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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 30, 2000
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 Identification No.)
incorporation or organization)
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
24, 2000, as reported on the OTC (Over-the-Counter) Bulletin Board, was
approximately 5,804,761. 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 24, 2000, the Registrant had 9,915,129 shares of Common Stock
outstanding.
------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders to be held on February 22, 2001 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 14
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 17
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27
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, NetStacker, AsantePrint, and AsanteFAST are
registered trademarks of Asante Technologies, Inc. Other product and brand names
may be trademarks of registered trademarks of their respective owners.
i
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 the largest provider 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"). The majority of these
Ethernet products are designed to function at speeds of either 10 Mbps (standard
Ethernet, or 10BASE-T) or 10/100 Mbps (known as "Fast Ethernet", or 100BASE-T).
Additionally, Gigabit Ethernet has been increasingly adopted in the industry due
to increasing bandwidth requirements needed at the backbone of the network
brought about by the standardization of 10/100 Ethernet at the user level, and
also due to the convergence of voice, data, and video across the same network
infrastructure.
In 2000, the Company transformed its products and services to focus on providing
high-speed local area network and Internet access. The Company sells to
distributors and resellers who serve three primary customer markets:
educational, digital design, and small business markets or Small Office/Home
Office (SOHO).
As the Internet market continues to evolve and grow, the Company believes that
three trends will create significant business opportunities for the Company:
o Increasing demand to receive digital content (information, graphics, video,
music, voice) locally and from the Internet;
o Rapid acceptance and deployment of high-speed local area networks; and
o Increasing demand for broadband (high speed / high bandwidth) Internet
access for small offices, home businesses and schools
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. MPEG-1, MPEG-2, MP-3, 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 in a reasonable time.
1
Additionally, as business and users increasingly develop and use the internet as
a means of communication, the need for increased speed and bandwidth is
increasing phenomenally. According to Infonetics, Inc., in 1999 and 2000, the
number of home Cable/DSL installations increased to $372 million, and is
projected to grow to $974 million in calendar 2000. This increased bandwidth 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 and video transfers over the internet. Additionally, the
number of computer users and the use of digital voice, video, music and graphics
has increased dramatically due to affordable higher speed processors, the cost
effectiveness of Fast Ethernet (10/100, or 100 Mbps) networking and even the
emergence of affordable Gigabit Ethernet products.
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.
Innovative technologies.
In fiscal 2000, the Company invested in multi-service networks to support
converged, high-speed data, voice and video networks. The Company also developed
Gigabit Ethernet products for our high-end IntraCore and workgroup-oriented
FriendlyNet product lines.
The greatly increased bandwidth and speed has been created primarily due to the
emergence of 10/100 Ethernet technology taking over the desktop as the
networking standard and to broadband technologies which are leading 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" LAN (Local Area Network), WAN
(Wide Area Network), phone, fax, and video communications centers at attractive
price points. With this new affordability and the emergence of newer
technologies such as wireless and IP (Internet Protocol) telephony, and
broadband technologies allowing easy connectivity in the home, the reality of
the true home network is nearing. Additionally, small business can afford to
have the same access to these resources and digital media prevously available
only to large companies.
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 technological expertise is well positioned to take advantage of
these growing markets to introduce all-in-one products to answer the needs of
the converged network for homes and small businesses.
Strategic sales channels.
By expanding its distribution channels to meet the 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 build
traditional retail channels that provide revenue and profit opportunities.
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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 2000, the Company announced several strategic partnerships designed to
place the Company in a leadership position in several areas. The Company's
alliance with Apple Computer and Broadcom enabled the Company to not only be the
first Company to ship the industry's first Gigabit over Copper switches, but to
offer it under $400 per port. For its advanced system business, the Company
announced its partnership with IBM to develop future Layer 3 and above routing
switches. Also, the Company is focusing its efforts into certain strategic
business and technical relationships to increase its strength and presence in
the market and to continue to introduce cutting edge technologies.
Our technological partners include companies such as National Semiconductor,
IBM, Broadcom and Apple Computer, Inc., as well as several large Internet
Service Providers (ISP's), and corporations.
In the beginning of fiscal 2001, the Company announced a partnership with
National Semiconductor with the goal to bring truly affordable Gigabit over
Copper solutions to the market place with a Copper Gigabit Ethernet adapter card
priced under $150, versus comparable products currently priced between $300 and
$400.
The Company's key competitive advantages are its ability to innovate within
industry standards and deliver network solutions that are easier to install,
configure and manage. Asante(R) is a strong brand name that is well-recognized
in Apple Macintosh and SOHO markets.
The Company continues to develop and sell Ethernet and Fast Ethernet adapters to
customers who use Apple Macintosh and iMAC computers. The Company historically
has been heavily associated with Apple and therefore had focused its business on
selling products into the Apple after-market. While the Company currently
designs its products to work on all computer platforms and does not rely
exclusively on new Apple product introductions, a large portion of its sales in
the near term are expected to be related to Apple products. Any material
decrease in sales of Macintoshes, iMACs, and Power PCs, further incorporation by
Apple of networking connectivity into their products, or additional developments
adversely affecting Apple'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.
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. 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
3
Internet Connectivity Products (Routers)
During fiscal 1999, the Company introduced a family of routers designed to allow
multiple SOHO or home users to connect to the Internet at the same time at
increased speeds. In fiscal 2000, the Company introduced its new family of
broadband Cable/DSL routers to meet the expanding demands of the rapidly growing
broadband market. The Company plans to introduce additional Internet routers to
meet the changing needs of the market. Current product development includes
wireless, DSL and other emerging technologies.
The FriendlyNet 3004 allows up to 12 users to connect to the Internet via one
Cable or DSL modem and includes a four port 10/100 switch for maximum
performance and expandability. The 3004LC offers a parallel printer port in
addition to a serial port for connection to an external redundant analog modem
during those times the broadband connection may be experiencing difficulties.
This feature also offers users who have not yet upgraded to broadband an upgrade
path from analog to digital. These products have recently won top honors in PC
World (Best Buy), MacWorld (4 mice award, and recommended product), and Macs
Only among other publications.
The FriendlyNet ISDN router allows up to four users to connect to the Internet
via one or two ISDN lines at speeds of up to eight times that of a standard 28.8
Kbps modem.
The FriendlyNet Dual 56K allows multiple users to simultaneously connect at 112
Kbps, or up to 168 Kbps with additional modems.
Switch Products
Asante's comprehensive line of switches includes multiple families of switches
designed to meet the needs of both its vertical and horizontal market customers.
IntraCore Series Switches were introduced during fiscal 2000, and currrently
consist of three new families of advanced managed multi-service 10/100/1000 Mbps
switches. Each product offers Asante's award winning built-in HTTP management
server software featuring Java-enabled features as well as other advanced
features.
The IntraCore 9000 chassis multi-service switches are currently Asante's most
sophisticated managed switches designed to provide maximum bandwidth for the
network backbone and other high congestion situations, and offer multiple
services, hot swappable architecture, as well as power redundancy. Each chassis
may support up to 192 10/100 ports, or 16 Gigabit ports, fiber or copper. These
products feature advanced management cababilities including IPMG multicast
pruning which allows IS managers to filter out unwanted internet broadcast
messages and unwanted data, VLAN (the ability to set up virtual LAN subgroups),
RMON (Remote Monitoring and management of the network), SNMP mangement, as well
as prioritization.
The IntraCore 8000 series of stackable switches offer a similar software feature
set to the IntraCore 9000 series of products. These switches offer true wire
speed (full Gigabit operation in full duplex mode, or bi-directionally) Gigabit
performance, and in a test by the Tolly group in March 2000, the Company was
4
rated as having the best value for performance available. Each switch comes with
24 built in 10/100 Ethernet ports, and can be stacked up to four switches high
to support up to 192 ports of 10/100, or 96 10/100 ports and up to 12 Gigabit
ports in a single stack configuration.
The IntraCore 6500 series of 10/100/1000Mbps switches were introduced in August
2000. The Company believes the IntraCore 6524 offers the best value and
bandwidth of any Layer 2 switch in the market, while offering an extremely rich
feature set including 24 10/100 ports plus two GBICs for the addition of fiber
Gigabit, copper Gigabit, or 10/100 GBICs (a new, lower cost, standard allowing a
much more cost effective upgrade path), and a large assortment of advanced
multi-service. In addition, the Company plans to offer stackability to the
product line in the near future.
The IntraSwitch 6000 series 10/100 switches provide maximum bandwidth for those
customers requiring solutions for high congestion situations. These products
feature an integrated HTTP management server with Java-enabled features, as well
as other advanced functions. The IntraSwitch 6000 series of switches currently
ships in a 24 port configurations and are based on the Company's proprietary
ASIC (application specific integrated circuit, or multi-function chip)
technology. In addition, these switches offer the customer additional management
features and a migration path for those customers requiring a Gigabit backplane.
The FriendlyNet 400/4000P/5000P series switch family features low cost, high
performance 10/100 Mbps unmanaged switches for smaller networks and other users
with high bandwidth needs. The switches feature NWay auto-negotiation to
automatically determine either 10 or 100 Mbps operation and currently come in 5,
8, 16, and 24 port configurations.
