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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2003
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission file number: 0-22632
ASANTE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0200286
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
821 Fox Lane
San Jose, CA 95131
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (408) 435-8388
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of January 21, 2004 there were 10,149,521 shares of the Registrant's Common
Stock outstanding.
ASANTE TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements:
Unaudited Condensed Balance Sheets -
June 28, 2003 and September 28, 2002 3
Unaudited Condensed Statements of Operations - Three and
nine months ended June 28, 2003 and June 29, 2002 4
Unaudited Condensed Statements of Cash Flows -
Nine months ended June 28, 2003 and
June 29, 2002 5
Notes to Unaudited Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 21
Item 4: Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 22
Item 5: Other Information 22
Item 6: Exhibits and Reports on Form 8-K 22
Signature 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Asante Technologies, Inc.
Unaudited Condensed Balance Sheets
(in thousands)
June 28, September 28,
2002
2003 (Restated)
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 1,423 $ 3,282
Accounts receivable, net 2,011 2,821
Inventory 1,821 1,515
Prepaid expenses and other current assets 58 141
-------- --------
Total current assets 5,313 7,759
Property and equipment, net 62 90
Other assets 171 172
-------- --------
Total assets $ 5,546 $ 8,021
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,320 $ 2,016
Accrued expenses 1,785 1,932
Payable to stockholder 33 --
-------- --------
Total current liabilities 3,138 3,948
-------- --------
Stockholders' equity
Common stock 28,423 28,422
Accumulated deficit (26,015) (24,349)
-------- --------
Total stockholders' equity 2,408 4,073
-------- --------
Total liabilities and stockholders' equity $ 5,546 $ 8,021
======== ========
3
The accompanying notes are an integral part of these
Unaudited Condensed Financial Statements.
Asante Technologies, Inc.
Unaudited Condensed Statements of Operations
(in thousands, except per share data
Three months ended Nine months ended
--------------------- ---------------------
June 28, June 29, June 28, June 29,
2002 2002
2003 (Restated) 2003 (Restated)
-------- -------- -------- --------
Net sales $ 2,677 $ 4,002 $ 9,075 $ 11,865
Cost of sales 1,767 2,626 5,721 7,671
-------- -------- -------- --------
Gross profit 910 1,376 3,354 4,194
-------- -------- -------- --------
Operating expenses:
Sales and marketing 571 873 2,447 3,430
Research and development 570 634 1,623 1,953
General and administrative 352 287 890 992
-------- -------- -------- --------
Total operating expenses 1,493 1,794 4,960 6,375
-------- -------- -------- --------
Loss from operations (583) (418) (1,606) (2,181)
Interest and other income (expense), net (17) 5 (58) 15
-------- -------- -------- --------
Loss before income taxes (600) (413) (1,664) (2,166)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (600) $ (413) $ (1,664) $ (2,166)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.06) $ (0.04) $ (0.17) $ (0.22)
======== ======== ======== ========
Shares used in per share calculation:
Basic and diluted 10,097 10,024 10,083 10,015
======== ======== ======== ========
4
The accompanying notes are an integral part of these
Unaudited Condensed Financial Statements.
Asante Technologies, Inc.
Unaudited Condensed Statements of Cash Flows
(in thousands)
Nine months ended
June 28, June 29,
2003 2002
(Restated)
------- -------
Cash flows from operating activities:
Net loss $(1,664) $(2,166)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 45 72
Provision for doubtful accounts receivable (32) (58)
Changes in operating assets and liabilities:
Accounts receivable 842 728
Inventory (306) 267
Prepaid expenses and other current assets 83 167
Accounts payable (696) (504)
Accrued expenses (147) (181)
Payable to stockholder 33 105
Net cash used in operating activities (1,842) (1,570)
Cash flows from investing activities:
Purchases of property and equipment (17) (60)
Other assets (1) 0
Net cash used by investing activities (18) (60)
Cash flows from financing activities:
Issuance of common stock 1 5
Net cash provided by financing activities 1 5
Net decrease in cash and cash equivalents (1,859) (1,625)
Cash and cash equivalents, beginning of period 3,282 5,065
Cash and cash equivalents, end of period $ 1,423 $ 3,440
5
The accompanying notes are an integral part of these
Unaudited Condensed Financial Statements.
ASANTE TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1. Interim Condensed Financial Statements
The unaudited condensed financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position,
operating results and cash flows for those periods presented. These unaudited
condensed financial statements should be read in conjunction with financial
statements and notes thereto for the year ended September 28, 2002, included in
the Company's restated 2002 Annual Report on Form 10-K/A. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for the entire year.
