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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 October 3, 1998
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 November
27, 1998 as reported on the Nasdaq National Market, was approximately
$10,269,216. Shares of Common Stock held by officers and directors and their
affiliated entities and related persons have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive for other purposes.
As of November 27, 1998, the Registrant had 9,285,893 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the 1998
Annual Meeting of Stockholders to be held on February 26, 1999 is incorporated
by reference in Part III of this Form 10-K to the extent stated herein.
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TABLE OF CONTENTS
Page of
Report
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 17
ITEM 3. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 21
ITEM 6. SELECTED FINANCIAL DATA 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 51
ITEM 11. EXECUTIVE COMPENSATION 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 52
SIGNATURES 55
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This discussion, other than the historical financial information, may consist of
forward-looking statements that involve risks and uncertainties, including
quarterly and yearly fluctuations in results, the timely availability of new
products, the impact of competitive products and pricing, and the other risks
detailed from time to time in the Company's SEC reports, including this report.
These forward-looking statements speak only as of the date hereof, and should
not be given undue reliance. Actual results may vary materially from those
projected.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
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. The
Company focuses much of its efforts in certain vertical markets, namely, the
educational channel, SOHO (Small Office/Home Office) and in pre-press, digital
graphic communications and related markets requiring high bandwidth solutions,
where the Company can differentiate the performance and features of its products
from those of its competitors. The Company is the largest third party provider
of Ethernet connectivity for the Macintosh platform.
The majority of the Company's products are designed to function across either
standard Ethernet (10 Megabits per second known as 10 Mbps, 10BASE-T), or Fast
Ethernet (100 Megabits per second, known as 100 Mbps, 100BASE-T) networks.
Ethernet is a type of network topology which determines how packets, or message
units, are handled and sent across the network. Ethernet is the most widely used
communication standard in Local Area Networks ("LAN").
There are six primary trends in computer networking that affect the Company's
business: 1) the adoption of switched Ethernet technology, 2) the adoption of
increased speed and Fast Ethernet and Gigabit products, 3) the use of Internet
and "Intranet" technology in corporate local area networks, 4) the anticipated
convergence of voice, data, and video over all market segments, 5) the
seasonality of certain segments of the networking industry, and 6) the
commoditization of low end networking products and growth of the home office.
The first trend is the growth in commercialization and adoption of Ethernet
switching technology, which enables a dedicated communication between a sending
and receiving computer or device as opposed to traditional shared Ethernet,
where multiple users share communication lines. Initially, switching products
were used primarily within larger companies which 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 backbone, in server groups, at the workgroup level, and in direct
connections to desktop PCs. This is especially applicable to those companies
which focus in high bandwidth graphics intensive applications. The Company
introduced several new switching products in 1996, delivered two
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new families of high performance switching products in 1997 designed to meet the
needs of the most high-bandwidth demanding applications and, in fiscal 1998,
announced several new switching product lines designed to meet the needs of
those customers demanding high performance, cost effective solutions. In 1999,
the Company will continue to focus research and development resources on the
development of additional switching products in order to complete its product
line and meet the needs of the Company's customers requiring high performance,
feature-rich products, and will continue to reduce the cost of existing lines as
necessary to counter declining prices.
The second trend is the adoption of Fast Ethernet (100 Mbps) technology and the
need for Gigabit solutions for certain applications. In fiscal 1997 and early
1998, users of 100Mbps technology were predominately two 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, which routinely transfer very
large files across their networks. The sharply declining prices the market
experienced in fiscal 1998 has accelerated the transition of the Company to Fast
Ethernet technologies, both shared and switched. The Company believes that
10/100 technology will continue to become the industry standard. Consequently,
the Company has focused the majority of its efforts in 1998 on the development
and introduction of new aggressively priced 10/100 adapters, shared hubs, and
switches. The Company offers a wide range of 100 Mbps and 10/100 Mbps Fast
Ethernet shared hubs, cards and switch products which have achieved strong
recognition and critical acclaim. In addition, as 10/100 technology takes over
as the standard for Ethernet networking, Gigabit technology (1,000 Mbps) will be
increasingly adopted for use in the corporate backbone, and at the server level
in order to handle the increased bandwidth and speed demands created by the
adoption of Fast Ethernet and the convergence of voice, data, and video to the
desktop.
The Company's Fast Ethernet products are differentiated from those of the
Company's competitors both due to their ease of use (Plug-and-Play), and
software utilities including built-in HTTP servers on many of the Company's
newer managed switch products, a software enhancement utility which optimizes
Fast Ethernet performance across most network topologies including standard
Ethernet, Fast Ethernet, and token ring networks. NetDoubler(TM), the Company's
network acceleration software, currently runs on Windows NT(TM), Macintosh(TM),
Power PC(TM), and Unix operating systems.
The third trend affecting the market for local area networking equipment is the
rapid adoption of internet technology into 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 Company has taken steps to integrate Intranet technology into its new
switches in the form of a built-in, Java(TM)-enabled, HTTP server. In early
fiscal 1999, the Company plans to announce several products to further
capitalize on the growing trend for the needs of companies and institutions for
both Intranet and LAN-edge technologies with the introduction of WAN-edge
devices such as a Plug-and-Play ISDN router and dual analog channel routers. In
addition, the Company is developing other products to meet the needs of its
customers to connect both to the Internet, and corporate Intranets.
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The fourth trend in the local area network (LAN) and LAN-edge market is the
anticipated convergence of voice, data, and video across both corporate
Intranets and the Internet. The greatly increased bandwidth and speed, which has
and is being created primarily due to emergence of 10/100 technology taking over
the desktop as the networking standard, has created much greater demand and
downward pricing pressures as the telephone companies and larger networking
companies are pressured to deliver "all-in-one" LAN, WAN, Phone, and FAX
communications centers at attractive price points.
Another observation in the local area networking market is the reported growth
in sales and market share for the Microsoft Windows NT(TM) operating system and
need for cross-platform solutions. The low installation and maintenance cost,
scalability, and compatibility with desktop versions of Windows have made
Windows NT(TM) an effective solution for servers in corporations.
The fifth trend, which affects the local area networking market and the Company
in particular is the seasonality of the Company's business. The first factor
which affects the Company most in the market is caused by the budgeting and
purchasing cycles of certain segments of the Company's customers. The Company
has a strong presence in the educational market which is characterized by its
typically seasonal purchasing habits due to the nature of educational seasons
and the ability for school administrators to more easily install network systems
during times when the majority of users (students) are not in session. Secondly,
many schools and other governmental agencies allocate spending based on seasonal
budgets and accept bids only seasonally.
The sixth trend which affects the local area networking market is the
commoditization of the lower end of the networking market, including 10/100
adapters, unmanaged 10/100 hubs and switches. This commoditization is the result
of the availability of commercial chipsets that allow manufacturers to introduce
new products with minimal engineering effort. The Company is working with
offshore manufacturing partners to develop cost competitive products based on
these new chipsets. The Company expects to remain competitive in this segment of
the market, and believes this area to be a potential growth area for the Company
due to the expected increase in the "home office" market segment brought on by
the affordability of these solutions.
The Company continues to develop and sell Ethernet and Fast Ethernet adapters to
customers who use Apple Macintosh(TM) and iMAC(TM) 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, iMAC's, Power PC's, or additional developments adversely affecting
Apple's business could have a material adverse effect on sales of the Company's
client access products, which would materially and adversely affect the
Company's business, financial condition and results of operations.
The Company is dependent on the development and release of new products,
specifically in the switched and Fast Ethernet shared areas. Delays in bringing
new products to market would have a material adverse effect on the Company's
financial results and condition.
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
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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.
Restructuring
During the third quarter ended July 4, 1998, the Company restructured its
operations. This restructuring of operations was necessary to re-establish the
strategic direction of the Company and better align its operating expenses with
anticipated revenues. Although the Company expects to realize the immediate
benefit of a reduced cost structure and other benefits from the restructuring of
operations, there is no assurance that losses will not occur in the future.
At July 4, 1998, the Company recorded a $400,000 reserve for personnel and
related costs associated with a company-wide restructuring plan. These costs
include employee severance costs, benefits, outplacement costs, termination
costs, and employee assistance expenses related to the realignment. The
reduction in force consisted of a reduction of approximately 40 employees,
primarily from the sales and marketing departments.
The Company's action plan included the release of proprietary ASIC-based
switches, development of retail channels, changes in the Company's financial
model, and realignment of cost structure, designed to better position the
Company going forward and which the Company believes will leverage its
strengths. The Company plans to expand its market share in the SOHO (Small
Office / Home Office) market by adding a retail channel in addition to
strengthening its mail order channel. As part of this plan, the Company has
entered into new marketing agreements with two of the nation's largest computer
retailers, Comp USA and Fry's Electronics and is negotiating agreements with
Micro Center, and a number of regional and independent resellers. The Company
shipped products, including its FriendlyNet family of products to both Fry's and
Comp USA nationwide during the fourth quarter of fiscal 1998.