The Company also offers the FS3208 FriendlyNet switch family, a 10 Mbps, eight
port unmanaged switch with two 10/100 port uplinks.
Gigabit Adapters and Other Gigabit Products
Gigabit Over Fiber Solutions
The Company shipped its first Gigabit products in February 1999. These products
included a full-featured Gigabit card. Additionally, in the second quarter of
fiscal 1999, the Company introduced the industry's first unmanaged Gigabit
switches designed to complement its current switch products and provide high-end
solutions at affordable prices for those customers with large bandwidth needs.
The Company's 7000 series switches feature 8, 16, and 24 port solutions. The
Company plans on investing in additional research and development on Gigabit
technology to meet the needs of its customers requiring implementation of a
Gigabit solution to the backbone of their networks.
The Company compliments these switches, with a high performance Gigabit over
fiber Ethernet card, for incorporation into a server or power user.
Gigabit Over Copper Solutions
In February 2000, the Company led the industry in introducing the world's first
Gigabit Ethernet over copper unmanaged system products in partnership with
Broadcom Communications, Inc. In July 2000, the Company announced a joint
partnership with Apple Computer and Broadcom in a drive to bring affordable
Gigabit Ethernet over Copper to the desktop. The first switch product introduced
was the GX4 Model 400 switch, which delivers over ten times the available
bandwidth per port of a standard 100 Mbps
5
(Fast Ethernet) connection, and can transmit and receive at 1000 Mbps
simultaneously, and comes with circuitry which self-corrects for the most common
types of wiring errors.
The GX4-224 includes two copper 100/1000 ports and 24 10/100 ports. This switch
offers the best value of 10/100 connectivity along with two Gigabit ports for
connection to a high speed server, or for power users compared with other
solutions on the market today.
In November 2000, the Company announced a partnership with National
Semiconductor to bring a Gigabit over Copper adapter card to market at a target
price of approximately $150, less than half the price of current competition.
The adapter ships with drivers for Windows, Unix, Novell, and Linux operating
systems. The Company also offers another card in this family compatible with
Apple OS, in addition to the operating systems available above.
10Base-T/100BASE-TX (Fast Ethernet) Shared Systems
In addition to switches, the Company offers a strong family of dual speed 10/100
Fast Ethernet systems and adapters to allow customers to connect personal
computers and high performance servers over a corporate Intranet and offer a
cost effective way to transition to 100BASE-T networking.
The Company's NetStacker II family of auto-negotiating 10/100 managed shared
hubs replaced the Company's award winning NetStacker family of managed 10 Mbps
stackable hubs. Asante's 12 and 24 port 10/100 Netstacker II stackable hubs
offer easy, cost effective migration to a managed solution via an optional
management module. The family supports up to eight unmanaged 12 or 24 port
stacked units for up to 192 ports and includes one standard MII slot on each
unit for 100Base-FX connectivity options.
The Company offers a growing family of 10/100 unmanaged hub solutions for its
customers. The Company's current products, the FriendlyNet 10/100 Dual Speed hub
family, include stand-alone 5, 8,16, and 24 port 10/100 hubs.
Fast Ethernet Adapter Cards
The Company's AsanteFast 10/100 dual speed adapters provide all-in-one
compatibility to 10BASE-T and 100BASE-TX Ethernet networks for personal
computers utilizing standard PCI bus architecture. The product plugs into the
PCI slot of the computer and automatically configures itself to the system. It
utilizes an "auto-negotiating" feature that senses whether the network hub speed
is 10 Mbps or 100 Mbps and sets the adapter speed accordingly. As such, the
product allows the customer to move from the existing 10BASE-T network to a new
Fast Ethernet network. The Asante Fast 10/100 has four LED lights to assist with
trouble shooting and to indicate connection speed, link integrity and data
traffic. The Company's PCI cards ship with Windows, Linux, UNIX, Macintosh, and
Power PC drivers for cross platform compatibility with most significant
operating systems.
The Company also offers FriendlyNet 10/100 PC Fast Ethernet family of adapters
designed to be price/technology leaders for Linux, Unix, Windows 98/NT, and
NetWare.
6
10BASE-T Systems and Adapter Cards
In fiscal 2000, the trend for sophisticated users and many new businesses has
continued to move to 10/100 Ethernet technology. However, the demand for low
cost 10 Mbps Ethernet technology from more price-sensitive and home customers
remained. In a recent article in Network Computing, demand for 10 Mbps
technology will continue to decline at a rate of 20-25% per year. The trend to
10/100 technology is particularly strong in the kindergarten through grade 12
education market and the smaller SOHO user in which the Company has a strong
reputation and product name recognition. The Company expects that sales levels
in the 10 Mbps market will continue to decline as pricing for switching
technology and 10/100 Mbps shared Ethernet technology have made adoption of
these standards more attractive, and the increasing use of Internet traffic and
data, voice, and video over the same cabling begins to necessitate the use of
faster speeds for some applications.
The FriendlyNet 10T Hubs in 5-port and 8-port product configurations also
comprise a family of inexpensive, non-intelligent Ethernet hubs designed to meet
the needs of the economy-minded user, small business, and home network. Their
smaller size makes them ideal for small businesses and personal or home users
who have limited workspace.
Adapter Cards for Macintosh Computers. The Company sells an Ethernet adapter
card and transceiver product line supporting all Macintosh platforms and all
Ethernet cabling options. The Company also offers AsantePrint that allows older
printers to be connected to 10 Mbps networks.
Other Client Access Products. Asante offers a family of converters to connect
LocalTalk devices to an Ethernet network. These converters connect from two to
eight devices such as printers to an Ethernet network. In addition, the Company
offers FriendlyNet media adapters to connect PC and Macintosh computers or
printers with built-in Ethernet support to an Ethernet network.
Personal Connectivity: USB products
With the increase of faster PCs and LAN communications comes the ability in the
SOHO and home networking market to support an advanced environment including
multiple printers and multimedia devices. USB (Universal Serial Bus) technology
offers users an inexpensive method to increase a system's number of ports, or
connectivity options. These products offer customers additional connectivity to
networks, peripherals, and other devices such as digital cameras, printers,
scanners and the like. Asante currently carries five products in its USB family,
which is one of the industry's easiest to use and most flexible technologies.
USB Hubs. The Company currently offers three FriendlyNet USB hubs to meet the
needs of its customers. The four and seven port USB hubs are perfect for
connecting a variety of USB peripheral devices to a USB Macintosh or PC
computer, allowing sound, controller devices, cameras and the like to be
connected easily. These FriendlyNet USB hubs offer auto-partitioning for
isolation of malfunctioning devices or ports and support a dual power mode.
Software Products
Software design and implementation is a key component of all Asante products.
Separately, the Company markets several cutting edge software products.
7
In the first quarter of fiscal 2000, the Company introduced several product
bundles in its FriendlyShare family. FriendlyShare offers home and small
business users a simple way to allow IMAC's, Macintoshes to share Internet
connections with other Macintoshes and PCs. FriendlyShare offers simplicity of
use, automatic server configuration, and has built-in two-way security along
with an integrated firewall to prevent other users and remote users from
accessing sensitive data.
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 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.
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. In addition, the Company has continued to offer
cutting edge software products over the past several years such as NetDoubler
and FriendlyShare.
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 directly to a large 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 appointed on a non-exclusive
basis. Fulfillment of products to e-commerce customers are typically handled
through the Company's distribution channel.
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 to 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.
Despite sales declines to OEM customers in fiscal 1998 through fiscal 2000, 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 continue to
constitute a smaller portion of the Company's total sales in fiscal 2001.
8
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 23%, 24%, and 22% of the Company's net sales in
fiscal years 2000, 1999, and 1998, respectively. The Company experienced reduced
sales in all three areas, primarily in Europe where sales declined approximately
35% since fiscal 1999 due to factors similar to those encountered domestically.
Sales in Asia Pacific decreased slightly in fiscal 2000, compared to the prior
year due primarily to competition from Asia manufacturing and softness in demand
in Macintosh related products.
The Company believes that it has good relationships with its distributors and
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 extensive trade advertising,
participation in industry trade shows, and other marketing efforts. As of
September, 2000, the Company supported the sales efforts of its distributors
with 21 direct sales and support related employees located throughout the United
States who promote the Company's products within assigned territories and with
14 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, 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. Although the Company
has increased its business with its other distribution channels, it does not
believe it has completely offset the loss of revenues from the cessation of
business with the two aforementioned distributors, however the Company has taken
steps to increase its channels which it believes will benefit the Company over
the next year. 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
9
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.
In fiscal 1998, the Company adopted a limited lifetime warranty of its existing
unmanaged products and new 10/100 6000 series managed and 4000 series unmanaged
switches. 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 lifetime 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.
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 30, 2000, the Company had 12 employees engaged in engineering
and product development. During the fiscal years 2000, 1999, and 1998, the
Company's engineering and product development expenses were approximately $3.0
million, $3.9 million, and $7.3 million, respectively.