The Company's expectations as to its cash flows, and as to future cash balances,
are subject to a number of assumptions, including assumptions regarding
anticipated revenues, customer purchasing and payment patterns, and improvements
in general economic conditions, many of which are beyond the Company's control.
If revenues do not match projections and if losses exceed the Company's
expectations, the Company will implement additional cost saving initiatives in
order to preserve cash. If the Company experiences a continued decrease in
demand for it's products from the level experienced during fiscal year 2002,
then it would need to reduce expenditures to a greater degree than anticipated,
or raise additional funds if possible.
The Company operates in a highly competitive market characterized by rapidly
changing technology, together with competitors and distributors that have
significantly greater financial resources than the Company. The Company intends
to incur significant expenses to develop and promote new products as well as to
support existing product sales. Failure to generate sufficient revenues from new
and existing products, or reduce discretionary expenditures would have a
material adverse effect on the Company's ability to achieve its intended
business objectives.
Note 2. Basic and Diluted Net Loss Per Share
Basic net loss per share is computed by dividing net loss (numerator) by the
weighted-average number of common shares outstanding (denominator) during the
period. Diluted net loss per share gives effect to all dilutive potential common
shares outstanding during the period including stock options, using the treasury
stock method. In computing diluted net loss per share, the average stock price
for the period is used in determining the number of shares assumed to be
purchased from the exercise of stock options.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations for the periods presented (in
thousands, except per share data):
6
Three Months Ended Nine Months Ended
---------------------- -------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
------ ------- -------- --------
Net loss $ (600) $ (413) $ (1,664) $ (2,166)
====== ======= ======== ========
Weighted average common stock outstanding (basic) 10,097 10,024 10,083 10,015
Effect of dilutive warrants and options -- -- -- --
------ ------- -------- --------
Weighted average common stock outstanding (diluted) 10,097 10,024 10,083 10,015
====== ======= ======== ========
Net loss per share:
Basic $(0.06) $ (0.04) $ (0.17) $ (0.22)
====== ======= ======== ========
Diluted $(0.06) $ (0.04) $ (0.17) $ (0.22)
====== ======= ======== ========
For the three months ended June 28, 2003, and June 29, 2002, options and
warrants outstanding of 1,693,032 and 1,609,845, respectively, were excluded
since their effect was antidilutive.
For the nine months ended June 28, 2003, and June 29, 2002, options and warrants
outstanding of 1,670,619 and 1,534,843, respectively, were excluded since their
effect was antidilutive.
Note 3. Comprehensive Income (Loss)
The Company had no items of other comprehensive income (loss) during any of the
periods presented, and, accordingly, net loss was equal to comprehensive loss
for all periods presented.
Note 4. Inventory
Inventory is stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis), or market. Adjustments of the inventory
values are provided for slow moving and discontinued products based upon future
expected sales and committed inventory purchases. Inventories consisted of the
following (in thousands):
June 28, September 28,
2003 2002
------ ------
Raw materials and component parts $ 146 $ 193
Work-in-process 47 54
Finished goods 1,628 1,268
------ ------
$1,821 $1,515
====== ======
Note 5. Warranties
We provide for estimated future warranty costs upon product shipment. The
specific terms and conditions of those warranties vary depending upon the
product sold and country in which we do
7
business. In the case of hardware manufactured by our sub-contract
manufacturers, our warranties generally start from the delivery date and
continue as follows:
Product Warranty Periods
------- ----------------
Managed switches Three to five years
Unmanaged Gigabit Switches, Gigabit Adapters One to five years
Unmanaged switches, hubs, USB hubs, routers, fiber One to five years
Other - Adapters One to five years
AsantePrint and AsanteTalk print routers, Gig cables Limited Lifetime
Longer warranty periods are provided on a limited basis including some
"lifetime" warranties on some of the Company's older legacy products.
From time to time, some of the Company's products may be manufactured to
customer specifications and their acceptance is based on meeting those
specifications. We historically have experienced minimal warranty costs related
to these products. Factors that affect our warranty liability include the number
of shipped units, historical experience and management's judgment regarding
anticipated rates of warranty claims and cost per claim. We assess the adequacy
of our recorded warranty liabilities every quarter and make adjustments to the
liability if necessary.
