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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 29, 2001
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
30, 2001, as reported on the OTC (Over-the-Counter) Bulletin Board, was
approximately $4,001,272. 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 30, 2001, the Registrant had 10,003,181 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the 2001
Annual Meeting of Stockholders to be held on February 21, 2002 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 15
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
EXECUTIVE OFFICERS OF THE COMPANY 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 18
ITEM 6. SELECTED FINANCIAL DATA 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 19
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 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 48
ITEM 11. EXECUTIVE COMPENSATION 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 49
SIGNATURES 52
Asante, FriendleyNet, IntraCore, IntraStack, IntraSwitch, NetStacker,
AsanteTalk, AsantePrint, FriendlyStack, AsanteFAST, GigaNix, and OpenView are
registered trademarks of Asante Technologies, Inc. Other product and brand names
may be trademarks of registered trademarks of their respective owners.
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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),
however, Gigabit Ethernet (an Ethernet technology that raises transmission speed
to 1 Gbps) has been increasingly adopted in the industry due to higher bandwidth
requirements needed in the network brought about by the standardization of
10/100 Fast Ethernet at the user level, and by the convergence of voice, data,
and video traffic usage across the same network infrastructure.
In fiscal 2001, the Company continued to focus its products and services on
providing high-speed local area network and Internet access solutions. The
Company sells to distributors and resellers who serve three primary customer
markets: educational, digital design, and small business markets or Small
Office/Home Office (SOHO). Additionally, in fiscal 2001, the Company began to
focus substantial efforts in the Multiple Tenant Unit/Multiple Dwelling Unit
(MTU/MDU) market, a rapidly emerging, high growth market even during the current
economic recession. This market segment may be reached through a combination of
partnerships, direct sales, and specialized value added resellers (VAR's).
During fiscal 2001, the high-tech industry, and in particular the networking
sector, experienced a significant slowdown in sales. This slowdown in sales was
partially caused by the failure of a significant number of large service
providers, who had been responsible for the purchase of a major amount of
mid-range switches, and large scale network switches and routers, broadband
routers and modems. Additionally, a large portion of the Internet based
companies have gone out of business causing a further decrease of purchases of
network systems products and services. This market-wide reduction in demand had
several effects including excess new and used inventories in the market, excess
inventories at global manufacturers, and reduced demand for semi-conductors and
electronic components causing component prices to drop significantly and certain
manufacturers to sell their products at extremely low margins in an attempt to
reduce inventory levels and increase inventory turnovers.
According to Business Week, revenues in the high tech sector decreased
approximately 20% in 2001. It has also been reported that networking sector
revenues decreased approximately 30% on average in 2001. Slowdown in revenues
had global effects on corporate spending and has significantly affected both
larger and smaller enterprises. As such, the economy has found itself in its
first recession in more than eleven years.
However, there are opportunities in the networking market even in a recession.
The demand for Storage Area Network product appears positive, as does the global
Metropolitan network and MTU/MDU market. The emergence and increasing adoption
of broadband technologies will continue to create demand for specific products
in these markets.
As the Internet and market for networking products continues to evolve and grow,
several trends will create significant business opportunities for the Company,
which is in a good position to take advantage, these include:
o Increasing demand to receive digital content (information, graphics, video,
music, voice);
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o Rapid acceptance and deployment of high-speed local area networks;
o Increasing demand for broadband (high speed / high bandwidth) Internet
access for small offices, home businesses, shared business complexes,
schools, consumers, and
o Integration of high speed networks using Ethernet into many existing
technologies.
The increasing availability of streaming audio and video and other digital media
has driven demand in the industry towards formats with substantially larger file
sizes requiring much larger storage requirements. 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. This continued demand at the
business and home consumer level continues to drive demand for high-speed access
to the Internet.
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 the trade publication Kinetic Strategies,
broadband subscribers now exceed 9.3 million, and household penetration is 8.2%
in the US. Additionally, according to Dataquest, residential gateway access in
the US is expected to grow to 28 million subscribers by 2004, and a report by
Cahner's In-Stat stated that residential gateways with integrated voice, video
and data services are expected to grow from $100 million is fiscal 2000 to $5
billion in 2005. 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. Even in the current economic climate, the
number of users and the use of digital voice, video, music and graphics has
continued to increase due to affordable higher speed processors, the cost
effectiveness of Fast Ethernet (10/100, or 100 Mbps) networking, the emergence
of affordable Gigabit Ethernet products and the standardization of the Internet
as a form of communication for businesses and consumers.
The Company's strategy is to capitalize on these trends with a comprehensive
product and service portfolio encompassing innovative technologies, enhanced
strategic sales channels, and strategic partnerships. While the current economic
climate and extreme competitiveness of the SOHO market remains, the Company is
penetrating certain horizontal markets with the Company's IntraCore products,
specifically the MTU/MDU and education markets.
Innovative technologies.
In fiscal 2001, the Company continued to invest in multi-service networks to
support converged, high-speed data, voice and video networks. The Company also
introduced a wide range of Gigabit Ethernet products for our high-end IntraCore
and workgroup-oriented FriendlyNet product lines.
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 continue to lead growth in
internet connectivity. This increased bandwidth has created much greater demand
and downward pricing pressures as the telephone companies and larger networking
companies are pressured to deliver "all-in-one" Local Area Network (LAN), Wide
Area Network (WAN), phone, fax, and video communications centers at attractive
price points. With this new affordability and the continued emergence of newer
technologies such as wireless and Internet Protocol (IP) telephony, and
broadband technologies allowing easy connectivity in the home, the reality of
the true home network is 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 FriendlyNet routers, including its 3004
Cable/DSL routers and new 3002 wireless routers have attained significant
recognition, including 21 different awards from PC World, Mac World, C-NET,
MacHome, Practically Networked, and Amazon.
The Company's technological expertise is well positioned to take advantage of
growing markets to introduce all-in-one products to answer the needs of the
converged network for homes and small
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businesses. Additionally, the Company's products are differentiated through its
strong software expertise.
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. In
fiscal 2001, the Company launched a new VAR program aimed at attracting
additional resellers to carry the Company's products both focusing on the
Company's IntraCore products and SOHO products. Additionally, the Company
re-entered the superstore retail market in August with the addition of Comp USA
as a customer.
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.
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Strategic Partnerships.
In fiscal 2001, the Company successfully continued its process of seeking
strategic partnerships designed to place the Company in a leadership position in
several areas. The Company's relationship with Apple Computer, Inc. continued
during fiscal 2001. The Company announced several customers and relationship in
the MTU/MDU market with well-known service providers such as Novus
Telecommunications, and Solutions, Inc. The Company has continued its Gigabit
Ethernet leadership with other technological partners including National
Semiconductor, IBM, and Broadcom, as well as several large Internet Service
Providers (ISP's), and corporations.
In addition, 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.
