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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 28, 1996
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 (I.R.S. Employer Identification No.)
of 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 December 5,
1996 as reported on the Nasdaq National Market, was approximately $47,788,000.
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 December 5, 1996, the Registrant had 8,890,742 shares of Common Stock
outstanding.
------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the 1997
Annual Meeting of Stockholders to be held on February 25, 1997 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 3
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 16
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING FINANCIAL DISCLOSURE 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 40
ITEM 11. EXECUTIVE COMPENSATION 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 41
SIGNATURES 44
PART I
This discussion, other than the historical financial information, may consist of
forward-looking statements that involve risks and uncertainties, including
quarterly and yearly fluctuations in results, the timely availability of new
products, the impact of competitive products and pricing, and the other risks
detailed from time to time in the Company's SEC reports, including this report.
Actual results may vary significantly.
ITEM 1. BUSINESS
Asante Technologies, Inc. ("Asante" or the "Company"), founded in 1988, designs,
manufactures and markets high-performance computer networking products that
address networking requirements at the departmental and workgroup level within
corporations and small businesses. The Company sells its products primarily
through distributors and supports this distribution channel with marketing and
promotional programs and a network of direct sales and service personnel.
There are four trends in computer networking that affect the Company's business:
1) the adoption of switched Ethernet technology, 2) the adoption of Fast
Ethernet products, 3) the use of "Intranet" software technology in corporate
local area networks, and 4) the gains in market share of Microsoft Windows NTR.
The first trend is the growth in commercialization and adoption of Ethernet
switching technology as an alternative to traditional shared Ethernet
technologies. Initially, switching products were used primarily within larger
companies that were the first to experience congestion in their traditional
network architectures. More recently, adoption of switching technology has
spread to smaller companies. Furthermore, many companies are deploying switching
at all layers of the network: in the local area network ("LAN") backbone, in
server groups, at the workgroup level, and in direct connections to desktop PCs.
The Company introduced several new switching products in 1996 and is continuing
to focus research and development resources on the development of additional
switching products.
Despite the move to switching among the more sophisticated sectors of the
networking market, the demand for low cost 10Mbps Ethernet technology from more
price-sensitive customers has continued to grow. This trend is particularly
strong in the kindergarten through grade 12 education market in which the
Company has a strong reputation and product name recognition. The adoption by
schools of wide area links to the worldwide internet has led to the use of low
cost 10Mbps shared technology for their local area networks. Schools connecting
to the internet for the first time find that they need to install an Ethernet
LAN and they have favored low cost 10Mbps solutions. The Company continues to
hold a competitive position in the market for 10Mbps shared hubs, and will
continue to deploy research and development and cost reduction engineering
resources to its 10Mbps product line to maintain competitiveness in this market.
The second trend is the adoption of Fast Ethernet (100Mbps) technology. The
users of this technology are in two very different sectors of the market: large
corporations seeking a solution to congestion at the "top" of their networks,
and those using specific vertical applications such as publishing, pre-press,
imaging and multimedia who routinely transfer very large files across their
networks.
3
The Company offers a wide range of 100Mbps Fast Ethernet shared hubs and cards,
and anticipates introducing 100Mbps switching products next year. Its Fast
Ethernet products are differentiated from those of the Company's competitors
through software utilities that significantly improve the overall performance of
a Fast Ethernet networking solution. In 1996, the Company introduced
NetDoublerTM, which optimizes Fast Ethernet performance. The Company has ported
NetDoubler to Windows NT and will update this product in the near future. The
Company has also entered into technology licensing agreements with several other
companies that offer networking software solutions. As these companies
incorporate NetDoubler into their server software, the Company anticipates that
the demand for its desktop portion of the NetDoubler solution will increase, and
in turn, the demand for its NetDoubler-enabled cards and Fast Ethernet hubs will
also increase.
The third trend affecting the market for local area networking equipment is the
rapid adoption of internet software for internal corporate networks. The
resulting "Intranets" are based on web servers and web browser technology. This
technology is easily deployed and the development tools offer large gains in
programmer productivity. This has caused growth in both the development of
in-house corporate applications based on Intranet technology, and efforts by
standard product software companies to develop products based on this same
technology. Many corporations view Intranet software technology as a
cost-effective alternative to traditional client-server software architectures.
The fourth trend in the local area networking market is the reported growth in
sales and market share for the Microsoft Windows NT operating system. The low
installation and maintenance cost, scalability, and compatibility with desktop
versions of Windows have made Windows NT an effective solution for servers in
corporations.
In response to these last two trends, the Company has developed a Windows
NT-based server software product called IntraSpectionTM that allows networks to
be managed by any web browser, thus facilitating the use of Intranet technology
and Windows NT for network management solutions. By using IntraSpection for
Window NT and Intranet technology, customers may reduce their network management
costs since Windows NT is a much lower cost platform than the Unix platforms
used for most of the major network platforms. In addition, Intranet software
tools offer higher programmer productivity, thus allowing customers to customize
the IntraSpection system inexpensively, and IntraSpection allows the customer to
manage all of its network resources using only one system, thus decreasing
network management costs.
The Company continues to sell Ethernet and Fast Ethernet adapters to customers
who use Apple Macintosh computers. The Company historically has been heavily
associated with, and therefore had a dependence 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 or other 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.
The Company is dependent on new products, specifically in the switch and Fast
Ethernet areas. Delays in bringing new products to market would have a material
adverse effect on the Company's financial results and condition.
4
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 and 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 in
inventory which would adversely affect working capital.
Industry Segment Information
Asante operates in one industry as described above.
Products
Switch Products
Asante's switch family includes four workgroup switches for small- to
medium-sized networks. The Asante 5216 Switch is a high-performance 16-port
segmentation switch with two 100BASE-TX "fat pipes" for high-speed connections
to servers or backbones. This product helps solve LAN congestion problems by
increasing aggregate bandwidth by up to 16 times for a total of 360Mbps. The
5216xp Switch offers the same port configuration as the 5216 switch, but with
two additional expansion slots for 100BASE-TX, 100BASE-FX, or FDDI (single or
dual attach station) modules. These modules can be utilized in any combination
or individually as needed. The ReadySwitch 5104 and 5104 FX are smaller
four-port Ethernet switches offering a single Fast Ethernet uplink for networks
with high demand for server access. The 5104 FX includes a 100BASE-FX fiber
optic port, providing a long-distance backbone connection of up to two
kilometers.
100BASE-T (Fast Ethernet) Systems
The Asante Fast 100 Hub is a 100BASE-TX hub providing ten times the performance
of 10Mbps Ethernet and is targeted for bandwidth intensive graphic, multimedia,
and mission-critical applications. The 12-port version has a stackable
architecture that supports up to 180 ports and comes in intelligent and
non-intelligent configurations. The 6-port version is non-intelligent and comes
in a non-stackable form. Features include auto-negotiation for seamless
integration of existing 10BASE-T with new 100BASE-T systems. The Asante Fast 100
Hub works with all personal computers equipped with a 100Mbps adapter, and
supports Windows 95TM, Windows NTTM, Novell NetWareTM, Banyan VINESTM, and other
popular network operating systems.
The Asante Fast 10/100 Bridge integrates 100Mbps Fast Ethernet workgroups into
existing 10Mbps networks by segmenting network traffic through the use of
filtering and forwarding data packets. It is compatible with any 100BASE-TX Fast
Ethernet hub and includes auto-negotiation, LEDs for network performance
indication, and supports the network operating systems mentioned above.
The Asante Fast 100 Management Module provides network management of Fast
Ethernet and 10BASE-T networks in order to determine network performance,
traffic bottlenecks, collisions and other vital signs. The Management Module
fully integrates with the Asante Fast 100 Hub shared backplane with a key-sized
5
expansion card so that it snaps on top of the hub eliminating the need for
external cabling. The module's built-in simple network management protocol
("SNMP") support enables the interconnected hub stack to be managed as a single
logical repeater and controlled from any workstation running AsanteView network
management software or from any SNMP-compatible or Telnet console.
10BASE-T Systems.
The NetStackerTM is a dual-slot, two-segment, intelligent Ethernet concentrator
that gives the user the flexibility of a multi-slot chassis with the convenience
of a stackable hub. Up to three NetStacker units can be snapped together to
support up to 72 users via 10BASE-T connections. Each chassis accommodates two
multi-port repeater modules for 10BASE-T, 10BASE-2 and 10BASE-F Ethernet
connectivity. A two-port Ethernet bridge module may be installed in any
available chassis slot to segment and isolate network traffic. The NetStacker is
also available with an SNMP-based network management module and is manageable
with IntraSpection and AsanteViewTM Network Management software.