Changes in our warranty liability, which is included as a component of "Accrued
expenses" on the Condensed Balance Sheets, during the period are as follows (in
thousands):
Balance as of September 28, 2002 $ 430
Provision for warranty liability for sales made during the
nine month period ended June 28, 2003 229
Settlements made during the nine month period ended June 28, 2003 (229)
-----
Balance as of June 28, 2003 $ 430
-----
Note 6. Bank Borrowings
On December 31, 2002, the Company renewed its bank line of credit which provides
for maximum borrowings of $2.0 million, and is limited to a certain percentage
(65%) of eligible accounts receivable. As of December 27, 2003 $477,935 was
available on this line-of-credit. No borrowings have been made under the
line-of-credit agreement. The line of credit is available through November 2003
and is subject to certain covenant requirements, including maintaining certain
net tangible worth amounts. As of June 28, 2003, the Company was in compliance
with the covenants under its line of credit agreement. The line-of-credit
agreement was set to expire in November 2003. However, the parties entered into
an Amendment to Loan Documents in which the line-of-credit term was extended to
January 31, 2004 during which time the Company has been negotiating a renewal of
its line-of-credit with the bank. As of January 20, 2004, the Company was in
compliance with the covenants under its line-of-credit agreement extension.
8
Note 7. Income Taxes
The Company has recorded no provision or benefit for federal and state income
taxes for the three and nine month periods ended June 28, 2003 and June 29,
2002, due primarily to a valuation allowance being established against the
Company's net deferred tax assets, which consist primarily of net operating loss
carryforwards and research and development credits. The Company has recorded a
full valuation allowance against its net deferred tax assets as sufficient
uncertainty exists regarding their recoverability.
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.
As of June 28, 2003, the Company was unaware of any asserted claims which would
have a material impact on its business, or results of operations.
Note 9. Recently Issued Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of EITF Issue No.
00-21 will have on its results of operations, financial condition and cash
flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Other" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and requires a guarantor to make disclosures, even when
the likelihood of making any payments under the guarantee is remote. For those
guarantees and indemnifications that do not fall within initial recognition and
measurement requirements of FIN 45, the Company must continue to monitor the
conditions that are subject to the guarantees and indemnifications, as required
under existing generally accepted accounting principles, to identify if a loss
has been incurred. If the Company determines that it is probable that a loss has
been incurred, any such estimable loss would be recognized. The initial
recognition and measurement requirements do not apply to the Company's product
warranties or to the provisions contained in the majority of the Company's
software license agreements that indemnify licensees of the Company's software
from damages and costs resulting from claims alleging that the Company's
software infringes the intellectual property rights of a third party. The
Company does not expect adoption of the liability recognition provisions to have
a material impact on its financial position or results of operations.
9
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company believes
that the adoption of this standard will have no material impact on its financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. In particular, this
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. This Statement is generally effective for contracts entered into
or modified after June 30, 2003 and is not expected to have a material impact on
the Company's financial statements.
In May 2003, the FASB has issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The new Statement requires that
those instruments be classified as liabilities in statements of financial
position. This statement is effective for interim periods beginning after June
15, 2003. The Company does not expect that the adoption of SFAS 150 will have a
material effect on its financial statements.
Note 10. Segment Information
The Company has determined that it does not have separately reportable operating
segments.
Sales as a percent of total sales by geographic region for the first nine months
of each fiscal year are as follows:
2003 2002
---- ----
United States 80% 81%
Europe 13% 13%
Other 7% 6%
Substantially all of the Company's assets are located in the United States of
America.
Note 11. Stock Based Compensation
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure," which amends SFAS No. 123. SFAS No.
148 requires more prominent and frequent disclosures about the effects of
stock-based compensation. The Company accounts for its stock-based compensation
plans using the intrinsic value method
10
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Compensation cost for stock options, if any, is measured
by the excess of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. SFAS No. 123,
"Accounting for Stock-Based Compensation," established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation plans. Had compensation expense for the Plans been
determined consistent with SFAS No. 123, the Company's net loss and basic and
diluted net loss per share would have increased to the following pro forma
amounts (dollars, in thousands, except per share amounts):
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
June 28, June 29, June 28, June 29,
(In thousands, except per share data) 2003 2002 2003 2002
-------- ---------- ---------- ---------
Net loss as reported $ (600) $ (413) $ (1,664) $ (2,166)
-------- ---------- ---------- ---------
Employee stock-based compensation expense
determined under the fair value method $ 14 $ 49 $ 72 $ 148
-------- ---------- ---------- ---------
Pro forma net loss $ (614) $ (462) $(1,736)$ (2,314)
========== ========== =========
Net loss per share:
As reported
Basic $ (0.06) $ (0.04) $ (0.17) $ (0.22)
======== ========== ========== =========
Diluted $ (0.06) $ (0.04) $ (0.17) $ (0.22)
======== ========== ========== =========
Pro forma
Basic $ (0.06) $ (0.05) $ (0.17) $ (0.23)
======== ========== ========== =========
Diluted $ (0.06) $ (0.05) $ (0.17) $ (0.23)
======== ========== ========== =========
Note 12. Guarantees
Officer and Director Indemnifications
As permitted and/or required under Delaware law and to the maximum
extent allowable under that law, the Company has agreements whereby the Company
indemnifies its current and former officers and directors for certain events or
occurrences while the officer or director is, or was serving, at the Company's
request in such capacity. These indemnifications are valid as long as the
director or officer acted in good faith and in a manner that a reasonable person
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a director and officer
insurance policy that limits the Company's exposure and enables the Company to
recover a portion of any future amounts paid. As a result of the Company's
insurance policy coverage, the Company believes the estimated fair value of
these indemnification obligations is minimal.