Products
The Company offers both advanced, or managed, systems products (hubs and
switches) and simple, easy to use unmanaged systems products. The Company's
advanced switches and hubs allow more sophisticated users the ability for
increased administration, system analysis, identification of network
communication problems, and security among other functions. Many of these
products offer advanced management features designed to allow service providers
and other entities differentiated software features highly demanded, yet now
generally available on most competitor's products near the price range. The
Company's unmanaged products feature easy to use, Plug-and-Play operation for
the customer needing convenient connectivity at a cost-effective price, or just
needing to extend an existing network. The Company's unmanaged, or SOHO products
include Internet connectivity products (routers), hubs, switches, and adapter
cards.
Internet Connectivity Products (Routers)
During fiscal 1999 and 2000, 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 a family of award
winning broadband Cable/DSL routers to meet the expanding demands of the rapidly
growing broadband market. During fiscal 2001, the Company introduced its first
wireless Internet access products which have also won numerous awards from
Macworld, Network Computer and PC World. The Company plans to introduce
additional Internet routers to meet the changing needs of the market. Current
product development includes additional wireless, Digital Subsciber Line (DSL)
modem, an integrated server/router, 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 won top honors in PC World
(Best Buy), MacWorld (4 mice award, and recommended product), and Macs Only
among other publications.
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Wireless Internet Connectivity Products
The FriendlyNet 3002AL family of wireless routers allow up to 12 users to
connect to the Internet via one Cable or DSL modem and includes a two port
10/100 switch for maximum flexibility and expandability. This wireless
connectivity allow users to connect to the network or internet without needing
to run wires to multiple locations within range of the router. The 3002's design
allows users to purchase the router at a low price, and upgrade to wireless at a
later date. In addition, since the router's flexible architecture allows users
to add their own wireless PCMCIA card (a credit-card sized, removable module for
portable computers standardized by Personal Computer Memory Card International
Association), users can upgrade the router as new technologies become available.
The 3002AL offers a parallel port for print routing among all users on the
network, a feature generally not available on most competitive products.
The FriendlyNet AL1011 wireless PCMCIA not only provides wireless connectivity
for Windows PCs, but integrates perfectly with the 3002 family of routers to
provide wireless connectivity on the router. This adapter is sold separately or
bundled with 3002AL routers.
The FriendlyNet AeroLan 2011 (AL2001) USB adapter offers wireless connectivity
to any PC featuring an industry standard USB port. The AL2001 integrates
seamlessly with the 3002 AL family of routers.
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.
Asante's 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 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. These products feature
advanced management cababilities including Independent Print Media Group (IPMG)
multicast pruning which allows Information System (IS) managers to filter out
unwanted Internet broadcast messages and unwanted data, Virtual Local Area
Network (VLAN ), Remote Monitoring and Management of the Network (RMON), Simple
Network Management Protocol (SNMP) 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
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 65120 family of switches, introduced in April 2001, is the
industry's first 12 Gigabit port switch in a 1 unit (1U) high chassis. These
powerful switches come in two varieties. The 65120-2G comes with 10 built in
copper Gigabit ports and 2 Gigabit Interface Converter (GBIC) module slots for a
variety of Gigabit Fiber or Copper connectivity. The 65120-12G comes with 12
built-in GBIC slots and offers customers the high value, features and
flexibility of connection options.
The new IntraCore 3524 series 10/100/1000Mbps switches and 6548, replaced the
popular 6524 series and was introduced in October 2001. This series of switches
offers maximum flexibility to meet the needs of all managed network
requirements, as well as offering the best value and functionality of any Layer
2 switch on the market. The 3524 switch family offers an extremely rich feature
set including 24 10/100 ports plus two modular slots for the addition of
100Fiber, 1000SX (standard fiber), 1000LX (long haul fiber), GBIC modules for
the addition of standard fiber Gigabit, copper Gigabit, GBICs, and a large
assortment of advanced multi-service management features. In addition, the 3524
plans offer the power stackability allowing network managers to manage an entire
stack of 8 switches from a single IP address.
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
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other advanced functions. The IntraSwitch 6000 series of switches currently
ships in a 24 port configurations and are based on the Company's proprietary
application specific integrated circuit (ASIC), 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 4000/5000/400 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 4016 and 4024 may be rack-mounted for
ease of set-up and placement in the wiring closet.
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 will continue investing in 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 to a power user.
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Gigabit Over Copper Solutions
In 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 (Fast Ethernet) connection, 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.
The GX4 800 GBIC, introduced in 2001, includes six copper 100/1000 ports and 2
GBIC expansion slots for either Gigabit Fiber or Copper connectivity to a high
speed server, power users, or as a backbone in small and medium sized networks
where network management is not essential. The fiber connectivity also allows
network manager's connectivity between local buildings.
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,
and now selling in the $100 price range. 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. The Company continues to be a leading
manufacturer of Gigabit Ethernet adapters.
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 Media Independent
Interface (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.
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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.
10BASE-T Systems and Adapter Cards
In fiscal 2001, the trend for sophisticated users and many new businesses
continued to move to 10/100 Ethernet technology. However, the demand for low
cost 10 Mbps Ethernet hubs and switches from more price-sensitive and home
customers remained. 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
more rapidly 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.
USB 2.0 Technologies. The Company currently ships technologies based on the new,
high bandwidth USB 2.0 standard to major customers and Original Equipment
Manufacturer (OEM) accounts. The Company plans to introduce products based on
this standard to the general market in fiscal 2002.
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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. Additionally, the Company currently focuses a significant portion of its
research and development efforts in bringing to market more advanced Layer 3
switches, and to differentiating its Layer 3 and Layer 2 switches with features
demanded in its vertical markets.
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.
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 generally appointed on a
non-exclusive basis. Fulfillment of products to e-commerce customers are
typically handled through the Company's distribution channel, or directly from
the Company to customers within the United States.
Asante also sells its products directly to major universities and educational
institutions to take advantage of the significant penetration of the Company's
products in these markets.
From time to time, the Company pursues OEM opportunities which it believes make
sense 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.
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
constitute a larger portion of the Company's total sales in fiscal 2002.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 23%, 23%, and 24% of the Company's net sales in
fiscal years 2001, 2000, and 1999, respectively. From fiscal 2000 to fiscal
2001, the Company experienced reduced sales in all three geographic regions due
to the downturn affecting the world economy. Of those the greatest impact was in
Europe where sales declined approximately 35% due to factors similar to those
encountered domestically. Sales in Asia Pacific decreased slightly in fiscal
2001, compared to the prior year due primarily to competition from Asia
manufacturing and softness in demand in Macintosh related products.
The Company intends to continue to introduce new products through its existing
distribution channels. The Company encourages the marketing efforts of its
distributors with cooperative advertising allowances and incentive-based rebates
and promotes its products and builds brand name recognition by extensive trade
advertising, participation in industry trade shows, and other marketing efforts.