The Company continues to invest significant resources in engineering projects
and will continue to focus additional resources as needed 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 2001 and going forward, the Company will continue to focus additional
efforts in the areas of imbedded software design, development of additional
switches and other LAN-edge devices, WAN router products, wireless, and on
system integration. The Company will also continue product development efforts
to expand its Gigabit product line.
10
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.
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
Network, Lite-on Communications, as well as other manufacturers based in
California, Taiwan and China. Both OSE and Delta are stockholders of the 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 2000, the Company
purchased $3.8 million of goods from OSE and purchased $7.9 million of goods
from Delta Networks, Inc. (See Note 5 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 supply through 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
11
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.
Competition
The markets for the Company's products are highly competitive, and the Company
believes that such competition will continue to intensify. 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 will continue.
In the market, 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 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
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 in connection with the Company's
product development efforts. Apple 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 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 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.
12
During fiscal 2000, a smaller portion of the Company's sales represented
products sold to OEMs than in fiscal 1999. 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 large product volume 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 decrease
slightly as a percentage of total revenue in fiscal 2001.
A significant percentage of the Company's sales in fiscal 1999 and fiscal 2000
was 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'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'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'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.
13
Employees
As of September 30, 2000, the Company had 70 employees, including 12 in
engineering and product development, 23 in manufacturing operations, 21 in
marketing, sales and support services, and 14 in corporate administration. The
number of employees reflects a reduction in workforce from fiscal 1999 as a
result of the restructuring which began in the third quarter of fiscal 1998, and
activities designed to streamline operations.
The Company's success also depends to a significant extent upon the
contributions of key sales, marketing, engineering, manufacturing, and
administrative employees, and on the Company's ability to attract and retain
highly qualified personnel, who are in great demand. None of the Company's key
employees are subject to a non-competition agreement with the Company. Unless
vacancies are promptly filled, the loss of current key employees or the
Company's inability to attract and retain other qualified employees in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations.
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 this
14,700 square foot facility under a lease that expires on August 31, 2004, with
an option to extend for an additional five years. During 1999 the Company closed
the majority of its leased sales offices in connection with its restructuring
activities. The Company currently has leased sales offices in Utah, and Oregon.
The Company believes that its existing facilities are adequate to meet its
requirements for the foreseeable future and that suitable additional or
substitute space will be available as needed. See Note 8 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.
On September 13, 1996, a complaint was filed by Datapoint Corporation against
the Company and six other companies individually and as purported
representatives of a defendant class of all manufacturers, vendors and users of
Fast Ethernet-compliant, dual protocol local-area network products, for alleged
infringement of United States letters Patent Nos. 5,077,732 and 5,008,879. The
complaint sought unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company filed a response to the complaint denying
liability. The case was consolidated, for purposes of claim interpretation only,
with similar cases filed against several other defendants, which include, among
others, Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks, and Sun
Microsystems. On April 16, 1998, the Special
14
Master appointed by the court issued a report agreeing in most material
respects, with the defendants' interpretation of the alleged patent claims.
Subsequently, and by order dated November 23, 1998, the District Court adopted
without modification the findings of the Special Master and the recommendations
of the Magistrate Judge regarding claim interpretation of the patents-in-suit.
The Court ordered dismissal of the case and entered judgment in favor of the
defendants. Plaintiff has filed an appeal of the judgment to the Federal Circuit
Court of Appeal, which is now pending. A ruling on the appeal is not expected
until the year 2001.
In September 1999 certain inventory having a cost of approximately $400,000 was
seized by the United States Customs for the alleged improper use of
certification marks owned by Underwriters Laboratories Inc. ("UL"). It is the
Company's position that the alleged improper use was simply a mistake or error.
The Company may obtain the return of the inventory through settlement
negotiations with either the United States Customs or United States Attorney's
Office, obtaining permission from UL to use the certification marks, or being
successful in trial proceedings. To contest the seizure, the Company determined
to seek a review with the United States Attorney's Office and filed a claim for
the inventory. It is now incumbent upon the United States Attorney's Office to
file in court seeking forfeiture of the inventory and allow the Company, as
claimant, to challenge such proceeding. The Company also expects that the United
States Customs may issue a penalty separate from the seizure under 19 U.S.C.
section 1526(f), which provides for a penalty ranging in amount from the retail
value of the seized inventory had the inventory been UL approved, to twice the
retail value. The Company asserts this is a first time offense. For a first time
offense, the United States Customs may mitigate the penalties when challenged
administratively, with such mitigation being as low as 10% of the value of the
inventory. The Company intends to contest any penalty action through
administrative and/or judicial procedures. On April 28, 2000, the Company
submitted a settlement proposal to the United States Attorney's Office offering
settlement of the case. The Company has not yet received a reply to its request.
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 2000.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages as of December 10, 2000, and
certain information regarding each of them are as follows:
15
Name Age Position with the Company
---- --- ----------------------------------------------
Wilson Wong 53 President and Chief Executive Officer
Rusty Callihan 51 Vice President of Sales
Anthony Contos 37 Vice President of Finance and Administration
Jim Hsia 38 Vice President of Marketing
Robert Young 57 Vice President of Operations
John Jeng* 44 Vice President of Operations
*Mr. Jeng resigned as Vice President of Operations in April, 2000.
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 a Director of the
Board of Directors.
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.
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 the 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 Robert Young joined the Company in December 1998, has served as Vice
President of Operations since October 2000. Mr. Young assumed the position of
Vice President of Operations previously held by Mr. John Jeng. From October 1998
to October 2000, he served as the Company's Director of Quality Control. From
June 1996 to October 1998, Mr. Young was self employed as a Real Estate Agent.
From February 1995 to June 1996, Mr Young was a Manufacturing Quality
Consultant. From November 1993 to February 1995, Mr. Young was Vice President of
Operations for Apaq Technogy.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sale prices for the Company's
Common Stock. The Company's Common Stock traded on the NASDAQ National Market
under the trading symbol ASNT until September 30, 1999, when the NASDAQ Listings
Qualifications Panel removed the Company's stock from trading on the NASDAQ NMS
System as a result of the Company's inability to maintain a net tangible asset
value of at least $4 million as required by NASDAQ National Market Maintenance
Standards to maintain its listing. Consequently, effective September 30, 1999,
the Company's Common Stock traded on the OTC (Over-the-Counter) Bulletin Board
under the trading symbol ASNT.OB.
Fiscal 2000 High Low
- ---------------------------------------------------------------------
First quarter $5 1/8 $ 11/16
Second quarter $3 3/8 $1 11/16
Third quarter $2 5/8 $ 7/8
Fourth quarter $2 1/8 $ 7/8
Fiscal 1999 High Low
- ---------------------------------------------------------------------
First quarter $2 1/2 $1
Second quarter $1 31/32 $ 13/16
Third quarter $1 $ 9/16
Fourth quarter $2 1/4 $ 3/4
As of November 30, 2000, there were 101 stockholders of record of the Company's
Common Stock. 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.
17
Under a stock repurchase plan approved September 16, 1998, the Company could
repurchase up to 500,000 shares of its outstanding Common Stock over a period of
up to one year. Pursuant to this program, the Company had repurchased 67,000
shares of its common stock for $117,200 as of October 2, 1999 and 15,500 shares
of its common stock for $28,400 as of October 3, 1998.
As of September 30, 2000, the Company has reissued 66,850 of the Treasury shares
to satisfy its Employee Stock Purchase Plan (ESPP) activities.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data) Year ended
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Statement of Operations Data:
Net sales $ 29,280 $ 37,488 $ 51,433 $ 83,279 $ 66,990
Income (loss) from operations $ 200 $(13,863) $(12,450) $ 2,331 $ (1,338)
Net income (loss) $ 392 $(14,161) $(14,435) $ 1,926 $ (457)
Diluted net income (loss) per share $ 0.04 $ (1.53) $ (1.57) $ 0.21 $ (0.05)
Balance Sheet Data:
Working Capital $ 3,251 $ 751 $ 13,645 $ 26,727 $ 25,101
Total assets $ 13,222 $ 13,345 $ 30,359 $ 40,567 $ 39,966
Stockholders' equity $ 3,679 $ 1,682 $ 15,850 $ 29,874 $ 26,909
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 30, 2000,
October 2, 1999, and October 3, 1998, respectively:
18
2000 1999 1998
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.4 86.8 69.9
------ ------ ------
Gross profit 36.6 13.2 30.1
------ ------ ------
Operating expenses:
Sales and marketing 20.2 33.6 32.2
Research and development 10.4 10.4 14.3
General and administrative 5.3 6.1 7.0
Restructuring - - 0.8
------ ------ ------
Total operating expenses 35.9 50.1 54.3
------ ------ ------
Income (loss) from operations 0.7 (37.0) (24.2)
Interest and other income (expense), net 0.6 (0.8) 0.9
------ ------ ------
Income (loss) before income taxes 1.3 (37.8) (23.3)
Provision (benefit) for income taxes - - 4.8
------ ------ ------
Net income (loss) 1.3% (37.8)% (28.1)%
====== ====== ======
Net Sales
Net sales decreased 21.9% to $29.3 million in fiscal 2000 from $37.5 million in
fiscal 1999. Net sales were $51.4 million in fiscal 1998. The decrease in net
sales from fiscal 1999 to fiscal 2000 was due to several factors including heavy
competitive pressures and the continued incorporation of Ethernet onto the
motherboard of Apple's newer computers causing a continued decline in older
connectivity products of approximately $4.7 million, a reduction in unmangaged
hubs of $2.1 million due to price declines and reduction in sales of 10 Mbps
product, a reduction in managed systems of $2.2 million due to the continuing
decline in shared systems, and the late introduction of the Company's IntraCore
8000 and 9000 switches due to delays in availability of certain ASIC's. These
decreases were partially offset by introduction of the Company's new unmanaged
Gigabit products, Cable/DSL routers, and USB products.