11
Other Indemnifications
As is customary in the Company's industry, the Company's standard
contracts provide remedies to its customers, such as defense, settlement, or
payment of judgment for intellectual property claims related to the use of the
Company's products. From time to time, the Company indemnifies customers against
combinations of loss, expense, or liability arising from various trigger events
related to the sale and the use of its products. In the Company's experience,
claims made under such indemnifications are rare and the associated estimated
fair value of the liability is not material.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion, other than the historical financial information, may consist of
forward-looking statements that involve risks and uncertainties, including
quarterly fluctuations in results, the timely availability of new products, the
impact of competitive products and pricing, and the other risks detailed from
time to time in the Company's SEC reports, including this report on Form 10-Q
for the three and nine months ended June 28, 2003, the Company's Annual Report
on Form 10-K for the fiscal year ended September 28, 2002, and the Company's
recently filed 10-K/A for the fiscal year ended September 28, 2002. These
forward-looking statements speak only as of the date thereof and should not be
given undue reliance. Actual results may vary materially from those projected.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
RESULTS OF OPERATIONS
Net Sales
Net sales for the third quarter of fiscal 2003 were $2.7 million, a decrease of
$1.3 million, or 32%, from net sales of $4.0 million for the third quarter of
fiscal 2002. Sales of the Company's products continued to be negatively impacted
by the ongoing economic slowdown affecting the industry, a reduction in revenues
in the distribution channel due to several factors including, heavy competitive
pressures negatively impacting selling prices of networking products, and to
some extent, delayed spending in the education channel due to budget cuts
causing a reduction in managed systems sales during the quarter. Management
anticipates that revenues of the Company's managed systems and Gigabit products
will improve compared to the third quarter, while sales of adapters will remain
flat, or decrease somewhat due to lower selling prices and continued
incorporation of Ethernet onto the motherboard of many newer computers.
Net sales for the first nine months of fiscal 2003 decreased by 24% to $9.1
million compared to $11.9 million for the first nine months of fiscal 2002.
During the nine months ended June 28, 2003, the Company's sales levels were
negatively impacted by the continued economic slow down affecting the industry.
Additionally, the decrease in sales for the nine months ended June 28, 2003
compared to June 29, 2002 was due to several factors including sharp declines in
selling prices due to heavy competitive pressures, a reduction of Mac specific
networking adapters due to Apple's continued incorporation of Ethernet onto the
motherboard of most of their newer computers, delays in educational purchasing
due to budget reductions, and the reduction of sales to one of the Company's
large customers in fiscal 2002.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 21% of net sales for the third quarter of fiscal
2003 and were approximately 20% for the first nine months of fiscal 2003. These
percentages compare to 15% and 19% for the third quarter and first nine months
of fiscal 2002, respectively. The slight decrease in international sales in
percentage terms for the first nine months of fiscal 2003 as compared to fiscal
2002 was due in part to increased revenues of the Company's products in Canada
during the quarter.
13
Cost of Sales and Gross Profit
Cost of sales for the quarter ended June 28, 2003 decreased 33% to $1.8 million,
compared to $2.6 million reported in the same quarter of fiscal 2002. The lower
cost of sales was due primarily to reduced sales for the third quarter of fiscal
2003. Gross profit for the quarter ended June 28, 2003 declined 34% to $0.9
million compared to $1.4 million for the quarter ended June 29, 2002. The
decrease in gross profit for the quarter is consistent with the decrease in net
sales and cost of sales experienced during the most recently completed quarter.
For the first nine months of fiscal 2003, cost of sales have decreased 26% to
$5.7 million compared to $7.7 million for the same period in fiscal 2002. Gross
profits have declined 20% to $3.4 million for the first nine months of fiscal
2003, compared to $4.2 million of gross profit reported during the first nine
months of fiscal 2002. The decrease in gross profit for the first nine months of
fiscal 2003 is due primarily to a 24% decline in net sales.
The Company's gross profit as a percentage of net sales decreased slightly to
34.0% for the third quarter of fiscal 2003 as compared to 34.4% for the same
period in fiscal 2002. This decrease was due primarily to competitive pricing
pressures. The Company's gross profit as a percentage of net sales increased to
36.9% for the first nine months of fiscal 2003 as compared to 35.3% for the same
period in fiscal 2002. The increase was due primarily to reduced reserves for
inventory obsolescence.