The AsanteHub 2072, an expandable, seven-slot, chassis-based, 72-port
intelligent hub offers departmental network managers enterprise-level features
at a departmental price. It has a seven-slot architecture that allows the
addition of a variety of multi-port repeater modules (10BASE-T, 10BASE-2 and
10BASE-F), a bridge module and an SNMP-based network management module. Network
growth can be accommodated simply, inexpensively and on an as-needed basis by
inserting new modules. A dual segment backplane allows the network manager to
create two completely separate networks within the AsanteHub 2072's chassis to
segment traffic and optimize network efficiency. When combined with AsanteView
network management software, this hub provides centralized management and
diagnosis and can be operated both locally and remotely to configure, control
and set alarms for the hub from a personal computer. The Company also offers
dual redundant power supplies for the AsanteHub 2072 for fault-tolerant
applications.
The 10T Hub/8, /12, /24 and BNC Hub/6 are a family of inexpensive,
non-intelligent Ethernet hubs for connecting personal computers, workstations
(including UNIX), network printers and other network resources to an Ethernet
network. These systems are used for creating small networks or extensions to
existing networks. They allow network managers to use economical unshielded
twisted pair (UTP) telephone wire instead of coaxial cable to set up their LANs,
and support all major network operating systems and hardware configurations.
Software Products
Asante currently offers two network management options. IntraSpection is the
Company's new Web-based network management program, providing users with
customized management solutions and support for every SNMP-based network device
on the market. IntraSpection's customized support is available through Asante
plug-in Personality Modules that are sold as additions to the basic
IntraSpection software. Furthermore, because IntraSpection allows for
programming in HTML and Java instead of the customary C++, network managers can
quickly create customized management modules on their own, a capability
previously not available in the networking industry. The basic IntraSpection
software is available at no cost to everyone via the Company's internet site at
www.asante.com. The Company has a patent pending on the IntraSpection software
technology.
AsanteView is the Company's proprietary network management software that
operates with the SNMP protocol. Using AsanteView with an AsanteHub 1016,
NetStacker or 2072, a network manager can
6
monitor and control the network. AsanteView enables the manager to gather
network statistics, monitor network performance, pinpoint bottlenecks and errors
and optimize network performance. The graphical user interface conveys network
information at a glance. AsanteView offers both local and remote capabilities
and permits management of up to twelve Asante hubs at the same time from a
single management station.
Asante has developed multiple versions of its network acceleration software,
NetDoubler. Providing a high-performance solution for publishing and pre-press
networks when combined with Asante switched and Fast Ethernet products
NetDoubler runs on Macintosh computers and most popular servers. The Company has
a patent pending for its acceleration software technology.
Client Access Adapter Products
The Company offers a broad family of adapters that connect personal computers
and high performance servers directly to 10BASE-T and 100BASE-T Ethernet
networks.
Fast Ethernet Adapters. The Asante Fast 10/100 Adapter provides 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 10Mbps or 100Mbps and sets the adapter speed accordingly. As such, the
product allows the customer to migrate 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.
Adapter Cards for IBM-compatible personal computers. The Company's EtherPaCTM
line of 10BASE-T Ethernet client access products consists of nine different
cards, which support either ISA, EISA or MCA buses. All cards support Novell
NetWare, Windows NT, and other popular network operating systems and protocols.
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 which allows older
printers to be connected to 10Mbps networks.
Marketing and Distribution
The Company markets its products through multiple channels including two-tier
distribution and direct sales to the end-user, value-added resellers (VARs),
system integrators and original equipment manufacturers (OEMs). Asante's major
distributors are leading wholesale distributors of computer products in North
America. To supplement the efforts of these distributors overseas, the Company
has appointed international distributors for specific territories. All of the
Company's distributors are appointed on a nonexclusive basis.
Asante also sells its client access and network system products directly to
university and educational institutions to take advantage of the significant
penetration of the Company's products in these markets. Beginning in fiscal
1996, the Company expanded its effort to sell more products to OEM customers.
The
7
Company expects to enter into agreements in fiscal 1997 with larger OEM
customers, although there can be no assurance that such agreements will be
attained.
Sales to customers outside the United States accounted for approximately 23%,
28% and 22% of the Company's net sales in fiscal years 1996, 1995, and 1994,
respectively. All sales to international customers are denominated in U.S.
dollars. The Company expects that international sales will continue to represent
a significant portion of its net sales. Accordingly, the Company's operating
results are subject to the risks inherent in international transactions,
including changes in regulatory requirements, exchange rate fluctuations that
may make the Company's products more expensive to non-U.S. purchasers, tariffs
or other barriers.
The Company believes that it has good relationships with its distributors and
intends to continue to introduce new products through its existing distribution
channels. The Company encourages the marketing efforts of its distributors with
cooperative advertising allowances and incentive-based rebates, and promotes its
products and builds brand name recognition by extensive trade advertising,
participation in industry trade shows, and other marketing efforts. As of
September 28, 1996, the Company supported the sales efforts of its distributors
with 65 direct sales related employees located throughout the United States who
promote the Company's products within assigned territories, and two outside
sales representatives.
The Company's agreements with its distributors can generally be terminated after
an initial term of one year or on short notice without cause, and do not provide
for minimum purchase commitments or preclude the distributors from offering
products that compete with those offered by the Company.
The Company grants to its distributors limited rights to return unsold
inventories of the Company's products in exchange for new purchases and provides
certain price protection to its distributors. Although the Company provides
reserves for projected returns and price decreases, any product returns or price
decreases in the future that exceed the Company's reserves will adversely affect
the Company's business, financial condition and results of operations. See Item
7: Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The distribution of products such as those offered by the Company has been
characterized by rapid change, including consolidations and financial
difficulties of 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. A reduction in the sales effort by any of the Company's major
distributors or the loss of any one of these distributors would have a material
adverse effect on the Company's business 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 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 1995, the Company changed its limited warranty policy to cover all
products for the life of the product. The Company has not encountered material
warranty claims, although there can be no assurance
8
that claims will not increase substantially over time as a result of the change
to a lifetime warranty. 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.
Rights under Company warranties is limited to the Company's rights 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 client access and network system products continue
to be characterized by rapidly changing technology, evolving industry standards
and frequent new product introductions. Asante believes that maintaining its
position in the Macintosh connectivity market and expanding its presence in the
IBM PC-compatible market requires continuing investment to develop new products,
enhance existing products and reduce manufacturing costs.
As of September 28, 1996, the Company had 41 employees engaged in engineering
and product development. During the fiscal years ended September 28, 1996,
September 30, 1995, and September 30, 1994, the Company's engineering and
product development expenses were approximately $6.2 million, $4.5 million and
$5.5 million, respectively.
The Company's 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
9
performing quality control of certain materials, components, subassemblies and
systems. The Company does not manufacture any of the materials or components
used in its products, and performs only limited assembly of some products. The
Company subcontracts substantially all of the assembly of its products through a
related party, Orient Semiconductor Electronics, Ltd. ("OSE"), a semiconductor
and printed circuit board assembler based in Taiwan, and through several other
subcontractors and manufacturers based in California and Taiwan. 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 poor workmanship have not been material. See Note 5 of
Notes to Financial Statements.
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 1996, the Company
purchased $17.9 million of goods from OSE. The Company does not have a long-term
supply agreement with any of its subcontractors. If any one of these
subcontractors experience financial or operational difficulties that result in a
reduction or interruption in the supply of products to the Company, or otherwise
fail 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 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.
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. 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 and
subcontractors to procure many of the components used in the Company's products.
Procurement and stocking of components and subassemblies is done by these
subcontractors based on the Company's purchase orders. If the Company, OSE or
other subcontractors are unable to obtain sufficient supplies of components or
develop alternative sources, delays or reductions in product shipments could
result, which would materially and adversely affect the Company's business,
financial condition and results of operations and damage the Company's
relationships with its customers.
10
Competition
The markets for the Company's products are highly competitive, and the Company
believes that such competition will intensify. Competitive factors in the
Company's markets are continuing declines in average selling prices, coupled
with improvements in product features and performance. The Company expects such
trends will continue.
In the mainstream market, the Company competes with Cisco Systems, Bay Networks,
3Com, and many smaller companies. Competition from these and other companies,
including new entrants, is expected to intensify, particularly in the
departmental users market. Many of the Company's competitors in this market 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 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 timely respond 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, increase the availability of Ethernet on the motherboard
of its computers 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.
The Company expects that a growing portion of the Company's sales will represent
products sold to OEMs. While the Company's OEM sales were previously made to
smaller OEMs, the Company has recently 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 attained.
In addition, since the Company intends to seek additional large product volume
arrangements, the loss of a single large OEM customer or several smaller OEM
customers would have a material adverse effect on the Company's revenues.