As of September, 2001, 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 11 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
9
returns and price decreases, any product returns or price decreases in the
future that exceed the Company's reserves will adversely affect the Company's
business, financial condition and results of operations. See Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The distribution of products such as those offered by the Company has been
characterized by rapid change, including consolidations and financial
difficulties of some distributors and the emergence of alternative distribution
channels. In addition, there are an increasing number of product suppliers
competing for access to these channels. Distributors may, at their option and at
any time, cease marketing the Company's products without prior notice to the
Company. During fiscal 2000, the Company took action to eliminate Pinacor, a
distributor of the Company, as a primary distributor due to perceived financial
risk. Subsequently, Pinacor initiated Chapter 11 bankruptcy proceedings. In the
beginning of the fourth quarter of fiscal 2000, the Company ceased product
shipments to Merisel USA, due to a perceived risk of financial exposure. The
debt write-off to these two distributors did not exceed $265,000 in fiscal 2000.
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 has benefited
the Company during fiscal 2001. A reduction in the sales effort by any of the
Company's other major distributors or the loss of any one of these distributors
would have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that future sales
by the Company's distributors will remain at current levels or that the Company
will be able to retain its current distributors on terms that are commercially
reasonable to the Company. Although the Company believes, except as described
above, that its major distributors are currently adequately capitalized, there
can be no assurance that in the future one or more of these distributors will
not experience financial difficulties. Such difficulties could have a material
adverse effect on the Company.
In fiscal 1998, the Company adopted a limited 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 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 29, 2001, the Company had 13 employees engaged in engineering
and product development. During the fiscal years 2001, 2000, and 1999, the
Company's engineering and product development expenses were approximately $2.8
million, $3.0 million, and $3.9 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 2002 and going forward, the Company will continue
10
to focus additional efforts in the areas of embedded 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 offerings.
The Company believes its future success will depend upon its ability to enhance
and expand its existing product offerings and to develop in a timely manner new
products that achieve rapid market acceptance. Substantially all of the
Company's products are designed to provide connectivity to Ethernet LANs. If the
Company is unable for technological or other reasons to modify its products or
develop new products to support Fast Ethernet or Switched Ethernet technology or
if Ethernet's importance declines as a result of alternative technologies, the
Company's business, financial condition and results of operations would be
materially and adversely affected. There can be no assurance that the Company
will be successful in developing and marketing enhanced or new products in a
timely manner, that those products will gain market acceptance, or that the
Company will be able to respond effectively to technological changes or new
industry standards.
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, Edimax, 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 2001, the Company
purchased $1.3 million of goods from OSE and purchased $4.8 million of goods
from Delta Networks, Inc. (See Note 4 of Notes to Financial Statements). The
Company does not have a long-term supply agreement with any of its
subcontractors. If any one of these subcontractors experiences financial or
operational difficulties that result in a reduction or interruption in the
supply of products to the Company or otherwise fails to deliver products to the
Company on a timely basis, the Company would be required to procure sufficient
manufacturing 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 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.
11
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 too 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.
During fiscal 2001, a smaller portion of the Company's sales represented
products sold to OEMs than in fiscal 2000. 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 increase
slightly as a percentage of total revenue in fiscal 2002.
A significant percentage of the Company's sales in fiscal 2001 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.
12
The Company has received in the past and may receive in the future
communications from third parties asserting intellectual property claims against
the Company. Claims made in the future could include assertions that the
Company's products infringe, or may infringe on the proprietary rights of third
parties or requests for indemnification against such infringement. There can be
no assurance that any claim will not result in litigation, which could involve
significant expense to the Company. If the Company is required or deems it
appropriate to obtain a license relating to one or more products or future
technologies, there can be no assurance that the Company would be able to do so
on commercially reasonable terms, or at all.
The Company relies on a combination of patents, trade secrets, copyright and
trademark law, nondisclosure agreements and technical measures to establish and
protect its proprietary rights in its products. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's technology is difficult,
and there can be no assurance that the measures being taken by the Company will
be successful. Moreover, the laws of some foreign countries do not protect the
Company's proprietary rights in its products to the same extent as do the laws
of the United States. See Item 3: Legal Proceedings.
Employees
As of September 29, 2001, the Company had 74 employees, including 13 in
engineering and product development, 17 in manufacturing operations, 30 in
marketing, sales and support services, and 14 in corporate administration. The
number reflects a small increase in sales, marketing and support services, when
compared to fiscal 2000.
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
44,700 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 7 of Notes to Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
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, 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, a Special Master appointed by the court issued a
report agreeing in most material respects with the defendants' interpretation of
the alleged patent claims. Subsequently, by order dated November 23,1998, the
District Court adopted without modification the findings of the Special Master
and the recommendations of the
13
Magistrate Judge regarding claim interpretation of the patents-in-suit. The
Court ordered dismissal of the case, and entered judgment in favor of all
defendants. Plaintiff has filed an appeal of the judgment to the Federal Circuit
Court of Appeal, which is now pending. Oral arguments on the appeal were heard
December 3, 2001, and a decision is expected in the next several weeks.
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
settlement proposal. Despite a recent federal case which upheld the US. Customs
authority to seize and penalize for improper use of the UL certification mark,
the U.S. Attorney recently stated that he would still consider settlement of the
Company's case in the near future due to factual differences.
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 2001.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages as of December 10, 2001, and
certain information regarding each of them are as follows:
Name Age Position with the Company
Wilson Wong 54 President and Chief Executive Officer
Rusty Callihan 52 Vice President of Sales
Anthony Contos 38 Vice President of Finance and Administration
Jim Hsia 39 Vice President of Marketing
Chiu K. Fung 54 Vice President of Operations
Robert Young* 57 Vice President of Operations
* Mr Robert Young resigned as Vice President of Operations in April 2001.
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
14
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 Chiu K. Fung (C.K.) joined the Company in October 2000, and has served as
Vice President of Operation since October 2001, a position previously held by
Mr. Robert Young. Before that Mr Fung held the position of Senior Director of
Operations with the Company. From June 1998 to June 2000, Mr Fung served as
Monitor Service Manager for Nakamichi America Corporation where he was
responsible for management of service and repair operations. From December 1995
to March 1998, Mr. Fung served as Technical Director at Orient Power Holding
Ltd. where he was responsible for management of their audio business unit. Prior
to that, Mr. Fung held other management positions in operations.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The 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
System under the trading symbol ASNT until September 30, 1999 at which time the
Company's Common Stock commenced trading on the Over-the-Counter (OTC) Bulletin
Board under the trading symbol ASNT.OB.