In fiscal 2000 and 1999, one customer, Ingram, accounted for 48% and 42%,
respectively, of the Company's total sales. This customer represented 33% of the
Company's sales in fiscal 1998.
The decrease in net sales from fiscal 1998 to fiscal 1999 was due to several
factors including a decrease in OEM sales of $2.2 million, which declined from
$3.5 million to $1.3 million, a decline in connectivity product sales of
approximately $6.7 million due to heavy competitive price pressures and the
continued incorporation of Ethernet onto the motherboard of Apple's newer
computers causing a continued decline in older adapter card sales, a reduction
in sales for older 10 Mbps unmanaged shared hubs of $0.5 million due primarily
to price decreases, the reduction of approximately $2.0 million of sales into
the distributor channel, and a decrease of approximately $5.5 million of sales
of the Company's older managed system products. These decreases were partially
offset by increases in sales of the Company's 10/100 unmanaged hubs and switches
of approximately $2.0 million and an increase in print router sales of $1.2
million.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for 23%, 24%, and 22% of net sales in fiscal 2000, 1999, and 1998,
respectively as a percentage of total sales. This decline was caused by a
decline in sales in Europe due primarily to price decreases and competition from
Asian manufacturers. The Company believes that its newer product lines will
offset to some extent the decline from in international sales which occurred
from fiscal 1999 to 2000. Sales in Asia Pacific and
19
Canada for fiscal 2000 remained fairly flat, compared to fiscal 1999. The
Company will continue to focus its efforts on increasing sales internationally
over the next several quarters but cannot be sure that its efforts will be
successful.
Although the proportion of international sales increased in fiscal 1999,
compared to fiscal 1998, the Company experienced reduced sales in Europe,
Canada, and Asia Pacific, but primarily in Canada where sales declined
approximately 40% since fiscal 1998 due to factors similar to those encountered
domestically. Sales in Asia Pacific declined 54% in fiscal 1999 compared to the
prior year due primarily to the continuation of the weak Asian economy and
softness in demand in Apple Macintosh related products that began in fiscal
1998. As a result of continuing declines, the Company closed is sales offices in
Taiwan and the United Kingdom during fiscal 1999.
The Company believes heavy competitive pressures that began in fiscal 1998 and
extended through 2000 will continue during fiscal 2001. Although the Company
experienced significant unit increases in several of its product lines such as
its 10/100 PCI adapter card and USB products, price declines offset increases in
unit sales. 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 managed products and adapter cards as a percent
of total sales will continue to decline in fiscal 2001.
Cost of Sales and Gross Profit
The Company's gross profit as a percentage of net sales increased to 36.6% in
fiscal 2000 from 13.2% in fiscal 1999. The gross profit as a percentage of net
sales was 30.1% in fiscal 1998. The increase in fiscal 2000 compared to fiscal
1999 was primarily due to tighter controls over inventories, improved management
of product life cycles leading to reduced write-offs of obsolete products,
reduced channel discounts, and reduced price protection activities resulting
from reduced levels of inventory in the distributor channel. Additionally, the
Company has realized overhead benefits from moving its manufacturing offshore.
The decrease during fiscal 1999, compared to fiscal 1998, was due primarily to
the decreased sales levels and inventory write-offs of the Company's older
legacy adapter cards, managed system products and component level inventories.
During fiscal 2000, sales prices continued to be affected by heavy competitive
pricing pressures. In response to this, the Company has brought to market and
plans to continue to bring to market lower cost replacement products. Although
the Company believes it is in a competitive position at present, the Company
will continue to take additional measures going forward to maintain its
competitiveness in the market place.
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 $5.9 million in fiscal 2000 compared to $12.6
million in fiscal 1999, or a decrease of 53.0%. Fiscal 1999 sales and marketing
expenses decreased $4.0 million, or 24%,
20
compared to $16.6 million in fiscal 1998. As a percentage of net sales, sales
and marketing expenses were 20.2%, 33.6%, and 32.2% in fiscal 2000, 1999, and
1998, respectively. The reduced fiscal 2000 expenditures, reflect tighter
controls over advertising, Co-operative advertising programs, and mail order
related expenditures, reduction of unprofitable channels, reduced personnel and
related costs, and the effect of lower revenue levels. The decrease in sales and
marketing expenses since fiscal 1998 was due primarily to decreases in personnel
and related costs, tradeshow participation, outside service related costs, which
were partially offset by increases in outside representatives, advertising and
product collateral related costs and a write-off of $0.7 million in prepaid
advertising credits.
The Company expects that its sales and marketing expenses will increase in
fiscal 2001 in absolute dollars, but should remain fairly flat as a percent of
total sales.
Research and Development
Research and development expenses decreased by 21.7% to $3.0 million in fiscal
2000, from $3.9 million in fiscal 1999. Research and development expenses were
$7.3 million in fiscal 1998. As a percentage of net sales, research and
development expenses were 10.4%, 10.4%, and 14.3%, in fiscal 2000, 1999, and
1998, respectively. The decrease in research and development expenses from
fiscal 1999 to fiscal 2000 was due to decreases in personnel related
expenditures as a result of lower staffing levels, and depreciation expense. The
decrease in research and development expenses from fiscal 1998 to fiscal 1999
was due to decreases in prototype materials, personnel, and outside consulting
services primarily related to the Company's strategic decision to leverage the
engineering expertise of certain of its key suppliers. The reduced spending in
these areas resulted from decreased product development activities for the
Company's proprietary 10/100 switch ASIC and reduced recruitment related
expenses, which were partially offset by the Company's write-off of certain idle
fixed assets related to its research and development activities.
The Company expects that spending on research and development in fiscal 2001
will increase in comparison to fiscal 2000 in absolute dollars, while the
Company will continue to leverage the engineering expertise of its strategic
partners.
General and Administrative
General and administrative expenses decreased to $1.6 million in fiscal 2000
from $2.3 million in fiscal 1999. General and administrative expenses were $3.6
million in fiscal 1998. As a percentage of net sales, general and administrative
expenses were 5.3%, 6.1%, and 7.0% in fiscal years 2000, 1999, and 1998,
respectively. The decrease in general and administrative expenses in absolute
dollars in fiscal 2000 is primarily related to reduced consulting, personnel and
outside service related expenditures. The decrease in general and administrative
expenses in absolute dollars in fiscal 1999 compared with 1998, was primarily
related to reduced consulting, legal, outside service related expenditures, and
personnel related costs.
The Company expects that general and administrative expenses will remain flat or
increase slightly in fiscal 2001 in absolute dollars and may increase slightly
as a percent of total sales.
21
Restructuring
During the third quarter of fiscal 1998, the Company restructured its operations
to re-establish the strategic direction of the Company and better align its
operating expenses with anticipated revenues. Although the Company has realized
the benefit of a reduced cost structure and other benefits from the
restructuring of operations, these benefits have been offset somewhat by reduced
product sales and margins.
The Company also recorded during the third quarter of fiscal 1998 a $400,000
reserve for personnel and related costs associated with a company-wide
restructuring plan. These costs included employee severance costs, benefits,
outplacement costs, termination costs, and employee assistance expenses related
to the realignment. The reduction in force in fiscal 1998 consisted of
approximately 40 employees, primarily from the sales and marketing departments.
The Company had utilized all of the restructuring reserve recorded in fiscal
1998 by October 2, 1999.
The Company's action plan included the release of proprietary ASIC-based
switches, development of retail channels, changes in the Company's financial
model, and realignment of its cost structure, designed to better position the
Company going forward and which the Company believes will leverage its
strengths.
Income Taxes
The Company recorded no provision for federal and state income taxes for fiscal
2000 due principally to a valuation allowance on deferred tax assets being
recorded and the Company's net operating loss carry forwards were sufficient to
offset any significant tax liability. The Company has recorded a full valuation
allowance on its deferred tax assets as sufficient uncertainty exists regarding
its recoverability. The Company's effective tax rate was 0.0% for fiscal 2000,
1999, and (20.6%) for fiscal 1998.
Factors Affecting Future Operating Results
The Company operates in a rapidly changing and growing industry, which is
characterized by vigorous competition from both established companies and
start-up companies. The market for the Company's products is extremely
competitive both as to price and capabilities. The Company's success depends in
part on its ability to enhance existing products and introduce new high
technology products. The Company must also bring its products to market at
competitive price levels. Unexpected changes in technological standards,
customer demand and pricing of competitive products could adversely affect the
Company's operating results if the Company is unable to respond effectively and
timely to such changes. The industry is also dependent to a large extent on
proprietary intellectual property rights. From time to time the Company is
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of patents, trademarks and other
intellectual property rights. Consequently, from time to time, the Company will
be required to prosecute or defend against alleged infringements of such rights.