Sales and Marketing
Sales and marketing expenses decreased by $300,000, or 35%, in the third quarter
of fiscal 2003 compared to the third quarter of fiscal 2002, and decreased by
$1.0 million, or 29%, in the first nine months of fiscal 2003 compared to the
first nine months of fiscal 2002. As a percentage of sales, these expenses were
21.3% in the third quarter of fiscal 2003 and 27.0% in the first nine months of
fiscal 2003, compared with 21.8% and 28.9% in the third quarter and first nine
months of fiscal 2002, respectively. The lower sales and marketing expenditures
were due primarily to decreases in personnel and related costs, tradeshow
participation, and advertising related costs. The Company believes that sales
and marketing expenses overall will remain approximately flat for the remainder
of fiscal 2003.
Research and Development
Research and development expenses decreased by $64,000, or 10%, in the third
quarter of fiscal 2003 compared to the third quarter of fiscal 2002 and
decreased by $300,000, or 17% in the first nine months of fiscal 2003 compared
to the first nine months of fiscal 2002. The decreases were due primarily to
lower depreciation, prototype and personnel related costs. The Company expects
that future spending on research and development will decrease slightly in
absolute dollars for the remainder of fiscal 2003.
General and Administrative
General and administrative expenses increased by $65,000 in the third quarter of
fiscal 2003 compared to the third quarter of fiscal 2002 and decreased by
$100,000, or 10%, in the first nine months of fiscal 2003 compared with the
first nine months of fiscal 2002. As a percentage of net
14
sales, these expenses were 13% for the third quarter of fiscal 2003, and 10% for
the first nine months of fiscal 2003, as compared with 7% and 8% in the third
quarter and first nine months of fiscal 2002, respectively. The increase during
the third quarter of 2003 reflects costs and fees associated with the Company's
negotiations of a potential acquisition. The Company expects that general and
administrative spending will be reduced for the remainder of fiscal 2003, except
for expenses associated with financing and related activities.
Income Taxes
The Company has recorded no provision or benefit for federal and state income
taxes for the periods ended June 28, 2003 and June 29, 2002, due primarily to a
valuation allowance being established against the Company's net deferred tax
assets which consist primarily of net operating loss carry-forwards and research
and development credits. The Company has recorded a full valuation allowance
against its net deferred tax assets as sufficient uncertainty exists regarding
their recoverability.
Liquidity and Capital Resources
Net cash used in operating activities was $1.8 million for the nine months ended
June 28, 2003, compared to cash used of $1.6 million for the nine months ended
June 29, 2002. During the first nine months of fiscal 2003, the net cash used in
operating activities resulted primarily from the Company's net loss, decreased
payables of $700,000, and increased inventory of $300,000. These cash outflows
were partially offset by net cash inflows from accounts receivable of $800,000.
Net cash used in investing activities and provided by financing activities for
the nine months of fiscal 2003 and fiscal 2002 was insignificant.
In December 2002, the Company renewed its bank line of credit that provides for
maximum borrowings of $2.0 million, and is limited to a certain percentage (65%)
of eligible accounts receivable. As of December 27, 2003 $477,935 was available
on this line-of-credit. The Company has not drawn on this line of credit. The
line of credit is available through November 2003 and is subject to certain
covenant requirements, including maintaining certain net tangible worth amounts.
As of June 28, 2003, the Company was in compliance with the covenants under its
line of credit agreement. The line-of-credit agreement was set to expire in
November 2003. However, the parties entered into an Amendment to Loan Documents
in which the line-of-credit term was extended to January 31, 2004 during which
time the Company has been negotiating a renewal of its line-of-credit with the
bank. As of January 20, 2004, the Company was in compliance with the covenants
under its line-of-credit agreement extension.
The Company has an operating lease for its main facility that expires on August
31, 2004. Future minimum lease payments under this lease at June 28, 2003 are as
follows (in thousands):
Three months ending September 27, 2003 248
Year ending October 2, 2004 909
------
$1,157
======
In the first nine months of fiscal 2003, and fiscal years 2002 and 2001, the
Company incurred net losses and negative cash flows from operations and as of
June 28, 2003, the Company had an
15
accumulated deficit of $26 million. Based upon the Company's operating budget
and cash flow projections the Company expects to continue to experience negative
cash flows from operations through fiscal year 2003. The Company anticipates
that its existing cash and its ability to borrow under its line of credit will
be sufficient to meet its working capital and operating expense requirements at
least through the end of fiscal year 2003. However, the Company's inventories
increased substantially in the second quarter and during the first month of the
third quarter, which negatively impacted the Company's cash position.