Fiscal 2001 High Low
First quarter $1 5/16 $ 7/16
Second quarter $1 1/8 $ 1/2
Third quarter $ 7/8 $ 1/12
Fourth quarter $ 5/8 $ 1/8
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
As of November 30, 2001, there were 99 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. In
August 2001, the Company filed an S-2 Registration Statement, pursuant to a
request by the purchasing shareholders, to register the shares under a
registration rights agreement.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data) Year ended
2001 2000 1999 1998 1997
Statement of Operations Data:
Net sales $ 22,074 $ 29,280 $ 37,488 $ 51,433 $ 83,279
Income (loss) from operations $ (1,177) $ 200 $ (13,863) $ (12,450) $ 2,331
Net income (loss) $ (949) $ 392 $ (14,161) $ (14,435) $ 1,926
Diluted net income (loss) per share $ (0.10) $ 0.04 $ (1.53) $ (1.57) $ 0.21
Balance Sheet Data:
Working Capital $ 2,483 $ 3,251 $ 751 $ 13,645 $ 26,727
Total assets $ 9,366 $ 13,222 $ 13,345 $ 30,359 $ 40,567
Stockholders' equity $ 2,772 $ 3,679 $ 1,682 $ 15,850 $ 29,874
16
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 29, 2001,
September 30, 2000, and October 2, 1999, respectively:
2001 2000 1999
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 64.0 63.4 86.8
Gross profit 36.0 36.6 13.2
Operating expenses:
Sales and marketing 22.2 20.2 33.6
Research and development 12.5 10.4 10.4
General and administrative 6.6 5.3 6.1
Total operating expenses 41.3 35.9 50.1
Income (loss) from operations (5.3) 0.7 (37.0)
Interest and other income (expense), net 1.0 0.6 (0.8)
Income (loss) before income taxes (4.3) 1.3 (37.8)
Provision (benefit) for income taxes -- -- --
Net income (loss) (4.3) % 1.3 % (37.8)%
Net Sales
Net sales decreased 24.6% to $22.1 million in fiscal 2001, from $29.3 million in
fiscal 2000. Net sales were $37.5 million in fiscal 1999. The decrease in net
sales from fiscal 2000 to fiscal 2001 was due to several factors including the
economic downturn in the high tech industry and network industry in particular.
Additionally, heavy competitive pressures for unmanaged 10/100 products and to
some extent, the continued incorporation of Ethernet onto the motherboard of
Apple's newer computers, has negatively affected the Company's results. During
fiscal 2001, sales of unmanaged hubs decreased $2.9 million, from $5.6 million
in fiscal 2000 to $2.6 million in 2001, reflecting slower economic conditions
and the continued transition from shared systems products to switches. During
this same period, sales of 10/100 unmanaged switches remained constant at $3.4
million.
In fiscal 2001, 2000, and 1999, one customer, Ingram Micro, Inc., distributor,
accounted for 43%, 48%, and 42%, respectively, of the Company's total sales.
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 products, a reduction in managed systems of $2.2 million due
to the continuing decline in shared
17
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.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for 23%, 23%, and 24% of net sales in fiscal 2001, 2000, and 1999,
respectively as a percentage of total sales. International revenue as a
percentage remained constant during fiscal 2001, compared to fiscal 2000, as the
economic downturn has affected the networking industry internationally. The
Company believes that the demand in the MTU, and the MDU market is particulary
strong in Asia and to some extent in Europe. Therefore, the Company will
continue to focus its efforts on increasing sales internationally over the next
several quarters but there cannot be any assurance that its efforts will be
successful.
The decline in international sales in fiscal 2000, from fiscal 1999 was caused
by reduced sales in Europe due primarily to price decreases and competition from
Asian manufacturers.
The Company believes that the economic down turn beginning just prior to fiscal
2001, will continue during fiscal 2002. Although the Company experienced
significant unit sales increases in certain products such as its Gigabit
Ethernet Products, and Internet routers, price declines partially offset
increases in sales quantities. 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 2002. The Company
will continue to focus on those markets it believes it can increase its revenues
and will continue to seek to increase its OEM revenues, compared to fiscal 2001.
Cost of Sales and Gross Profit
The Company's gross profit as a percentage of net sales decreased marginally to
36.0%, in fiscal 2001, from 36.6% in fiscal 2000. The decrease in fiscal 2001
compared to fiscal 2000 was primarily due to reduced selling prices for its
products, which was substantialy offset by the stronger inventory and purchasing
controls. During fiscal 2001, 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 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 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 $4.9 million in fiscal 2001 compared to $5.9
million in fiscal 2000, or a decrease of 17%. Fiscal 2000 sales and marketing
expenses decreased $6.7 million, or 53.0%, compared to $12.6 million in fiscal
1999. As a percentage of net sales, sales and marketing expenses were 22.2%,
20.2%, and 33.6%, in fiscal 2001, 2000, and 1999, respectively. The reduced
fiscal 2001 expenditures reflect reduced sales levels during fiscal 2001. 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 Company expects that its sales and marketing expenses will remain at current
levels, or increase slightly in fiscal 2002 in absolute dollars, but should
remain fairly constant as a percentage of total sales.
18
Research and Development
Research and development expenses decreased by 9.4% to $2.8 million in fiscal
2001, from $3.0 million in fiscal 2000. Research and development expenses were
$3.9 million in fiscal 1999. As a percentage of net sales, research and
development expenses were 12.5%, 10.4%, and 10.4%, in fiscal 2001, 2000, and
1999, respectively. The decrease in research and development expenses from
fiscal 2000 to fiscal 2001 was due to decreases in personnel related
expenditures as a result of lower staffing levels, and depreciation expense. The
decrease in research and development expenses from fiscal 1999 to fiscal 2000
was also due to decreases in personnel related expenditures as a result of lower
staffing levels, and depreciation expense.
The Company expects that spending on research and development in fiscal 2002
will increase in comparison to fiscal 2001 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 $1.5 million in fiscal 2001
from $1.6 million in fiscal 2000. General and administrative expenses were $2.3
million in fiscal 1999. As a percentage of net sales, general and administrative
expenses were 6.6%, 5.3%, and 6.1% in fiscal years 2001, 2000, and 1999,
respectively. The decrease in general and administrative expenses in absolute
dollars in fiscal 2001 is primarily related to reduced legal and personnel
related expenditures. The decrease in general and administrative expenses in
absolute dollars in fiscal 2000, compared to fiscal 1999, is primarily related
to reduced consulting, personnel and outside service related expenditures.
The Company expects that general and administrative expenses will remain
constant in fiscal 2002 in absolute dollars.
Income Taxes
The Company recorded no provision for federal and state income taxes for fiscal
2001, 2000, or 1999 due principally to a valuation allowance on deferred tax
assets being recorded and the Company's net operating loss carry forwards being
sufficient to offset 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 2001, 2000, and 1999, respectively.
19
Liquidity and Capital Resources
During fiscal 2001, the Company's operating activities used cash of $1.4
million. During fiscal 2000, the Company's operating activities provided cash of
$0.1 million. During fiscal 1999 the Company's operating activities used cash of
$3.9 million.
During fiscal 2001, net cash used in operations resulted primarily from the
Company's net loss of $0.9 million, and a decrease in both accounts payable and
accrued expenses of $1.3 million. These uses were partially offset primarily by
decreases in accounts receivable and inventories of $1.3 million and $0.8
million, respectively.
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 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 used in investing activities in fiscal 2001 and fiscal 2000 was
insignificant. In fiscal 2001, purchases of property and equipment were
insignificant. In fiscal 2000 and 1999, purchases of property and equipment
totaled $0.1 and $0.1 million, respectively. In fiscal 2001, net cash provided
by financing activities was insignificant. In fiscal 2000, net cash provided by
financing activities amounted to $1.6 million, due primarily to private
placement equity amounting to $1.5 million. In fiscal 1999, cash used in
financing activities was insignificant.
