assurance that such agreements will be obtained. OEM sales are expected to be
fairly flat in fiscal 2003, compared to fiscal 2002.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 20%, 23%, and 23% of the Company's net sales in
fiscal years 2002, 2001, and 2000, respectively. From fiscal 2001 to fiscal
2002, the Company experienced reduced sales in all three geographic regions due
to the economic downturn affecting a large portion of the world economy. Of
these decreases the greatest impact was in Europe where sales declined
approximately 29% due to factors similar to those encountered domestically.
Sales in Asia Pacific decreased slightly in fiscal 2002, compared to the prior
year due primarily to competition from Asian competitors and softness in demand
in Macintosh related products.
7
The Company intends to continue to introduce new products through its existing
distribution channels. The Company encourages the marketing efforts of its
distributors with cooperative advertising allowances and incentive-based rebates
and promotes its products and builds brand name recognition by trade
advertising, participation in industry trade shows, and other marketing efforts.
As of September 28, 2002, the Company supported the sales efforts of its
distributors with 20 direct sales and support related employees located
throughout the United States who promote the Company's products within assigned
territories and with 13 outside sales representatives.
The Company's agreements with its distributors can generally be terminated after
an initial term of one year or on short notice without cause and do not provide
for minimum purchase commitments or preclude the distributors from offering
products that compete with those offered by the Company.
The Company grants to its distributors limited rights to return unsold
inventories of the Company's products in exchange for new purchases and provides
certain price protection to its distributors. Although the Company provides
reserves for projected returns and price decreases, any product returns or price
decreases in the future that exceed the Company's reserves will adversely affect
the Company's business, financial condition and results of operations. See Item
7: Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The distribution of products such as those offered by the Company has been
characterized by rapid change, including consolidations and financial
difficulties of some distributors and the emergence of alternative distribution
channels. In addition, there are an increasing number of product suppliers
competing for access to these channels. Distributors may, at their option and at
any time, cease marketing the Company's products without prior notice to the
Company. During fiscal 2000, the Company took action to eliminate Pinacor, a
distributor of the Company, as a primary distributor due to perceived financial
risk. Subsequently, Pinacor initiated Chapter 11 bankruptcy proceedings. In the
beginning of the fourth quarter of fiscal 2000, the Company ceased product
shipments to Merisel USA, due to a perceived risk of financial exposure. The
debt write-off to these two distributors did not exceed $265,000 in fiscal 2000.
In fiscal 2002, the Company terminated its relationship with Tech Data
domestically on terms mutually agreed by both parties. Although the Company has
increased its business with its other distributors, it does not believe it has
completely offset the loss of revenues from the cessation of business with the
aforementioned distributors, however the Company has taken steps to increase its
channels which it believes has benefited the Company during fiscal 2002. A
reduction in the sales effort by any of the Company's other major distributors
or the loss of any one of these distributors would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that future sales by the Company's distributors will
remain at current levels or that the Company will be able to retain its current
distributors on terms that are commercially reasonable to the Company. Although
the Company believes, except as described above, that its major distributors are
currently adequately capitalized, there can be no assurance that in the future
one or more of these distributors will not experience financial difficulties.
Such difficulties could have a material adverse effect on the Company.
Although some prior products contained lifetime, or limited lifetime warranties,
most new products contain limited warranties ranging from one year to five
years. These limited warranties exclude from lifetime coverage the fan and power
supply included with its products, due to the shorter life expectancy of these
parts. The Company has not encountered material warranty claims, although there
can be no assurance that claims will not increase substantially over time as a
result of the change to a limited warranty for a majority of the Company's
products. Future warranty claims exceeding the Company's reserves for warranty
expense could have an adverse effect on the Company's business, financial
condition and results of operations. The Company plans on reviewing its warranty
policy as it brings new products to market to offer its customers competitive
policies while reducing its exposure to adverse warranty claims.
8
Company warranties are limited to the Company's obligation to repair or replace
the defective product. The Company attempts to further limit its liability to
end-users through disclaimers of special, consequential and indirect damages and
similar provisions in its end-user warranty. However, no assurance can be given
that such limitations of liability will be legally enforceable.
Backlog
The Company generally ships products shortly after orders are received and
consequently maintains very little backlog. Accordingly, the Company does not
believe that its backlog as of any particular date is indicative of future
sales.
Engineering and Product Development
The markets for the Company's products continue to be characterized by rapidly
changing technology, evolving industry standards and frequent new product
introductions. Asante believes that maintaining its market position in the Apple
Macintosh connectivity market and expanding its presence in the multi-platform
market requires continuing investment to develop new products, enhance existing
products and reduce manufacturing costs.
As of September 28, 2002, the Company had 13 employees engaged in engineering
and product development. During the fiscal years 2002, 2001, and 2000, the
Company's engineering and product development expenses were approximately $2.6
million, $2.8 million, and $3.0 million, respectively.
The Company continues to invest significant resources in engineering in order to
develop and bring to market additional high technology, high demand products
supporting both its network systems and the Intranet/Internet markets. In
particular, in fiscal 2003 and going forward, the Company intends to focus
additional efforts in the areas of embedded software design, development of
additional Layer 2-7 switches and other LAN-edge devices, WAN router products,
wireless, security, and on system integration. The Company will also continue
product development efforts to expand its Gigabit product offerings.
The Company believes its future success will depend upon its ability to enhance
and expand its existing product offerings and to develop in a timely manner new
products that achieve rapid market acceptance. Substantially all of the
Company's products are designed to provide connectivity to Ethernet LANs. If the
Company is unable, for technological or other reasons, to modify its products or
develop new products to support Fast Ethernet or Switched Ethernet technology or
if Ethernet's importance declines as a result of alternative technologies, the
Company's business, financial condition and results of operations would be
materially and adversely affected. There can be no assurance that the Company
will be successful in developing and marketing enhanced or new products in a
timely manner, that those products will gain market acceptance, or that the
Company will be able to respond effectively to technological changes or new
industry standards.
9
Manufacturing and Suppliers
The Company's manufacturing operations consist primarily of managing its
materials and inventories, purchasing certain components, performing limited
final assembly of some products, and testing and performing quality control of
certain materials, components, subassemblies and systems. The Company
subcontracts substantially all of the assembly of its products. The
subcontractors include Orient Semiconductor Electronics, Ltd. ("OSE"), an
assembler of semiconductor and printed circuit boards based in Taiwan, Delta
Networks, Edimax, Surecom Communications, as well as other manufacturers based
in California, Taiwan and China. Both OSE and Delta are stockholders of Asante.
The Company believes that its quality control procedures and the quality
standards of its manufacturing partners have been instrumental in the high
performance and reliability of the Company's products. To date, customer returns
of the Company's products due to quality issues have not been material.
OSE and the Company's other subcontract manufacturers purchase or manufacture
most components, assemble printed circuit boards, and test and package products
for Asante on a purchase order, turnkey basis. In fiscal 2002, the Company
purchased $0.5 million of goods from OSE and purchased $3.2 million of goods
from Delta Networks, Inc. (See Note 4 of Notes to Financial Statements). The
Company does not have a long-term supply agreement with any of its
subcontractors. If any one of these subcontractors experiences financial or
operational difficulties that result in a reduction or interruption in the
supply of products to the Company or otherwise fails to deliver products to the
Company on a timely basis, the Company would be required to procure sufficient
manufacturing services from alternative sources. The Company believes that
alternative manufacturers are available; however, the qualification of such
alternative sources and the commencement of volume manufacturing of the
Company's products could take a significant period of time. Accordingly, any
reduction or interruption of supply from its existing subcontractors would
materially and adversely affect the Company's business, financial condition and
results of operations. In addition, the use of OSE, Delta and other offshore
subcontractors subjects the Company to certain risks of conducting business
internationally, including changes in trade policy and regulatory requirements,
tariffs and other trade barriers and restrictions, and changes in the political
or economic environment in Taiwan and other countries where the Company's
subcontractors are located.
Although the Company generally uses standard parts and components for its
products, certain key components used in the Company's products are available
from only one source, and others are available from only a limited number of
sources. Components currently available from only one source include, among
others, custom integrated circuits used in the Company's intelligent hubs and
certain ASICs used in the Company's 10/100 and Gigabit switching products as
well as ASIC's used in several of the Company's other products including the
Company's Print Router products. The Company does not have a long-term supply
agreement with any of its suppliers. The Company believes that certain key
components remain in short supply and from time to time receives only limited
allocations of these products which in prior years has caused shipping delays of
one or more of the Company's products. If the Company or any of its suppliers
experience component shortages in the future or any of its competitors have
long-term supply agreements under which it is possible for them to obtain
greater supplies of such components than the Company, the Company's business,
financial condition and results of operations could be materially and adversely
affected. The Company also relies on OSE, Delta and other subcontractors to
procure many of the components used in the Company's products. These
subcontractors procure and stock components and subassemblies based on the
Company's purchase orders.