11
A significant percentage of the Company's sales in fiscal 1996 were derived from
products designed for use with Macintosh computers. Sales of these products as a
percentage of total Company revenue have steadily declined over the last several
years due to Apple's competition in the Company's adapter card market 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 has received in the past and may receive in the future
communications from third parties asserting intellectual property claims against
the Company. For example, a claim made against the Company by Bay Networks
(formerly SynOptics Communications) in fiscal 1994 required the Company to
devote significant resources to defend against the claim. Claims made in the
future could include assertions that the Company's products infringe, or may
infringe, 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 trade secret, copyright and trademark
law, nondisclosure agreements and technical measures to establish and protect
its proprietary rights in its products. Despite these precautions, it may be
possible for unauthorized third parties to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's technology is difficult,
and there can be no assurance that the measures being taken by the Company will
be successful. Moreover, the laws of some foreign countries do not protect the
Company's proprietary rights in its products to the same extent as do the laws
of the United States. See Item 3: Legal Proceedings.
Employees
As of September 28, 1996, the Company had 197 employees, including 41 in
engineering and product development, 44 in manufacturing operations, 79 in
marketing, sales and support services, and 33 in corporate administration.
During fiscal 1996, the Company appointed a new Chief Financial Officer and a
new Vice President of Sales. The Company's future success will depend on the
effectiveness of its executive officers in their new roles. In November 1996,
the Company appointed a new Vice President of Engineering.
The Company's success also depends to a significant extent upon the
contributions of other key sales, marketing, engineering and manufacturing
employees, and on the Company's ability to attract and retain
12
highly qualified personnel, who are in great demand. None of the Company's key
employees is 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 is 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
facility under a lease that expires in September 1997 and provides for two
options to extend the lease for up to an additional two and five years,
respectively; during fiscal 1996, the Company exercised its option to extend the
lease for an additional two years. The Company leases sales offices in Southern
California, Colorado, North Carolina, Utah, Washington, Taiwan, England and
Japan. The Company believes that its existing facilities are adequate to meet
its requirements for the foreseeable future and that suitable additional or
substitute space will be available as needed. See Note 8 of Notes to Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
In November 1994, the Company reached an agreement with SynOptics
Communications, Inc. (now Bay Networks, Inc.) to settle the complaint brought by
SynOptics against the Company for patent and copyright infringement, and
misappropriation of trade secrets. The terms of the settlement did not have a
material impact on the Company's financial condition or results of operations.
In July and August of 1994, several complaints were filed against the Company
and certain of its current and former officers and directors in the United
States District Court, Northern District of California, alleging violations of
federal securities laws. The lawsuits, which purport to be class actions brought
on behalf of all purchasers of the Company's stock during the period from
December 10, 1993 through July 11, 1994, were consolidated and plaintiffs filed
a consolidated, amended class action complaint on October 21, 1994. In September
1995, the Company entered into an agreement in principle to settle the suit with
the establishment of a settlement fund of $2.6 million. The Company contributed
$520,000, with the remainder funded by the Company's insurance. On November 18,
1996, the Court entered an order finally approving the settlement and dismissing
the action against all defendants with prejudice. See Note 9 of Notes to
Financial Statements.
On September 13, 1996, a complaint was filed by Datapoint Corporation against
the Company and six other companies individually and as purported
representatives of a defendant class of all manufacturers, vendors and users of
Fast Ethernet-compliant, dual protocol local-area network products, for alleged
infringement of United States Letters Patent Nos. 5,077,732 and 5,008,879. The
complaint seeks
13
unspecified damages in excess of $75,000 and permanent injunctive relief. The
Company has not yet filed a response to the Complaint, and no discovery has been
taken. The Company intends to defend the action vigorously.
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 1996.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages as of November 20, 1996 and
certain information regarding each of them are as follows:
Name Age Position with the Company
---- --- -------------------------
Jeff Yuan-Kai Lin 45 President and Chief Executive Officer
Wilson Wong 49 Vice President and General Manager
James Cansler 49 Vice President of Sales
Tommy Leung 53 Vice President of Engineering
William Leung 56 Vice President of Operations
Robert Sheffield 47 Vice President of Finance,
Chief Financial Officer, and Secretary
Paul Smith 38 Vice President of Marketing
Philip Wang 52 Vice President of Engineering
Mr. Lin co-founded the Company in 1988 and currently serves as President, Chief
Executive officer and Co-Chairman of the Board of Directors. From 1993 through
1994, he served as Vice President, General Manager of Network Systems Business.
From 1991 to 1993, he served as the Company's Chairman of the Board of Directors
and Chief Operating Officer. From 1988 to 1991, Mr. Lin served as the Company's
Vice President of Operations and Engineering, Chief Financial Officer and
Secretary.
Mr. Wong co-founded the Company in 1988 and currently is 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. Cansler joined the Company in March 1996 and currently serves as Vice
President of Sales. From 1993 to 1995 he was Vice President of Sales and
Marketing for the systems division of National Semiconductor Corporation. During
1993, and from 1991 to 1993, he served as Chief Executive Officer and Vice
President of Marketing and Sales, respectively, of SysKonnect, Inc.
14
Mr. Tommy Leung has served as Vice President of Engineering since November 1996
when Mr. Wang resigned. He joined the Company in March 1994 and served in
various capacities including Director of Client Access Engineering, Vice
President of Client Access Engineering and Vice President of Technology. From
1989 to 1994 he was Chief Executive Officer of Datatrek Corporation., which was
purchased by Asante. Mr. Tommy Leung is not related to Mr. William Leung.
Mr. William Leung joined the Company in August 1995 as Vice President of
Operations. From December 1987 to August 1995, he was President and Chief
Executive Officer of Cache Computers, Inc., a manufacturer of mother boards for
personal computers. Mr. William Leung is not related to Mr. Tommy Leung.
Mr. Sheffield joined the Company in March 1996 and currently serves as Vice
President of Finance, Chief Financial Officer, and Secretary. From 1994 to 1995
he served as Vice President of Business Development for Time Warner
Interactive/Atari Games Corporation. From 1989 to 1994 he served as Vice
President of Finance and Chief Financial Officer of Time Warner
Interactive/Atari Games Corporation.
Mr. Smith joined the Company in May 1995 as Vice President of Marketing. From
1994 to 1995 he was Chairman and Chief Executive Officer of Holosoft, Inc., a
developer of application software for Personal Digital Assistants. Mr. Smith
continues as Chairman of Holosoft. From 1993 to 1994, he was Vice President of
Product Development and Manufacturing at Virtual Microsystems, Inc., a
manufacturer of high performance CD-ROM servers and internet access devices.
From 1988 to 1993 he held senior management positions including Vice President
of Marketing at Proxim, Inc., a manufacturer of wireless networking devices.
Mr. Wang joined the Company in January 1995 as Vice President of Engineering.
From 1990 to 1995, he was President and Chief Technology Officer of Network
Application Technology, Inc., a manufacturer of computer inter-networking
equipment that he founded. Mr. Wang resigned from his position with the Company
in November 1996.
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 as reported on the NASDAQ National Market under the trading symbol
ASNT for the Company's last two fiscal years.
Fiscal 1996 High Low
- --------------------------------------------------------------------
First quarter 14 1/2 7 7/8
Second Quarter 8 1/8 5 7/8
Third quarter 9 1/4 5 1/8
Fourth quarter 7 1/4 5 1/8
Fiscal 1995 High Low
- --------------------------------------------------------------------
First quarter 5 1/2 4
Second Quarter 5 3/8 3 7/8
Third quarter 5 1/8 3 1/8
Fourth quarter 8 1/4 4 1/4
As of December 5, 1996, there were 120 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. The Company's
bank line of credit restricts the Company from declaring any dividends on the
Common Stock. See Note 4 of Notes to Financial Statements.
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. In addition, 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.
16
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
Statement of Operations Data: Year ended
- ------------------------------------------------------------------------------------------------------------------------------------
9/28/96 9/30/95 9/30/94 9/30/93 9/30/92
------- ------- ------- ------- -------
Net sales $ 66,990 $ 60,884 $ 79,941 $ 67,283 $ 47,501
Income (loss) from operations $ (1,338) $ (6,324) $ 1,818 $ 4,093 $ 3,455
Net income (loss) $ (457) $ (3,705) $ 1,125 $ 2,101 $ 1,826
Net income (loss) per share $ (0.05) $ (0.45) $ 0.13 $ 0.29 $ 0.27
Balance Sheet Data: Year ended
- ------------------------------------------------------------------------------------------------------------------------------------
9/28/96 9/30/95 9/30/94 9/30/93 9/30/92
------- ------- ------- ------- -------
Total assets $39,966 $36,767 $40,913 $29,417 $19,362
Mandatorily redeemable
convertible preferred stock -- -- -- $ 1,948 $ 1,948
Stockholders' equity $26,909 $26,119 $28,389 $ 6,383 $ 4,202
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion, other than the historical financial information, may consist of
forward-looking statements that involve risks and uncertainties, including
quarterly and yearly fluctuations in results, the timely availability of new
products, 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.