At September 29, 2001, the Company had cash, cash equivalents and short-term
investments of $5.1 million compared to $6.4 million at September 30, 2000.
Working capital was $2.5 million at September 29, 2001, compared to $3.3 million
at September 30, 2000. As of December 1, 2001, the Company had renewed its line
of credit for $3.0 million, which will expire on December 1, 2002 and covers
eligible receivables. The Company's ability to borrow under this line is subject
to compliance with covenants related to financial performance and condition, as
well as the amount of eligible receivables.
On September 30, 1999, the Company's stock ceased to be traded on the NASDAQ
National Market System and was moved to the Over-The-Counter (OTC) Bulletin
Board. 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 affect on the Company's ability to
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 2002. 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.
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.
20
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. 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. 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 networking industry and
technology markets in general have been affected by a widespread reduction in
demand for products due to financial problems experienced by many Internet
Service Provider's (ISP's), and the failure of many Internet companies. The
duration, or long-term effect on the Company's operations is difficult to
measure, but the inability to alter its structure, or react properly to this
slowdown could have an adverse effect on the Company's financial position.
The 10/100 Mbps and 100 Mbps Ethernet technology (100BASE-T, or "Fast-Ethernet")
has become a standard networking topology in the networking and computer
industries. This standard has been adopted widely by end-user customers because
of its ability to increase the efficiency of LANs and because of its ease of
integration into existing 10BASE-T networks. Because of the importance of this
standard, the Company has focused its ongoing research and development
activities on introducing future products incorporating 100BASE-T technology.
The Company realizes the importance of bringing more 10/100BASE-T (10 Mbps)
switching and 100BASE-T switching to market in order to complement its existing
100BASE-T shared products. In addition, Gigabit (1000BASE-T, or 1000Mbps)
Ethernet technology is increasingly being adopted in the backbone of large
enterprises and educational institutions. In that regard, the Company's future
operating results may be dependent on the market acceptance and the rate of
adoption of these technologies, as well as timely product 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
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, the current economic
recession 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.
21
In addition to the above, the Company is also susceptible to 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.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company believes that the adoption of SFAS 141 will not have a significant
impact on the Company's financial position, results of operations and cash
flows.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment only approach. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on the Company's financial position, results of operations and cash flows.
In June 2001, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-25 ("EITF 00-25"), "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products." EITF 00-25 establishes the
treatment in the income statement of vendor consideration to resellers of a
vendor's products. EITF 00-25 is effective for the interim and year end periods
beginning after December 15, 2001. The Company has not yet determined the impact
that adoption of this issue will have on the Company's consolidated financial
position, results of operations and cash flows.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which is effective for fiscal years beginning after December 15, 2001
and interim periods within those fiscal periods. SFAS 144 supersedes FASB
Statement No. 121 and APB Opinion No. 30, however, it retains the requirement of
Opinion No. 30 to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, by abandonment, or in a distribution to owners)
or is classified as held for sale. SFAS 144 addresses financial accounting and
reporting for the impairment of certain long-lived assets and for long-lived
assets to be disposed of. The Company believes that SFAS 144 will not have a
material impact on the financial position or results of operations of the
Company.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of September 29, 2001, 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% change 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.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Financial Statements:
Report of Independent Accountants 24
Balance Sheets at September 29, 2001, and September 30, 2000 25
Statements of Operations for the years ended September 29, 2001,
September 30, 2000, and October 2, 1999 26
Statements of Stockholders' Equity for the years ended
September 29, 2001, September 30, 2000, and October 2, 1999 27
Statements of Cash Flows for the years ended September 29, 2001, September 30, 2000,
and October 2, 1999 28
Notes to Financial Statements 29
Quarterly Results of Operations (unaudited) 40
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts and Reserves 46
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.
23
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 29, 2001 and September 30, 2000, and the results
of its operations and its cash flows for each of the three years in the period
ended September 29, 2001 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 statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
November 2, 2001, except for note 9,
as to which the date is December 1, 2001
24
ASANTE TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except share
and per share amounts)
September 29, September 30,
2001 2000
-------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 5,065 $ 6,433
Accounts receivable, net of allowance for doubtful accounts,
rebates and sales returns of $3,572 and $4,193 in 2001
and 2000, respectively 1,764 3,233
Inventory 1,848 2,605
Prepaid expenses and other current assets 400 523
------- -------
Total current assets 9,077 12,794
Property and equipment, net 117 261
Other assets 172 167
------- -------
Total assets $ 9,366 $13,222
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,469 $ 3,776
Accrued expenses 4,117 5,437
Payable to stockholder 8 330
------- -------
Total current liabilities 6,594 9,543
------- -------
Commitments and contingencies (Notes 7 and 8)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued or outstanding in 2001 and 2000 -- --
Common stock, $0.001 par value; 25,000,000 shares authorized;
10,003,181 and 9,912,463 shares issued and outstanding in
2001 and 2000, respectively 10 10
Additional paid-in capital 28,402 28,360
Accumulated deficit (25,640) (24,691)
-------- --------
Total stockholders' equity 2,772 3,679
-------- --------
Total liabilities and stockholders' equity $ 9,366 $ 13,222
======== ========
The accompanying notes are an integral part of these financial statements
25
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended
-------------------------------------------------------
September 29, September 30, October 2,
2001 2000 1999
----------------- ----------------- -----------------
Net sales $ 22,074 $ 29,280 $ 37,488
Cost of sales 14,134 18,555 32,557
----------------- ----------------- -----------------
Gross profit 7,940 10,725 4,931
----------------- ----------------- -----------------
Operating expenses:
Sales and marketing 4,897 5,930 12,609
Research and development 2,756 3,042 3,883
General and administrative 1,464 1,553 2,302
----------------- ----------------- -----------------
Total operating expenses 9,117 10,525 18,794
----------------- ----------------- -----------------
Income (loss) from operations (1,177) 200 (13,863)
Interest and other income (expense), net 228 192 (298)
----------------- ----------------- -----------------
Net income (loss) $ (949) $ 392 $ (14,161)
================= ================= =================
Basic income (loss) per share $ (0.10) $ 0.04 $ (1.53)
================= ================= =================
Diluted income (loss) per share $ (0.10) $ 0.04 $ (1.53)
================= ================= =================
Shares used in per
share calculation
Basic 9,948 9,620 9,282
================= ================= =================
Diluted 9,948 10,014 9,282
================= ================= =================
The accompanying notes are an integral part of these financial statements
26
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Additional Total
Common Stock Paid-in Treasury Accumulated Stockholders'
Shares Amount Capital Stock Deficit Equity
---------------- -------- ---------- ------------- --------------- -------------
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
--------------- --------- ----------- ------------------------------ --------------
Common stock issued under stock plans 90,718 -- 42 -- 42
Net loss (949) (949)
--------------- --------- ----------- ------------------------------ --------------
Balances as of September 29, 2001 10,003,181 $ 10 $ 28,402 $ -- $ (25,640) $ 2,772
============== ======== ========== ============= =============== =============
27
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended
------------------------------------------------------
September 29, September 30, October 2,
2001 2000 1999
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ (949) $ 392 $ (14,161)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 184 563 986
Provision for doubtful accounts receivable 138 19 341
Loss due to write-off of idle assets - 4 425
Changes in operating assets and liabilities:
Accounts receivable 1,331 1,162 3,573
Inventory 757 58 5,010
Prepaid expenses and other current assets 123 6 2,755
Accounts payable (1,307) (1,251) (2,687)
Accrued expenses and other (1,320) (268) 906
Payable to stockholder (322) (601) (1,065)
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities (1,365) 84 (3,917)
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (40) (115) (120)
Other (5) 51 -
---------------- ---------------- ----------------
Net cash used in investing activities (45) (64) (120)
---------------- ---------------- ----------------
Cash flows from financing activities:
Issuance of common stock 42 1,605 82
Repurchase of common stock - (89)
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities 42 1,605 (7)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (1,368) 1,625 (4,044)
Cash and cash equivalents at beginning of year 6,433 4,808 8,852
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 5,065 $ 6,433 $ 4,808
================ ================ ================
The accompanying notes are an integral part of these financial statements
28
ASANTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. The Company and Summary of Significant Accounting Policies
Asante Technologies, Inc. (the "Company" or "Asante") designs, manufactures and
markets a broad family of 10BASE-T, 100BASE-T ("Fast Ethernet") and 1000BASE-T
(Gigabit Ethernet) network and connectivity products. Asante's client access
products (which include adapter cards and media access adapters) connect PCs,
Macintoshes, iMAC's and peripheral devices (such as printers) to Ethernet
networks. The Company's network system products, which include intelligent and
non-intelligent switches, hubs, bridge modules, internet access devices
(routers), and network management software for Macintoshes and PCs, interconnect
users within and between departmental networks.