10
Competition
The markets for the Company's products are highly competitive, and the Company
believes that such competition will remain vigorous. Competitive trends in the
Company's markets are continuing declines in average selling prices, coupled
with improvements in product features and performance. The Company expects such
trends to continue. The current slowdown in the economy has served to magnify
the effects of the competitive pressures in the industry.
The Company competes with Cisco Systems, Nortel, 3Com, Intel, Netgear, Linksys,
and many smaller companies. Competition from these and other companies,
including new entrants, is expected to intensify, particularly in the SOHO,
workgroup, and departmental user markets. Many of the Company's competitors in
these markets are more established, enjoy significant name recognition and
possess far greater financial, technological and marketing resources than the
Company.
The Company believes the principal competitive factors in the departmental
connectivity market are brand name recognition, value for price, breadth of
product line, technical features, ease of product use, reliability, customer
support and the ability to develop and introduce new or enhanced products
rapidly. The Company believes that it has established itself as a supplier of
high quality, reliable products and, as a result, currently competes favorably
with respect to these factors. There can be no assurance, however, that the
Company will be able to compete successfully in the future against current or
future competitors, or that it will be able to adapt successfully to changes in
the market for its products. The Company's inability to compete successfully in
any respect or to respond timely to market demands or changes would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In the Macintosh client access market, Apple(R) develops and markets products
that compete directly with certain of the Company's client access products. The
Company also competes with a number of other companies in this market. Apple(R)
provides Ethernet connectivity in its computers which has adversely affected
sales of the Company's client access products. The Company also relies on an
informal working relationship with Apple(R) in connection with the Company's
product development efforts. Apple(R) is likely to continue to introduce
competitive products and has significantly greater financial, marketing and
technical resources than the Company. Furthermore, no assurance can be given
that Apple(R) will not pursue a more aggressive strategy with respect to
competitive products, or in other ways attempt to make the sale of add-on
products by third party developers and vendors such as the Company more
difficult. If Apple(R) takes any of such actions, the Company's business,
financial condition and results of operations would be materially and adversely
affected. See Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company's sales to OEMs represented 9% and 3% of its total revenue in fiscal
2002 and fiscal 2001 respectively. While the Company has pursued and will
continue to pursue additional OEM agreements with larger companies, there can be
no assurance that existing OEM agreements will continue or that new agreements
will be obtained. In addition, since the Company intends to seek additional high
volume product arrangements, the acquisition or loss of a single large OEM
customer or several smaller OEM customers would have a material effect on the
Company's revenues. Unless the Company signs additional large OEM agreements in
the near future, the Company expects that OEM sales will remain fairly flat as a
percentage of total revenue in fiscal 2003.
11
A significant percentage of the Company's sales in fiscal 2002 and fiscal 2001
were derived from products designed for use with Macintosh Power PC, and iMAC
computers. Sales of these products as a percentage of total Company revenue,
excluding OEM sales, have steadily declined over the last several years due to
Apple(R)'s competition in the Company's adapter card market and incorporation of
Ethernet into the motherboard of a large portion of its products, and Apple(R)'s
decline in market share. However, the Company expects that sales of such
products will continue to represent a substantial portion of its net sales for
the foreseeable future. There can be no assurance that unit sales of these
products will continue at their present levels or increase in the future. Any
material adverse developments in Apple(R)'s business could have a material
adverse effect on sales of the Company's client access products, which would
materially and adversely affect the Company's business, financial condition and
results of operations. See Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Proprietary Rights
The Company is currently evaluating several domestic and foreign patent
applications relating to its software and systems technology. The Company is
currently filing renewals on several of its existing patents.
The Company has received in the past and may receive in the future
communications from third parties asserting intellectual property claims against
the Company. Claims made in the future could include assertions that the
Company's products infringe, or may infringe on the proprietary rights of third
parties or requests for indemnification against such infringement. There can be
no assurance that any claim will not result in litigation, which could involve
significant expense to the Company. If the Company is required or deems it
appropriate to obtain a license relating to one or more products or future
technologies, there can be no assurance that the Company would be able to do so
on commercially reasonable terms, or at all.
The Company relies on a combination of patents, trade secrets, copyright and
trademark law, nondisclosure agreements and technical measures to establish and
protect its proprietary rights in its products. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's technology is difficult,
and there can be no assurance that the measures being taken by the Company will
be successful. Moreover, the laws of some foreign countries do not protect the
Company's proprietary rights in its products to the same extent as do the laws
of the United States. See Item 3: Legal Proceedings.
Employees
As of September 28, 2002, the Company had 68 employees, including 13 in
engineering and product development, 15 in manufacturing operations, 28 in
marketing, sales and support services, and 12 in corporate administration. The
number reflects a small decrease in all areas except engineering and product
development which remains unchanged when compared to fiscal 2001. In October
2002, the Company reduced approximately 10% of its regular and contractor
headcount as part of its cost reduction efforts.
The Company's success 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.
12
None of the Company's employees are represented by a labor organization, and the
Company is not a party to any collective bargaining agreement. The Company has
never had any employee strike or work stoppage and considers its relations with
its employees to be good.
ITEM 2. PROPERTIES
The Company's headquarters, including its executive offices and corporate
administration, manufacturing, marketing, sales and technical support
facilities, are located in San Jose, California. The Company occupies a 44,700
square foot facility under a lease that expires on August 31, 2004, with an
option to extend for an additional five years. In fiscal 2002, the Company
closed its leased sales office in Oregon and moved its inside sales activities
into its San Jose location. The Company currently has a leased sales office in
Utah. The Company believes that its existing facilities are more than adequate
to meet its requirements for the foreseeable future and believes that suitable
additional or substitute space will be available as needed. See Note 7 of Notes
to Financial Statements.
ITEM 3. 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.
In September 1999, certain inventory having a cost of approximately $400,000 was
seized by the United States Customs for the alleged improper use of
certification marks owned by Underwriters Laboratories Inc. ("UL"). It is the
Company's position that the alleged improper use was simply a mistake or error.
The Company may obtain the return of the inventory through settlement
negotiations with either the United States Customs or United States Attorney's
Office, obtaining permission from UL to use the certification marks, or being
successful in trial proceedings. To contest the seizure, the Company determined
to seek a review with the United States Attorney's Office and filed a claim for
the inventory. It is now incumbent upon the United States Attorney's Office to
file in court seeking forfeiture of the inventory and 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.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages as of December 10, 2002, and
certain information regarding each of them are as follows:
Name Age Position with the Company
---- --- --------------------------------------------
Wilson Wong 55 President and Chief Executive Officer
Jeff Lin 51 Chief Operating Officer
Rusty Callihan 53 Vice President of Sales
Anthony Contos 39 Vice President of Finance and Administration
Jim Hsia 40 Vice President of Marketing
Chiu K. Fung 55 Vice President of Operations
Mr. Wilson Wong co-founded the Company in 1988 and has served as President and
Chief Executive Officer since December 1998, when he assumed these positions
following the resignation of Jeff Lin. From 1994 to August 1997, he served as
Vice President and General Manager and Co-Chairman of the Board of Directors.
From 1993 to 1994, he served as Vice President and General Manager for the
Company's client access products. >From 1988 to 1993, he served as the Company's
President and Chief Executive Officer. Mr. Wong serves as Chairman of the Board
of Directors.
Mr. Jeff Lin co-founded the Company in 1988 and rejoined the Company in June
2002 as Chief Operating Officer. Mr. Lin has been a General Partner at Proton
Management Consulting since January 2001. Mr. Lin was President and Vice
Chairman of Lite-on Communication in Taiwan from January 1999 to July 2000. Mr.
Lin served as the Company's President, Chief Executive Officer and Chairman of
the Board of Directors until his resignation in December 1998. From 1993 to
1994, he served as the Company's Vice President, General Manager of Network
Systems Business. From 1991 to 1993, he served as the Compnay's Chairman of the
Board of Directors and Chief Operating officer. From 1988 to 1991, Mr. Lin
served as the Company's Vice President of Operations and Engineering, Chief
Financial Officer and Secretary.
Mr. Rusty Callihan rejoined the Company in August 1999 and currently serves as
Vice President of Sales. Mr. Callihan initially joined the Company in October
1990 and served in various sales positions until July 1996. Prior to rejoining
the Company Mr. Callihan was the Vice President of Sales for UMAX Corporation
from June 1997 to July 1998. He also held senior sales management positions with
RasterOps Corporation and Apple Computer Inc.
14
Mr. Anthony Contos joined the Company in June 1994, and has served as Vice
President of Finance and Administration, and corporate Secretary since August
1999. From October 1997 to August 1999 he served as the Company's Corporate
Controller/Director of Finance. Prior to joining the Company Mr. Contos was a
financial consultant for Electronic Arts, Inc. where he was responsible for the
international consolidation activities. Prior to that he was a financial and
operations analyst with Ross Stores.
Mr. Jim Hsia joined the Company in September 1999 and has served as Vice
President of Marketing for the Company. From February 1996 to September 1999 Mr.