The Company also expanded its focus on its existing mail order catalog channel
including the addition of CDW, Multiple Zones, and Insight Direct. Management
believes that these additions will contribute positively to the Company's
results of operations in the coming quarters.
The Company plans to focus its efforts on providing lower cost products and to
refocus its research efforts as well as its sales and marketing efforts on
certain key channels for which the Company could leverage its strengths. The
Company will continue to devote significant efforts on its educational and mail
order markets, but is also in the process of concentrating resources to its new
retail channel. In implementing this plan, the Company found it necessary to
realign its workforce to more effectively focus on these channels and to bring
expenses in line with the Company's new targeted revenue and margin structure.
Industry Segment Information
Asante operates in one industry as described above.
Products
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Switch Products
Asante's comprehensive line of switches includes multiple families of switches
designed to meet the needs of both its vertical and horizontal market customers.
The IntraStack(TM) 10/100 6000 series dual speed switch family and the Company's
newly introduced, feature rich IntraSwitch(TM) 6000 series 10/100 switches are
currently Asante's highest performance, managed products, designed to provide
maximum bandwidth for those customers requiring solutions for high congestion
situations. Both families feature an integrated HTTP management server with
Java(TM)-enabled features, as well as other advanced functions. The
IntraStack(TM) family, which uses the Company's patented Goldcard(TM) connector
technology to expand the switching system via a 2.1 Gigabit PCI backplane,
currently includes a suite of 3 units. The IntraStack(TM) 6014DSB base is a
12-port 10/100 auto-sensing management switch offering two additional MII
expansion slots which allow additional 10/100 ports, 10/100 Fiber, or 10 FL
modules to be added. The Intrastack(TM) 6016DSE switch offers an expansion
module with 16 10/100TX ports and is fully manageable from the base module. The
third product in this family is the IntraStack(TM) 6008FXE switch, which offers
8 100Base-FX (fiber) ports and is fully stackable using Asante's Goldcard(TM)
technology with the entire IntraStack(TM) family. The IntraSwitch(TM) 6000
series of switches currently ships in both 16 and 24 port configurations and are
based on the Company's proprietary ASIC technology. In addition, these switches
offer the customer additional management features such as RMON, and VLAN, and a
migration path for those customers requiring a Gigabit backplane. The Company
plans to introduce additional feature rich 10/100 managed switches during fiscal
1999, including a chassis based 10/100 switch to meet the needs of the Company's
educational customers and customers requiring full featured, high bandwidth
solutions.
The IntraSwitch(TM) 5000 series switch family currently features three products.
The IntraSwitch(TM) 5324 is a high performance 10 + 100 switch featuring 24
dedicated, 10 Mbps switched ports: one fixed, dual-speed 10/100TX port featuring
NWay auto-negotiation to automatically determine 10 or 100 Mbps operation; and
two MII slots for optional 10/100TX, 100Base-FX, or 10Base-FL, expansion
modules. The IntraSwitch(TM) 5212 introduced in the first quarter of fiscal
1998, has 12 dedicated, 10 Mbps switched ports: one fixed, dual-speed 10/100 TX
port featuring NWay auto-negotiation; and one MII slot. The IntraSwitch(TM) 5308
introduced in the second quarter of fiscal 1998, has 8 dedicated, 10 Mbps
switched fiber ports; one fixed, dual speed 10/100TX port featuring NWay
auto-negotiation, and one optional MII slot for 10/100 TX, 100Base-FX, or
10Base-FL, expansion modules. These products feature integrated HTTP management
software, RMON, and VLAN, among other features.
The FriendlyNet(TM) 4000 series switch family features cost effective, high
performance 10/100 Mbps unmanaged switches for the smaller and midsized network
and "power users" with high bandwidth needs. The switches feature NWay
auto-negotiation to automatically determine either 10 or 100 Mbps operation and
come in 2, 4, 8, and 16 port configurations.
The Company also offers a 10 Mbps, 8 port unmanaged plus 2 10/100 uplink,
FriendlyNet(TM) Switch.
Gigabit Adapters and Other Gigabit Products
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In early fiscal 1999, the Company plans to ship its first Gigabit products. The
Company's first Gigabit product, to be introduced in the February time frame,
will be a full-featured Gigabit card. The Company plans shipping additional
Gigabit products in fiscal 1999 which will both complement its current switch
products and provide those customers with large bandwidth needs high end
solutions at affordable prices. The Company plans on investing in additional
Gigabit technology to meet the needs of its customers requiring implementation
of a Gigabit solution to the backbone of their networks.
10Base-T/100BASE-TX (Fast Ethernet) Systems
In addition to switches, the Company offers a complete family of dual speed
10/100 Fast Ethernet systems and adapters to allow customers to connect personal
computers and high performance servers over a corporate Intranet. The Company's
award-winning, high performance products offer customers with high bandwidth
needs a complete line of products to fulfill their intranet needs and offer
those customers with existing 10BASE-T Ethernet networks a cost effective way to
transition to 100BASE-T networking.
The Company offers a growing family of 10/100 hub solutions for its customers.
The Company's current products, the FriendlyNet 10/100 Dual Speed hub family,
includes standalone 8 and 16 port 10/100 hubs. In addition, the Company offers a
stackable, unmanaged 10/100 hub as part of the FriendlyNet family. The stackable
product includes 8 and 16 port base units, and 8 or 16 port expansion units for
departmental or workgroup sized networks.
Asante also offers a stackable, high port count 100Mb solution for larger
networks under the AsanteFast family name. The AsanteFast 100 Hub is a
100BASE-TX hub providing ten times the performance of 10 Mbps 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.
Features include auto-negotiation for seamless integration of existing 10BASE-T
with new 100BASE-T systems. The AsanteFast 100 Hub works with all personal
computers equipped with a 100Mbps adapter, and supports Windows 95(TM), Windows
NT(TM), Novell NetWare(TM), Banyan VINES(TM), and other popular network
operating systems.
The AsanteFast 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
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(TM)
network management software or from any SNMP-compatible or Telnet console.
Fast Ethernet Adapter Cards
The Company's AsanteFast 10/100 dual speed adapters provide all-in-one
compatibility to 10BASE-T and 100BASE-TX Ethernet networks for personal
computers utilizing standard PCI bus architecture. The product plugs into the
PCI slot of the computer and automatically configures itself to the system. It
utilizes an "autonegotiating" feature that senses whether the network hub speed
is 10 Mbps or 100 Mbps and sets the adapter speed accordingly. As such, the
product allows the customer to move from the existing 10BASE-T network to a new
Fast Ethernet network. The Asante Fast 10/100 has four LED lights
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to assist with trouble shooting and to indicate connection speed, link integrity
and data traffic. The Company's PCI cards ship with Windows(TM), Macintosh(TM),
and Power PC(TM) drivers for cross platform compatibility.
10BASE-T Systems and Adapter Cards
Along with the trend by customers in the more sophisticated sectors of the
networking market to move to switching and 10/100 shared technology, the demand
for low cost 10 Mbps Ethernet technology from more price-sensitive customers
remained consistent. 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 10 Mbps shared technology for
their existing 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 10 Mbps solutions. The Company continues to hold a competitive position
in the market for 10 Mbps shared hubs, and will continue to pursue cost
reduction objectives for its 10 Mbps product line to maintain competitiveness in
this market. The Company expects that sales levels in the 10 Mbps market will
not continue as declining pricing for switching technology and 10/100 Mbps
shared Ethernet technology are making adoption of these standards more
attractive.
The Company offers a broad family of 10BASE-T systems and adapters to meet needs
ranging from the corporate workgroup to the departmental workgroup and small
business user.
The NetStacker(TM) 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(TM) 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(TM) is also available with an SNMP-based network management
module and is manageable with IntraSpection(TM) and AsanteView(TM) 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(TM) network management software, this hub provides centralized
management and diagnosis which 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 unmanaged hub family includes multiple port versions including 8, 12 and
24 port versions. In addition, the Company offers a 6-port, BNC unmanaged hub.
These 10T hubs form 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
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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.
The FriendlyNet(TM) 10T Hubs in 5-port and 8-port product configurations also
comprise a family of inexpensive, non-intelligent Ethernet hubs designed to
complement the 10T-Hub/8, /12 and /24 to meet the needs of the economy-minded
user, small business, and home network. Their smaller size makes them ideal for
small businesses and personal or home users who have limited workspace.
Adapter Cards for IBM-compatible personal computers. The Company's AsanteNIC(TM)
and EtherPaC(TM) line of 10BASE-T Ethernet client access products consist of
nine different cards, which support either PCI, ISA, EISA or MCA buses. All
cards support Novell NetWare(TM), Windows NT(TM), and other popular network
operating systems and protocols.
Adapter Cards for Macintosh(TM) Computers. The Company sells an Ethernet adapter
card and transceiver product line supporting all Macintosh(TM) platforms and all
Ethernet cabling options. The Company also offers AsantePrint which allows older
printers to be connected to 10 Mbps networks.
Other Client Access Products. Asante offers a family of converters to connect
LocalTalk devices to an Ethernet network. These converters connect from 2 to 8
devices such as printers to an Ethernet network. In addition, the Company offers
FriendlyNet media adapters to connect PC and Macintosh(TM) computers or printers
with built-in Ethernet support to an Ethernet network.