In fiscal years 2001 and 1999, the Company incurred substantial losses and
negative cash flows from operations and as of September 29, 2001, the Company
had an accumulated deficit of $25.6 million. For the year ended September 29,
2001, the Company recorded a loss from operations of $1.2 million and had cash
used from operating activities of $1.4 million.
On September 30, 1999, the Company's stock ceased to be traded on the NASDAQ
National Market System and was moved to the Over-The Counter (OTC) Bulletin
Board. During fiscal year 2000, the Company successfully completed a $1.5
million private placement, however the Company's access to further equity
finance could be affected adversely 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
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.
29
Management estimates and assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue recognition
Revenue from product sales to customers is recognized, including freight
charges, when a definite arrangement exists, upon shipment to the customer, upon
fulfillment of acceptance terms, if any, when no significant contractual
obligations remain outstanding, price is fixed and determinable and collection
is considered probable. 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 29, 2001 and September 30, 2000, 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 29, 2001 and September 30, 2000 four customers accounted for 64%, and
62%, respectively, of the accounts receivable balance. In fiscal 2001, one
customer accounted for 46% of the Company's sales. In fiscal 2000 and 1999 one
customer accounted for 48% and 42%, respectively, of the Company's sales.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis), or market. Appropriate adjustments of the
inventory values are provided for slow moving and discontinued products based
upon future expected sales and committed inventory purchases.
Property and equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is based on the straight-line method for financial reporting purposes
over the estimated useful lives of the related assets, generally three to five
years. Equipment under capital leases is amortized over the shorter of its
estimated useful life or lease term and included in depreciation expense.
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived assets
based upon undiscounted cash flows and recognizes impairment from the carrying
value of long-lived assets, if any, based on the fair value of such assets.
Income taxes
Income taxes are computed using the liability method. Under the liability
method, deferred income tax assets and liabilities are determined based upon the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws. A
valuation allowance is provided against deferred tax assets when it is
considered more likely than not they will not be realizable.
Research and development costs
Research and development costs are expensed as incurred. Research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. The Company believes its current process for developing software is
essentially completed concurrently with the establishment of
30
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 thereof, including
Financial Accounting Standards Board (FASB) interpretation No. 44, in accounting
for its employee stock options and stock purchase plan. Pro forma information
regarding net income (loss) and net income (loss) per share is disclosed as
required by Statement of Financial Accounting Standards Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123).
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS 123 and Emerging Issues Task Force No. 96-18 (EITF 96-18)
"Accounting for Equity Instraments that are Issued to Other than Employees for
Acquiring or in Conjunction with Selling Goods or Services."
Fair value of financial instruments
The carrying amounts for certain of the Company's 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 (loss)
The Company had no items of other comprehensive income (loss) during any of the
periods presented, and accordingly comprehensive income (loss) is equal to net
income (loss) for all periods presented.
Reclassifications
Certain previously reported amounts in the fiscal 2000 and 1999 statements of
operations have been reclassified to conform to the 2001 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:
2001 2000 1999
United States 77% 77 % 76%
Europe 12 15 18
Other 11 8 6
100% 100% 100%
Substantially all of the Company's assets are located in the United States.
Recently issued accounting pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company believes that the adoption of SFAS 141 will not have a significant
impact on the Company's financial position, results of operations and cash
flows.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment only approach. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company is currently assessing but has not yet determined the
31
impact of SFAS 142 on the Company's financial position, results of operations
and cash flows.
In June 2001, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-25 ("EITF 00-25"), "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products." EITF 00-25 establishes the
treatment in the income statement of vendor consideration to resellers of a
vendor's products. EITF 00-25 is effective for the interim and year end periods
beginning after December 15, 2001. The Company has not yet determined the impact
that adoption of this issue will have on the Company's consolidated financial
position, results of operations and cash flows.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which is effective for fiscal years beginning after December 15, 2001
and interim periods within those fiscal periods. SFAS 144 supersedes FASB
Statement No. 121 and APB Opinion No. 30, however, it retains the requirement of
Opinion No. 30 to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, by abandonment, or in a distribution to owners)
or is classified as held for sale. SFAS 144 addresses financial accounting and
reporting for the impairment of certain long-lived assets and for long-lived
assets to be disposed of. The Company believes that SFAS 144 will not have a
material impact on the financial position or results of operations of the
Company.
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):
2001 2000 1999
Net income (loss) $ (949) $ 392 $(14,161)
Weighted average common stock outstanding (basic) 9,948 9,620 9,282
Dilutive effect of warrants and options - 394 -
Weighted average common stock outstanding (diluted) 9,948 10,014 9,282
Net income (loss) per share:
Basic $ (0.10) $ 0.04 $ (1.53)
Diluted $ (0.10) $ 0.04 $ (1.53)
Diluted net loss per share for the year ended September 29, 2001 and October 2,
1999, excludes all dilutive potential common shares as their effect is
antidilutive. At September 29, 2001 and October 2, 1999, 1,613,058 and 1,762,512
outstanding options and warrants, respectively, were excluded since their effect
was antidilutive. As of September 30, 2000, all excercisable options were issued
at prices above the market value of common shares and are therefore included in
diluted shares.