The Company's success also depends to a significant extent upon the
contributions of key sales, marketing, engineering, manufacturing, and
administrative employees, and on the Company's ability to
22
attract and retain highly qualified personnel, who are in great demand. None of
the Company's key employees are subject to a non-competition agreement with the
Company. Unless vacancies are promptly filled, the loss of current key employees
or the Company's inability to attract and retain other qualified employees in
the future could have a material adverse effect on the Company's business,
financial condition and results of operations. The job market in the San
Francisco Bay Area is characterized by fierce competition, rapidly changing
salary structures, and a shortage of the workforce in general. As of the end of
the Company's fiscal year, unemployment in the Bay Area is approximately only
1.6%. These conditions could affect the Company's ability to retain and recruit
a sufficiently qualified workforce.
The Company's current manufacturing and sales structure is particularly subject
to various risks associated with international operations including currency
exchange rate fluctuations, changes in costs of labor and material, reliability
of sources of supply and general economic conditions in foreign countries.
Unexpected changes in foreign manufacturing or sources of supply, fluctuations
in monetary exchange rates and changes in the availability, capability or
pricing of foreign suppliers could adversely affect the Company's business,
financial condition and results of operations.
The 10/100 Mbps and 100 Mbps Ethernet technology (100BASE-T, or "Fast-Ethernet")
has become a standard networking topology in the networking and computer
industries. This standard has been adopted widely by end-user customers because
of its ability to increase the efficiency of LANs and because of its ease of
integration into existing 10BASE-T networks. Because of the importance of this
standard, the Company has focused its ongoing research and development
activities on introducing future products incorporating 100BASE-T technology.
The Company realizes the importance of bringing more 10/100BASE-T (10 Mbps)
switching and 100BASE-T switching to market in order to complement its existing
100BASE-T shared products. In addition, Gigabit Ethernet technology is
increasingly being adopted in the backbone of large enterprises, and educational
institutions. In that regard, the Company's future operating results may be
dependent on the market acceptance and the rate of adoption of these
technologies, as well as timely product release. There can be no assurance that
the market will accept and adopt this new technology or that the Company can
meet market demand in a timely manner.
The Company's success will depend in part on its ability to accurately forecast
its future sales due to the lead time required to order components and assemble
products. If the Company's product sales forecasts are below actual product
demand, there may be delays in fulfilling product orders; consequently, the
Company could lose current and future sales to competitors. Alternatively, if
the Company's product sales forecasts are above actual product demand, this may
result in excess orders of components or assembled products and a build up of
inventory that would adversely affect working capital.
The Company commits to expense levels, including manufacturing costs and
advertising and promotional programs, based in part on expectations of future
net sales levels. If future net sales levels in a particular quarter do not meet
the Company's expectations or the Company does not bring new products timely to
market, the Company may not be able to reduce or reallocate such expense levels
on a timely basis, which could adversely affect the Company's operating results.
There can be no assurance that the Company will be able to achieve profitability
on a quarterly or annual basis in the future.
The Company's target markets include end-users, value-added resellers, systems
integrators, retailers, and OEMs. Due to the relative size of the customers in
some of these markets, particularly the OEM market, sales in any one market
could fluctuate dramatically on a quarter to quarter basis. Fluctuations in the
23
OEM market could materially adversely affect the Company's business, financial
condition and results of operations.
In summary, the Company's net sales and operating results in any particular
quarter may fluctuate as a result of a number of factors, including competition
in the markets for the Company's products, delays in new product introductions
by the Company, market acceptance of new products incorporating 100BASE-T by the
Company or its competitors, changes in product pricing, material costs or
customer discounts, the size and timing of customer orders, distributor and
end-user purchasing cycles, variations in the mix of product sales,
manufacturing delays or disruptions in sources of supply, and economic
conditions and seasonal purchasing patterns specific to the computer and
networking industries as discussed above. The Company's future operating results
will depend, to a large extent, on its ability to anticipate and successfully
react to these and other factors. Failure to anticipate and successfully react
to these and other factors could adversely affect the Company's business,
financial condition and results of operations.
Successfully addressing the factors discussed above is subject to various risks
discussed in this report, as well as other factors that generally affect the
market for stocks of high technology companies. These factors could affect the
price of the Company's stock and could cause such stock prices to fluctuate over
relatively short periods of time.
Liquidity and Capital Resources
During fiscal 2000, the Company's operating activities provided cash of $0.1
million. During fiscal 1999 and 1998, the Company's operating activities
utilized $3.9 million and $4.0 million, respectively.
During fiscal 2000, net cash provided by operating activities resulted primarily
from the net income of $0.4 million and a reduction in accounts receivable of
$1.2 million. Such cash provided was partially offset by an increase in
inventory of $2.0 million, and reductions in accounts payable and shareholder
payable of $1.3 million and $0.6 million, respectively. Depreciation and
amortization and provisions for losses of inventory totaled $2.6 million. Days
of sales outstanding in accounts receivable, net, decreased to 30 days at the
end of fiscal 2000 compared to 45 days at the end of fiscal 1999.
Net cash provided by or used in investing activities in fiscal 2000 and fiscal
1999 was insignificant. In fiscal 2000, 1999, and 1998 respectively, purchases
of property and equipment totaled $0.1, $0.1, and $0.7 million, respectively. In
fiscal 2000, net cash provided by financing activities amounted to $1.6 million,
due primarily to private placement equity amounting to $1.5 million. In fiscal
1999, cash provided by, or used in financing activities was insignificant.
During fiscal 1998, the Company generated cash from financing activities of
approximately $0.4 million from the exercise of employee stock options and the
Company's employee stock purchase plan. On September 23, 1998, the Company's
Board of Directors approved a stock repurchase program whereby up to 500,000 of
the Company's outstanding common stock could be repurchased in the open market
from time to time. The Company did not repurchase shares during fiscal 2000. As
a result of such repurchase program the Company repurchased 51,500 shares for
$89,000 in fiscal 1999 and 15,500 shares for $28,000 in fiscal 1998.
At September 30, 2000, the Company had cash, cash equivalents and short-term
investments of $6.4 million as compared to $4.8 million at October 2, 1999.
Working capital was $3.2 million at September
24
30, 2000, compared to $0.8 million at October 2, 1999. The Company has a line of
credit that provides for maximum borrowings of $5.0 million, primarily limited
to a certain percentage of eligible accounts receivable and eligible inventory
and bears interest at the bank's prime rate plus 2.0%-2.75% dependent upon the
Company's performance during the year. As of December 6, 2000, the Company had
renewed this line of credit, which will expire on December 6, 2001. The
Company's ability to borrow under this line is subject to compliance with
covenants related to financial performance and condition.
On September 30, 1999, the Company's stock ceased to be traded on the NASDAQ
National Market System and was moved to the Over-The-Counter (OTC) Bulletin
Board. During the fiscal year 2000, the Company successfully completed a $1.5
million private placement of 500,000 shares of common stock, however the
Company's access to further equity finance could be effected by the level of the
Company's share price and the Company's listing status.
The Company operates in a highly competitive market characterized by rapidly
changing technology, together with competitors and distributors that have
significantly greater financial resources than Asante. The Company intends to
incur significant expenses to develop and promote new products as well as to
support existing product sales. Failure to generate sufficient revenues from new
and existing products, raise additional capital or reduce discretionary
expenditures would have a material adverse effect on the Company's ability to
continue as a going concern and achieve its intended business objectives.
The Company believes that its current cash and cash equivalents, together with
cash expected to be generated by operations and existing credit facilities, will
be sufficient to fund its operations and meet capital requirements through
fiscal 2001. However, the Company has incurred substantial operating losses in
the past and may seek additional financing. If additional funds are required
there can be no assurance that such funds will be available at all or on terms
favorable to the Company and its stockholders.
Year 2000 Issue
The Company established a formal program with a project team to address this
issue and achieve readiness. The Company believed it had no material issues
related to the year 2000 issue, and did not experience any material adverse
effect due to the year 2000 issue.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statements of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the derivative must
be highly effective in achieving offsetting changes in fair value or cash flows
of the hedged items during the term of the hedge. The Company will adopt SFAS
No. 133 in fiscal year 2001. Although the Company can not determine the impact,
if any, that the adoption of SFAS No. 133 will have on its consolidated
financial statements, the Company believes that the effect on its financial
statements will be immaterial.