Software Products
Software design and implementation is a key component of all Asante products.
Separately, the Company markets several cutting edge software products.
Asante currently offers two network management options: IntraSpection(TM) and
AsanteView(TM). IntraSpection(TM) is the Company's Web-based network management
software program, providing users with customized management solutions and
support for every SNMP-based network device on the market. IntraSpection(TM)'s
customized support is available through Asante plug-in Personality Modules that
are sold as additions to the basic IntraSpection(TM) software. Furthermore,
because IntraSpection(TM) allows for programming in HTML and Java(TM) 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(TM) software is available at no cost through
the Company's internet site at http://www.asante.com.
AsanteView(TM) is the Company's proprietary network management software that
operates with the SNMP protocol. Using AsanteView(TM) with an AsanteHub 1016,
NetStacker or AsanteHub 2072, a network manager can monitor and control the
network. AsanteView(TM) enables the manager to gather network statistics,
monitor network performance, pinpoint bottlenecks and errors and optimize
network performance. The graphic user interface conveys network information at a
glance. AsanteView(TM) offers both local and remote capabilities and permits
management of up to 12 Asante hubs at the same time from a single management
station.
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Asante has developed multiple versions of its network acceleration software,
NetDoubler(TM). Providing a high-performance solution for publishing and
pre-press networks when combined with Asante switched and Fast Ethernet
products, NetDoubler(TM) runs on Macintosh(TM) computers and most popular
servers including Windows NT(TM) Macintosh(TM) and UNIX. The Company has several
patents pending for its acceleration software and systems technology.
Technology
The Company is a provider of leading edge products in the Ethernet networking
industry. The Company introduced the first 100 Mbps stackable hub system
products in 1995 and has continued to bring new technology to the market ahead
of competition. In line with its goal to provide its customers with value-added
features which continue to differentiate the Company's products from those of
its competitors, the Company has developed and patented its GoldCard(TM)
connector technology. The Company's Goldcard(TM) connector technology allows
customers to expand the Company's switching via a 2.1 Gbps PCI backplane without
having to use valuable 100BASE-T ports in order to connect the modules in a
stack, giving the Company a true stackable system architecture that is cost
effective for the customer. In addition, the Company completed design work on
its proprietary 10/100 ASIC (Application Specific Integrated Circuit) chip
allowing the Company to offer the most competitively priced switches in the
industry. The Company is continuing its development of new and enhanced products
for connecting to the Internet and corporate Intranets. The Company will also be
focusing efforts to expand its Gigabit product line.
Marketing and Distribution
The Company markets its products in three main channels: first, through a two
tier distribution channel which sells primarily to commercial and corporate
users; second, the Company sells directly to a large number of educational
institutions; and third, through a number of OEM customers.
Asante's major distributors are leading wholesale distributors of computer
products in North America. To supplement the efforts of these distributors
overseas, the Company has appointed international distributors for specific
territories. All of the Company's distributors are appointed on a non-exclusive
basis.
Asante also sells its client access and network system products directly to
major universities 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. As a result, a significantly increased portion of the
Company's revenue resulted from OEM sales in fiscal 1997, due to certain
agreements with larger OEM customers. These relationships may typically cause
fluctuations in the Company's business based on the Company's ability to locate,
or maintain various OEM opportunities and the ability of the Company to offer
cutting edge, cost effective technology of interest to its OEM customers.
However, sales to OEM customers declined in fiscal 1998 and the Company will
continue to focus resources on obtaining additional, cost effective agreements
with larger OEM customers, although there can be no assurance that such
agreements will be obtained. OEM sales are expected to continue to constitute a
smaller portion of the Company's total sales in fiscal 1999.
11
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Sales to customers outside the United States accounted for approximately 22.0%,
18.0%, and 23.1% of the Company's net sales in fiscal years 1998, 1997, and 1996
respectively. The increase in international sales as a percentage of net sales
in fiscal 1998, was due primarily to increased sales in Europe and decreased OEM
sales. The decrease in international sales as a percentage of total sales in
fiscal 1997, was due primarily to increased sales of products to OEM customers
in the United States. All sales to international customers are denominated in
U.S. dollars. 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
October 3, 1998, the Company supported the sales efforts of its distributors
with 36 direct sales and support related employees located throughout the United
States who promote the Company's products within assigned territories, and 15
outside sales representatives.
The Company's agreements with its distributors can generally be terminated after
an initial term of one year or on short notice without cause, and do not provide
for minimum purchase commitments or preclude the distributors from offering
products that compete with those offered by the Company.
The Company grants to its distributors limited rights to return unsold
inventories of the Company's products in exchange for new purchases and provides
certain price protection to its distributors. Although the Company provides
reserves for projected returns and price decreases, any product returns or price
decreases in the future that exceed the Company's reserves will adversely affect
the Company's business, financial condition and results of operations. See Item
7: Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The distribution of products such as those offered by the Company has been
characterized by rapid change, including consolidations and financial
difficulties of some distributors and the emergence of alternative distribution
channels. In addition, there is 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, financial condition and results of
operations. There can be no assurance that future sales by the Company's
distributors will remain at current levels or that the Company will be able to
retain its current distributors on terms that are commercially reasonable to the
Company. Although the Company believes 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 1997, the Company altered a portion of its warranty policy limiting
coverage on certain of its high-end switch products to 3 years. In fiscal 1998,
the Company adopted a limited lifetime warranty of its existing unmanaged
products and new 10/100 6000 series managed and 4000 series unmanaged
12
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switches. This warranty excludes from lifetime coverage, the fan and power
supply included with its products, due to the shorter life expectancy of these
parts. The Company has not encountered material warranty claims, although there
can be no assurance that claims will not increase substantially over time as a
result of the change to a lifetime warranty for a majority of the Company's
products. Future warranty claims exceeding the Company's reserves for warranty
expense could have an adverse effect on the Company's business, financial
condition and results of operations.
Company warranties are limited to the Company's obligation to repair or replace
the defective product. The Company attempts to further limit its liability to
end-users through disclaimers of special, consequential and indirect damages and
similar provisions in its end-user warranty. However, no assurance can be given
that such limitations of liability will be legally enforceable.
Backlog
The Company generally ships products shortly after orders are received and
consequently maintains very little backlog. Accordingly, the Company does not
believe that its backlog as of any particular date is indicative of future
sales.
Engineering and Product Development
The markets for the Company's 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
market position in the Macintosh(TM) connectivity market and expanding its
presence in the multiplatform market requires continuing investment to develop
new products, enhance existing products and reduce manufacturing costs.
As of October 3, 1998, the Company had 26 employees engaged in engineering and
product development. During the fiscal years ended October 3, 1998, September
27, 1997, and September 28, 1996, the Company's engineering and product
development expenses were approximately $6.6 million, $7.1 million, and $6.2
million respectively.
The Company continues to invest significant resources in engineering projects
and will continue to focus additional resources as needed in order to develop
and bring to market additional high technology, high demand products supporting
both its network systems and the Intranet/Internet markets. In particular, in
fiscal 1998 and going forward, the Company will focus additional efforts in the
areas of imbedded software design, development of additional switches and other
LAN-edge devices, WAN router products, and on system integration. The Company
will also direct product development efforts to expand its Gigabit product line.
The Company believes its future success will depend upon its ability to enhance
and expand its existing product offerings and to develop in a timely manner new
products that achieve rapid market acceptance. Substantially all of the
Company's products are designed to provide connectivity to Ethernet LANs. If the
Company is unable for technological or other reasons to modify its products or
develop new products to support Fast Ethernet or Switched Ethernet technology,
or if Ethernet's importance declines as a result of alternative technologies,
the Company's business, financial condition and results of operations would be
13
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materially and adversely affected. There can be no assurance that the Company
will be successful in developing and marketing enhanced or new products in a
timely manner, that those products will gain market acceptance, or that the
Company will be able to respond effectively to technological changes or new
industry standards.
Manufacturing and Suppliers
The Company's manufacturing operations consist primarily of managing its
materials and inventories, purchasing certain components, performing limited
final assembly of some products and testing and performing quality control of
certain materials, components, subassemblies and systems. The Company
subcontracts substantially all of the assembly of its products. This includes
Orient Semiconductor Electronics, Ltd. ("OSE"), a semiconductor and printed
circuit board assembler based in Taiwan, and several other subcontractors and
manufacturers based in California, Taiwan and China. 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 1998, the Company
purchased $8.2 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 and other countries
where the Company's subcontractors are located.
Although the Company generally uses standard parts and components for its
products, certain key components used in the Company's products are available
from only one source and others are available from only a limited number of
sources. Components currently available from only one source include, among
others, custom integrated circuits used in the Company's intelligent hubs, and
certain ASICs used in the Company's 10/100 and 10T switching products. The
Company does not have a long-term supply agreement with any of its suppliers.
The Company believes that certain key components remain in short supply, and
from time to time receives only limited allocations of these products which in
prior years has caused shipping delays of one or more of the Company's products.