Actual results may vary significantly.
Results of Operations
The following table sets forth certain selected financial information expressed
as a percentage of net sales for the fiscal years ended September 28, 1996, and
September 30, 1995 and 1994, respectively:
1996 1995 1994
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 60.0 67.2 63.0
------ ------- -----
Gross profit 40.0 32.8 37.0
------ ------- -----
Operating expenses:
Sales and marketing 28.4 29.2 23.2
Research and development 9.3 7.3 6.8
General and administrative 4.3 6.6 4.7
------ ------- -----
Total operating expenses 42.0 43.1 34.7
------ ------- -----
Income (loss) from operations (2.0) (10.3) 2.3
Interest and other income (expense), net 0.9 0.4 0.1
------ ------- -----
Income (loss) before income taxes (1.1) (9.9) 2.4
Provision (benefit) for income taxes (0.4) (3.8) 1.0
------ ------- -----
Net income (loss) (0.7%) (6.1%) 1.4%
====== ======= =====
The Company recorded a net loss for fiscal 1996 of $0.5 million, or ($0.05) per
share compared to a net loss of $3.7 million, or ($0.45) per share, in fiscal
1995.
Net Sales
Net sales increased 10.0% to $67.0 million in fiscal 1996 from $60.9 million in
1995. Net sales were $79.9 million in 1994. The increase in sales from 1995 to
1996 was due primarily to increased shipments of the Company's Fast Ethernet and
new switched products as well as its stackable and unmanaged hubs. This increase
was partially offset by competitive pricing pressures and reduced shipments of
the Company's 10T (10 Mbps) adapter cards due in part to Apple's incorporation
of Ethernet connectivity into the motherboard of certain of its Macintosh and
PowerBook computers.
18
Sales of network systems products increased 63.1% from approximately $21.4
million in 1995 to $34.9 million in 1996 due primarily to shipments of Fast
Ethernet shared systems and the introduction of switching products into Asante's
product line. Client access product sales declined from approximately $39.5
million in 1995 to $32.1 million in 1996, or 18.7%. Client access products are
expected to constitute a smaller portion of the Company's total sales in the
future.
During fiscal 1996, the Company expanded its line of Fast Ethernet (100Base-T,
or 100 Mbps) products and introduced new software technology to complement the
Fast Ethernet product line. The Company increased its sales force and devoted
additional resources to its research and development projects. The Company
continued to focus its efforts on certain vertical market segments where Fast
Ethernet systems excel over standard Ethernet systems and concentrated on
expanding its non-Macintosh market incrementally. Pricing continued to be under
heavy competitive pressure and, in response, the Company continued a number of
programs including discount programs, value added reseller programs, selling
incentives, educational specific discounts, and announced several product price
reductions during the year.
The decrease in sales from 1994 to 1995 was primarily due to a continuation of
the competitive pressures including Apple Computer's incorporation of Ethernet
connectivity into the motherboard of certain of its Macintosh and PowerBook
computers. In addition to this and to competitive pressures leading to a
continuing reduction in the average selling price of certain of the Company's
products, the Company experienced a decrease in sales.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for 23.1%, 28.3%, and 22.4% of net sales in fiscal 1996, 1995, and
1994, respectively. In the third quarter of 1996, the Company established a
sales office in Japan, complementing its other international sales offices in
the United Kingdom, Taiwan, and Canada. Despite this increased presence
internationally, the Company experienced reductions in sales into Europe caused
primarily by certain new product certification regulations that delayed the
Company's ability to ship certain of its products into Europe in the second
quarter of the year. As standards continue to evolve in Europe, the Company will
be required to meet new specifications to allow for prompt delivery of products.
The Company will continue to focus its efforts on increasing sales
internationally over the next several quarters, but cannot be sure that its
efforts will be successful.
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. As such, the Company anticipates that
the selling prices of its products will continue to decline. The Company makes
significant ongoing efforts to 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.
19
Gross Profit
The Company's gross profit as a percentage of net sales increased to 40.0% in
fiscal 1996 from 32.8% in 1995, and 37.0% in 1994. This increase during fiscal
1996 was due primarily to improved management of production cycles and
distribution channel inventory balances. The Company's gross profit percentage
increase was partially offset during the year by charges against sales due to
various pricing and marketing programs. The Company's gross profit percentage in
the future will continue to be affected by competitive pricing pressures, the
Company's ability to further reduce the cost of its products, and the Company's
pursuit of certain OEM sales opportunities at lower margins.
The decrease in gross profit as a percentage of net sales from 1994 to 1995 was
attributable to several factors including declines in the demand for certain of
the Company's products. As a result, additional reserves for inventory
obsolescence were made, resulting in a charge to cost of sales of approximately
$1.5 million in 1995. Additional factors affecting the gross profit was a charge
of $0.3 million related to previously purchased technology, charges related to
price protection activity, and sales during the first half of 1995 of $1.1
million of slow-moving products at cost.
Sales and Marketing
Sales and marketing expenses increased by 6.9% to $19.0 million in fiscal 1996
from $17.8 million in 1995. The 1995 expenses decreased by 4.1% from $18.5
million in 1994. As a percentage of net sales, sales and marketing expenses were
28.4%, 29.2%, and 23.2% in fiscal years 1996, 1995, and 1994, respectively. In
the fourth quarter of 1995, the Company increased its direct field staff
organization in order to focus its sales strategy on penetrating the IBM
compatible market in order to gain market share. As a result of the additional
sales personnel and additional vertical market and PC-related marketing
programs, the sales and marketing-related spending level in 1996 was higher in
absolute dollars.
The decrease in sales and marketing expenses from 1994 to 1995 was primarily
attributable to lower advertising costs, lower salary expense due to reduced
headcount, and lower commissions due to lower net sales.
The Company expects that its sales and marketing expenses will increase slightly
in 1997.
Research and Development
Research and development expenses increased by 39.2 % to $6.2 million in fiscal
1996 from $4.5 million in fiscal 1995. Research and development expenses were
$5.5 million in 1994. As a percentage of net sales, research and development
expenses were 9.3%, 7.3% and 6.8% in fiscal years 1996, 1995 and 1994,
respectively. The $1.7 million increase in expenses from 1995 to 1996 resulted
from the Company's decision to increase its research and development effort in
order to bring more Fast Ethernet (100Base-T, or 100Mbps), switching, and
software products to market. As a result, salaries and wages increased by $0.4
million due to an increase in engineering personnel, non-recurring engineering
expense charges increased by $0.3 million, and other expenses, including
spending for prototype materials,
20
equipment purchases, and outside engineering consulting services, increased by
approximately $0.4 million.
Research and development expenses decreased by $1.0 million from 1994 to 1995
due primarily to the Company's efforts to consolidate engineering projects and
reduce operating expenses.
The Company expects that spending on research and development will increase in
the future in order to support the development of new products incorporating the
Fast Ethernet standard, switching technology, and cost reduction efforts
pertaining to current products.
General and Administrative
General and administrative expenses decreased 28.1% to $2.9 million in fiscal
1996 from $4.0 million in fiscal 1995. General and administrative expenses were
$3.7 million in 1994. As a percentage of net sales, general and administrative
expenses were 4.3%, 6.6%, and 4.7% in fiscal years 1996, 1995, and 1994,
respectively. The decrease in administrative expenses in 1996 was primarily due
to the settlement and reduction in related defense litigation costs associated
with the stockholders' class action suit (See Note 9 of Notes to Financial
Statements) and lower salary and other wage related expenses due to Company's
effort to control expenses.
The increase in general and administrative expenses from 1994 to 1995 was
related primarily to litigation costs in connection with the aforementioned
stockholders' class action suit, a one-time charge related to state sales tax
audits, and increased consulting for services previously performed by former
employees.
The Company expects that general and administrative expenses will increase
slightly in 1997.
Income Taxes
The Company has accounted for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", for all
periods. Under this method, deferred assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. In 1996, the Company
incurred a loss before income taxes of approximately $733,000 resulting in an
income tax benefit (tax loss carryback) of $276,000.
The Company has not recorded a valuation allowance against its deferred tax
assets because management believes that it is more likely than not that its
deferred tax assets will be realized. Realization is dependent on generating
sufficient taxable income. The amount of deferred tax assets expected to be
realized could be reduced in the near term, resulting in a charge to net income,
if estimates of future taxable income in the carryforward period are reduced.
21
Factors Affecting Future Operating Results
The Company generally attempts to maintain very little backlog and to ship
products shortly after orders are received. Most of the Company's net sales in
any quarter therefore result from orders booked during that quarter. The Company
commits to spending levels, including investing in advertising and promotional
programs, based in part on expectations as to future net sales. 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's
operating results will be adversely affected. Furthermore, although the Company
was profitable in the fourth quarter of 1996, there can be no assurance that the
Company will be able to maintain profitability on a quarterly or annual basis in
the future.