32
Note 3. Balance Sheet Components
2001 2000
(in thousands)
Inventory:
Raw materials and component parts $ 154 $ 449
Work-in-process 130 154
Finished goods 1,564 2,002
$ 1,848 $ 2,605
Property and equipment:
Computers and R&D equipment $ 6,221 $ 6,183
Furnitureand Fixtures 1,494 1,492
7,715 7,675
Accumulated depreciation (7,598) (7,414)
$ 117 $ 261
Accruedexpenses:
Payroll-related expenses $ 789 $ 1,079
Sales promotion expenses 1,727 2,205
Legal and professional fees 539 811
Warranty 470 570
Other 592 772
$ 4,117 $ 5,437
Note 4. Related Party Transactions
The Company has a supply agreement (the "OSE Agreement") with Orient
Semiconductor Electronics, Ltd., ("OSE"). OSE and one of its principal
shareholders own, in aggregate, approximately 12.2% of the Company's Common
Stock as of September 29, 2001. Under the OSE Agreement, the Company purchases
from and sells at cost to OSE certain component parts. The Company is obligated
to purchase goods only to the extent it has signed firm purchase commitments
with OSE. At September 29, 2001, the Company's firm purchase commitments under
the OSE Agreement were insignificant.
For fiscal 2001, 2000, and 1999 the Company sold, at cost, approximately $0.1
million, $0.2 million, and $0.8 million, respectively, of component parts to OSE
and purchased $1.3 million, $3.7 million, and $8.4 million, respectively, of
goods from OSE. Amounts classified as "payable to stockholder" in the
accompanying balance sheets are solely related to the purchases of inventory
from OSE.
On March 16, 2000, the Company signed a Stock Purchase Agreement with Delta
Networks. Inc and Delta International Holdings Ltd. The Company issued 500,000
shares at $3.00 per share, amounting to $500,000 from Delta Networks, and
$1,000,000 from Delta International Holdings Ltd. During fiscal year 2001 and
2000, the Company purchased approximately $4.8 and $7.9 millions of goods from
Delta and sold approximately $0.08 and $0.4 million at cost to Delta,
respectively. At September 29, 2001 the Company had approximately $0.9 million
in accounts payable to Delta and approximately $7,000 receivable from Delta, and
at September 30, 2000 the Company had approximately $2.3 million in accounts
payable to Delta and approximately $0.2 million receivable from Delta.
Note 5. Income Taxes
There was no provision for income taxes made in fiscal years 2001, 2000, or
1999.
33
Deferred tax assets, net, comprise the following at September 29, 2001 and
September 30, 2000 (in thousands):
2001 2000
Deferred tax assets :
Net operating losses $ 6,512 $ 5,346
Research and development credits 2,340 2,230
Receivable and sales-related reserves 1,352 2,085
Inventory-related reserves 2,386 2,232
Compensation accruals 113 228
Depreciation 211 204
Other reserves and accruals 1,278 1,500
Total deferred tax assets 14,192 13,825
Valuation allowance (14,192) (13,825)
$ -- $ --
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 29, 2001.
At September 29, 2001, the Company had federal and state net operating loss
carryforwards of approximately $17.8 million and approximately $9.9 million,
respectively, available to offset future taxable income which expire beginning
in 2018 and 2003, respectively. In addition, as of September 29, 2001, the
Company had approximately $1.4 million and approximately $1.0 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):
2001 2000 1999
Tax expense/(benefit) at U.S. statutory rate $ (327) $ 14 $(4,815)
State taxes, net of federal benefits (47) -- (776)
Research and development credits -- -- (25)
Other 6 96 366
Valuation allowance 368 (110) 5,250
$ -- $ -- $ --
Note 6. 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 Based Compensation Plans
As of September 29, 2001, the Company had granted options under three
stock-based compensation plans that are described below.
The 2001 Stock Option Plan allows for issuance of options to the Company
employees and consultants to purchase a maximum of 1,000,000 plus 7% of the
outstanding common shares as of the last day of the immediately preceeding year
beginning in fiscal year 2002. This plan replaces the Company's 1990 Stock
Option Plan (the 1990 Plan) which allowed for the issuance of options to Company
employees and consultants to purchase a maximum of 4,597,333 shares of common
stock. The 1990 Plan expired in May 2000, and was temporarily replaced by the
2000 Non-Statutory Stock Option Plan which
34
allows for issuance of options to the Company employees and consultants to
purchase a maximum of 120,000 shares of common stock.
The Directors' Stock Option Plan allows for the issuance of options to directors
of the Company who are not employees of, or consultants to, the Company or any
affiliate of the Company. The Directors' Stock Option Plan allows for the
issuance of options to Non-Employee Directors to purchase a maximum of 300,000
shares of common stock.
The Key Executive Option Plan allows for the issuance of options to key
employees of the Company who are not recognized under the Directors' Stock
Option Plan. The Key Executive Option Plan allows for the issuance of options to
Key Employees to purchase a maximum of 404,999 shares of common stock.
Individuals owning more than 10% of the Company's stock are not eligible to
participate in the above three Plans unless the exercise price of the option is
at least 110% of the fair market value of the common stock at the date of grant.
Incentive stock options issued to holders of less than 10% of the Company's
stock must be issued at 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 are granted at 100% of the fair market value of
the common stock at the date of grant with an expiration date of ten years from
the date of grant. Initial option grants generally become vested over a period
of four years from the date of hire, commencing on the date one year after the
date of grant of the initial option. Unexercised options terminate three months
after an Optionee's termination of all service with the Company and its
affiliates.
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 elected 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,
2001 Stock Option Plan, Directors' Stock Option Plan and the Key Executive
Option Plan are summarized as follows:
2001 2000 1999
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 1,576,971 $1.91 1,762,512 $2.03 1,584,539 $4.93
Granted 125,500 $0.81 257,866 $1.48 1,663,005 $1.45
Exercised (2,516) $0.87 (29,643) $0.94 -- --
Canceled (86,897) $1.74 (413,764) $2.24 (1,485,032) $4.48
Ending Balance 1,613,058 $1.82 1,576,971 $1.91 1,762,512 $2.03
35
The following table summarizes information about stock options outstanding at
September 29, 2001:
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
$0.6400 - $0.8125 72,550 9.40 $0.7715 17,725 $0.7647
$0.8750 - $0.8750 250,100 7.81 $0.8750 190,327 $0.8750
$0.9000 - $1.000 106,900 8.34 $0.9337 46,568 $0.9426
$1.0320 - $1.0320 600,000 7.84 $1.0320 399,999 $1.0320
$1.6250 - $1.9375 192,168 8.03 $1.8949 94,950 $1.8675
$1.9380 - $2.5000 192,435 6.09 $2.4585 149,414 $2.4743
$4.0000 - $6.3125 151,705 4.05 $5.0437 151,673 $5.0437
$6.5000 - $6.5000 1,000 4.78 $6.5000 1,000 $6.5000
$6.8750 - $6.8750 6,200 5.07 $6.8750 6,200 $6.8750
$7.5000 - $7.5000 40,000 1.94 $7.5000 40,000 $7.5000
$0.6400 - $7.5000 1,613,058 7.24 $1.8240 1,097,856 $2.0931
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants during fiscal 2001, 2000, and 1999, risk free
interest rates ranging from 4.54% to 6.79% as the date of grant; expected
average volatility of 119%, 65%, and 57%, respectively; an expected option life
of four years, and no expected dividends. The weighted average fair value of
stock options granted under the plans for fiscal 2001, 2000, and 1999 was $0.69,
$0.74, and $0.73, respectively.