During the third quarter, the Company implemented several cost savings measures
aimed at reducing its cash usage rate, including a reduction in personnel and a
change in independent accountants. The Company's expectations as to its cash
flows, and as to future cash balances, are subject to a number of assumptions,
including assumptions regarding anticipated revenues, customer purchasing and
payment patterns, and improvements in general economic conditions, many of which
are beyond the Company's control. If revenues do not match projections or if
losses exceed the Company's expectations, the Company will implement additional
cost saving initiatives in order to preserve cash. If the Company experiences a
continued decrease in demand for it's products from the level experienced during
fiscal year 2002, then it would need to reduce expenditures to a greater degree
than anticipated, or raise additional funds if possible.
The Company operates in a highly competitive market characterized by rapidly
changing technology, together with competitors and distributors that have
significantly greater financial resources than the Company. The Company intends
to incur significant expenses to develop and promote new products as well as to
support existing product sales. Failure to generate sufficient revenues from new
and existing products, or reduce discretionary expenditures would have a
material adverse effect on the Company's ability to achieve its intended
business objectives.
Factors Affecting Future Operating Results
The development and marketing of products requires significant amounts of
capital. A decline in future orders and revenues might require the Company to
seek additional capital to meet it's working capital needs during or beyond the
next twelve months if we are unable to reduce expenses to the degree necessary
to avoid incurring losses. If the Company needs additional capital resources, it
may be required to sell additional equity or debt securities, secure additional
lines of credit or obtain other third party financing. The timing and amount of
such capital requirements cannot be determined at this time and will depend on a
number of factors, including demand for our existing and new products and
changes in technology in the networking industry. There can be no assurance that
additional financing will be available on satisfactory terms when needed, if at
all. Failure to raise such additional financing, if needed, may result in
Company's inability to achieve our long-term business objectives. To the extent
that additional capital is raised through the sale of additional equity or
convertible debt securities, the issuance of these securities would result in
additional dilution to the Company's shareholders.
The Company operates in a rapidly changing industry, which is characterized by
intense competition from both established companies and start-up companies. The
market for the Company's products is extremely competitive both as to price and
capabilities. The Company's success depends in part on its ability to enhance
existing products and introduce new technology products. This requires the
Company to accurately predict future technology trends and preferences. The
Company must also bring its products to market at competitive price levels.
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Unexpected changes in technological standards, customer demand and pricing of
competitive products could adversely affect the Company's operating results if
the Company is unable to respond effectively and timely to such changes.
The industry is also dependent to a large extent on proprietary intellectual
property rights. From time to time the Company is subject to legal proceedings
and claims in the ordinary course of business, including claims of alleged
infringement of patents, trademarks and other intellectual property rights.
Consequently, from time to time, the Company will be required to prosecute or
defend against alleged infringements of such rights.
The Company's success also depends to a significant extent upon the
contributions of key sales, marketing, engineering, manufacturing, and
administrative employees, and on the Company's ability to attract and retain
highly qualified personnel, who are in great demand. None of the Company's key
employees are subject to a non-competition agreement with the Company. High
employee turnover in the technology industry is typical. Although the Company
has reduced its workforce during fiscal 2002 and in the first two quarters of
fiscal 2003, vacancies in the workforce must be promptly filled, because the
loss of current key employees or the Company's inability to attract and retain
other qualified employees in the future could have a material adverse effect on
the Company's business, financial condition and results of operations. The job
market in the San Francisco Bay Area is characterized by significant
competition, rapidly changing salary structures, and a need for very specialized
experience. These conditions could affect the Company's ability to retain and
recruit a sufficiently qualified workforce.
The Company's current manufacturing structure is particularly subject to various
risks associated with its use of offshore contract manufacturers including
changes in costs of labor and materials, reliability of sources of supply and
general economic conditions in foreign countries. Unexpected changes in foreign
manufacturing or sources of supply, and changes in the availability, capability
or pricing of foreign suppliers could adversely affect the Company's business,
financial condition and results of operations. The networking industry and
technology markets in general continue to adjust to a widespread reduction in
demand for products due to financial problems experienced by many Internet
Service Provider's (ISP's), and the failure of many Internet companies. The
duration, or long-term effect on the Company's operations is difficult to
measure, but the inability to alter its strategic markets, or react properly to
this slowdown could have an adverse effect on the Company's financial position.
The 10/100 Mbps and 100 Mbps Ethernet technology (100BASE-T, or "Fast-Ethernet")
has become a standard networking topology in the networking and computer
industries. This standard has been adopted widely by end-user customers because
of its ability to increase the efficiency of LANs and because of its ease of
integration into existing 10BASE-T networks. Because of the importance of this
standard, the Company has focused its ongoing research and development
activities on introducing future products incorporating 100BASE-T technology.