If the Company or any of its suppliers experience component shortages in the
future or any of its competitors have long-term supply agreements under which it
is possible for them to obtain greater supplies of such components than the
Company, the Company's business, financial condition and results of operations
could be materially and adversely affected. The Company also relies on OSE and
subcontractors to procure many of the components used in
14
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the Company's products. Procurement and stocking of components and subassemblies
is done by these subcontractors based on the Company's purchase orders.
Competition
The markets for the Company's products are highly competitive, and the Company
believes that such competition will intensify. Competitive trends in the
Company's markets are continuing declines in average selling prices, coupled
with improvements in product features and performance. The Company expects such
trends will continue.
In the mainstream market, the Company competes with Cisco Systems, Nortel, 3Com,
Intel, and many smaller companies. Competition from these and other companies,
including new entrants, is expected to intensify, particularly in the SOHO,
workgroup, and departmental user markets. Many of the Company's competitors in
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 has established itself as a supplier of
high quality, reliable products and as a result, currently competes favorably
with respect to these factors. There can be no assurance, however, that the
Company will be able to compete successfully in the future against current or
future competitors, or that it will be able to adapt successfully to changes in
the market for its products. The Company's inability to compete successfully in
any respect or to respond timely to market demands or changes would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In the Macintosh(TM) 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.
During fiscal 1998, a smaller portion of the Company's sales represented
products sold to OEMs than in fiscal 1997. While the Company has pursued, and
will continue to pursue, additional OEM agreements with larger companies, there
can be no assurance that existing OEM agreements will continue or that new
agreements will be obtained. In addition, since the Company intends to seek
additional large product volume arrangements, the acquisition or loss of a
single large OEM customer or several smaller OEM customers would have a material
effect on the Company's revenues. Unless the Company signs
15
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additional large OEM agreements in the near future, the Company expects that OEM
sales will remain flat or decrease slightly as a percentage of total revenue in
fiscal 1999.
A significant percentage of the Company's sales in fiscal 1998 was derived from
products designed for use with Macintosh(TM) Power PC(TM), and iMAC(TM)
computers. Sales of these products as a percentage of total Company revenue,
excluding OEM sales, have steadily declined over the last several years due to
Apple's competition in the Company's adapter card market and incorporation of
Ethernet into the motherboard of a large portion of its products, and Apple's
decline in market share. However, the Company expects that sales of such
products will continue to represent a substantial portion of its net sales for
the foreseeable future. There can be no assurance that unit sales of these
products will continue at their present levels or increase in the future. Any
material adverse developments in Apple's business could have a material adverse
effect on sales of the Company's client access products, which would materially
and adversely affect the Company's business, financial condition and results of
operations. See Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Proprietary Rights
The Company is currently pursuing several domestic and foreign patent
applications relating to its acceleration software and systems technology.
The Company has received in the past and may receive in the future
communications from third parties asserting intellectual property claims against
the Company. Claims made in the future could include assertions that the
Company's products infringe, or may infringe on the proprietary rights of third
parties or requests for indemnification against such infringement. There can be
no assurance that any claim will not result in litigation, which could involve
significant expense to the Company. If the Company is required or deems it
appropriate to obtain a license relating to one or more products or future
technologies, there can be no assurance that the Company would be able to do so
on commercially reasonable terms, or at all.
The Company relies on a combination of patents, trade secrets, copyright and
trademark law, nondisclosure agreements and technical measures to establish and
protect its proprietary rights in its products. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's technology is difficult,
and there can be no assurance that the measures being taken by the Company will
be successful. Moreover, the laws of some foreign countries do not protect the
Company's proprietary rights in its products to the same extent as do the laws
of the United States. See Item 3: Legal Proceedings.
Employees
As of October 3, 1998, the Company had 130 employees, including 26 in
engineering and product development, 33 in manufacturing operations, 46 in
marketing, sales and support services, and 25 in corporate administration. The
number of employees reflects a reduction in workforce as a result of the
restructuring which occurred in the third quarter of fiscal 1998.
16
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The Company's success also depends to a significant extent upon the
contributions of key sales, marketing, engineering, manufacturing, and
administrative employees, and on the Company's ability to attract and retain
highly qualified personnel, who are in great demand. None of the Company's key
employees are subject to a non-competition agreement with the Company. Unless
vacancies are promptly filled, the loss of current key employees or the
Company's inability to attract and retain other qualified employees in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations.
None of the Company's employees are represented by a labor organization, and the
Company is not a party to any collective bargaining agreement. The Company has
never had any employee strike or work stoppage and considers its relations with
its employees to be good.
ITEM 2. PROPERTIES
The Company's headquarters, including its executive offices and corporate
administration, manufacturing, marketing, sales and technical support
facilities, are located in San Jose, California. The Company occupies this
facility under a lease that expires on August 31, 1999. The lease provides an
option to extend for an additional five years. During 1998, the Company leased
sales offices in Southern California, Colorado, North Carolina, Texas, Utah,
Washington, Taiwan and England . The Company believes that its existing
facilities are adequate to meet its requirements for the foreseeable future and
that suitable additional or substitute space will be available as needed. See
Note 8 of Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
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.
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 unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company has filed a response to the complaint denying
liability. The case has been consolidated, for purposes of claim interpretation
only, with similar cases filed against several other defendants, which include,
among others,
17
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Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks, and Sun
Microsystems. Plaintiff has served claim charts purporting to set forth its
basis for its claims that products compliant with an IEEE standard infringe its
patents. On April 16, 1998, the Special Master appointed by the court issued a
report agreeing in most material respects, with the defendants' interpretation
of the alleged patent claims. Subsequently, and by order dated November 23,
1998, the District Court adopted without modification the findings of the
Special Master and the recommendations of the Magistrate Judge regarding claim
interpretation of the patents-in-suit. The Court noted that plaintiff Datapoint
had conceded that the Special Master's claim interpretation would result in a
finding of no infringement for the accused products, and therefore ordered the
case dismissed on the merits effective December 30, 1998.
Subsequent to the Company's fiscal year end, on October 16, 1998, the Company
received a collection letter from Dunn and Bradstreet, Receivable Management
Services, on behalf of Plaintree Systems Corporation ("Plaintree"). The letter
claims that the Company owes Plaintree $197,400 and demands immediate payment.
The Company believes Plaintree's claim stems from the OEM Purchase and
Manufacturing License Agreement between Plaintree and the Company, dated June 1,
1996. Pursuant to the Agreement, the Company purchased certain products from
Plaintree. The Company has determined the Plaintree products were defective and
has demanded arbitration against Plaintree pursuant to the Agreement, for monies
already paid to Plaintree, a minimum of $300,000. The time to respond to the
Company's demand has not yet passed. The arbitration will take place in
Massachusetts. Management believes the ultimate resolution of this matter will
not have a material effect on the Company's financial position or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages as of December 15, 1998, and
certain information regarding each of them are as follows:
Name Age Position with the Company
---- --- -------------------------
Wilson Wong (1) 51 President and Chief Executive Officer
Jeff Yuan-Kai Lin (2) 47 President and Chief Executive Officer
William Leung (3) 57 Vice President of Operations
Rajiv Matthew (4) 38 Vice President of Finance and Administration
Ronald Volkmar (5) 51 Vice President of Sales Americas
William Fenley (6) 51 Vice President of Product Marketing and OEM
Business
Robert Sheffield (7) 49 Vice President of Finance, CFO and Secretary
Paul Smith (8) 40 Senior Vice President of Marketing and Sales
John Jeng (3) 43 Vice President of Operations
- --------------------------------------------------------------------------------
18
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1) Wilson Wong resigned as an Officer of the Company in August, 1997 and was
rehired as Vice President of Engineering on September 10, 1998. Mr. Wong
assumed the position previously held by Mr. Yen Chang. On December 17,
1998, Mr. Wong assumed the position of President and Chief Executive
Officer following the resignation of Mr. Lin.
2) On December 17, 1998, Mr. Jeff Lin resigned from his positions as President
and Chief Executive with the Company, but will retain his position on the
Board of Directors.
3) On December 7, 1998, Mr. William Leung resigned as Vice President of
Operations. His responsibilities will be assumed by Mr. Jeng.
4) Rajiv Matthew was hired as Vice President of Finance and Administration on
July 6, 1998.
5) Ronald Volkmar left the Company in fiscal 1994 and was rehired as Vice
President of Sales-Americas on April 3, 1998.
6) In November 1998, Mr. Fenley was promoted to Vice President of Product
Marketing and OEM Sales.
7) Robert Sheffield resigned from his positions with the Company effective
June 30, 1998.
8) Paul Smith resigned from his position with the Company effective May 1,
1998.
Mr. Jeff Lin co-founded the Company in 1988 and until recently served as
President, Chief Executive Officer and Chairman of the Board of Directors. Mr.
Lin also served as Vice President of Engineering following the death of Mr.