Hsia was the Vice President of Marketing at ZNYX Corporation. Prior to that he
held various marketing positions at National Semiconductor, Eagle Technology (a
business unit of Artisoft), Accton Technology and 3Com Corporation.
Mr. Chiu K. Fung (C.K.) joined the Company in October 2000, and has served as
Vice President of Operations since October 2001. Before that Mr. Fung held the
position of Senior Director of Operations with the Company. From June 1998 to
June 2000, Mr. Fung served as Monitor Service Manager for Nakamichi America
Corporation where he was responsible for management of service and repair
operations. >From December 1995 to March 1998, Mr. Fung served as Technical
Director at Orient Power Holding Ltd. where he was responsible for management of
their audio business unit. Prior to that, Mr. Fung held other management
positions in operations.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock traded on the NASDAQ National Market System under the
trading symbol ASNT until September 30, 1999 at which time the Company's Common
Stock commenced trading on the Over-the-Counter (OTC) Bulletin Board under the
trading symbol ASNT.OB.
The following table sets forth the high and low bid prices for the Company's
Common Stock for each quarter during the last two fiscal years. The quotations
set forth below reflect inter-dealer prices, without retail mark-up, mark-downs,
or commissions and may not represent actual transactions.
Fiscal 2002 High Low
- ---------------------------------------------------------------------
First quarter $ 7/16 $ 3/16
Second quarter $ 3/8 $ 2/8
Third quarter $ 5/16 $ 3/16
Fourth quarter $ 3/16 $ 1/16
Fiscal 2001 High Low
- ---------------------------------------------------------------------
First quarter $ 1 5/16 $ 7/16
Second quarter $ 1 1/8 $ 1/2
Third quarter $ 7/8 $ 1/12
Fourth quarter $ 5/8 $ 1/8
As of November 29, 2002, there were 100 stockholders of record of the Company's
Common Stock. This number does not include shares held in street name. The
Company has not paid cash dividends on its Common Stock and does not plan to pay
cash dividends in the foreseeable future.
Factors such as announcements of technological innovations or new products by
the Company, its competitors and other third parties, as well as quarterly
variations in the Company's anticipated or actual results of operations and
market conditions in high technology industries generally may cause the market
price of the Company's Common Stock to fluctuate significantly. The stock market
has on occasion experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many high technology companies and
have often been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. In addition, the market price of the Company's Common Stock may
not be indicative of current or future performance.
In March 2000, the Company sold 500,000 shares of its common stock for gross
proceeds of $1.5 million. The shares were sold to one corporate entity in a
private transaction. The shares were issued pursuant to a claimed exemption from
registration under Section 4(2) of the Securities Act of 1933 as a private
placement to one investor which acquired the shares with investment intent. In
August 2001, the Company filed an S-2 Registration Statement, pursuant to a
request by the purchasing shareholders, to register the shares under a
registration rights agreement. The Registration Statement was declared effective
on August 31, 2001 covering the resale of up to 500,000 shares of the Company's
common stock by selling shareholders.
16
Asante Equity Compensation Plan Information
As of September 28, 2002
Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a) )
(a) (b) (c)
Equity compensation plans 62,775 (1) 0.5338 (1) 937,225 (1)
approved by security holders 195,000 (2) 1.0320 (2) 50,474 (2)
230,000 (3) 3.5978 (3) 70,000 (3)
1,202,045 (5) 1.3577 (5) 0 (5)
Equity compensation plans 29,700 (4) 0.8125 (4) 120,300 (4)
not approved by security
holders
Total 1,719,520 1,177,999
(1) the 2001 Stock Option Plan
(2) the Key Executive Option Plan
(3) the 1993 Directors' Stock Option Plan
(4) the 2000 Non-Statutory Stock Option Plan
(5) the 1990 Stock Option Plan
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data) Year ended
--------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 15,218 $ 22,074 $ 29,280 $ 37,488 $ 51,433
Income (loss) from operations $ (2,160) $ (1,177) $ 200 $(13,863) $(12,450)
Net income (loss) $ (2,149) $ (949) $ 392 $(14,161) $(14,435)
Diluted net income (loss) per share $ (0.21) $ (0.10) $ 0.04 $ (1.53) $ (1.57)
Balance Sheet Data:
Working Capital $ 371 $ 2,483 $ 3,251 $ 751 $ 13,645
Total assets $ 6,758 $ 9,366 $ 13,222 $ 13,345 $ 30,359
Stockholders' equity $ 633 $ 2,772 $ 3,679 $ 1,682 $ 15,850
17
ITEM 7. 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 and yearly fluctuations in results, the timely availability of new
products, including switch 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. 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
The following table sets forth certain selected financial information expressed
as a percentage of net sales for the fiscal years ended September 28, 2002,
September 29, 2001, and September 30, 2000, respectively:
2002 2001 2000
------ ------ ------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 63.8 64.0 63.4
------ ------ ------
Gross profit 36.2 36.0 36.6
------ ------ ------
Operating expenses:
Sales and marketing 24.8 22.2 20.2
Research and development 16.8 12.5 10.4
General and administrative 8.8 6.6 5.3
------ ------ ------
Total operating expenses 50.4 41.3 35.9
------ ------ ------
Income (loss) from operations (14.2) (5.3) 0.7
Interest and other income (expense), net 0.1 1.0 0.6
------ ------ ------
Income (loss) before income taxes (14.1) (4.3) 1.3
Provision (benefit) for income taxes -- -- --
------ ------ ------
Net income (loss) (14.1) % (4.3) % 1.3 %
====== ====== ======
18
Net Sales
Net sales decreased 31.1% to $15.2 million in fiscal 2002, from $22.1 million in
fiscal 2001. Net sales were $29.3 million in fiscal 2000. The decrease in net
sales from fiscal 2001 to fiscal 2002 was due to several factors including the
economic downturn in the high tech industry and network industry, heavy
competitive pressures particularly for unmanaged products, and to the continued
incorporation of Ethernet onto the motherboard of Apple's newer computers.
During fiscal 2001, sales of unmanaged products decreased across most existing
product lines, except for Gigabit switch sales, which increased marginally to
$0.5 million, from $0.2 million. In addition, a significant portion of the
Company's OEM sales were of unmanaged Gigabit products.
The decrease in net sales from fiscal 2000 to fiscal 2001 was due to several
factors including the economic downturn in the high tech industry. Additionally,
heavy competitive pressures for unmanaged 10/100 products including cable/DSL
routers and, to some extent, the continued incorporation of Ethernet onto the
motherboard of Apple's newer computers negatively affected the Company's
results. This continued incorporation of Ethernet onto the motherboard as well
as other factors described in this form 10-K, has caused a reduction in revenues
and volume of product sold for Apple specific applications. Mac specific
products are expected to comprise a much smaller portion of the Company's
revenues going forward. During fiscal 2001, sales of unmanaged hubs decreased
$2.9 million, from $5.6 million in fiscal 2000 to $2.6 million in 2001,
reflecting slower economic conditions and the continued transition from shared
systems products to switches. During this same period, sales of 10/100 unmanaged
switches remained constant at $3.4 million.
In fiscal 2002, 2001, and 2000, one customer, a distributor, accounted for 40%,
43%, and 48%, respectively, of the Company's total sales.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for 20%, 23%, and 23% of net sales in fiscal 2002, 2001, and 2000,
respectively. The reduction in international sales during fiscal 2002, compared
to fiscal 2001, was due partially to the elimination of Merisel as a major
distributor in the US and Canada. The Company continues to believe the demand in
the MTU/MDU markets is particularly strong in Europe and Asia, and plans to
continue to focus additional efforts to increase sales in these areas. To that
end, the Company has hired additional sales representatives in these areas, and
has focused on adding distributors in these areas to strengthen its channels.
However, there cannot be any assurance that its efforts will be successful.
International revenue as a percentage remained constant during fiscal 2001,
compared to fiscal 2000, as the economic downturn has affected the networking
industry internationally.
The Company believes that the economic downturn beginning just prior to fiscal
2001, will continue during fiscal 2003. The Company's declines in revenues were
offset partially by increased sales of the Company's managed and unmanaged
Gigabit switches. The Company believes that the competition in the markets in
which it competes has intensified and will continue to intensify as existing and
potential competitors introduce competing products. Consequently, the Company
anticipates that the selling prices of its existing products will continue to
decline and that sales of older systems products and adapter cards as a percent
of total sales will continue to decline in fiscal 2003. The Company has
continued to focus on introducing newer managed systems products such as its
IntraCore 3524 and 3548 Layer 2 switches, which it believes should offset the
declines in revenues of its older systems products. The Company will continue to
focus on those markets in which it believes it can increase its revenues and
will continue to seek to increase its OEM revenues, compared to fiscal 2002.