In 1995, a coalition of more than one hundred companies (including Asante)
supplying adapters, hubs, and other networking equipment developed a new
standard for increasing the data transmission speed over Ethernet networks by
ten-fold. This new standard (100BASE-T, or "Fast Ethernet") is expected to be
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 new standard, the Company recently
focused its research and development activities on introducing future products
incorporating 100BASE-T technology. The Company realizes the importance of
bringing more 10BASE-T (10 Mbps) switching and 100BASE-T switching to market in
order to complement its existing 100BASE-T shared products. In that regard, the
Company's future operating results may be dependent on the market acceptance and
the rate of adoption of this new technology.
The Company'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, general economic
conditions, and economic conditions and seasonal purchasing patterns specific to
the computer and networking industries.
Liquidity and Capital Resources
During 1996, the Company's operating activities provided cash of $0.9 million
compared to net cash provided of $3.8 million in 1995. In 1994, operating
activities used cash of $7.1 million which was provided by proceeds from the
Company's initial public offering. During 1996, the increase in cash resulted
from the increase in accounts payable and decrease in income tax receivable
resulting from a 1995 loss carryback and was partially offset by the increase in
accounts receivable, inventory, and the reduction in accounts payable to a major
stockholder. The increase in cash provided from operations in 1995 was due to a
decrease in accounts receivable, net of allowances for receivable accounts of
approximately $6.7 million. Days of sales outstanding decreased to 47 at the end
of fiscal 1996 compared to 49 at the end of 1995.
Net cash provided by investing activities was $0.4 million in fiscal 1996 which
consisted primarily of net maturities of marketable securities of $1.7 million,
offset by other investment activities including purchases of property and
equipment totaling approximately $1.3 million. The Company's purchasing
22
activities consisted primarily of investments in computers and related equipment
used in the Company's operations. During fiscal 1996, 1995, and 1994, the
Company's purchases of property and equipment totaled $1.3 million, $.5 million,
and $1.0 million, respectively.
Net cash generated from financing activities for fiscal 1996 was $0.94 million
including proceeds of approximately $1.0 million from the exercise of employee
stock options, and offset by other financing activities. In 1995, the Company
generated cash from financing activities of $1.1 million including proceeds of
approximately $1.0 million from the exercise of employee stock options. In
fiscal 1994 the Company generated net cash from financing activities of $15.4
million including $16.8 proceeds from the Company's initial public offering,
proceeds from stock option exercises of $0.5 million, and was offset by net
repayments under the Company's line of credit amounting to approximately $2.1
million dollars.
At September 28, 1996, the Company had cash, cash equivalents and short-term
investments of $12.7 million as compared to $12.1 million at September 30, 1995.
Working capital was $25.1 million at September 28, 1996, compared to $24.4
million at September 30, 1995. The Company has a bank line of credit that
provides for maximum borrowings of $5 million, limited to a certain percentage
of eligible accounts receivable, and bears interest at the bank's base rate plus
1/4%. The Company's ability to borrow under this line is subject to compliance
with covenants related to financial performance and condition. The line of
credit expires on February 1, 1997. As of September 28, 1996 there were no
borrowings under the line of credit, and the Company was not in compliance with
a certain financial covenant. The Company has received a waiver from its bank
for the noncompliance with this covenant for fiscal 1996.
The Company believes that its current cash, cash equivalents and short-term
investments, 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 1997. However, 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.
See concentration of credit risk section under Note 1 of Notes to Financial
Statements.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Financial Statements:
Report of Independent Accountants 25
Balance Sheets at September 28, 1996 and September 30, 1995 26
Statements of Operations for the years ended September 28, 1996,
September 30, 1995 and September 30, 1994 27
Statements of Stockholders' Equity for the years ended
September 28, 1996, September 30, 1995 and September 30, 1994 28
Statements of Cash Flows for the years ended September 28, 1996,
September 30, 1995 and September 30, 1994 29
Notes to Financial Statements 30
Quarterly Results of Operations (unaudited) 39
Financial Statement Schedule:
Report of Independent Accountants on Financial Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts and Reserves S-2
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.
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Asante Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Asante Technologies, Inc. at
September 28, 1996 and September 30, 1995, and the results of its operations and
its cash flows for each of the three years in the period ended September 28,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
October 25, 1996, except as to paragraph 2 of Note 9,
which is as of November 18, 1996
25
ASANTE TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except share
and per share amounts)
September 28, September 30,
1996 1995
------------------------------
Assets
Current assets:
Cash and cash equivalents $12,693 $10,371
Short-term investments -- 1,700
Accounts receivable, net of allowance for doubtful
accounts, rebates and sales returns of $3,174 and $2,691 10,038 8,504
Inventory 9,851 7,009
Deferred income tax 2,972 3,691
Income tax refund receivable 1,558 2,147
Prepaid expenses and other 1,046 1,660
------- -------
Total current assets 38,158 35,082
Property and equipment, net 1,524 1,362
Other assets 284 323
------- -------
Total assets $39,966 $36,767
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 7,200 $ 3,275
Accrued expenses 4,175 4,826
Payable to stockholder 1,682 2,547
------- -------
Total current liabilities 13,057 10,648
------- -------
Commitments and contingencies (Notes 8 and 9)
Stockholders' equity:
Common stock, $0.001 par value; 25,000,000 shares authorized;
8,859,990 and 8,612,420 shares issued and outstanding 9 9
Additional paid-in capital 25,313 24,066
Retained earnings 1,587 2,044
------- -------
Total stockholders' equity 26,909 26,119
------- -------
Total liabilities and stockholders' equity $39,966 $36,767
======= =======
The accompanying notes are an integral part of these financial statements
26
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except
per share amounts)
Year ended
------------------------------------------------------
September 28, September 30, September 30,
1996 1995 1994
------------------------------------------------------
Net sales $ 66,990 $ 60,884 $ 79,941
Cost of sales 40,220 40,936 50,344
-------- -------- --------
Gross profit 26,770 19,948 29,597
-------- -------- --------
Operating expenses:
Sales and marketing 19,007 17,784 18,547
Research and development 6,198 4,451 5,484
General and administrative 2,903 4,037 3,748
-------- -------- --------
Total operating expenses 28,108 26,272 27,779
-------- -------- --------
Income (loss) from operations (1,338) (6,324) 1,818
Interest and other income (expense), net 605 257 89
-------- -------- --------
Income (loss) before income taxes (733) (6,067) 1,907
Provision (benefit) for income taxes (276) (2,362) 782
-------- -------- --------
Net income (loss) $ (457) $ (3,705) $ 1,125
======== ======== ========
Net income (loss) per share $ (0.05) $ (0.45) $ 0.13
======== ======== ========
Weighted average common
shares and equivalents 8,997 8,288 8,773
======== ======== ========
The accompanying notes are an integral part of these financial statements
27
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Convertible Additional Total
Preferred Stock Common Stock Paid-in Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
-----------------------------------------------------------------------------------
Balances as of September 30, 1993 1,907,738 $ 2 3,350,861 $ 3 $ 1,754 $ 4,624 $ 6,383
Conversion of Convertible Preferred
Stock to Common Stock (1,907,738) (2) 1,907,738 2 --
Conversion of redeemable Preferred
Stock to Common Stock 350,877 1 1,947 1,948
Initial public offering of Common Stock,
net of issuance costs 1,560,044 1 16,821 16,822
Common Stock issued under stock plans 770,544 1 536 537
Repayment of note receivable 111 111
Amortization of deferred compensation 490 490
Repurchase of restricted stock (64,583) -- --
Tax benefit from employee stock
transactions 973 973
Net income 1,125 1,125
---------- ----- --------- ----- -------- -------- -------
Balances as of September 30, 1994 -- -- 7,875,481 8 22,632 5,749 28,389
Common Stock issued under stock plans 736,939 1 953 954
Repayment of note receivable 196 196
Amortization of deferred compensation 17 17
Tax benefit from employee stock
transactions 268 268
Net loss (3,705) (3,705)
---------- ----- --------- ----- -------- -------- -------
Balances as of September 30, 1995 -- -- 8,612,420 9 24,066 2,044 26,119
Common Stock issued under stock plans 247,570 995 995
Amortization of deferred compensation 2 2
Tax benefit from employee stock
transactions 250 250
Net loss (457) (457)
---------- ----- --------- ----- -------- -------- -------
Balances as of September 28, 1996 -- -- 8,859,990 $ 9 $ 25,313 $ 1,587 $26,909
========== ===== ========= ===== ======== ======== =======
The accompanying notes are an integral part of these financial statements
28
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended
----------------------------------------------
September 28, September 30, September 30,
1996 1995 1994
----------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (457) $(3,705) $ 1,125
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,090 1,165 1,234
Write-off of purchased technology -- 289 --