Tommy Leung from November 24, 1997 until Mr. Wilson Wong was hired as Vice
President of Engineering on September 10, 1998. 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. Wilson Wong co-founded the Company in 1988 and currently serves President
and Chief Executive Officer. From 1994 to August 1997, he served as Vice
President and General Manager and Co-Chairman of the Board of Directors. From
1993 to 1994, he served as Vice President and General Manager for the Company's
client access products. From 1988 to 1993, he served as the Company's President
and Chief Executive Officer. Mr. Wong serves as a Director of the Board of
Directors.
Mr. 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 motherboards for
personal computers. Mr. William Leung is not related to Mr. Tommy Leung,
previously Vice President of Engineering. On December 7, 1998, Mr. Leung
resigned his position with the Company. The responsibilities of Mr. Leung will
be assumed by Mr. John Jeng.
Mr. Rajiv Matthew joined the Company in July 1998 and serves as Vice President
of Finance and Administration and Principal Financial Officer. From January 1997
to July 1998, he was Corporate
19
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Controller at Avant! Corporation, an electronic design automation company. From
1994 to 1995, he was Treasury Director for Connor-Seagate, a manufacturer of
disk drives and other electronic storage devices. From 1992 to 1994, Mr. Matthew
was Staff Director-Finance for Airtouch Communications (formerly Pactel
Corporation). Prior to Pactel Corporation, Mr. Matthew held financial management
positions with BankAmerica Corporation and PriceWaterhouseCoopers, LLP. Mr.
Matthew also serves as non-executive director of Ibeam Technologies, a PCB
supplier.
Mr. Ronald Volkmar joined the Company in April 1998 and currently serves as Vice
President of Sales, Americas. From September 1997 to March 1998, he was
President of Mustang Microsystems, a sales consulting firm. From June 1996 to
September 1997, Mr. Volkmar was Director of Sales for Paladin Marketing, Inc.
From October 1995 to June 1996, he was Vice President of Sales and Marketing for
Lite-on, a manufacturer of network systems products. Mr. Volkmar was also
formerly Vice President of Sales and Marketing for Asante from December 6, 1989
to June 30, 1994.
Mr. William Fenley joined the Company in January 1996, and served as Senior
Director Of OEM Business until November 16, 1998, when he was promoted to his
current position of Vice President of Product Marketing and OEM Business. From
December 1994 to January 1996, he was Vice President of OEM Sales for Zynx, a
manufacturer of network adapter cards. From June 1989 to December 1994, Mr.
Fenley was Vice President of Sales and Marketing for Cache Computers, a
manufacturer of motherboards and network adapter cards.
Mr. John Jeng joined the Company in December 1998 and currently serves as Vice
President of Operations. From December 1992 to October 1998, he was Director of
Operations for Diamond Multimedia (formerly known as Micronics, Inc), a
manufacturer of motherboards, computer, and other multimedia related products.
From February 1988 to December 1992, Mr. Jeng was Director of Manufacturing for
Eveready Industry Corp., a subcontract manufacturer.
20
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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 1998 High Low
- ---------------------------------------------------------------------
First quarter $5 3/4 $3 1/8
Second quarter 3 7/8 2 15/16
Third quarter 4 2
Fourth quarter 2 3/8 13/16
Fiscal 1997 High Low
- ---------------------------------------------------------------------
First quarter $7 3/8 $4 3/4
Second quarter 5 1/2 4 3/16
Third quarter 5 3/8 3 5/8
Fourth quarter 6 9/16 4 7/8
As of November 27, 1998, 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.
Factors such as announcements of technological innovations or new products by
the Company, its competitors and other third parties as well as quarterly
variations in the Company's anticipated or actual results of operations and
market conditions in high technology industries generally, may cause the market
price of the Company's Common Stock to fluctuate significantly. The stock market
has on occasion experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many high technology companies and
have often been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. In addition, the market price of the Company's stock may not be
indicative of current or future performance.
In early fiscal 1998, the Company issued 4,648 shares of its restricted common
stock to Dr. David Lam as compensation for consulting services rendered by Dr.
Lam's company during fiscal 1997 prior to his becoming a board member of the
Company. Such shares were issued pursuant to a claimed exemption from
registration under section 4(2) of the Securities Act of 1933, as amended, as a
private placement to one individual who acquired such shares with investment
intent.
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On September 23, 1998, the Company announced a stock repurchase program in which
the Company may repurchase up to 500,000 shares of its outstanding Common Stock
over a period of up to one year. Pursuant to this program, the Company had
repurchased 15,500 shares of its common stock for $28,400. As of November 27,
1998, the Company had repurchased 67,000 shares of its Common Stock in open
market transactions. Total stock repurchases will not exceed 500,000 shares, or
5.4% of the total number of shares of the Company's Common Stock outstanding.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
Statement of Operations Data: Year ended
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net sales $ 51,433 $ 83,279 $ 66,990 $ 60,884 $ 79,941
Income (loss) from operations $(12,450) $ 2,331 $ (1,338) $ (6,324) $ 1,818
Net income (loss) $(14,435) $ 1,926 $ (457) $ (3,705) $ 1,125
Diluted net income (loss) per share $ (1.57) $ 0.21 $ (0.05) $ (0.45) $ 0.13
Balance Sheet Data:
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Working Capital $ 13,645 $ 26,727 $ 25,101 $ 24,548 $ 24,629
Total assets $ 30,359 $ 40,567 $ 39,966 $ 36,767 $ 40,913
Stockholders' equity $ 15,850 $ 29,874 $ 26,909 $ 26,119 $ 28,389
22
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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.
These forward-looking statements speak only as of the date thereof, and should
not be given undue reliance. Actual results may vary materially from those
projected.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
Results of Operations
The following table sets forth certain selected financial information expressed
as a percentage of net sales for the fiscal years ended October 3, 1998,
September 27, 1997, and September 28, 1996 , respectively:
1998 1997 1996
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 69.9 63.7 60.0
----- ----- -----
Gross profit 30.1 36.3 40.0
----- ----- -----
Operating expenses:
Sales and marketing 33.7 20.8 28.4
Research and development 12.8 8.6 9.3
General and administrative 7.0 4.1 4.3
Restructuring 0.8 - -_
----- ----- -----
Total operating expenses 54.3 33.5 42.0
----- ----- -----
Income (loss) from operations (24.2) 2.8 (2.0)
Interest and other income (expense), net 0.9 0.8 0.9
----- ----- -----
Income (loss) before income taxes (23.3) 3.6 (1.1)
Provision (benefit) for income taxes 4.8 1.3 (0.4)
----- ----- -----
Net income (loss) (28.1%) 2.3% (0.7%)
===== ===== =====
The Company recorded net loss for fiscal 1998 of $14.4 million, or $(1.57) per
diluted share compared to net income of $1.9 million, or $0.21 per diluted
share, in fiscal 1997.
23
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Net Sales
Net sales decreased 38.3% to $51.4 million in fiscal 1998 from $83.3 million in
fiscal 1997. Net sales were $67.0 million in fiscal 1996. The decrease in net
sales from fiscal 1997 to fiscal 1998 was due primarily to a significant
decrease in OEM sales, and to decreases in sales of the Company's 10T (10 Mbps)
adapter products, 10T shared hubs as well as less significant decreases in
several of the Company's other product lines due to a general softness in the
networking and computer industries in the second and third quarters of fiscal
1998, delays in sales to educational customers due to the delay in
implementation of the government's new "E-Rate", K-12 educational networking
equipment subsidy program, and significant competitive pressures. The decreases
were partially offset by increased shipments of the Company's switch products
during the year.
Specifically, sales of OEM products during fiscal 1998 decreased by $18.0
million to $3.5 million in fiscal 1998 from $21.5 million in fiscal 1997. The
decrease was due primarily to the expiration of an agreement regarding an OEM
Ethernet/fax modem card sold by the Company to Apple Computer in fiscal 1997.
In addition to general industry conditions and delays in government subsidized
educational programs, sales of the Company's networking products by product
groups were adversely affected by the following factors. The Company experienced
continued decline in sales of its 10T adapter cards to $13.1 million in fiscal
1998 from $21.9 million in fiscal 1997, due in part to Apple Computer's
continued incorporation of Ethernet connectivity into the motherboard of certain
of its Macintosh and PowerBook computers and the transition of many customers to
10/100 adapter products. Sales of the Company's 10T shared products also
decreased by approximately $8.5 million, to $11.4 million in fiscal 1998 from
$19.9 million in fiscal 1997, due primarily to sharp pricing declines for 10T
shared products during the year and the transition of many customers, including
educational institutions to 10/100 shared and switched technologies. Sales of
the Company's 10/100 and 100 Mbps ("Fast Ethernet") shared systems products
decreased by $2.7 million from $4.8 million in fiscal 1997 to $2.1 million in
fiscal 1998, due primarily to the transition of many companies to 10/100 shared
hubs and 10/100 switches. These decreases were offset partially by an increase
of $7.1 million in sales of the Company's switch products during fiscal 1998 to
$12.2 million from $5.1 million. Such sales relate primarily to the Company's
10/100 managed stackable and unmanaged switches.