In 1993, the Company adopted the Employee Stock Purchase Plan (the "Purchase
Plan") covering an aggregate of 500,000 shares of common stock. During fiscal
2000 the Stockholders approved an amendment increasing the number of shares
available for issuance under the Purchase Plan by 500,000 shares. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the commencement
of the Purchase Plan. Employees who participate in the Purchase Plan can have up
to 10% of their earnings withheld and used to purchase shares of common stock on
specified dates as determined by the Board. The price of common stock purchased
under the Purchase Plan is equal to 85% of the lower of the fair market value of
the common stock determined by the closing price on the Nasdaq National Market
System, at the commencement date or the ending date of each six month offering
period.
Sales under the Purchase Plan in fiscal 2001, 2000, and 1999 were 88,202,
81,548, and 82,379 shares of common stock, respectively, at an average price of
$0.64, $0.99, and $1.00, respectively. At the 2001 Meeting of Stockholders,
500,000 additional shares were approved for grant under the Purchase Plan. On
September 29, 2001, 406,850 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 2001, 2000, and 1999: risk free interest rates ranging from
4.54% to 6.73%, respective of commencement date of the offering period, expected
volatility of 119%, 65%, and 57%, 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 2001, 2000, and
1999, was $0.72, $0.99, and $1.00, respectively.
If compensation expense under these plans had been recorded in the Company's
financial statements pursuant to SFAS No. 123, the Company's net income (loss)
and net income (loss) per share for fiscal 2001, 2000, and 1999 would have been
as follows (in thousands, except per share amounts):
36
2001 2000 1999
Net income (loss):
As reported $ (949) $ 392 $ (14,161)
Pro forma $ (1,174) $ 43 $ (14,614)
Net income (loss) per share
As reported
Basic $ (0.10) $ 0.04 $ (1.53)
Diluted $ (0.10) $ 0.04 $ (1.53)
Pro forma
Basic $ (0.12) $ 0.00 $ (1.57)
Diluted $ (0.12) $ 0.00 $ (1.57)
Such pro forma disclosures may not be representative of future compensation cost
because options vest over several years and additional grants are made each
year.
Note 7. Commitments and Contingencies
The Company has an operating lease for its main facility that expires on August
31, 2004. Various other leases for sales offices expire through 2004. Rent
expense under such operating leases aggregated approximately $692,000, $705,000,
and $970,800 for fiscal 2001, 2000, and 1999, respectively. Certain leases
require the Company to pay a portion of facility operating expenses.
37
Future minimum lease payments under these leases at September 29, 2001 are as
follows (in thousands):
Year
2002 976
2003 989
2004 909
$ 2,874
The Company recorded income of approximately $150,800 during fiscal 1999, under
sublease agreements, the last of which expired in June 1999. As of September 29,
2001, none of the Company's existing facilities are being subleased.
The Company has available a $5.0 million bank revolving line of credit under an
agreement with a bank. Borrowings under the line are secured by Company's
inventory, equipment and accounts receivable and bear interest at the bank's
prime rate plus 1.75% (approximately 7.75% to 8.00%, depending on the term of
the borrowings at September 29, 2001) . Borrowings under the line are subject to
certain financial covenants and restrictions on liquidity, indebtedness,
financial guarantees, business combinations, profitability levels, and other
related items. As of September 29, 2001 the Company was not in compliance with
one financial covenant to keep tangible net worth at no less than $3 million at
the end of fiscal year, and the Company obtained a waiver of default from the
bank. The line expires on December 1, 2001 but may be renewed by the Company for
an additional year so long as certain liquidity measures are met at the time of
renewal (See subsequent event note no. 9). There was no balances outstanding for
the above mentioned line of credit for the period presented.
Note 8. Litigation
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
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, 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, a Special Master appointed by the court issued a
report agreeing in most material respects with the defendants' interpretation of
the alleged patent claims. Subsequently, 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 all defendants. Plaintiff has filed an appeal of the
judgment to the Federal Circuit Court of Appeal, which is now pending. Oral
arguments on the appeal were heard December 3, 2001, and a decision is expected
in the next several weeks.
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
settlement proposal. Despite a recent federal case which upheld the US. Customs
authority to seize and penalize for improper use of the UL
38
certification mark, the U.S. Attorney recently stated that he would still
consider settlement of the Company's case in the near future due to factual
differences.
Note 9. Subsequent Event
On November 20, 2001, the Company's line of credit with an expiration of
December 6, 2002 was renewed with substantially similar terms, and an expiration
date of December 1, 2002.
39
Unaudited Quarterly Results of Operations (in thousands except net income (loss)
per share):
Fiscal 2001 Quarter Ended
September 29 June 30 March 31 December 31
Net sales $ 5,187 $ 4,919 $ 5,016 $ 6,952
Gross profit $ 1,911 $ 1,698 $ 1,801 $ 2,530
Net income (loss) $ (126) $ (557) $ (498) $ 232
Net income (loss) per share $ (0.01) $ (0.06) $ (0.05) $ 0.02
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 income (loss) $ 412 $ (60) $ (149) $ 189
Net income (loss) per share $ 0.04 $ (0.00) $ (0.02) $ 0.02
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
40
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 2001 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 29,
2001.
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.
41
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 Schedule - See Index to Financial Statements
and Financial Statement Schedule at page 27 of this Form 10-K.
(3) Exhibits - See Exhibit Index at page 48 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 48 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.
42
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.
* The item listed is a compensatory plan.
(1) Previously filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 (No. 33-70300).
(2) Confidential treatment granted as to certain
portions of these exhibits.
(3) Previously filed as an Exhibit to the Registrant's
Form 10-K for the fiscal year ended September 30,
1994.
(4) Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended October 3, 1998.
43
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 21, 2001
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 21, 2001
(Wilson Wong) (Principal Executive Officer) and Director
/s/ ANTHONY CONTOS Vice President of Finance and Administration December 21, 2001
(Anthony Contos) (Principal Finance and Accounting Officer)
/s/ MICHAEL KAUFMAN (Director) December 21, 2001
(Michael Kaufman)
/s/ EDMOND TSENG (Director) December 21, 2001
(Edmond Tseng)
/s/ JEFF YUAN KAI LIN (Director) December 21, 2001
(Jeff Yuan Kai Lin)
45
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 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
Year ended September 29, 2001:
Allowance for doubtful accounts,
price protection and distributor rebates $ 3,085 $ 529 $ (1,147) $ 2,467
Allowance for sales returns 1,108 36 (39) 1,105
$ 4,193 $ 565 $ (1,186) $ 3,572
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