19
Cost of Sales and Gross Profit
The Company's gross profit as a percentage of net sales increased marginally to
36.2%, in fiscal 2002, from 36.0% in fiscal 2001. The increase in fiscal 2002,
compared to fiscal 2001 was due primarily to decreased inventory write-downs
during the year due to tight inventory controls, reduced manufacturing overhead
due to the Company's cost reduction efforts, and cost reductions on products
during the year. During fiscal 2002, sales prices continued to be affected by
heavy competitive pricing pressures and reduced volumes for many of the
Company's products. The Company has brought to market and plans to continue to
bring to market lower cost replacement products and is focusing its product
development efforts on introducing additional unmanaged Gigabit products and
managed IntraCore products to help offset those products which are under the
most significant margin pressure. The Company will continue to take additional
measures going forward to maintain its competitiveness in the market place.
The decrease in gross margin in fiscal 2001 compared to fiscal 2000, was
primarily due to reduced selling prices for the Company's products, which was
substantially offset by stronger inventory and purchasing controls. During
fiscal 2001, sales prices continued to be affected by heavy competitive pricing
pressures.
The Company will continue in its efforts to develop new products and decrease
its manufacturing costs faster than related declines in selling prices. If the
Company is unable to offset anticipated price declines in its products by
reducing its manufacturing costs and by introducing new products that gain
market acceptance, its business, financial condition and results of operations
will be materially and adversely affected.
Sales and Marketing
Sales and marketing expenses were $3.8 million in fiscal 2002 compared to $4.9
million in fiscal 2001, or a decrease of 22.8%. Fiscal 2001 sales and marketing
expenses decreased $1.0 million, or 17.0%, compared to $5.9 million in fiscal
2000. As a percentage of net sales, sales and marketing expenses were 24.8%,
22.2%, and 20.2%, in fiscal 2002, 2001, and 2000, respectively. The reduced
fiscal 2002 expenditures in absolute dollars and increase as of percentage of
sales reflect reduced sales levels during fiscal 2002 and reduced expenditures
for outside representative commissions, co-operative advertising, and trade
advertising activities. The reduced fiscal 2001 expenditures, primarily reflect
reduced sales levels and related sales based activity expenditures.
The Company expects that its sales and marketing expenses will remain at current
levels, or decrease slightly in fiscal 2003 in absolute dollars. As a percent of
total sales, the Company believes these expenditures should decrease slightly
compared to fiscal 2002.
Research and Development
Research and development expenses decreased by 7.4% to $2.6 million in fiscal
2002, from $2.8 million in fiscal 2001. Research and development expenses were
$3.0 million in fiscal 2000. As a percentage of net sales, research and
development expenses were 16.8%, 12.5%, and 10.4%, in fiscal 2002, 2001, and
2000, respectively. The decrease in research and development expenses in
absolute dollars in fiscal 2002 compared to fiscal 2001 was due primarily to
decreases in personnel related expenditures as a result of salary reductions
implemented by the Company. The increase of research and development expenses as
a percentage of sales was due to decline of revenue. The decrease in research
and development expenses from fiscal 2000 to fiscal 2001 was due to decreases in
personnel related expenditures as a result of lower staffing levels and lower
depreciation expense.
20
The Company expects that spending on research and development in fiscal 2003
will remain fairly flat in comparison to fiscal 2002 in absolute dollars, while
the Company continues to leverage the engineering expertise of its strategic
partners.
General and Administrative
General and administrative expenses decreased to $1.3 million in fiscal 2002
from $1.5 million in fiscal 2001. General and administrative expenses were $1.6
million in fiscal 2000. As a percentage of net sales, general and administrative
expenses were 8.8%, 6.6%, and 5.3% in fiscal years 2002, 2001, and 2000,
respectively. The decrease in general and administrative expenses in absolute
dollars in fiscal 2002 is primarily related to reduced personnel related
expenditures. The increase in general and administrative expenses as of
percentage of sales was due to decline in revenue. The decrease in general and
administrative expenses in absolute dollars in fiscal 2001 compared to fiscal
2000, was primarily related to reduced legal and personnel related expenditures.
The Company expects that general and administrative expenses will remain
constant or decrease somewhat in fiscal 2003 in absolute dollars.
Income Taxes
The Company recorded no provision for federal and state income taxes for fiscal
2002, 2001, or 2000 due principally to a valuation allowance on deferred tax
assets being recorded and the Company's net operating loss carry forwards being
sufficient to offset its tax liability in fiscal 2000. The Company has recorded
a full valuation allowance on its deferred tax assets as sufficient uncertainty
exists regarding recoverability. The Company's effective tax rate was 0.0% for
fiscal 2002, 2001, and 2000, respectively.
21
Liquidity and Capital Resources
During fiscal 2002, the Company's operating activities used cash of $1.7
million. During fiscal 2001, the Company's operating activities used cash of
$1.4 million. During fiscal 2000, the Company's operating activities provided
cash of $0.1 million.
During fiscal 2002, net cash used in operations resulted primarily from the
Company's net operating loss of $2.1 million, and a decrease in both accounts
payable and accrued expenses of $0.5 million. These uses were partially offset
by decreases in accounts receivable, inventory, and prepaid expenses of $0.3
million, $0.3 million, and $0.2 million, respectively.
During fiscal 2001, net cash used in operations resulted primarily from the
Company's net operating loss of $0.9 million, and a decrease in both accounts
payable and accrued expenses of $1.3 million. These uses were partially offset
primarily by decreases in accounts receivable and inventories of $1.3 million
and $0.8 million, respectively. Days of sales outstanding in accounts
receivable, net, remained below 30 days at the end of fiscal 2002.
Net cash used in investing activities in fiscal 2002 and fiscal 2001 was
insignificant. In fiscal 2002, purchases of property and equipment were
approximately $0.1 million. In fiscal 2001, purchases of property and equipment
were insignificant. In fiscal 2000, purchases of property and equipment totaled
$0.1 million. In fiscal 2002 and fiscal 2001, net cash provided by financing
activities was insignificant. In fiscal 2000, net cash provided by financing
activities amounted to $1.6 million, due primarily to a private placement of the
Company's common stock resulting in proceeds of $1.5 million.
At September 28, 2002, the Company had cash, cash equivalents and short-term
investments of $3.3 million compared to $5.1 million at September 29, 2001 which
represents a 35% decline. Working capital was $0.3 million at September 28,
2002, compared to $2.5 million at September 29, 2001. As of September 28, 2002,
the Company had available a $3.0 million bank revolving line of credit under an
agreement with a bank. As of September 28, 2002, the Company was in compliance
with the financial covenants. The Company was not in compliance with debt
covenants as of October 26, 2002, or November 23, 2002. As of December 31, 2002,
the Company had renewed its line of credit for $2.0 million, which will expire
on November 30, 2003. As of December 31, 2002, the Company obtained a waiver of
default from the bank. Borrowings under the line are secured by the Company's
inventory, equipment and accounts receivable and bear interest at the bank's
prime rate plus 2.00% with a minimum interest rate of 6.25%. The Company's
ability to borrow under this line is subject to compliance with certain
financial covenants related to financial performance and condition, as well as
the amount of eligible receivables. Further, the amount of borrowings available
under the line is limited based on eligible accounts receivable at any point in
time. As of September 28, 2002, the amount of borrowings available under the
line was $0.9 million.
On September 30, 1999, the Company's stock ceased to be traded on the NASDAQ
National Market System and was moved to the Over-The-Counter (OTC) Bulletin
Board. During fiscal 2000, the Company successfully completed a $1.5 million
private placement of 500,000 shares of common stock, however the Company's
access to further equity financing could be affected by the level of the
Company's share price and the Company's listing status.
22
The Company has an operating lease for its main facility that expires on August
31, 2004. Future minimum lease payments under these leases at September 28, 2002
are as follows (in thousands):
Year
----
2003 989
2004 909
-------
$ 1,898
=======
The Company operates in a highly competitive market characterized by rapidly
changing technology, together with competitors and distributors that have
significantly greater financial resources than Asante.
In fiscal years 2002 and 2001, the Company incurred substantial losses and
negative cash flows from operations and as of September 28, 2002, the Company
had an accumulated deficit of $27.8 million. For the year ended September 28,
2002, the Company recorded a loss from operations of $2.1 million and had cash
used from operating activities of $1.7 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 the 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.
Failure to generate sufficient revenues from new and existing products, raise
additional capital, or reduce discretionary expenditures would have a material
adverse effect on the Company's ability to achieve its intended business
objectives.
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.
23
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 and sales structure is particularly subject
to various risks associated with international operations 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.
24
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 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 as discussed above. The Company's
future operating results will depend, to a large extent, on its ability to
anticipate and successfully react to these and other factors. Failure to
anticipate and successfully react to these and other factors could adversely
affect the Company's business, financial condition and results of operations.
In addition to the above, the Company is also susceptible to other factors that
generally affect the market for stocks of technology companies. These factors
could affect the price of the Company's stock and could cause such stock prices
to fluctuate over relatively short periods of time.
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.