During fiscal 1998, the Company continued to expand its line of 10T switched and
10/100 switched products and introduced 10/100 switched products based on the
Company's own proprietary switch ASIC. The Company continued to focus its
efforts on certain vertical market segments where Fast Ethernet switches and hub
systems excel over standard Ethernet. 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, sales
incentives, educational specific discounts, and announced several product price
reductions during the year.
The increase in sales from fiscal 1996 to fiscal 1997 was due primarily to
increased sales of the Company's 10/100 adapter card and switch products caused
by the increasing need for faster speeds and additional bandwidth by many
customers and increased incorporation of these technologies into the industry
due to pricing decreases. In addition, the Company experienced a significant
increase in its OEM sales, due primarily to a combination of Ethernet/fax modem
card sold to Apple Computer and to significant sales of the Company's 100 Mbps
stackable hubs to OEM customers.
24
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International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for 22.0%, 18.0%, and 23.1%, of net sales in fiscal 1998, 1997, and
1996, respectively. The Company has sales offices in the United Kingdom and
Taiwan. The Company experienced reductions in sales in Asia Pacific, primarily
in Japan, due to the weakening of foreign currencies against the dollar
worldwide, the weak Asian economy, and in part to the softness in demand for
Apple Macintosh(TM) related products in Asia. 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 heavy competitive pressures will continue during fiscal
1999. Although the Company experienced significant unit increases in several of
its product lines such as its 10/100 PCI adapter card products, pricing declines
offset the increases in unit sales. The Company believes that the competition in
the markets in which it competes has intensified and will continue to intensify
as existing and potential competitors introduce competing products.
Consequently, the Company anticipates that the selling prices of its existing
products will continue to decline. The Company makes significant ongoing efforts
to develop new products and decrease its manufacturing costs faster than related
declines in selling prices. If the Company is unable to offset anticipated price
declines in its products by reducing its manufacturing costs and by introducing
new products that gain market acceptance, its business, financial condition and
results of operations will be materially and adversely affected.
Gross Profit
The Company's gross profit as a percentage of net sales decreased to 30.1% in
fiscal 1998 from 36.3% in fiscal 1997, and from 40.0% in fiscal 1996. The
decrease during fiscal 1998 was due primarily to the Company's decreased sales
levels and increased competitive pricing pressures experienced during fiscal
1998. In addition, the Company discontinued a number of its products resulting
in writedowns of the related inventory. 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 40.0% in fiscal 1996 to 36.3% in
fiscal 1997 was attributable primarily to increased sales to OEM customers at
lower margins and was also partially affected during the year by charges against
sales due to various pricing and marketing programs.
Sales and Marketing
Sales and marketing expenses were at $17.3 million in fiscal 1998 consistent
with fiscal 1997. The fiscal 1997 expenses decreased by 8.9% to $17.3 million
from $19.0 million in fiscal 1996. As a percentage of net sales, sales and
marketing expenses were 33.7%, 20.8%, and 28.4% in fiscal 1998, 1997, and 1996,
respectively. In the third quarter of fiscal 1998, the Company reduced the size
of its marketing department and its direct sales force. This decrease in the
direct sales force, offset partially by the addition of a number of
Manufacturers Representatives was related to the restructuring of the Company
and its distribution channels as described below. Management believes this
action along with efforts to reduce fixed marketing expenses will allow the
Company to invest in additional marketing and advertising activities to aid in
future revenue growth. The decrease in sales and marketing expenses from fiscal
1996 to fiscal 1997 was primarily due to the reduction of outside sales firms
representing the
25
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Company and was also affected by the Company's vertical focus on the digital
graphics and pre-press industry.
The Company expects that its sales and marketing expenses will increase in
fiscal 1999 in absolute dollars.
Research and Development
Research and development expenses decreased by 7.0% to $6.6 million in fiscal
1998, from $7.1 million in fiscal 1997. Research and development expenses were
$6.2 million in fiscal 1996. As a percentage of net sales, research and
development expenses were 12.8%, 8.6%, and 9.3% in fiscal 1998, 1997, and 1996,
respectively. The $0.5 million decrease in expenses from fiscal 1997 to fiscal
1998 resulted from reduced payroll, consulting and outside service related
expenditures.
Research and development expenses increased by $0.9 million from fiscal 1996 to
fiscal 1997 due primarily to the Company's commitment to focus additional
resources on research and development in order to bring more Fast Ethernet (100
Base-T, or 100 Mbps) products, switching products, and software products to
market. As a result, the Company increased expenses relating to salaries and
wages to recruit additional engineering personnel, non-recurring engineering
expense charges, as well as other research related expenses.
The Company expects that spending on research and development in fiscal 1999
will remain flat or decrease in comparison to fiscal 1998.
General and Administrative
General and administrative expenses increased to $3.6 million in fiscal 1998
from $3.5 million in fiscal 1997. General and administrative expenses were $2.9
million in fiscal 1996. As a percentage of net sales, general and administrative
expenses were 7.0%, 4.1%, and 4.3%, in fiscal years 1998, 1997, and 1996,
respectively. Such costs include a $575,000 write-down of property and equipment
and idle facility costs. The increase in general and administrative expenses
from fiscal 1996 to fiscal 1997 was related primarily to the increased outside
service and consulting related fees and to increased salary and wage related
expenses.
The Company expects that general and administrative expenses will decrease in
fiscal 1999 in absolute dollars.
Restructuring
During the third quarter ended July 4, 1998, the Company restructured its
operations. This restructuring of operations was necessary to re-establish the
strategic direction of the Company and better align its operating expenses with
anticipated revenues. Although the Company expects to realize the immediate
benefit of a reduced cost structure and other benefits from the restructuring of
operations, there is no assurance that losses will not occur in the future.
26
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At July 4, 1998, the Company recorded a $400,000 reserve for personnel and
related costs associated with a company-wide restructuring plan. These costs
include employee severance costs, benefits, outplacement costs, termination
costs, and employee assistance expenses related to the realignment. The
reduction in force consisted of a reduction of approximately 40 employees,
primarily from the sales and marketing departments. Through October 3, 1998,
approximately $376,000 of the reserve was paid in cash and $24,000 remains
accrued at October 31, 1998.
The Company's plan included the release of proprietary ASIC-based switches,
development of retail channels, changes in the Company's financial model, and
realignment of cost structure, designed to better position the Company going
forward and which the Company believes will leverage its strengths. The Company
plans to expand its market share in the SOHO (Small Office / Home Office) market
by adding a retail channel in addition to strengthening its mail order channel.
As part of this plan, the Company has entered into new agreements with two of
the nation's largest computer retailers, Comp USA and Fry's Electronics and is
negotiating agreements with a number of regional and independent resellers. The
Company shipped products, including its FriendlyNet family of products to both
Fry's and Comp USA nationwide during the fourth quarter of fiscal 1998.
The Company also expanded its focus on its existing mail order catalog channel
including the addition of CDW, Multiple Zones, and Insight Direct. Management
believes that these additions will contribute positively to the Company's
results of operations in the coming quarters.
The Company plans to focus its efforts on providing lower cost products and to
refocus its research efforts as well as its sales and marketing efforts on
certain key channels for which the Company could leverage its strengths. The
Company will continue to devote significant efforts on its educational and mail
order markets, but is currently emphasizing support for its new retail channel.
In implementing this plan, the Company found it necessary to realign its
workforce to more effectively focus on these channels and to bring expenses in
line with the Company's new targeted revenue and margin structure.
Income Taxes
The Company recorded a provision for federal and state income taxes of
approximately $2.5 million for fiscal 1998. The provision relates principally to
establishing a valuation allowance on previously recorded deferred tax assets
offset, in part, by the tax benefit related to losses which the Company carried
back to prior years. The Company has recorded a full valuation allowance on its
remaining deferred tax assets as sufficient uncertainty exists regarding its
recoverability. The Company's effective tax rate was 36.0% for fiscal 1997 and
(37.7%) for fiscal 1996.
Factors Affecting Future Operating Results
The Company operates in a rapidly changing and growing industry, which is
characterized by vigorous competition from both established companies and
start-up companies. The market for the Company's products is extremely
competitive both as to price and capabilities. The Company's success depends in
part on its ability to enhance existing products and introduce new high
technology products. The Company must also bring its products to market at
competitive price levels. Unexpected changes in technological standards,
customer demand and pricing of competitive products could adversely affect the
27
================================================================================
Company's operating results if the Company is unable to effectively and timely
respond to such changes. The industry is also dependent to a large extent on
proprietary intellectual property rights. From time to time the Company is
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of patents, trademarks and other
intellectual property rights. Consequently, from time to time, the Company will
be required to prosecute or defend against alleged infringements of such rights.
The Company's success also depends to a significant extent upon the
contributions of key sales, marketing, engineering, manufacturing, and
administrative employees, and on the Company's ability to attract and retain
highly qualified personnel, who are in great demand. None of the Company's key
employees are subject to a non-competition agreement with the Company. Unless
vacancies are promptly filled, the loss of current key employees or the
Company's inability to attract and retain other qualified employees in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is subject to various risks associated with international operations
including currency exchange rate fluctuations, changes in costs of labor and
material, reliability of sources of supply and general economic conditions in
foreign countries. Unexpected changes in foreign manufacturing or sources of
supply, fluctuations in monetary exchange rates and changes in the availability,
capability or pricing of foreign suppliers could adversely affect the Company's
business, financial condition and results of operations.