25
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the fourth quarter of
the fiscal year beginning after December 31, 2000. We believe that adopting SAB
101 will not have a material impact on our financial position and results of
operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions involving
Stock Compensation an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 was effective July 1, 2000, but certain other provisions cover specific
events that occur after either December 15, 1998, or January 12, 2000. The
adoption of the provisions of FIN 44 did not have a material effect on the
financial position, or results of the Company.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of September 30, 2000, the Company's cash and investment
portfolio comprised primarily money market securities, and did not include
fixed-income securities. Due to the short-term nature of the Company's
investment portfolio, an immediate 10% increase in interest rates would not have
a material effect on the fair market value of the Company's portfolio. Since the
Company has the ability to liquidate this portfolio, it does not expect its
operating results or cash flows to be materially 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 and purchases 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.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Financial Statements:
Report of Independent Accountants 28
Balance Sheets at September 30, 2000, and October 2, 1999 29
Statements of Operations for the years ended September 30, 2000,
October 2, 1999, and October 3, 1998 30
Statements of Stockholders' Equity for the years ended
September 30, 2000, October 2, 1999, and October 3, 1998 31
Statements of Cash Flows for the years ended September 30, 2000,
October 2, 1999, and October 3, 1998 32
Notes to Financial Statements 33
Quarterly Results of Operations (unaudited) 46
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts and Reserves 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.
27
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 30, 2000 and October 2, 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended September 30, 2000 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 present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statements schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statements 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
October 30, 2000, except for note 10,
as to which the date is December 1, 2000
28
ASANTE TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except share
and per share amounts)
September 30, October 2,
2000 1999
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 6,433 $ 4,808
Accounts receivable, net of allowance for doubtful accounts,
rebates and sales returns of $4,193 and $5,771 in 2000
and 1999 respectively 3,233 4,414
Inventory 2,605 2,663
Prepaid expenses and other current assets 523 529
-------- --------
Total current assets 12,794 12,414
Property and equipment, net 261 713
Other assets 167 218
-------- --------
Total assets $ 13,222 $ 13,345
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,776 $ 5,027
Accrued expenses 5,437 5,705
Payable to stockholder 330 931
-------- --------
Total current liabilities 9,543 11,663
-------- --------
Commitments and contingencies (Notes 8 and 9)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued or outstanding in 2000 and 1999 --
Common stock, $0.001 par value; 25,000,000 shares authorized;
9,912,463 and 9,301,272 shares issued and outstanding in
2000 and 1999 respectively 10 9
Additional paid-in capital 28,360 26,873
Treasury Stock -- (117)
Accumulated deficit (24,691) (25,083)
-------- --------
Total stockholders' equity 3,679 1,682
-------- --------
Total liabilities and stockholders' equity $ 13,222 $ 13,345
======== ========
The accompanying notes are an integral part of these financial statements.
29
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended
---------------------------------------------------
September 30, October 2, October 3,
2000 1999 1998
-------- -------- --------
Net sales $ 29,280 $ 37,488 $ 51,433
Cost of sales 18,555 32,557 35,959
-------- -------- --------
Gross profit 10,725 4,931 15,474
-------- -------- --------
Operating expenses:
Sales and marketing 5,930 12,609 16,587
Research and development 3,042 3,883 7,346
General and administrative 1,553 2,302 3,591
Restructuring -- -- 400
-------- -------- --------
Total operating expenses 10,525 18,794 27,924
-------- -------- --------
Income (loss) from operations 200 (13,863) (12,450)
Interest and other income (expense), net 192 (298) 477
-------- -------- --------
Income (loss) before income taxes 392 (14,161) (11,973)
Provision (benefit) for income taxes -- -- 2,462
-------- -------- --------
Net income (loss) $ 392 $(14,161) $(14,435)
======== ======== ========
Basic income (loss) per share $ 0.04 $ (1.53) $ (1.57)
======== ======== ========
Diluted income (loss) per share $ 0.04 $ (1.53) $ (1.57)
======== ======== ========
Shares used in per
share calculation
Basic 9,620 9,282 9,206
======== ======== ========
Diluted 10,014 9,282 9,206
======== ======== ========
The accompanying notes are an integral part of these financial statements.
30
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Retained
Common Stock Additional Earnings / Total
------------------------ Paid-in Treasury (Accumulated Stockholders'
Shares Amount Capital Stock Deficit) Equity
---------- ---------- ---------- ---------- ---------- ----------
Balances as of September 27, 1997 9,121,601 $ 9 $ 26,352 $ -- $ 3,513 $ 29,874
Common stock issued under stock plans 164,292 -- 430 430
Tax benefit from employee stock
transactions 9 9
Repurchase of common stock (15,500) -- (28) (28)
Net loss (14,435) (14,435)
---------- ---------- ---------- ---------- ---------- ----------
Balances as of October 3, 1998 9,270,393 9 26,791 (28) (10,922) 15,850
Common stock issued under stock plans 82,379 -- 82 82
Repurchase of common stock (51,500) -- (89) (89)
Net loss (14,161) (14,161)
---------- ---------- ---------- ---------- ---------- ----------
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
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
31
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Year ended
----------------------------------------
September 30, October 2, October 3,
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 392 $(14,161) $(14,435)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 563 986 1,417
Provision for doubtful accounts receivable 19 341 528
Loss due to write-off of idle assets 4 425 --
Deferred income taxes -- 3,606
Changes in operating assets and liabilities:
Accounts receivable 1,162 3,573 (543)
Inventory 58 5,010 4,407
Prepaid expenses and other current assets 6 2,755 (2,811)
Accounts payable (1,251) (2,687) 2,756
Accrued expenses and other (268) 906 (59)
Payable to stockholder (601) (1,065) 1,119
-------- -------- --------
Net cash provided by (used in) operating activities 84 (3,917) (4,015)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (115) (120) (653)
Other 51 -- 178
-------- -------- --------
Net cash used in investing activities (64) (120) (475)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 1,605 82 439
Repurchase of common stock -- (89) (28)
-------- -------- --------
Net cash provided (used in) by financing activities 1,605 (7) 411
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,625 (4,044) (4,079)
Cash and cash equivalents at beginning of year 4,808 8,852 12,931
-------- -------- --------
Cash and cash equivalents at end of year $ 6,433 $ 4,808 $ 8,852
======== ======== ========
The accompanying notes are an integral part of these financial statements.
32
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) 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.
In fiscal years 1999 and 1998, the Company incurred substantial losses and
negative cash flows from operations and as of September 30, 2000, the Company
had an accumulated deficit of $24,691,000. For the year ended September 30, 2000
the Company recorded income from operations of $200,000 and cash inflows from
operating activities of $84,000.
On September 30, 1999, the Company's stock ceased to be traded on the NASDAQ
National Market System and was moved to the Over-The Counter (OTC) Bulletin
Board. During the fiscal year 2000, the Company successfully completed a $1.5
million private placement, however the Company's access to further equity
finance could be effected by the level of the Company's share price and the
Company's listing status.
The Company operates in a highly competitive market characterized by rapidly
changing technology, together with competitors and distributors that have
significantly greater financial resources than Asante. The Company intends to
incur significant expenses to develop and promote new products as well as to
support existing product sales. Failure to generate sufficient revenues from new
and existing products, raise additional capital or reduce discretionary
expenditures would have a material adverse effect on the Company's ability to
continue as a going concern and achieve its intended business objectives.
The Company historically has been heavily associated with Apple and therefore
had focused its business on selling products into the Apple after-market. While
the Company currently designs its products to work on all computer platforms and
does not rely on new Apple product introductions, a large portion of its sales
in the near term are expected to be related to Apple products. Any material
decrease in sales of Macintoshes, iMACs, and Power PCs, further incorporation by
Apple of networking connectivity into their products, or additional developments
adversely affecting Apple'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.
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
32
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 upon shipment, and
reserves are provided for estimated returns. 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 a reserve 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 or
purchase periods of greater than 90 days to be short-term investments. At
September 30, 2000 and October 2, 1999, 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 30, 2000 and October 2, 1999, four customers accounted for 62%, and
63%, respectively, of the accounts receivable balance. In fiscal 2000 and 1999,
one customer accounted for 48% and 42%, respectively, of the Company's sales. In
fiscal year 1998, sales to the Company's largest customer accounted for 33% 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.
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.
Loss due to write-off of idle assets
In fiscal 1999 the Company identified certain assets used for research and
development activities that were no longer being used and the Company had no
plans to use the assets in the foreseeable future. Accordingly, the assets were
removed from service and are currently held for resale. The Company recognized a
loss due to write-off of these idle assets of $425,000, which was charged to
research and development expense, being the previous classification of
depreciation expense arising from these assets. The loss reflects the difference
between the carrying value and the expected net proceeds from sale. The
34
Company estimated the net proceeds based on the market value of similar used
equipment, less the cost of disposal. In the event that a buyer can not be found
the equipment will be scrapped. The Company does not expect the net proceeds
from sale or the scrap value of the assets to be significant.
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; accordingly, 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 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).
Accounting for certain transactions involving stock compensation
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions involving
Stock Compensation an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 was effective July 1, 2000, but certain other provisions cover specific
events that occur after either December 15, 1998, or January 12, 2000. The
adoption of the provisions of FIN 44 did not have a material effect on the
financial position, or results of the Company.
35
Fair value of financial instruments
The carrying amounts for certain of the Company's financial instruments, 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
Effective October 2, 1999, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting comprehensive income and its components in its financial statements.
The Company had no items of other comprehensive income during any of the periods
presented.
Reclassifications
Certain previously reported amounts in the fiscal 1999 and 1998 statements of
operations have been reclassified to conform to the 2000 presentation.