25
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 again, 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 April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
SFAS Nos. 4, 44 and 64, Amendment of FAS 13, and Technical Corrections as of
April 2002," which is effective for fiscal years beginning after May 15, 2002.
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of SFAS No. 145 relating to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions in paragraphs 8 and 9(c) of SFAS No. 145 relating to
SFAS No. 13 shall be effective for transactions occurring after May 15, 2002.
All other provisions of SFAS No. 145 shall be effective for financial statements
issued on or after May 15, 2002. The Company believes the adoption of SFAS No.
145 will not have a significant impact on its financial statements.
26
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes that SFAS No. 146 will not have a
material impact on its financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of September 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.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Financial Statements:
Report of Independent Accountants 29
Balance Sheets at September 28, 2002 and September 29, 2001 30
Statements of Operations for the years ended September 28, 2002,
September 29, 2001 and September 30, 2000 31
Statements of Stockholders' Equity for the years ended
September 28, 2002, September 29, 2001 and September 30, 2000 32
Statements of Cash Flows for the years ended September 28, 2002,
September 29, 2001 and September 30, 2000 33
Notes to Financial Statements 34
Quarterly Results of Operations (unaudited) 46
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 53
All other schedules are omitted, because they are not required, are not
applicable or the information is included in the consolidated financial
statements and notes thereto.
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Asante Technologies, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Asante
Technologies, Inc. at September 28, 2002 and September 29, 2001, and the results
of its operations and its cash flows for each of the three years in the period
ended September 28, 2002 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
November 1, 2002, except for note 9,
as to which the date is December 31, 2002
29
ASANTE TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except share
and per share amounts)
September 28, September 29,
2002 2001
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 3,282 $ 5,065
Accounts receivable, net of allowance for doubtful accounts,
rebates and sales returns of $3,033 and $3,572 in 2002
and 2001, respectively 1,558 1,764
Inventory 1,515 1,848
Prepaid expenses and other current assets 141 400
-------- --------
Total current assets 6,496 9,077
Property and equipment, net 90 117
Other assets 172 172
-------- --------
Total assets $ 6,758 $ 9,366
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,291 $ 2,469
Accrued expenses 3,834 4,117
Payable to stockholder -- 8
-------- --------
Total current liabilities 6,125 6,594
-------- --------
Commitments and contingencies (Notes 7 and 8)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued or outstanding in 2002 and 2001 -- --
Common stock, $0.001 par value; 25,000,000 shares authorized;
10,066,020 and 10,003,181 shares issued and outstanding in
2002 and 2001, respectively 10 10
Additional paid-in capital 28,412 28,402
Accumulated deficit (27,789) (25,640)
-------- --------
Total stockholders' equity 633 2,772
-------- --------
Total liabilities and stockholders' equity $ 6,758 $ 9,366
======== ========
The accompanying notes are an integral part of these financial statements
30
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended
------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
------------ ------------ ------------
Net sales $ 15,218 $ 22,074 $ 29,280
Cost of sales 9,708 14,134 18,555
-------- -------- --------
Gross profit 5,510 7,940 10,725
-------- -------- --------
Operating expenses:
Sales and marketing 3,782 4,897 5,930
Research and development 2,552 2,756 3,042
General and administrative 1,336 1,464 1,553
-------- -------- --------
Total operating expenses 7,670 9,117 10,525
-------- -------- --------
Income (loss) from operations (2,160) (1,177) 200
Interest and other income (expense), net 11 228 192
-------- -------- --------
Net income (loss) $ (2,149) $ (949) $ 392
======== ======== ========
Basic income (loss) per share $ (0.21) $ (0.10) $ 0.04
======== ======== ========
Diluted income (loss) per share $ (0.21) $ (0.10) $ 0.04
======== ======== ========
Shares used in per
share calculation
Basic 10,024 9,948 9,620
======== ======== ========
Diluted 10,024 9,948 10,014
======== ======== ========
The accompanying notes are an integral part of these financial statements
31
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Common Stock Additional Total
------------------------ Paid-in Treasury Accumulated Stockholders'
Shares Amount Capital Stock Deficit Equity
---------- ---------- ---------- ---------- ---------- ----------
Balances as of October 2, 1999 9,301,272 $ 9 $ 26,873 $ (117) $ (25,083) $ 1,682
Common stock issued under stock plans 111,191 -- (13) 117 -- 104
Issuance of common stock
in private placement 500,000 1 1,500 -- -- 1,501
Net income -- -- -- -- 392 392
---------- ---------- ---------- ---------- ---------- ----------
Balances as of September 30, 2000 9,912,463 10 28,360 -- (24,691) 3,679
---------- ---------- ---------- ---------- ---------- ----------
Common stock issued under stock plans 90,718 -- 42 -- -- 42
Net loss -- -- -- -- (949) (949)
---------- ---------- ---------- ---------- ---------- ----------
Balances as of September 29, 2001 10,003,181 10 28,402 0 (25,640) 2,772
---------- ---------- ---------- ---------- ---------- ----------
Common stock issued under stock plans 62,839 -- 10 -- -- 10
Net loss -- -- -- -- (2,149) (2,149)
---------- ---------- ---------- ---------- ---------- ----------
Balances as of September 28, 2002 10,066,020 $ 10 $ 28,412 $ -- $ (27,789) $ 633
========== ========== ========== ========== ========== ==========
32
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended
---------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $(2,149) $ (949) $ 392
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 88 184 563
Provision for doubtful accounts receivable (54) 138 19
Loss due to write-off of idle assets -- -- 4
Changes in operating assets and liabilities:
Accounts receivable 260 1,331 1,162
Inventory 333 757 58
Prepaid expenses and other current assets 259 123 6
Accounts payable (178) (1,307) (1,251)
Accrued expenses and other (283) (1,320) (268)
Payable to stockholder (8) (322) (601)
------- ------- -------
Net cash provided by (used in) operating activities (1,732) (1,365) 84
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (61) (40) (115)
Other -- (5) 51
------- ------- -------
Net cash used in investing activities (61) (45) (64)
------- ------- -------
Cash flows from financing activities:
Issuance of common stock 10 42 1,605
------- ------- -------
Net cash provided by financing activities 10 42 1,605
------- ------- -------
Net increase (decrease) in cash and cash equivalents (1,783) (1,368) 1,625
Cash and cash equivalents at beginning of year 5,065 6,433 4,808
------- ------- -------
Cash and cash equivalents at end of year $ 3,282 $ 5,065 $ 6,433
======= ======= =======
The accompanying notes are an integral part of these financial statements
33
ASANTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. The Company and Summary of Significant Accounting Policies
Asante Technologies, Inc. (the "Company" or "Asante") designs, manufactures and
markets a broad family of 10BASE-T, 100BASE-T ("Fast Ethernet") and 1000BASE-T
(Gigabit Ethernet) network and connectivity products. Asante's client access
products (which include adapter cards and media access adapters) connect PCs,
Macintoshes, iMAC's and peripheral devices (such as printers) to Ethernet
networks. The Company's network system products, which include intelligent and
non-intelligent switches, hubs, bridge modules, internet access devices
(routers), and network management software for Macintoshes and PCs, interconnect
users within and between departmental networks.
The Company operates in a highly competitive market characterized by rapidly
changing technology, together with competitors and distributors that have
significantly greater financial resources than Asante.
In fiscal years 2002 and 2001, the Company incurred substantial losses and
negative cash flows from operations and as of September 28, 2002, the Company
had an accumulated deficit of $27.8 million. For the year ended September 28,
2002, the Company recorded a loss from operations of $2.1 million and cash used
in operating activities was $1.7 million.
At September 28, 2002, the Company had cash, cash equivalents and short-term
investments of $3.3 million compared to $5.1 million at September 29, 2001 which
represents a 35% decline. Working capital was $0.3 million at September 28,
2002, compared to $2.5 million at September 29, 2001. As of December 31, 2002,
the Company had renewed its line of credit for $2.0 million, which will expire
on November 30, 2003. The Company's ability to borrow under this line is subject
to compliance with covenants related to financial performance and condition, as
well as the amount of eligible receivables.
On September 30, 1999, the Company's stock ceased to be traded on the NASDAQ
National Market System and was moved to the Over-The Counter (OTC) Bulletin
Board. Accordingly, the Company's access to further equity financing could be
affected adversely by the level of the Company's share price and the Company's
listing status.
Based upon the Company's operating budget and cash flow projections the Company
expects to continue to experience negative cash flows from operations through
financial year 2003. The Company anticipates that its existing cash and its
ability to borrow under its line of credit will be sufficient to meet the
working capital and operating expense requirements for the next twelve months.
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 financial year 2002, then it would need to
reduce expenditures to a greater degree than anticipated, or raise additional
funds if possible.
34
Failure to generate sufficient revenues from new and existing products, raise
additional capital or reduce discretionary expenditures would have a material
adverse effect on the Company's ability to achieve its intended business
objectives.