The 10/100 Mbps and 100 Mbps Ethernet technology (100BASE-T, or "Fast-Ethernet")
has become a standard networking topology in the networking and computer
industries. This standard has been adopted widely by end-user customers because
of its ability to increase the efficiency of LANs and because of its ease of
integration into existing 10BASE-T networks. Because of the importance of this
standard, the Company has focused its ongoing research and development
activities on introducing future products incorporating 100BASE-T technology.
The Company realizes the importance of bringing more 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, and on timely product release. There can be no assurance
that the market will accept and adopt this new technology or that the Company
can meet market demand in a timely manner.
The Company commits to expense levels, including manufacturing costs, investing
in advertising and promotional programs, based in part on expectations of future
net sales levels. If future net sales levels in a particular quarter do not meet
the Company's expectations or the Company does not bring new products timely to
market, the Company may not be able to reduce or reallocate such expense levels
on a timely basis, which could adversely affect the Company's operating results.
There can be no assurance that the Company will be able to achieve profitability
on a quarterly or annual basis in the future.
The Company's target markets include end-users, value-added resellers (VARs),
systems integrators, retailers, and OEMs. Due to the relative size of the
customers in some of these markets, particularly the OEM market, sales in any
one market could fluctuate dramatically on a quarter to quarter basis.
Fluctuations in the OEM market could materially adversely affect the Company's
business, financial condition and results of operations.
28
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In summary, the Company's net sales and operating results in any particular
quarter may fluctuate as a result of a number of factors, including competition
in the markets for the Company's products, delays in new product introductions
by the Company, market acceptance of new products incorporating 100BASE-T by the
Company or its competitors, changes in product pricing, material costs or
customer discounts, the size and timing of customer orders, distributor and
end-user purchasing cycles, variations in the mix of product sales,
manufacturing delays or disruptions in sources of supply, and economic
conditions and seasonal purchasing patterns specific to the computer and
networking industries as discussed above. The Company's future operating results
will depend, to a large extent, on its ability to anticipate and successfully
react to these and other factors. Failure to anticipate and successfully react
to these and other factors could adversely affect the Company's business,
financial condition and results of operations.
Successfully addressing the factors discussed above is subject to various risks
discussed in this report, as well as other factors which generally affect the
market for stocks of high technology companies. These factors could affect the
price of the Company's stock and could cause such stock prices to fluctuate over
relatively short periods of time.
Liquidity and Capital Resources
During fiscal 1998, the Company's operating activities utilized $4.0 million of
cash and cash equivalents as compared to net cash provided of $1.7 million and
$0.9 million in fiscal 1997, and 1996, respectively. During fiscal 1998, the net
cash utilized by operating activities resulted primarily from the net operating
loss of $14.4 million, increases of prepaid expenses and other current assets of
$2.8 million, partially offset by the non-cash charge related to the reserve of
$3.6 million related to the deferred tax assets, depreciation and amortization
expense of $1.4 million, the decrease in inventory of $4.4 million, and increase
in accounts payable of $2.8 million. Days of sales outstanding increased to 36
at the end of fiscal 1998 compared to 32 at the end of fiscal 1997, which had
the effect of decreasing cash from operations.
Net cash used in investing activities was $0.5 million in fiscal 1998, which was
due primarily to purchases of property and equipment. During fiscal 1998, 1997,
and 1996, the Company's purchases of property and equipment totaled $0.7
million, $2.3 million, and $1.3 million, respectively. The Company anticipates
that capital equipment purchases in fiscal 1999 will not be material.
During fiscal 1998, the Company generated cash from financing activities of
approximately $0.4 million from the exercise of employee stock options and the
Company's employee stock purchase plan. Cash generated from financing activities
in fiscal 1997 was approximately $1.0 million, comprised primarily of stock
option exercises. On September 23, 1998, the Company's Board of Directors
approved a stock repurchase program whereby up to 500,000 of the Company's
outstanding common stock may be repurchased in the open market from time to
time. As of October 3, 1998, 15,500 shares have been repurchased for $28,000.
The Company intends to continue to repurchase common stock in the future, but is
under no obligation to do so.
At October 3, 1998, the Company had cash, cash equivalents and short-term
investments of $8.9 million as compared to $12.9 million at September 27, 1997.
Working capital was $13.6 million at October 3, 1998, compared to $26.7 million
at September 27, 1997. The Company has a bank line of credit that
29
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provides for maximum borrowings of $5.0 million, limited to a certain percentage
of eligible accounts receivable, and bears interest at the bank's base rate. The
Company's ability to borrow under this line is subject to compliance with
covenants related to financial performance and condition. As of October 3, 1998
there were no borrowings under the line of credit, and the Company was in
compliance with all such covenants. The line of credit expires on February 15,
1999.
The Company believes that its current cash and cash equivalents, together with
cash expected to be generated by operations and existing credit facilities, will
be sufficient to fund its operations and meet capital requirements through
fiscal 1999. 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.
30
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Year 2000 Issue
Computer programs and systems that make use of dates represented by only two
digits (98 rather than 1998) may not operate properly after the year 2000.
Two-digit fields can cause problems with sorting, mathematical calculations and
comparisons when working with years outside the range of 1900 through 1999. The
problem also potentially extends to any systems or devices that include embedded
technology, such as microchips.
The Company has established a formal project with project team to address this
issue and achieve Year 2000 (Y2K) readiness. The project focuses on four key
readiness areas: 1) Product readiness, addressing product functionality; 2)
Supplier readiness, addressing the preparedness of the Company's key suppliers;
3) Internal infrastructure readiness, addressing mission-critical internal
information technology (IT) and non-IT systems; and 4) Customer readiness,
addressing customer preparedness and the Company's customer support. For each
readiness area, the Company is systematically performing an enterprise-wide risk
assessment, and developing contingency plans to mitigate unknown risk. The
Company is also communicating with its customers, suppliers, employees to
reinforce awareness and to inform them of its progress toward Year 2000
readiness and to gather information as to the Year 2000 product readiness of its
customers, and suppliers. The Company is doing this through a variety of media,
including updates to the Y2K area of the corporate web site.
The Company's Y2K project is comprised of 3 phases; Awareness and assessment,
Renovation, and Product Readiness. The Awareness and Assessment phases of the
project have been substantially completed and the Renovation phase commenced in
May 1998. Product Readiness: The Company has made a thorough evaluation of its
products and believes its products do not cause Year 2000 issues to arise and,
therefore, feels that its year 2000 product readiness phase is complete. The
Company has communicated to its customers the current status of its products.
Customer Readiness: The Company plans to commence making Year 2000 compliant
updates to its customers' systems through a standard Service Update Plan process
by January 1999, with completion estimated by June 1999. A Monitoring phase of
the program is planned as well, which provides for the contingency of customers
experiencing issues with the validation and implementation phases of the
Supplier Readiness project: This aspect of the program is focused on minimizing
risk associated with the Company's suppliers in two areas: first, the supplier's
capability to provide Y2K compliant products and second, the supplier's business
capability to continue to provide the required products and services. The
Company has corresponded with its suppliers to receive assurance as to the Y2K
readiness of each key supplier. A supplier action list and contingency plans are
being developed based upon this assessment. Supplier issues that potentially
affect the Company's products are targeted to be resolved by February 1999.
Internal Infrastructure Readiness: The Company has completed an assessment of
its IT and non-IT applications and its business processes. Some applications and
processes have already been made Y2K compliant, while others are being
prioritized and assigned resources based upon their importance to the Company's
ability to conduct business. All implementations are scheduled to be completed
no later than July 1999. The Company estimates that the total Year 2000 costs
will not be material, with the majority of costs to be incurred over the next
six fiscal quarters. The Company is continuing its assessment and developing
alternatives that will result in a further refinement of this estimate over
time. There can be no assurance that actual costs will not differ materially
from the current estimate. If computer systems used by the Company or its
suppliers, or the software applications used in systems manufactured and sold by
31
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the Company, fail or experience significant difficulties, the Company's results
of operations could be materially affected.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS 130), "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustment and unrealized
gain/loss on available for sale securities. The disclosure prescribed by SFAS
130 must be made beginning with the first quarter of fiscal 1999 and is not
anticipated to have a material impact on the Company's financial position or
results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
has not yet determined the impact, if any, of adopting this new standard. The
disclosures prescribed by SFAS 131 are effective in fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at their fair
value in the statement of financial position and the corresponding gains or
losses be either reported in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
The Company has not yet determined the effect of adopting SFAS 133, which will
be effective for the Company's fiscal year 2000.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of October 3, 1998, the Company's cash and investment
portfolio includes fixed-income securities. These securities are subject to
interest rate risk and will decline in value if interest rates increase. Due to
the short-term nature of the Company's investment portfolio, an immediate 10%
increase in interest rates would not have a material effect on the fair market
value of the Company's portfolio. The Company has the ability to liquidate this
portfolio or hold its fixed income investments until maturity, and therefore the
Company would not expect its operating results or cash flows to be materially
affected to any significant degree by the effect of a sudden change in market
interest rates on its securities portfolio.