Amortization of deferred compensation 2 17 490
Deferred income taxes 719 (753) (1,823)
Changes in operating assets and liabilities:
Accounts receivable (1,534) 6,719 (3,276)
Inventory (2,842) 2,492 (669)
Income tax refund receivable 839 (1,879) --
Prepaid expenses and other current assets 659 1,351 429
Accounts payable 3,983 (1,881) (2,130)
Accrued expenses and other (651) (384) 1,955
Payable to stockholder (865) 348 (4,447)
------ ------- --------
Net cash provided by (used in) operating activities 943 3,779 (7,112)
------ ------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,252) (473) (985)
Purchases of marketable securities -- (985) (17,150)
Maturities of marketable securities 1,700 4,285 12,150
Other (6) (71) (41)
------ ------- --------
Net cash provided by (used in) investing activities 442 2,756 (6,026)
------ ------- --------
Cash flows from financing activities:
Net proceeds from initial public offering -- -- 16,822
Payment on note receivable from stockholder -- 196 111
Proceeds from stock options exercised 995 954 537
Bank borrowings under line of credit -- -- 4,300
Repayments under line of credit -- -- (6,359)
Other (58) (54) (58)
------ ------- --------
Net cash provided by financing activities 937 1,096 15,353
------ ------- --------
Net increase in cash and cash equivalents 2,322 7,631 2,215
Cash and cash equivalents at beginning of year 10,371 2,740 525
------ ------- --------
Cash and cash equivalents at end of year $12,693 $10,371 $ 2,740
====== ======= ========
Supplemental disclosures of cash flow information:
Interest paid during the year $ 11 $ 22 $ 98
====== ======= ========
Income taxes paid (refunded) during the year $(1,835) $ 759 $ 1,144
====== ======= ========
Supplemental disclosure of non-cash financing activies:
Conversion of preferred stock into common stock $ -- $ -- $ 1,948
====== ======= ========
The accompanying notes are an integral part of these financial statements
29
ASANTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. The Company
Asante Technologies, Inc. (the "Company") designs, manufactures and markets a
broad family of 10BASE-T and 100BASE-T ("Fast Ethernet") client access and
network system products. Asante's client access products (which include adapter
cards and media access adapters) connect Macintoshes, PCs, and peripheral
devices (such as printers) to Ethernet networks. The Company's network system
products, which include intelligent and non-intelligent hubs, bridge modules,
and network management software for Macintoshes and PCs, interconnect users
within and between departmental networks.
Sales to historically major distributors/customers were as follows:
1996 1995 1994
---- ---- ----
Distributor/customer A 27% 21% 33%
Distributor/customer B - 17% 16%
Distributor/customer C 10% - -
International sales as a percentage of net sales by geographic region were as
follows:
Year ended
-------------------------------------
9/28/96 9/30/95 9/30/94
------- ------- -------
United States 77% 72% 78%
Europe 11 16 13
Canada and Asia Pacific 12 12 9
------- ------- -------
100% 100% 100%
======= ======= =======
Note 2. Summary of Significant Accounting Policies
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.
30
Revenue recognition
Revenue is recognized upon product shipment. The Company grants certain
distributors limited rights to exchange products and price protection on unsold
merchandise. The Company establishes an estimated allowance for future product
returns based on historical returns experience and provides for appropriate
price protection reserves at the time the related revenue is recorded. The
Company also provides a reserve for incentive rebates to distributors at the
time the related revenue is recorded.
Warranty
The Company accrues the estimated cost of fulfilling its warranty obligations at
the time the related revenue is recorded.
Cooperative advertising
The Company accrues the estimated cost of 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 date of acquisition.
The Company considers all investments with initial maturity periods of greater
than 90 days to be short-term investments. The Company accounts for short-term
investments in accordance with the provisions of Financial Accounting Standard
No. 115, "Accounting for Certain Investments in Debt or Equity Securities" ("FAS
115"). At September 28, 1996, the Company did not hold any short-term
investments.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of unsecured trade receivables. The Company's
products are primarily sold to domestic distributors who have operations
throughout the world. The Company performs ongoing credit evaluations of its
customers and maintains reserves for credit losses. At September 28, 1996 and
September 30, 1995, three customers accounted for 41% and 52%, respectively, of
the accounts receivable balance.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis) or market.
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 capitalized leases is amortized over its useful life and
included in depreciation expense.
31
Income taxes
The Company accounts for income taxes under the liability method, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their amounts reported on the financial statements.
Research and development costs
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. The Company believes its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility; accordingly, software costs incurred
after the establishment of technological feasibility have not been material and
therefore have been expensed.
Net income (loss) per share
Net income (loss) per share is computed using the average number of common and
common equivalent shares outstanding during the period. Common equivalent shares
include common stock issuable upon the exercise of stock options using the
treasury stock method, except when antidilutive.
Foreign currency
The Company's transactions with foreign suppliers and purchasers are denominated
in U.S. dollars. As a result, the Company's exposure to foreign currency gains
and losses is minimal.
Recently issued accounting pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard Number 121 ("FAS 121"), "Accounting
for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed
of." FAS 121 requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. FAS 121 is effective for fiscal years
beginning after December 15, 1995. Adoption of FAS 121 is not expected to have a
materiel impact on the Company's financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting Standard
Number 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which
establishes a fair value method of accounting for stock-based compensation
plans, and requires additional disclosures for those companies that elect not to
adopt the new method of accounting. The Company currently expects to elect to
continue to measure compensation costs using the intrinsic value method
prescribed by APB Opinion Number 25, "Accounting for Stock Issued to Employees,"
and to comply with the pro forma disclosure requirements of FAS 123. If the
Company makes this election, FAS 123 will have no impact on the Company's
financial statements.
Fair value of financial instruments
For certain of the Company's financial instruments, including cash, trade
accounts receivable, receivable from related party, accounts payable and
capitalized lease obligations, the carrying amounts approximate fair value due
to the relatively short maturity of these instruments.
32
Note 3. Balance Sheet Components
(in thousands)
9/28/96 9/30/95
------- -------
Inventory:
Raw materials and component parts $ 3,298 $ 4,081
Work-in-process 1,630 485
Finished goods 4,923 2,443
------- -------
$ 9,851 $ 7,009
======= =======
Property and equipment:
Computer equipment $ 3,286 $ 2,603
Furniture and test equipment 3,026 2,457
------- -------
6,312 5,060
Accumulated depreciation (4,788) (3,698)
------- -------
$ 1,524 $ 1,362
======= =======
Accrued expenses:
Payroll-related expenses $ 1,239 $ 1,152
Sales promotion expenses 1,077 514
Other 1,859 3,160
------- -------
$ 4,175 $ 4,826
======= =======
Note 4. Bank Borrowings
The Company has a bank line of credit that provides for maximum borrowings of $5
million, limited to a certain percentage of eligible accounts receivable, and
bears interest at the bank's base rate plus 1/4%. The Company's ability to
borrow under this line is subject to compliance with covenants related to
financial performance and condition. The line of credit expires on February 1,
1997. As of September 28, 1996 there were no borrowings under the line of credit
and the Company was not in compliance with a certain financial covenant. The
Company has received a waiver from its bank for the noncompliance with this
covenant for fiscal 1996.
Note 5. Related Party Transactions
The Company has an agreement (the "OSE Agreement") with Orient Semiconductor
Electronics, Ltd., ("OSE"). OSE and its principal stockholder own approximately
14% of the Company's Common Stock as of September 28, 1996. Under the OSE
Agreement, the Company purchases from and sells to OSE certain component parts,
at cost. The Company is obligated to purchase goods only to the extent it has
signed firm purchase commitments with OSE. At September 28, 1996 and September
30, 1995, the Company had firm purchase commitments under the OSE Agreement of
approximately $3.5 million and $7.0 million, respectively.
In connection with the OSE Agreement for the years ended September 28, 1996,
September 30, 1995, and September 30, 1994, the Company sold, at cost,
approximately $5.5 million, $1.8 million and $6.3
33
million, respectively, of component parts to OSE and purchased $17.9 million,
$16.0 million and $21.0 million, respectively, of goods from OSE. The decrease
in component parts sold to OSE in fiscal 1995 was due to the fact that OSE was
able to purchase component parts directly at lower cost.
In June 1993, the Company sold 166,666 shares of its common stock to its then
president in consideration for a promissory note in the amount of $500,000. The
note was secured by a pledge of the Common Stock purchased with no interest due.
In 1994, $111,000 was paid on the note and the Company repurchased the 64,583
unvested shares following the resignation of the president. The balance of the
note of approximately $196,000 was paid in July 1995.