Management estimates and assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue recognition
Revenue from product sales to customers is recognized, including freight
charges, when a definite arrangement exists, the product has been shipped to the
customer, acceptance terms, if any, have been fulfilled, no significant
contractual obligations remain outstanding, the price is fixed or determinable,
and collection is considered probable. Reserves are provided for estimated
returns at the time the related revenue is recorded. Sales to distributors are
generally subject to agreements allowing certain rights of return and price
protection with respect to unsold merchandise held by the distributor. Reserves
for distributor returns are established based on historical returns experience
at the time the related revenue is recorded. Reserves for price protection are
established based on actual price reduction programs. Additionally, the Company
provides reserves for incentive rebates to distributors, warranty obligations
and cooperative advertising at the time the related revenue is recorded.
Cash, cash equivalents and short-term investments
Cash equivalents consist primarily of highly liquid investments in U.S.
government and corporate debt securities with insignificant interest rate risk
and original maturity periods of three months or less at the date of
acquisition. The Company considers all investments with initial maturity at the
time of purchase of greater than 90 days to be short-term investments. At
September 28, 2002 and September 29, 2001, the Company did not hold any
short-term investments.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and accounts receivable.
Accounts receivable are typically unsecured and are derived from worldwide
distributor and customer revenues. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses;
historically, such losses have been within management's expectations. At
September 28, 2002 and September 29, 2001 four customers accounted for 66%, and
64%, respectively, of the accounts receivable balance. In fiscal 2002, 2001 and
2000 one customer accounted for 40%, 46% and 48%, respectively, of the Company's
sales.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis), or market. Appropriate adjustments of the
inventory values are provided for slow moving and discontinued products based
upon future expected sales and committed inventory purchases.
35
Property and equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is based on the straight-line method for financial reporting purposes
over the estimated useful lives of the related assets, generally three to five
years. Equipment under capital leases is amortized over the shorter of its
estimated useful life or lease term and included in depreciation expense.
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived assets
based upon undiscounted cash flows and recognizes impairment from the carrying
value of long-lived assets, if any, based on the fair value of such assets.
Income taxes
Income taxes are computed using the liability method. Under the liability
method, deferred income tax assets and liabilities are determined based upon the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws. A
valuation allowance is provided against deferred tax assets when it is
considered more likely than not they will not be realizable.
Research and development costs
Research and development costs are expensed as incurred. Research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. The Company believes its current process for developing software is
essentially completed concurrently with the establishment of technological
feasibility. Software costs incurred after the establishment of technological
feasibility have not been material to date and therefore have been expensed.
Stock-based compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations thereof, including
Financial Accounting Standards Board (FASB) interpretation No. 44, in accounting
for its employee stock options and stock purchase plan. Pro forma information
regarding net income (loss) and net income (loss) per share is disclosed as
required by Statement of Financial Accounting Standards Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123).
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS 123 and Emerging Issues Task Force No. 96-18 (EITF 96-18)
"Accounting for Equity Instraments that are Issued to Other than Employees for
Acquiring or in Conjunction with Selling Goods or Services."
Fair value of financial instruments
The carrying amounts for certain of the Company's cash equivalents, trade
accounts receivable, accounts payable, and payable to stockholder approximate
fair value due to the relatively short maturity of these instruments.
Comprehensive income (loss)
The Company had no items of other comprehensive income (loss) during any of the
periods presented, and accordingly comprehensive income (loss) is equal to net
income (loss) for all periods presented.
36
Reclassifications
Certain previously reported amounts in the fiscal 2001 statement of operations
have been reclassified to conform to current period presentation.
Segment information
In accordance with the provisions of SFAS No. 131, the Company has determined
that it operates in one business segment, networking and connectivity, and does
not have separately reportable segments.
Sales as a percentage of net sales by geographic region were as follows:
2002 2001 2000
---- ---- ----
United States 80% 77% 77%
Europe 14 12 15
Other 6 11 8
---- ---- ----
100% 100% 100%
==== ==== ====
Substantially all of the Company's assets are located in the United States.
Recently issued accounting pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
SFAS Nos. 4, 44 and 64, Amendment of FAS 13, and Technical Corrections as of
April 2002," which is effective for fiscal years beginning after May 15, 2002.
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of SFAS No. 145 relating to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions in paragraphs 8 and 9(c) of SFAS No. 145 relating to
SFAS No. 13 shall be effective for transactions occurring after May 15, 2002.
All other provisions of SFAS No. 145 shall be effective for financial statements
issued on or after May 15, 2002. The Company believes the adoption of SFAS No.
145 will not have a significant impact on its financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes that SFAS No. 146 will not have a
material impact on its financial position, results of operations or cash flows.
37
Note 2. Basic and Diluted Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with SFAS No. 128
"Earnings per Share" (SFAS No. 128). Basic net income (loss) per share is
computed by dividing net income (loss) available to common stockholders
(numerator) by the weighted-average number of common shares outstanding
(denominator) during the period. Diluted net income (loss) per share gives
effect to all dilutive potential common shares outstanding during the period
including stock options, using the treasury stock method. In computing diluted
net income (loss) per share, the average stock price for the period is used in
determining the number of shares assumed to be re-purchased from the exercise of
stock options.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the periods
presented below (in thousands, except per share data):
2002 2001 2000
-------- ------- -------
Net income (loss) $ (2,149) $ (949) $ 392
======== ======= =======
Weighted average common stock outstanding (basic) 10,024 9,948 9,620
Dilutive effect of options -- -- 394
-------- ------- -------
Weighted average common stock outstanding (diluted) 10,024 9,948 10,014
======== ======= =======
Net income (loss) per share:
Basic $ (0.21) $ (0.10) $ 0.04
======== ======= =======
Diluted $ (0.21) $ (0.10) $ 0.04
======== ======= =======
Diluted net loss per share for the year ended September 28, 2002 and September
29, 2001, excludes all dilutive potential common shares as their effect is
antidilutive. At September 28, 2002 and September 29, 2001, 1,638,681 and
1,613,058 outstanding options and warrants, respectively, were excluded since
their effect was antidilutive.
38
Note 3. Balance Sheet Components
2002 2001
------- -------
(in thousands)
Inventory:
Raw materials and component parts $ 193 $ 154
Work-in-process 54 130
Finished goods 1,268 1,564
------- -------
$ 1,515 $ 1,848
======= =======
Property and equipment (1):
Computers and R&D equipment $ 2,205 $ 6,221
Furniture and Fixtures 508 1,494
------- -------
2,713 7,715
Accumulated depreciation (2,623) (7,598)
------- -------
$ 90 $ 117
======= =======
Accrued expenses:
Payroll-related expenses $ 990 $ 789
Sales promotion expenses 1,218 1,727
Legal and professional fees 561 539
Warranty 470 470
Other 595 592
------- -------
$ 3,834 $ 4,117
======= =======
(1) The decrease in gross fixed assets and accumulated depreciation in fiscal
2002 is comprised entirely of the removal of fully depreciated assets.
Note 4. Related Party Transactions
The Company has a supply agreement (the "OSE Agreement") with Orient
Semiconductor Electronics, Ltd., ("OSE"). OSE and one of its principal
shareholders own, in aggregate, approximately 12.2% of the Company's Common
Stock as of September 28, 2002. Under the OSE Agreement, the Company purchases
from and sells at cost to OSE certain component parts. The Company is obligated
to purchase goods only to the extent it has signed firm purchase commitments
with OSE. At September 28, 2002, the Company's firm purchase commitments under
the OSE Agreement were insignificant.
For fiscal 2002, 2001, and 2000 the Company sold, at cost, approximately
$37,000, $0.1 million, and $0.2 million, respectively, of component parts to OSE
and purchased $0.5 million, $1.3 million, and $3.7 million, respectively, of
goods from OSE. Amounts classified as "payable to stockholder" in the
accompanying balance sheets are solely related to the purchases of inventory
from OSE.
On March 16, 2000, the Company signed a Stock Purchase Agreement with Delta
Networks Inc., and Delta International Holdings Ltd. The Company issued 500,000
shares at $3.00 per share, amounting to $500,000 from Delta Networks, and
$1,000,000 from Delta International Holdings Ltd. During fiscal years 2002, 2001
and 2000, the Company purchased approximately $3.2 million, $4.8 million and
$7.9 million of goods from Delta and sold component parts totaling approximately
$0.01 million, $0.08 million, and $0.4 million at cost to Delta, respectively.
At September 28, 2002 the Company had approximately $0.7 million in accounts
payable to Delta and approximately $29,000 receivable from Delta, and at
September 29, 2001 the Company had approximately $0.9 million in accounts
payable to Delta and approximately $7,000 receivable from Delta.
39
Note 5. Income Taxes
There was no provision for income taxes made in fiscal years 2002, 2001, or
2000.