The Company realizes the importance of bringing more 10/100BASE-T (10 Mbps)
switching and 100BASE-T switching to market in order to complement its existing
100BASE-T shared products. In addition, Gigabit (1000BASE-T, or 1000Mbps)
Ethernet technology is increasingly being adopted in the backbone of large
enterprises and educational institutions. In that regard, the Company's future
operating results may be dependent on the market acceptance and the rate of
adoption of these technologies, as well as timely product releases. There can be
no assurance that the market will
17
accept, adopt, or continue to use this new technology or that the Company can
meet market demand in a timely manner.
The Company's success will depend in part on its ability to accurately forecast
its future sales due to the lead time required to order components and assemble
products. If the Company's product sales forecasts are below actual product
demand, there may be delays in fulfilling product orders; consequently, the
Company could lose current and future sales to competitors. Alternatively, if
the Company's product sales forecasts are above actual product demand, this may
result in excess orders of components or assembled products and a build-up of
inventory that would adversely affect working capital. The Company experienced a
build-up in inventories in the March time frame, and expects a further near term
build-up in inventories which it believes will negatively affect near-term cash
flows.
The Company commits to expense levels, including manufacturing costs and
advertising and promotional programs, based in part on expectations of future
net sales levels. If future net sales levels in a particular quarter do not meet
the Company's expectations or the Company does not bring new products timely to
market, the Company may not be able to reduce or reallocate such expense levels
on a timely basis, which could adversely affect the Company's operating results
and cash position. There can be no assurance that the Company will be able to
achieve profitability on a quarterly or annual basis in the future.
The Company's target markets include end-users, value-added resellers, systems
integrators, retailers, education, Multiple Tenant Unit/Multiple Dwelling Unit
(MTU/MDU) providers, and OEMs. Due to the relative size of the customers in some
of these markets, particularly the OEM market, sales in any one market could
fluctuate dramatically on a quarter to quarter basis. Fluctuations in the OEM
market could materially adversely affect the Company's business, financial
condition and results of operations. Additionally, the Company's revenues and
results of operations could be adversely affected, if the Company were to lose
certain key distribution partners.
In summary, the Company's net sales and operating results in any particular
quarter may fluctuate as a result of a number of factors, including competition
in the markets for the Company's products, delays in new product introductions
by the Company, market acceptance of new products incorporating 100BASE-T by the
Company or its competitors, changes in product pricing, material costs or
customer discounts, the size and timing of customer orders, distributor and
end-user purchasing cycles, fluctuations in channel inventory levels, variations
in the mix of product sales, manufacturing delays or disruptions in sources of
supply, the current economic downturn and seasonal purchasing patterns specific
to the computer and networking industries. The Company's future operating
results will depend, to a large extent, on its ability to anticipate and
successfully react to these and other factors. Failure to anticipate and
successfully react to these and other factors could adversely affect the
Company's business, financial condition and results of operations.
In addition to the above, the Company is also susceptible to other factors that
generally affect the market for stocks of technology companies. These factors
could affect the price of the Company's stock and could cause such stock price
to fluctuate over relatively short periods of time.
18
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon Asante Technologies, Inc. financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management bases estimates and judgments on historical experience and on various
other factors that are believed to be reasonable under the circumstances; the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from these estimates under
different assumptions or conditions. Management believes the following critical
accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its financial statements.
Revenue Recognition. The Company recognizes revenue net of estimated product
returns, expected payments to resellers for customer programs including
cooperative advertising and marketing development funds, volume rebates, and
special pricing programs. Product returns are provided for at the time revenue
is recognized, based on historical return rates, the product stage relative to
its expected life cycle, and assumptions regarding the rate of sell-through to
end users from our various channels, which is based on historical sell-through
rates. Should these product lives vary significantly from our estimates, or
should a particular selling channel experience a higher than estimated return
rate, or a slower sell-through rate causing inventory build-up, then our
estimated returns, which net against revenue, may need to be revised. Reductions
to revenue for expected and actual payments to resellers for volume rebates and
pricing protection are based on actual expenses incurred during the period and
on estimates for what is due to resellers for estimated credits earned during
the period. If market conditions were to decline, the Company may take action to
increase promotional programs resulting in incremental reductions in revenue at
the time the incentive is offered based on our estimate of inventory in the
channel that is subject to such pricing actions.