Segment information
In accordance with 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:
2000 1999 1998
---- ---- ----
United States 77% 76% 78%
Europe 15 18 14
Other 8 6 8
--- --- ---
100% 100% 100%
=== === ===
Substantially all of the Company's assets are located in the United States.
Recently issued accounting pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statements of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the derivative must
be highly effective in achieving offsetting changes in fair value or cash flows
of the hedged items during the term of the hedge. The Company will adopt SFAS
No. 133 in fiscal year 2001. Although the Company can not determine the impact,
if any, that the adoption of SFAS No. 133 will have on its financial statements,
the Company believes that the effect on its financial statements will be
immaterial.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The
36
effective date of this pronouncement is the fourth quarter of the fiscal year
beginning after Q1 2001. We believe that adopting SAB 101 will not have a
material impact on our financial position and results of operations.
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):
2000 1999 1998
-------- -------- --------
Net income (loss) $ 392 $(14,161) $(14,435)
======== ======== ========
Weighted average common stock outstanding (basic) 9,620 9,282 9,206
Effect of dilutive warrants and options 394 -- --
-------- -------- --------
Weighted average common stock outstanding (diluted) 10,014 9,282 9,206
======== ======== ========
Net income (loss) per share:
Basic $ 0.04 $ (1.53) $ (1.57)
======== ======== ========
Diluted $ 0.04 $ (1.53) $ (1.57)
======== ======== ========
Diluted net loss per share for the years ended October 2, 1999 and October 3,
1998, excludes all dilutive potential common shares as their effect is
antidilutive. At October 2, 1999, and October 3, 1998, options and warrants
outstanding of 1,762,512, and 1,584,539, respectively, were excluded since their
effect was antidilutive.
37
Note 3. Balance Sheet Components
2000 1999
------- -------
(in thousands)
Inventory:
Raw materials and component parts $ 449 $ 177
Work-in-process 154 173
Finished goods 2,002 2,313
------- -------
$ 2,605 $ 2,663
======= =======
Property and equipment:
Computers and R&D equipment $ 6,183 $ 6,246
Furniture and Fixtures 1,492 1,480
------- -------
7,675 7,726
Accumulated depreciation (7,414) (7,013)
------- -------
$ 261 $ 713
======= =======
Accrued expenses:
Payroll-related expenses $ 1,079 $ 1,227
Sales promotion expenses 2,205 2,059
Legal and professional fees 811 997
Warranty 570 572
Other 772 850
------- -------
$ 5,437 $ 5,705
======= =======
Note 4. Restructuring and Other Costs
During the third quarter of fiscal 1998, the Company restructured its operations
to re-establish the strategic direction of the Company and better align its
operating expenses with anticipated revenues. The Company's restructuring plan
included the realignment of cost structure designed to better position the
Company going forward.
The Company also recorded during the third quarter of fiscal 1998 a $400,000
reserve for personnel and related costs associated with a company-wide
restructuring plan. These costs include employee severance costs, benefits,
outplacement costs, termination costs, and employee assistance expenses related
to the realignment. The reduction in force consisted of a reduction of
approximately 40 employees, primarily from the sales and marketing departments.
The Company had utilized all of the restructuring reserves recorded in fiscal
1998 by October 2, 1999.
In addition, the Company recorded in fiscal 1998 charges of $550,000 for
inventory write-downs related to the discontinuation of several of the Company's
adapter card and transceiver products and $575,000 for write-downs related to
property and equipment and idle facilities costs. These charges were recorded in
cost of sales and general and administrative expenses, respectively.
38
Note 5. 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 12.7% of the Company's Common
Stock as of September 30, 2000. Under the OSE Agreement, the Company purchases
from and sells to OSE certain component parts, at cost. The Company is obligated
to purchase goods only to the extent it has signed firm purchase commitments
with OSE. At September 30, 2000, the Company had firm purchase commitments under
the OSE Agreement of approximately $0.5 million.
For fiscal 2000, 1999, and 1998 the Company sold, at cost, approximately $0.2
million, $0.8 million, and $2.5 million, respectively, of component parts to OSE
and purchased $3.7 million, $8.4 million, and $8.2 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 as a private placement of funds from Delta Networks, amounting
to $500,000, and from Delta International Holdings Ltd, amounting to $1,000,000.
During fiscal year 2000, the Company purchased approximately $7.9 million of
goods from Delta and sold approximately $0.4 million at cost to Delta. At
September 30, 2000 the Company has approximately $2.3 million on its accounts
payable to Delta and approximately $0.2 million on its receivable from Delta.
Note 6. Income Taxes
The provision for income taxes comprises the following (in thousands):
2000 1999 1998
--------- ------- -------
Current:
Federal $ -- $ -- $(1,008)
State -- -- (136)
--------- ------- -------
Total current -- -- (1,144)
--------- ------- -------
Deferred:
Federal -- -- 2,689
State -- -- 917
--------- ------- -------
Total Deferred -- -- 3,606
--------- ------- -------
$ -- $ -- $ 2,462
========= ======= =======
39
Deferred tax assets, net, comprise the following at September 30, 2000 and
October 2, 1999 (in thousands):
2000 1999
-------- --------
Deferred tax assets :
Net operating losses $ 5,346 $ 5,554
Research and development credits 2,230 2,131
Receivable- and sales-related reserves 2,085 2,277
Inventory-related reserves 2,232 2,180
Compensation accruals 228 206
Depreciation 204 109
Other reserves and accruals 1,500 1,478
-------- --------
Total deferred tax assets 13,825 13,935
Valuation allowance (13,825) (13,935)
-------- --------
$ -- $ --
======== ========
The Company believes that sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance
was taken as of September 30, 2000.
At September 30, 2000, the Company had federal and state net operating loss
carryforwards of approximately $14.4 million and approximately $9.1 million,
respectively, available to offset future taxable income which expire beginning
in 2018 and 2003, respectively. In addition, as of September 30, 2000, the
Company had approximately $1.4 million and approximately $0.8 million of federal
and state research and development credits, respectively. The federal credits
will expire beginning in 2012 if not utilized.
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period.
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):
2000 1999 1998
------- ------- -------
Tax expense/(benefit) at U.S. statutory rate $ 14 $(4,815) $(4,071)
State taxes, net of federal benefits -- (776) (537)
Research and development credits -- (25) (1,551)
Other 96 366 (64)
Valuation allowance (110) 5,250 8,685
------- ------- -------
$ -- $ -- $ 2,462
======= ======= =======
40
Note 7. Stockholders' Equity
Preferred Stock
There are 2,000,000 shares of Preferred Stock authorized by the Board of
Directors. No shares of Preferred Stock have been outstanding since the
Company's public offering in December 1993.
Stock Repurchase Program
In September 1998, the Company's Board of Directors approved a stock repurchase
program whereby up to 500,000 shares of the Company's common stock may be
purchased in the open market from time to time. Pursuant to this program, the
Company had repurchased 67,000 shares of its common stock for $117,200 as of
October 2, 1999 and 15,500 shares of its common stock for $28,400 as of October
3, 1998.
As of September 30, 2000, the Company has reissued 66,850 of the Treasury shares
to satisfy its Employee Stock Purchase Plan (ESPP) activities.
Stock Based Compensation Plans
As of September 30, 2000, the Company had five stock-based compensation plans
that are described below.
The 1990 Stock Option Plan allows for the issuance of options to Company
employees and consultants to purchase a maximum of 4,597,333 shares of common
stock. This plan expired as of May 24, 2000, and has been temporarily replaced
by the 2000 Nonstatutory 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 shall be issued at no less than fair market value 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 issued are granted at prices of 100% of the fair
market value of the common stock at the date of grant with expirations of ten
years from the date of grant. Initial options granted 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 will
terminate three months after such Optionee's termination of all service with the
Company and its affiliates.
41
On November 16, 1998, the Board of Directors approved a repricing of its then
outstanding options issued pursuant to the 1990 Stock Option Plan and the Key
Executive Option Plan. The repricing includes a new four-year vesting schedule
commencing on November 23, 1998 for those who elect to reprice. Such options
were repriced to the closing price on November 20, 1998.