Deferred tax assets, net, comprise the following at September 28, 2002 and
September 29, 2001 (in thousands):
2002 2001
-------- --------
Deferred tax assets :
Net operating losses $ 5,216 $ 6,512
Research and development credits 2,838 2,340
Receivable and sales-related reserves 1,178 1,352
Inventory-related reserves 2,351 2,386
Compensation accruals 114 113
Depreciation 211 211
Other reserves and accruals 1,136 1,278
-------- --------
Total deferred tax assets 13,044 14,192
Valuation allowance (13,044) (14,192)
-------- --------
$ -- $ --
======== ========
The Company believes that sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance
was provided as of September 28, 2002.
At September 28, 2002, the Company had federal and state net operating loss
carryforwards of approximately $13.5 million and $12.9 million, respectively,
available to offset future taxable income which expire beginning in 2018 and
2003. In addition, as of September 28, 2002, the Company had approximately $1.7
million and approximately $1.1 million of federal and state research and
development credits, respectively. The federal credits will expire beginning in
2012 if not utilized. The state tax credits will be carried forward until
utilized.
Under Internal Revenue Code Section 382 and 383, the future utilization of net
operating losses and tax credits may be limited in certain circumstances where
there is a significant ownership change. Events which may cause changes include,
but are not limited to, a cumulative ownership change of more than 50% over a
three year period.
40
A reconciliation between the Company's income tax provision and the amount
computed by applying the statutory federal rate to income before taxes for the
recorded provisions follows (in thousands):
2002 2001 2000
----- ----- -----
Tax expense/(benefit) at U.S. statutory rate $(731) $(327) $ 14
State taxes, net of federal benefits (104) (47) --
Other 6 96
Valuation allowance 835 368 (110)
----- ----- -----
$ -- $ -- $ --
===== ===== =====
Note 6. Stockholders' Equity
Preferred Stock
There are 2,000,000 shares of Preferred Stock authorized by the Board of
Directors none of which have been issued.
Stock Based Compensation Plans
As of September 28, 2002, the Company had granted options under five stock-based
compensation plans that are described below.
The 2001 Stock Option Plan allows for issuance of options to the Company
employees and consultants to purchase a maximum of 1,000,000 shares of common
stock plus 7% of the outstanding common shares as of the last day of the
immediately preceeding year beginning in fiscal year 2002. This plan replaces
the Company's 1990 Stock Option Plan (the 1990 Plan) which allowed for the
issuance of options to Company employees and consultants to purchase a maximum
of 4,597,333 shares of common stock. The 1990 Plan expired in May 2000, and was
temporarily replaced by the 2000 Non-Statutory Stock Option Plan which allows
for issuance of options to the Company employees and consultants to purchase a
maximum of 120,000 shares of common stock.
The Directors' Stock Option Plan allows for the issuance of options to directors
of the Company who are not employees of, or consultants to, the Company or any
affiliate of the Company. The Directors' Stock Option Plan allows for the
issuance of options to Non-Employee Directors to purchase a maximum of 300,000
shares of common stock.
The Key Executive Option Plan allows for the issuance of options to key
employees of the Company who are not recognized under the Directors' Stock
Option Plan. The Key Executive Option Plan allows for the issuance of options to
Key Employees to purchase a maximum of 404,999 shares of common stock.
Individuals owning more than 10% of the Company's stock are not eligible to
participate in the above three Plans unless the exercise price of the option is
at least 110% of the fair market value of the common stock at the date of grant.
Incentive stock options issued to holders of less than 10% of the Company's
stock must be issued at exercise prices no less than the fair market value of
the Company's common stock per share on the date of grant and with expirations
not to exceed ten years from the grant date. Under the terms of the Plans,
options are granted at 100% of the fair market value of the common stock at the
date of grant with an expiration date of ten years from the date of grant.
Initial option grants generally become vested over a period of four years from
the date of hire, commencing on the date one year after the date of grant of the
initial option. Unexercised options terminate three months after an Optionee's
termination of all service with the Company and its affiliates.
41
Activity under the 1990 Stock Option Plan, 2000 Nonstatutory Stock Option Plan,
2001 Stock Option Plan, Directors' Stock Option Plan and the Key Executive
Option Plan are summarized as follows:
2002 2001 2000
----------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Price per of Price per of Price per
Shares Share Shares Share Shares Share
------ ----- ------ ----- ------ -----
Beginning Balance 1,613,058 $1.82 1,576,971 $1.91 1,762,512 $2.03
Granted 230,726 $0.17 125,500 $0.81 257,866 $1.48
Exercised -- -- (2,516) $0.87 (29,643) $0.94
Canceled (124,264) $2.22 (86,897) $1.74 (413,764) $2.24
--------- --------- ---------
Ending Balance 1,719,520 $1.58 1,613,058 $1.82 1,576,971 $1.91
========= ========= =========
The following table summarizes information about stock options outstanding at
September 28, 2002:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- ---------------------- ----------- ------------- ----- ----------- -----
$0.1200 - $0.2800 228,259 9.21 $0.20 30,223 $0.24
$0.3000 - $0.8125 59,275 8.34 $0.78 27,550 $0.76
$0.8750 - $0.8750 226,100 6.83 $0.88 195,994 $0.88
$0.9000 - $1.000 91,700 7.17 $0.94 68,993 $0.94
$1.0320 - $1.0320 600,000 6.84 $1.03 549,999 $1.03
$1.6250 - $2.3443 174,137 6.97 $1.92 124,214 $1.92
$2.3750 - $4.0000 188,024 4.72 $2.63 181,248 $2.64
$4.2500 - $6.5000 105,825 3.38 $5.21 105,825 $5.21
$6.8750 - $6.8750 6,200 4.07 $6.88 6,200 $6.88
$7.5000 - $7.5000 40,000 0.95 $7.50 40,000 $7.50
--------- ---------
$0.1200 - $7.5000 1,719,520 6.65 $1.58 1,330,246 $1.84
========= =========
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants during fiscal 2002, 2001, and 2000, risk free
interest rates ranging at the date of grant from 4.17% to 6.79%; expected
average volatility of 120%, 119%, and 65%, respectively; an expected option life
of four years, and no expected dividends. The weighted average fair value of
stock options granted under the plans for fiscal 2002, 2001, and 2000 was $0.17,
$0.69, and $0.74, respectively.
In 1993, the Company adopted the Employee Stock Purchase Plan (the "Purchase
Plan") covering an aggregate of 500,000 shares of common stock. During fiscal
2000 the Stockholders approved an amendment increasing the number of shares
available for issuance under the Purchase Plan by 500,000 shares. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the commencement
of the Purchase Plan. Employees who participate in the Purchase Plan can have up
to 10% of their earnings withheld and used to purchase shares of common stock on
specified dates as determined by the Board. The price of common stock purchased
under the Purchase Plan is equal to 85% of the lower of the fair market value of
the common stock determined by the closing price on the Nasdaq National Market
System, at the commencement date or the ending date of each six month offering
period.
42
Sales under the Purchase Plan in fiscal 2002, 2001, and 2000 were 62,839,
88,202, and 81,548 shares of common stock, respectively, at an average price of
$0.15, $0.64, and $0.99, respectively. On September 28, 2002, 344,011 shares of
common stock were available for future purchase.
The fair value of the employee's purchase rights under SFAS No. 123, was
estimated using the Black-Scholes model with the following assumptions used for
grants during fiscal 2002, 2001, and 2000: risk free interest rates ranging from
4.17% to 6.73%, respectively, expected volatility of 120%, 119%, and 65%,
respectively, an expected option life of six months for all years, and no
expected dividends. The weighted average fair value of stock purchased under the
Purchase Plan for fiscal 2002, 2001, and 2000, was $0.15, $0.72, and $0.99,
respectively.
If compensation expense under these plans had been recorded in the Company's
financial statements pursuant to SFAS No. 123, the Company's net income (loss)
and net income (loss) per share for fiscal 2002, 2001, and 2000 would have been
as follows (in thousands, except per share amounts):
2002 2001 2000
--------- --------- ---------
Net income (loss):
As reported $ (2,149) $ (949) $ 392
Pro forma $ (2,338) $ (1,174) $ 43
Net income (loss) per share
As reported
Basic $ (0.21) $ (0.10) $ 0.04
Diluted $ (0.21) $ (0.10) $ 0.04
Pro forma
Basic $ (0.23) $ (0.12) $ 0.00
Diluted $ (0.23) $ (0.12) $ 0.00
Such pro forma disclosures may not be representative of future compensation cost
because options vest over several years and additional grants are made each
year.
Note 7. Commitments and Contingencies
The Company has an operating lease for its main facility that expires on August
31, 2004. Other leases for sales offices expire through 2004. Rent expense under
such operating leases aggregated approximately $714,000, $692,000, and $705,000
for fiscal 2002, 2001, and 2000, respectively. Certain leases require the
Company to pay a portion of facility operating expenses.
43
Future minimum lease payments under these leases at September 28, 2002 are as
follows (in thousands):
Year
----
2003 989
2004 909
-------
$ 1,898
=======
As of September 28, 2002, none of the Company's existing facilities are being
subleased.