Accounts Receivable. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from our
customers. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of our customers should deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Inventory. The Company maintains reserves for estimated excess and obsolete
inventory based on projected future shipments using historical selling rates,
and taking into account market conditions, inventory on-hand, purchase
commitments, product development plans and life expectancy, and competitive
factors. If markets for the Company's products and corresponding demand were to
decline, then additional reserves may be deemed necessary.
Warranty. The Company provides for the estimated cost of warranties at the time
revenue is recognized. Should actual failure rates and material usage differ
from our estimates, revisions to the warranty obligation may be required.
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Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of EITF Issue No.
00-21 will have on its results of operations, financial condition and cash
flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Other" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and requires a guarantor to make disclosures, even when
the likelihood of making any payments under the guarantee is remote. For those
guarantees and indemnifications that do not fall within initial recognition and
measurement requirements of FIN 45, the Company must continue to monitor the
conditions that are subject to the guarantees and indemnifications, as required
under existing generally accepted accounting principles, to identify if a loss
has been incurred. If the Company determines that it is probable that a loss has
been incurred, any such estimable loss would be recognized. The initial
recognition and measurement requirements do not apply to the Company's product
warranties or to the provisions contained in the majority of the Company's
software license agreements that indemnify licensees of the Company's software
from damages and costs resulting from claims alleging that the Company's
software infringes the intellectual property rights of a third party. The
Company does not expect adoption of the liability recognition provisions to have
a material impact on its financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company believes
that the adoption of this standard will have no material impact on its financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. In particular, this
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. This Statement is generally effective for contracts entered into
or modified after June 30, 2003 and is not expected to have a material impact on
the Company's financial statements.
In May 2003, the FASB has issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
improves the accounting for
20
certain financial instruments that, under previous guidance, issuers could
account for as equity. The new Statement requires that those instruments be
classified as liabilities in statements of financial position. This statement is
effective for interim periods beginning after June 15, 2003. The Company does
not expect that the adoption of SFAS 150 will have a material effect on its
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. As of June 28, 2003, the Company's cash and investment
portfolio did not include fixed-income securities. Due to the short-term nature
of the Company's investment portfolio, an immediate 10% increase or decrease in
interest rates would not have a material effect on the fair market value of the
Company's portfolio. Since the Company has the ability to liquidate this
portfolio, it does not expect its operating results or cash flows to be
materially affected to any significant degree by the effect of a sudden change
in market interest rates on its investment portfolio.
Foreign Currency Exchange Risk. All of the Company's sales are denominated in
U.S. dollars, and as a result the Company has little exposure to foreign
currency exchange risk. The effect of an immediate 10% change in exchange rates
would not have a material impact on the Company's future operating results or
cash flows.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Form 10-Q, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in this Form 10-Q.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect the internal controls subsequent
to the date the Company carried out its evaluation.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
As of June 28, 2003, the Company was unaware of any asserted claims which would
have a material impact on its business or results of operations.
ITEM 5. OTHER INFORMATION
On June 13, 2003, the Company entered into an Agreement and Plan of Merger with
Oblique, Inc. ("Oblique") (the "Merger Agreement"), pursuant to which the
Company would merge with and into Oblique with Oblique being the surviving
corporation (the "Merger"). The value of the Merger transaction is approximately
$5,120,000, subject to certain performance requirements. Under the terms of the
Merger Agreement, each existing stockholder of the Company could expect to
receive a pro rata share of the Merger consideration of approximately $.50 in
cash per share with approximately $.45 of such amount being paid at the closing
with the remaining approximately $.05 per share being distributed by March 31,
2004, subject to certain indemnification obligations.
The transaction was approved by the Company's board of directors and is subject
to stockholder approval. In conjunction with such stockholder approval, the
Company filed a preliminary proxy statement with the SEC on July 18, 2003.
The Merger is subject to various conditions including the delivery of a fairness
opinion by the Company's financial adviser and Oblique's delivery of proof of
sufficient funds available to consummate the Merger.
As a result of the Merger, the Company's common stock would be delisted from the
Nasdaq OTC Bulletin Board and the Company would discontinue its reporting
obligations under the Securities Exchange Act of 1934.
Subsequent to the quarter being reported on herein, the Company terminated the
Merger Agreement with Oblique.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 OF
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THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1 - CERTIFICATION BY CEO PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
(b) Reports on Form 8-K:
(1) On May 8, 2003, the Company filed a Form 8-K reporting an
Item 9 event regarding its announcement of unaudited financial results for the
fiscal quarter ended March 29, 2003.
(2) On June 23, 2003, the Company filed a Form 8-K reporting
an Item 5 event regarding the Company's entering into a Merger Agreement with
Oblique, Inc.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: January 26, 2004 ASANTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ Wilson Wong
--------------------------------
Wilson Wong, President
(Authorized Officer and Chief Executive Officer)
24