Activity under the 1990 Stock Option Plan, 2000 Nonstatutory Stock Option Plan,
Directors' Stock Option Plan and the Key Executive Option Plan are summarized as
follows:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
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 1,762,512 $ 4.93 1,584,539 $ 4.93 1,919,607 $ 5.72
Granted 257,866 $ 1.45 1,663,005 $ 1.45 743,010 $ 3.03
Exercised (29,643) -- -- -- (27,978) $ 4.61
Canceled (413,764) $ 4.48 (1,485,032) $ 4.48 (1,050,100) $ 5.08
---------- ---------- ----------
Ending Balance 1,576,971 $ 2.03 1,762,512 $ 2.03 1,584,539 $ 4.93
========== ========== ==========
The following table summarizes information about stock options outstanding at
September 30, 2000:
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
--------------- ----------- ------------- ----- ----------- -----
$0.8750 - $0.8750 273,166 8.79 $ 0.8750 182,743 $ 0.8750
$0.9375 - $0.9375 80,125 8.82 $ 0.9375 25,893 $ 0.9375
$1.0320 - $1.0320 600,000 8.84 $ 1.0320 249,999 $ 1.0320
$1.6250 - $1.9375 199,772 9.04 $ 1.8933 44,167 $ 1.8787
$1.9380 - $2.3750 50,950 8.04 $ 2.3029 19,913 $ 2.3499
$2.5000 - $2.5000 160,482 6.88 $ 2.5000 104,115 $ 2.5000
$3.8750 - $6.3125 164,096 5.13 $ 4.9791 155,440 $ 4.9625
$6.5000 - $6.5000 2,000 5.78 $ 6.5000 2,000 $ 6.5000
$6.8750 - $6.8750 6,200 6.07 $ 6.8750 6,090 $ 6.8750
$7.5000 - $7.5000 40,000 2.94 $ 7.5000 40,000 $ 7.5000
--------- -------
$0.8750 - $7.5000 1,576,791 8.09 $ 1.9043 830,360 $ 2.3586
========= =======
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions used for
grants during fiscal 2000, 1999, and 1998, risk free interest rates ranging from
4.6% to 6.79% respective of grant date; expected average volatility of 65%, 57%,
and 67%, respectively; an expected option life of four years, and no expected
dividends. The
42
weighted average fair value of stock options granted under the plans for fiscal
2000, 1999, and 1998 was $1.51, $0.73, and $1.68, 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 100,000 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.
Sales under the Purchase Plan in fiscal 2000, 1999, and 1998 were 81,548,
82,380, and 136,314 shares of common stock, respectively, at an average price of
$0.99, $1.00, and $2.27, respectively. As of September 30, 2000, the Company has
reissued 66,850 of the Treasury shares to satisfy its Employee Stock Purchase
Plan (ESPP) activities during fiscal 2000. On September 30, 2000, 51,660 shares
of common stock were available for future purchase.
The fair value of the employee's purchase rights under SFAS No. 123, which was
estimated using the Black-Scholes model with the following assumptions used for
grants during fiscal 2000, 1999, and 1998: risk free interest rates ranging from
4.55% to 6.73%, respective of commencement date of the offering period, expected
volatility of 65%, 57%, and 60%, respectively, an expected option life of six
months for both years, and no expected dividends. The weighted average fair
value of stock purchased under the Purchase Plan for fiscal 2000, 1999, and 1998
was $0.99, $1.00, and $2.27, respectively.
If compensation expense under these plans had been determined pursuant to SFAS
No. 123, the Company's net income (loss) and net income (loss) per share for
fiscal 2000, 1999, and 1998 would have been as follows (in thousands, except per
share amounts):
2000 1999 1998
------------ ----------- ----------
Net income (loss):
As reported $ 392 $ (14,161) $ (14,435)
Pro forma $ 43 $ (14,614) $ (15,433)
Net income (loss) per share
As reported
Basic $ 0.04 $ (1.53) $ (1.57)
Diluted $ 0.04 $ (1.53) $ (1.57)
Pro forma
Basic $ 0.00 $ (1.57) $ (1.68)
Diluted $ 0.00 $ (1.57) $ (1.68)
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.
43
Note 8. Commitments and Contingencies
The Company has an operating lease for its main facility that expires on August
31, 2004. Various other leases for sales offices expire through 2004. Rent
expense under such operating leases aggregated approximately $705,000, $970,800
and 1,012,000 for fiscal 2000, 1999, and 1998, respectively. Certain leases
require the Company to pay a portion of facility operating expenses.
Approximate future minimum lease payments under these leases at September 30,
2000 are as follows (in thousands):
Year
----
2001 $ 686
2002 705
2003 729
2004 748
---------
$ 2,868
=========
The Company recorded income of approximately $150,800, and $226,200 during
fiscal 1999, and 1998, respectively, under sublease agreements, the last of
which expired in June 1999. As of September 30, 2000, none of the Company's
existing facilities are being subleased.
Note 9. Litigation
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
On September 13, 1996, a complaint was filed by Datapoint Corporation against
the Company and six other companies individually and as purported
representatives of a defendant class of all manufacturers, vendors and users of
Fast Ethernet-compliant, dual protocol local-area network products, for alleged
infringement of United States letters Patent Nos. 5,077,732 and 5,008,879. The
complaint sought unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company filed a response to the complaint denying
liability. The case was consolidated, for purposes of claim interpretation only,
with similar cases filed against several other defendants, which include, among
others, Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks, and Sun
Microsystems. On April 16, 1998, the Special Master appointed by the court
issued a report agreeing in most material respects, with the defendants'
interpretation of the alleged patent claims. Subsequently, and by order dated
November 23, 1998, the District Court adopted without modification the findings
of the Special Master and the recommendations of the Magistrate Judge regarding
claim interpretation of the patents-in-suit. The Court ordered dismissal of the
case and entered judgment in favor of the defendants. Plaintiff has filed an
appeal of the judgment to the Federal Circuit Court of Appeal, which is now
pending. A ruling on the appeal is not expected for several months.
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
44
Inc. ("UL"). It is the Company's position that the alleged improper use was
simply a mistake or error. The Company may obtain the return of the inventory
through settlement negotiations with either the United States Customs or United
States Attorney's Office, obtaining permission from UL to use the certification
marks, or being successful in trial proceedings. To contest the seizure, the
Company determined to seek a review with the United States Attorney's Office and
filed a claim for the inventory. It is now incumbent upon the United States
Attorney's Office to file in court seeking forfeiture of the inventory and allow
the Company, as claimant, to challenge such proceeding. The Company also expects
that the United States Customs may issue a penalty separate from the seizure
under 19 U.S.C. section 1526(f), which provides for a penalty ranging in amount
from the retail value of the seized inventory had the inventory been UL
approved, to twice the retail value. The Company asserts this is a first time
offense. For a first time offense, the United States Customs may mitigate the
penalties when challenged administratively, with such mitigation being as low as
10% of the value of the inventory. The Company intends to contest any penalty
action through administrative and/or judicial procedures. On April 28, 2000, the
Company submitted a settlement proposal to the United States Attorney's Office
offering settlement to the case. The Company has not yet received a reply to its
request.
Note 10. Subsequent Event
In October, the line of credit which expired on October 26, 2000, was extended
pending negotiation of a new line. As of December 1, 2000, the line of credit
was renewed.
45
Unaudited Quarterly Results of Operations (in thousands except net income (loss)
per share):
Fiscal 2000 Quarter Ended
- --------------------------------------------------------------------------------
September 30 July 1 April 1 January 1
------------ ------ ------- ---------
Net sales $ 7,539 $ 6,688 $ 5,987 $ 9,065
Gross profit $ 2,483 $ 2,463 $ 2,247 $ 3,531
Net loss $ 412 $ (60) $ (149) $ 189
Net loss per share $ 0.04 $ (0.00) $ (0.02) $ 0.02
Fiscal 1999 Quarter Ended
- --------------------------------------------------------------------------------
October 2 July 3 April 3 January 2
--------- ------ ------- ---------
Net sales $ 9,102 $ 7,914 $ 8,867 $ 11,605
Gross profit $ 3,108 $ (629) $ 1,000 $ 1,452
Net loss $ (432) $ (4,641) $ (4,670) $ (4,418)
Net loss per share $ (.05) $ (.50) $ (.50) $ (.48)
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 2000 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 30,
2000.
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. 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 27 of this Form 10-K.
(2) Financial Statement Schedules - See Index to Financial
Statements and Financial Statement Schedule at page 27 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 30,
2000.
(c) See Exhibit Index at page 49 of this Form 10-K.
(d) See Index to Financial Statements, Financial Statements and
Financial Statement Schedule at page 27 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)
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
* The item listed is a compensatory plan.
49
(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.
December 22, 2000
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
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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 December 22, 2000
- -------------------------------------- (Principal Executive Officer) and Director
(Wilson Wong)
/s/ ANTHONY CONTOS Vice President of Finance and Administration December 22, 2000
- -------------------------------------- (Principal Finance and Accounting Officer)
(Anthony Contos)
/s/ MICHAEL KAUFMAN (Director) December 22, 2000
- --------------------------------------
(Michael Kaufman)
/s/ EDMOND TSENG (Director) December 22, 2000
- --------------------------------------
(Edmond Tseng)
/s/ JEFF YUAN KAI LIN (Director) December 22, 2000
- --------------------------------------
(Jeff Yuan Kai Lin)
52
SCHEDULE II
ASANTE TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charge to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ----------- --------- -------- ---------- ------
Year ended October 3, 1998:
Allowance for doubtful accounts,
price protection and distributor rebates $ 3,317 $ 3,408 $(3,740) $ 2,985
Allowance for sales returns 1,405 (17) (229) 1,159
------- ------- ------- -------
$ 4,722 $ 3,391 $(3,969) $ 4,144
======= ======= ======= =======
Year ended October 2, 1999:
Allowance for doubtful accounts,
price protection and distributor rebates $ 2,985 $ 3,128 $(1,506) $ 4,607
Allowance for sales returns 1,159 927 (922) 1,164
------- ------- ------- -------
$ 4,144 $ 4,055 $(2,428) $ 5,771
======= ======= ======= =======
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
======= ======= ======= =======
53