Note 6. Income Taxes
The provision for income taxes is comprised of the following:
Year ended
(in thousands)
-----------------------------
9/28/96 9/30/95 9/30/94
------- ------- -------
Current tax expense (benefit)
Federal $ (995) $(1,609) $ 2,058
State -- -- 547
------- ------- -------
(995) (1,609) 2,605
------- ------- -------
Deferred tax benefit
Federal 780 (681) (1,571)
State (61) (72) (252)
------- ------- -------
719 (753) (1,823)
------- ------- -------
$ (276) $(2,362) $ 782
======= ======= =======
The deferred tax assets (liabilities) are comprised of the following:
(in thousands)
9/28/96 9/30/95
------- -------
Deferred tax assets
Receivable- and sales-related reserves $1,235 $1,263
Inventory-related reserves 572 1,750
Compensation accruals 227 123
Depreciation 43 115
Other 895 440
------ ------
Total deferred tax asset 2,972 3,691
====== ======
The Company was able to carry back tax losses in fiscal 1996 and fiscal 1995
which has resulted in federal tax refunds of $1.2 million and $1.6 million,
respectively.
34
The Company has not recorded a valuation allowance against its deferred tax
assets because management believes that it is more likely than not that its
deferred tax assets will be realized. Realization is dependent on generating
sufficient taxable income. The amount of deferred tax assets considered
realizable could be reduced in the near term, resulting in a charge to net
income, if estimates of future taxable income in the carryforward period are
reduced.
A reconciliation of the income tax provisions computed at the United States
federal statutory rate to the effective rate for the recorded provisions for
income taxes is as follows:
Year ended
---------------------------
9/28/96 9/30/95 9/30/94
------- ------- -------
Federal income tax statutory rate (34.0)% (34.0)% 34.0%
State taxes, net of federal tax benefit (6.1) (6.1) 6.1
Research and development credit -- -- (4.0)
Other 2.4 1.2 4.9
------- ------- -------
Effective income tax rate (37.7)% (38.9)% 41.0%
======= ======= =======
Note 7. Stockholders' Equity
Preferred Stock
At September 30, 1993, the Company had 3,907,738 shares of Preferred Stock
authorized, of which 1,907,938 shares were issued and outstanding with a
convertible feature (the "Preferred Stock"). The holders of the Preferred Stock
were entitled to non-cumulative dividends as determined by the Board of
Directors. The Company did not declare or pay dividends on the Preferred Stock.
All shares of the issued and outstanding Preferred Stock were converted
automatically in conjunction with the initial public offering of the Company's
Common Stock on December 10, 1993. After the conversion, there were remaining
2,000,000 shares of Preferred Stock issuable by the Board of Directors. No such
shares of Preferred Stock were issued at September 28, 1996.
Employee Stock Purchase Plans
In September 1993, the Company established the 1993 Employee Stock Purchase Plan
(the "Purchase Plan"). The Company has reserved 500,000 shares of Common Stock
for issuance to employees under the Purchase Plan. Under the Purchase Plan, an
eligible employee may purchase shares of Common Stock from the Company through
payroll deductions of up to 10% of his base compensation, at a price per share
equal to 85% of the lesser of the fair market value of the Company's Common
Stock as of the first day or as of the last day of each six-month period under
the Purchase Plan. Offering periods commence on August 1 and February 1. Under
the Purchase Plan, 81,587, 66,620, and 38,312 shares were issued in the years
ending September 28, 1996, September 30, 1995, and September 30, 1994,
respectively.
Stock Option Plan
In May 1990, the Company established the 1990 Stock Option Plan (the "Option
Plan"). The Option Plan provides for the granting of incentive stock options to
employees and non-qualified stock options to employees and consultants. At
September 28, 1996, the Company has reserved 3,597,333 shares of
35
Common Stock for issuance under the Option Plan. Incentive and non-qualified
stock options generally have ten year terms and vest over periods determined by
the Board of Directors, generally four years.
A summary of all option activity under the Option Plan follows:
Shares available Options
for grant outstanding Price per share
------------------------------------------------------------
Balance as of September 30, 1993 2,002,304 1,485,833 $0.11 - $9.00
Granted (1,377,198) 1,377,198 $5.00 - $11.75
Canceled 898,973 (898,973) $0.11 - $11.75
Exercised - (702,232) $0.11 - $5.00
---------- ---------
Balance as of September 30, 1994 1,524,079 1,261,826 $0.11 - $7.75
Granted (1,364,334) 1,364,334 $3.88 - $4.63
Canceled 743,092 (743,092) $0.30 - $7.75
Exercised - (550,460) $0.11 - $5.00
---------- ---------
Balance as of September 30, 1995 902,837 1,332,608 $0.11 - $5.00
Granted (781,938) 781,938 $5.63 - $8.00
Canceled 401,777 (401,777) $2.25 - $8.00
Exercised - (163,983) $0.11 - $6.25
---------- ---------
Balance as of September 28, 1996 522,676 1,548,786 $0.11 - $8.00
========== =========
Options for 469,878 shares were exercisable under the Option Plan as of
September 28, 1996.
Directors' Stock Option Plan
In September 1993, the Company established the 1993 Directors' Stock Option Plan
(the "Directors' Plan"). The Company has reserved 300,000 shares of Common Stock
for issuance under the Directors' Plan. Under the Directors' Plan, each
non-employee director will be automatically granted stock options to purchase
40,000 shares of Common Stock on the date he or she first becomes a director. At
the 1996 annual meeting, the stockholders approved an amendment to the
Directors' Plan pursuant to which each non-employee director will be
automatically granted additional options for the purchase of 10,000 shares of
Common Stock on the anniversary date of his or her election to the board. The
exercise price of the option may not be less than 100% of the fair market value
of the Common Stock on the grant date. Options granted under the Directors' Plan
have 10 year terms and vest over a four year period.
A summary of all option activity under the Directors' Plan follows:
Options available Options Price per
for Grant Outstanding share
----------------------------------------------------------
Balance as of September 30, 1993 140,000 160,000 $7.50 - $9.00
------- -------
Balance as of September 30, 1994 140,000 160,000 $7.50 - $9.00
Granted (40,000) 40,000 $4.63
------- -------
Balance as of September 30, 1995 100,000 200,000 $4.63 - $9.00
Canceled 40,000 (40,000) $7.50
------- -------
Balance as of September 28, 1996 140,000 160,000 $4.63 - $9.00
======= =======
36
Key Executive Stock Plan
In June 1993, the Company established the 1993 Key Executive Stock Plan (the
"Key Executive Plan"). The Key Executive Plan provides for the issuance of
Common Stock or the grant of options to purchase Common Stock to key executive
officers of the Company. At September 30, 1993, a total of 571,665 shares of
Common Stock had been reserved for and issued under the Key Executive Plan.
Options issued have a term of 10 years, vest over 4 years and have been granted
at an exercise price equal to the fair market value of the Common Stock on the
date of grant.
A summary of all option activity under the Key Executive Plan follows:
Options available Options Price per
for Grant Outstanding share
----------------------------------------------------------
Balance as of September 30, 1993 - 404,999 $3.00 - $9.00
Granted (25,000) 25,000 $5.00
Canceled 181,945 (181,945) $3.00 - $9.00
Exercised - (30,000) $3.00
------- --------
Balance as of September 30, 1994 156,945 218,054 $3.00 - $5.00
Canceled 98,195 (98,195) $3.00 - $5.00
Exercised - (119,859) $3.00
------- --------
Balance as of September 30, 1995 255,140 -
Granted (267,000) 267,000 $5.63 - $7.38
Canceled 18,000 (18,000) $6.25
Exercised - (2,000) $6.25
------- --------
Balance as of September 28, 1996 6,140 247,000 $5.63 - $7.38
======= ========
In August 1994, the Board of Directors offered non-executive employees in the
Option Plan and the Key Executive Plan the opportunity to exchange existing
options for new options at an exercise price of $5.00, the fair market value of
the Company's common stock on the date of the exchange. Any vesting in the
canceled options was lost, and the new options were subject to the normal
four-year vesting schedule under the stock option plans. Under the offer,
options to purchase 503,198 shares were exchanged under the Option Plan and
options to purchase 25,000 shares were exchanged under the Key Executive Plan.
The Company has recorded compensation expense in connection with certain shares
issued and options under its stock and option plans. Deferred compensation of
approximately $740,000, recorded through September 30, 1993, is being amortized
ratably over the vesting periods of such shares and options. During the year
ended September 28, 1996, September 30, 1995, and September 30, 1994,
approximately $2,000, $17,000 and $490,000, respectively, of deferred
compensation was amortized.