As of September 28, 2002 the Company had available a $3.0 million bank revolving
line of credit under an agreement with a bank, and it was in compliance with the
financial covenants. The Company was not in compliance with debt covenants as of
October 26, 2002, or November 23, 2002. As of December 31, 2002, the Company
obtained a waiver of default from the bank. The line expired on December 1, 2002
(See subsequent event note no. 9), and the Company renewed it on December 31,
2002 for $2.0 million. Borrowings under the line are secured by Company's
inventory, equipment and accounts receivable and bear interest at the bank's
prime rate plus 2.00% (approximately 6.25% to 8.00) and a minimum interest rate
of 6.25%. The amount of borrowings available under the line is limited to a
percentage of eligible receivables at any point in time. Borrowings under the
line are subject to certain financial covenants and restrictions on liquidity,
indebtedness, financial guarantees, business combinations, profitability levels,
and other related items. There were no balances outstanding under this line of
credit for any of the periods presented.
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 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.
44
Note 9. Subsequent Event
On December 31, 2002, the Company's line of credit with an expiration of
December 1, 2002, was renewed with an available amount of $2.0 million and with
substantially similar terms, and an expiration date of November 30, 2003.
45
Unaudited Quarterly Results of Operations (in thousands except net income (loss)
per share):
Fiscal 2002 Quarter Ended
- ----------------------------------------------------------------------------------
September 28 June 29 March 30 December 30
------------ ------- -------- -----------
Net sales $ 3,352 $ 4,052 $ 3,955 $ 3,859
Gross profit $ 1,336 $ 1,427 $ 1,437 $ 1,310
Net loss $ (434) $ (493) $ (466) $ (756)
Net loss per share $ (0.04) $ (0.05) $ (0.05) $ (0.07)
Fiscal 2001 Quarter Ended
- ----------------------------------------------------------------------------------
September 29 June 30 March 31 December 31
------------ ------- -------- -----------
Net sales $ 5,187 $ 4,919 $ 5,016 $ 6,952
Gross profit $ 1,911 $ 1,698 $ 1,801 $ 2,530
Net income (loss) $ (126) $ (557) $ (498) $ 232
Net income (loss) per share $ (0.01) $ (0.06) $ (0.05) $ 0.02
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, the information required by
this Item concerning the Company's directors is incorporated by reference to the
information contained in the section captioned "Proposal One - Election of
Directors" in the Company's definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders (the "Proxy Statement") to be filed with the Commission
within 120 days after the end of the Company's fiscal year ended September 28,
2002.
The information required by this Item concerning the executive officers of the
Company is incorporated by reference to the information set forth in the section
titled "Executive Officers of the Company" at the end of Part I of this Form
10-K.
Information with respect to Directors and Officers of the Company required by
Item 405 of Regulation S-K is incorporated herein by reference from information
set forth under the caption "Filing of Reports by Directors and Officers" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-K, the information required by
this Item is incorporated by reference to the information contained in the
section captioned "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3) to Form 10-K, the information required by
this Item is incorporated by reference to the information contained in the
section captioned "Security Ownership" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, the information required by
this Item is incorporated by reference to the information contained in the
section captioned "Certain Relationships and Related Transactions" in the Proxy
Statement.
47
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Form 10-K, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's 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 13-a-14. Based upon that evaluation, the Company's Chief
Executive Officer along with the Company Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in timely
recording, processing, summarizing and reporting material information relating
to the Company required to be disclosed in this Form 10-K.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - See Index to Financial Statements and
Financial Statement Schedule at page 28 of this Form 10-K.
(2) Financial Statement Schedule - See Index to Financial
Statements and Financial Statement Schedule at page 28 of
this Form 10-K.
(3) Exhibits - See Exhibit Index at page 49 of this Form 10-K.
(b) The Registrant did not file or amend any reports on Form 8-K
during the last quarter of the fiscal year ended September 28,
2002.
(c) See Exhibit Index at page 49 of this Form 10-K.
(d) See Index to Financial Statements and Financial Statement
Schedule at page 28 of this Form 10-K.
48
EXHIBIT INDEX
Number Description of Document
------ -----------------------
2.1 Agreement and Plan of Merger between Registrant and Asante
Technologies, Inc., a California corporation, effective October
12, 1993.(1)
3.1 Certificate of Incorporation of Registrant. (1)
3.1A Certificate of Amendment of Certificate of Incorporation of
Registrant. (1)
3.1B Certificate of Retirement of Stock of Registrant.
3.2 By Laws of Registrant. (1)
4.1 Form of Common Stock certificate.(1)
10.1* 1990 Stock Option Plan and form of Option Agreement.(1)
10.2* 1993 Directors' Stock Option Plan and form of Option
Agreement.(1)
10.3* 1993 Employee Stock Purchase Plan and form of subscription
agreement thereunder.(1)
10.4* Form of Key Executive Stock Plan Agreement.(1)
10.5 Form of Indemnification Agreement entered into between
Registrant and its directors and officers.(1)
10.6 Registration Rights Agreement dated July 10, 1992 between
Registrant and certain holders of Common Stock and Series E
Preferred Stock.(1)
10.7 Lease dated July 16, 1992 for facilities located at 821 Fox
Lane in San Jose, California.(1)
10.8 Manufacturing Payment Agreement dated October 1, 1990 between
Registrant and Orient Semiconductor Electronics, Ltd.(1)
10.9 Distribution Agreement dated November 2, 1989 between
Registrant and Ingram Micro, Inc., as amended.(1)(2)
10.10 Distribution Agreement dated June 19, 1989 between Registrant
and Merisel, Inc. (formerly Macamerica), as amended.(1)(2)
10.11 Distribution Agreement dated August 30, 1990 between Registrant
and TechData Corporation, as amended.(1)(2)
10.12 Volume Purchase Agreement dated April 15, 1992 between
Registrant and National Semiconductor Corporation.(1)(2)
10.13 Sublease agreement dated August 21, 1995 for facilities located
at 821 Fox Lane in San Jose, California, and amendments
pertaining thereto.(1)(2)
10.14 Extension of Sublease Agreement dated June 10, 1997.(2)
10.15 Distribution Agreement dated September 30, 1992 between
Registrant and MicroWarehouse.(4)
49
23.1 Consent of Independent Accountants.
99.1 Certification by CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002t.
* The item listed is a compensatory plan.
(1) Previously filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 (No. 33-70300).
(2) Confidential treatment granted as to certain portions of
these exhibits.
(3) Previously filed as an Exhibit to the Registrant's Form
10-K for the fiscal year ended September 30, 1994.
(4) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 3,
1998.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
January 9, 2003
ASANTE TECHNOLOGIES, INC.
By: /s/ WILSON WONG
-----------------------------------
Wilson Wong,
President and Chief Executive Officer
By: /s/ ANTHONY CONTOS
-------------------------------------
Anthony Contos
Vice President of Finance and
Administration, and Secretary
51
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wilson Wong and Anthony Contos, and each of them,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Dates
- ------------------------------ -------------------------------------------- ---------------
/s/ WILSON WONG President, and Chief Executive Officer January 9, 2003
- ------------------------------ (Principal Executive Officer) and Director
(Wilson Wong)
/s/ ANTHONY CONTOS Vice President of Finance and Administration January 9, 2003
- ------------------------------ (Principal Finance and Accounting Officer)
(Anthony Contos)
/s/ MICHAEL KAUFMAN (Director) January 9, 2003
- ------------------------------
(Michael Kaufman)
/s/ EDMOND TSENG (Director) January 9, 2003
- ------------------------------
(Edmond Tseng)
/s/ JEFF YUAN KAI LIN (Director) January 9, 2003
- ------------------------------
(Jeff Yuan Kai Lin)
52
SCHEDULE II
ASANTE TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ----------------------------------------------- --------- -------- ---------- --------
Year ended September 30, 2000:
Allowance for doubtful accounts,
price protection and distributor rebates $ 4,607 $ 805 $ (2,327) $ 3,085
Allowance for sales returns 1,164 267 (323) 1,108
--------- -------- ---------- --------
$ 5,771 $ 1,072 $ (2,650) $ 4,193
========= ======== ========== ========
- ---------------------------------------------------------------------------------------------------------------------------
Year ended September 29, 2001:
Allowance for doubtful accounts,
price protection and distributor rebates $ 3,085 $ 529 $ (1,147) $ 2,467
Allowance for sales returns 1,108 36 (39) 1,105
--------- -------- ---------- --------
$ 4,193 $ 565 $ (1,186) $ 3,572
========= ======== ========== ========
- ---------------------------------------------------------------------------------------------------------------------------
Year ended September 28, 2002:
Allowance for doubtful accounts,
price protection and distributor rebates $ 2,467 $ 861 $ (1,364) $ 1,964
Allowance for sales returns 1,105 75 (111) 1,069
--------- -------- ---------- --------
$ 3,572 $ 936 $ (1,475) $ 3,033
========= ======== ========== ========
- ---------------------------------------------------------------------------------------------------------------------------