Note 8. Long-Term Obligations, Commitments and Contingencies
The Company has entered into an operating lease for its main facilities that
expires in September 1997; however, the Company has exercised its option under
the contract to extend the lease for an additional
37
two years. Various other leases for sales offices expire throughout 1998 and
1999. Rent expense under operating leases aggregated approximately $901,000,
$784,000, and $817,000 for the years ended September 28, 1996, September 30,
1995, and September 30, 1994, respectively. Certain leases require the Company
to pay a portion of facility operating expenses.
In September 1995, the Company entered into an agreement to sublease a portion
of its headquarters building for a period of two years. The Company expects to
collect approximately $217,000 during fiscal year 1997 under this agreement.
Following are minimum lease payments under non-cancelable leases, net of
sub-lease amounts, for the given fiscal years:
Operating leases
----------------
1997 $ 807,000
1998 879,000
1999 837,000
--------------
Total minimum lease payments $ 2,523,000
==============
Note 9. Litigation
In September 1995, the Company entered into an agreement in principle to settle
the securities class action lawsuits initiated against the Company in July 1994.
As part of the agreement, a settlement fund of $2.6 million was established with
the Company contributing $520,000 and the Company's insurance carriers
contributing the balance. The Company's portion was accrued for during fiscal
1995 and paid in fiscal 1996.
On November 18, 1996, the Court entered an order finally approving the
settlement and dismissing the action against all defendants with prejudice.
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 certain patents. The Company has not yet filed a response to the
Complaint, and no discovery has been taken. The Company intends to defend the
action vigorously. The Company anticipates that the lawsuit will not have a
material impact on its financial condition or results of operations.
38
Quarterly Results of Operations (in thousands, unaudited):
Fiscal 1996 Quarter Ended
- ------------------------------------------------------------------------------
9/28/96 6/29/96 3/30/96 12/30/95
-------- -------- -------- ---------
Net sales $ 19,576 $ 16,102 $ 14,808 $ 16,504
Gross profit $ 7,622 $ 6,590 $ 5,779 $ 6,779
Net income (loss) $ 402 $ (664) $ (520) $ 325
Net income (loss) per share $ 0.04 $ (0.08) $ (0.06) $ 0.03
Fiscal 1995 Quarter Ended
- ------------------------------------------------------------------------------
9/30/95 7/1/95 4/1/95 12/31/94
-------- -------- -------- --------
Net sales $ 16,783 $ 14,422 $ 12,213 $ 17,466
Gross profit $ 6,805 $ 5,684 $ 3,345 $ 4,114
Net income (loss) $ 572 $ 108 $ (3,053) $ (1,332)
Net income (loss) per share $ 0.06 $ 0.01 $ (0.37) $ (0.17)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
39
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 1997 Annual
Meeting of Stockholders (the "Proxy Statement") to be filed with the Commission
within 120 days after the end of the Company's fiscal year ended September 28,
1996.
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.
40
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 24 of this Form 10-K.
(2) Financial Statement Schedules - See Index to Financial
Statements and Financial Statement Schedule at page 24 of
this Form 10-K.
(3) Exhibits - See Exhibit Index at page 42 of this Form 10-K.
(b) The Registrant did not file or amend any reports on Form 8-K during
the last quarter of the fiscal year ended September 28, 1996.
(c) See Exhibit Index at page 42 of this Form 10-K.
(d) See Index to Financial Statements and Financial Statements and
Financial Statement Schedule at page 24 of this Form 10-K.
41
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* Employment Agreement between Registrant and Ralph S. Dormitzer dated
June 2, 1993.(1)
10.5A Option and Note Extension Agreement between Registrant and Ralph S.
Dormitzer dated August 22, 1994.(5)
10.6 Form of Indemnification Agreement entered into between Registrant and
its directors and officers.(1)
10.7 Registration Rights Agreement dated July 10, 1992 between Registrant
and certain holders of Common Stock and Series E Preferred Stock.(1)
10.8 Lease dated July 16, 1992 for facilities located at 821 Fox Lane in San
Jose, California.(1)
10.9 Loan Agreement between Registrant and Comerica Bank California for
$10,000,000 line of credit dated July 20, 1993, as amended as of July
20, 1993.(1)
10.9A First Modification dated February 15, 1994, to the Loan and Security
Agreement dated July 20, 1993.(2)
10.9B Third Modification, dated September 30, 1994, to the Loan and Security
Agreement dated July 20, 1993.(5)
10.9C Fourth Modification, dated September 30, 1994, to the Loan and Security
Agreement dated July 20, 1993.(4)
10.9D Sixth Modification Agreement to the Loan and Security Agreement dated
July 10, 1993.(6)
10.9E Seventh Modification Agreement to the Loan and Security Agreement dated
July 20, 1993.(6)
10.10 Manufacturing Payment Agreement dated October 1, 1990 between
Registrant and Orient Semiconductor Electronics, Ltd.(1)
10.11 Distribution Agreement dated November 2, 1989 between Registrant and
Ingram Micro, Inc., as amended.(1)(3)
10.12 Distribution Agreement dated June 19, 1989 between Registrant and
Merisel, Inc. (formerly Macamerica), as amended.(1)(3)
42
10.13 Distribution Agreement dated August 30, 1990 between Registrant and
TechData Corporation, as amended.(1)(3)
10.14 Volume Purchase Agreement dated April 15, 1992 between Registrant and
National Semiconductor Corporation.(1)(3)
10.15 Sublease agreement dated August 21, 1995 for facilities located at 821
Fox Lane in San Jose, California, and amendments pertaining thereto.
11.1 Calculation of Earnings per Share
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule.
* 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) Previously filed as an Exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1994.
(3) Confidential treatment granted as to certain portions of these
exhibits.
(4) Previously filed as an Exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended April 1, 1995.
(5) Previously filed as an Exhibit to the Registrant's Form 10-K for
the fiscal year ended September 30, 1994.
(6) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 30,
1996.
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 20, 1996
ASANTE TECHNOLOGIES, INC.
By: /s/ JEFF YUAN-KAI LIN
-------------------------------------
Jeff Yuan-Kai Lin,
President and Chief Executive Officer
By: /s/ ROBERT SHEFFIELD
-------------------------------------
Robert Sheffield
Vice President of Finance,
Chief Financial Officer, and Secretary
44
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeff Yuan-Kai Lin and Robert Sheffield, 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/ JEFF YUAN-KAI LIN President, and Chief Executive Officer December 20, 1996
- -------------------------------------- (Principal Executive Officer) and Director
(Jeff Yuan-Kai Lin)
/s/ ROBERT SHEFFIELD Vice President of Finance, and December 20, 1996
- -------------------------------------- Chief Financial Officer (Principal Financial
(Robert Sheffield) and Accounting Officer)
/s/ MICHAEL KAUFMAN (Director) December 20, 1996
- --------------------------------------
(Michael Kaufman)
/s/ SOO BOON KOH (Director) December 20, 1996
- --------------------------------------
(Soo Boon Koh)
/s/ EDMOND TSENG (Director) December 20, 1996
- --------------------------------------
(Edmond Tseng)
/s/ CYRUS TSUI (Director) December 20, 1996
- --------------------------------------
(Cyrus Tsui)
/s/ WILSON WONG (Director) December 20, 1996
- --------------------------------------
(Wilson Wong)
45
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Asante Technologies, Inc.
Our audits of the financial statements referred to in our report dated October
25, 1996, except as to paragraph 2 of Note 9, which is as of November 18, 1996,
appearing in this Form 10-K also included an audit of the Financial Statement
Schedule listed in Item 14(a) of this Form 10-K. In our opinion, the Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related financial
statements.
PRICE WATERHOUSE LLP
San Jose, California
October 25, 1996
S-1
ASANTE TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
----------- ---------- ---------- ---------- ----------
Year ended September 30, 1994:
Allowance for doubtful accounts, price protection
and distributor rebates $ 1,270 $ 2,769 $ (2,482) $ 1,557
Allowance for sales return 225 1,594 ( 473) 1,346
--------- --------- ------------ ---------
$ 1,495 $ 4,363 $ (2,955) $ 2,903
========= ========= =========== =========
Year ended September 30, 1995:
Allowance for doubtful accounts, price protection
and distributor rebates $ 1,557 $ 3,566 $ (3,340) $ 1,783
Allowance for sales return 1,346 1,055 (1,493) 908
--------- --------- ------------ ---------
$ 2,903 $ 4,621 $ (4,833) $ 2,691
========= ========= =========== =========
Year ended September 28, 1996:
Allowance for doubtful accounts, price protection
and distributor rebates $ 1,783 $ 2,406 $ (2,032) $ 2,157
Allowance for sales return 908 242 (133) 1,017
--------- --------- ------------ ---------
$ 2,691 $ 2,648 $ (2,165) $ 3,174
========= ========= =========== =========
S-2