Foreign Currency Exchange Risk. All of the Company's sales are denominated in
U.S. dollars and as a result, the Company has little exposure to foreign
currency exchange risk. The effect of an immediate 10% change in exchange rates
would not have a material impact on the Company's future operating results or
cash flows.
32
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Financial Statements:
Report of Independent Accountants 34
Balance Sheets at October 3, 1998 and September 27, 1997 35
Statements of Operations for the years ended October 3, 1998,
September 27, 1997, and September 28, 1996 36
Statements of Stockholders' Equity for the years ended
October 3, 1998, September 27, 1997, and September 28, 1996 37
Statements of Cash Flows for the years ended October 3, 1998,
September 27, 1997, and September 28, 1996 38
Notes to Financial Statements 39
Quarterly Results of Operations (unaudited) 50
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.
33
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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
October 3, 1998 and September 27, 1997, and the results of its operations and
its cash flows for each of the three years in the period ended October 3, 1998,
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.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
October 30, 1998, except as to Note 10, which is as of December 30, 1998
34
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ASANTE TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except share
and per share amounts)
October 3, September 27,
1998 1997
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 8,852 $ 12,931
Accounts receivable, net of allowance for doubtful
accounts, rebates and sales returns of $4,144 and $4,722 8,328 8,313
Inventory 7,673 12,080
Prepaid expenses and other 3,301 4,096
-------- --------
Total current assets 28,154 37,420
Property and equipment, net 2,004 2,768
Other assets 201 379
-------- --------
Total assets $ 30,359 $ 40,567
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 7,714 $ 4,958
Accrued expenses 4,799 4,858
Payable to stockholder 1,996 877
-------- --------
Total current liabilities 14,509 10,693
-------- --------
Commitments and contingencies (Notes 8, 9 and 10)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $0.001 par value; 25,000,000 shares authorized;
9,270,393 and 9,121,601 shares issued and outstanding 9 9
Additional paid-in capital 26,791 26,352
Treasury Stock (28) --
Retained earnings (Accumulated deficit) (10,922) 3,513
-------- --------
Total stockholders' equity 15,850 29,874
-------- --------
Total liabilities and stockholders' equity $ 30,359 $ 40,567
======== ========
The accompanying notes are an integral part of these financial statements
35
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended
October 3, September 27, September 28,
1998 1997 1996
-------- -------- --------
Net sales $ 51,433 $ 83,279 $ 66,990
Cost of sales 35,959 53,040 40,220
-------- -------- --------
Gross profit 15,474 30,239 26,770
-------- -------- --------
Operating expenses:
Sales and marketing 17,342 17,322 19,007
Research and development 6,591 7,135 6,198
General and administrative 3,591 3,451 2,903
Restructuring 400 -- --
-------- -------- --------
Total operating expenses 27,924 27,908 28,108
-------- -------- --------
Income (loss) from operations (12,450) 2,331 (1,338)
Interest and other income (expense), net 477 678 605
-------- -------- --------
Income (loss) before income taxes (11,973) 3,009 (733)
Provision (benefit) for income taxes 2,462 1,083 (276)
-------- -------- --------
Net income (loss) $(14,435) $ 1,926 $ (457)
======== ======== ========
Basic earnings (loss) per share $ (1.57) $ 0.21 $ (0.05)
======== ======== ========
Diluted earnings (loss) per share $ (1.57) $ 0.21 $ (0.05)
======== ======== ========
Weighted average common
shares and equivalents
Basic 9,206 8,992 8,997
======== ======== ========
Diluted 9,206 9,202 8,997
======== ======== ========
The accompanying notes are an integral part of these financial statements
36
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Retained
Additional Earnings / Total
Common Stock Paid-in Treasury (Accumulated Stockholders'
Shares Amount Capital Stock Deficit) Equity
---------- ---------- ---------- ---------- ---------- ----------
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
Common Stock issued under stock plans 256,963 -- 996 996
Compensation expense upon issuance
of common stock 4,648 -- 20 20
Tax benefit from employee stock
transactions 23 23
Net income 1,926 1,926
---------- ---------- ---------- ---------- ---------- ----------
Balances as of September 27, 1997 9,121,601 9 26,352 -- 3,513 29,874
Common Stock issued under stock plans 164,292 -- 430 430
Tax benefit from employee stock
transactions 9 9
Repurchase of common stock (15,500) -- (28) (28)
Net loss (14,435) (14,435)
---------- ---------- ---------- ---------- ---------- ----------
Balances as of October 3, 1998 9,270,393 $ 9 $ 26,791 $ (28) $ (10,922) $ 15,850
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements
37
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended
------------------------------------------
October 3, September 27, September 28,
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $(14,435) $ 1,926 $ (457)
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,417 1,062 1,092
Compensation expense upon issuance of common stock -- 20
Deferred income taxes 3,606 (634) 719
Changes in operating assets and liabilities:
Accounts receivable (15) 1,725 (1,534)
Inventory 4,407 (2,229) (2,842)
Prepaid expenses and other current assets (2,811) 2,463 1,498
Accounts payable 2,756 (2,242) 3,983
Accrued expenses and other (59) 435 (651)
Due to affiliate 1,119 (805) (865)
-------- -------- --------
Net cash provided by (used in) operating activities (4,015) 1,721 943
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (653) (2,305) (1,252)
Maturities of marketable securities -- -- 1,700
Other 178 (142) (6)
-------- -------- --------
Net cash provided by (used in) investing activities (475) (2,447) 442
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 439 996 995
Repurchase of common stock (28) -- --
Other -- (32) (58)
-------- -------- --------
Net cash provided by financing activities 411 964 937
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (4,079) 238 2,322
Cash and cash equivalents at beginning of year 12,931 12,693 10,371
-------- -------- --------
Cash and cash equivalents at end of year $ 8,852 $ 12,931 $ 12,693
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid during the year $ -- $ 7 $ 11
======== ======== ========
Income taxes paid (refunded) during the year $ 147 $ (143) $ (1,835)
======== ======== ========
The accompanying notes are an integral part of these financial statements
38
ASANTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. The Company and Summary of Significant Accounting Policies
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 PCs, Macintoshes, and peripheral
devices (such as printers) to Ethernet networks. The Company's network system
products, which include intelligent and non-intelligent switches, hubs, bridge
modules, and network management software for Macintoshes and PCs, interconnect
users within and between departmental networks.
Management estimates and assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue recognition
Revenue from product sales to customers is recognized upon shipment and reserves
are provided for estimated returns. Sales to distributors are generally subject
to agreements allowing certain rights of return and price protection with
respect to unsold merchandise held by the distributor. Reserves for distributor
returns are established based on historical returns experience at the time the
related revenue is recorded. Reserves for price protection are established based
on actual price reduction programs. Additionally, the Company provides a reserve
for incentive rebates to distributors, warranty obligations and cooperative
advertising at the time the related revenue is recorded.
International sales as a percentage of net sales by geographic region were as
follows:
1998 1997 1996
---- ---- ----
United States 78% 82% 77%
Europe 14 10 11
Canada and Asia Pacific 8 8 12
---- ----- ----
100% 100% 100%
==== ==== ====
39
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Cash, cash equivalents and short-term investments
Cash equivalents consist primarily of highly liquid investments in U.S.
government and corporate debt securities with insignificant interest rate risk
and original maturity periods of three months or less at the date of
acquisition. The Company considers all investments with initial maturity 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 October 3, 1998 and September 27, 1997, 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 cash equivalents and accounts receivables.
Accounts receivable are typically unsecured and are derived from worldwide
distributor revenues. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potential credit losses; historically, such
losses have been insignificant and within management's expectations. At October
3, 1998 and September 27, 1997, four customers accounted for 49%, and 45%,
respectively, of the accounts receivable balance. In fiscal 1998, one customer
accounted for 33% of the Company's sales. In fiscal years 1997 and 1996, sales
to the Company's two largest distributors accounted for 44% and 37%,
respectively of the Company's sales.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis), or market. Appropriate adjustments of the
inventory values are provided for slow moving and discontinued products based
upon future expected sales and committed inventory purchases.
Property and equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is based on the straight-line method for financial reporting purposes
over the estimated useful lives of the related assets, generally three to five
years. Equipment under capital leases is amortized over the shorter of its
estimated useful life or lease term and included in depreciation expense.
Income taxes
Income taxes are computed using the liability method. Under the liability
method, deferred income tax assets and liabilities are determined based upon the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws.
Research and development costs
Research and development costs are expensed as incurred. Research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. The Company believes its current process for developing software is
essentially completed concurrently with the establishment of technological
feasibility; accordingly, software costs incurred after the establishment of
technological feasibility have not been material to date and therefore have been
expensed.
Stock-based compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related interpretations in accounting
for its employee stock options and stock purchase plan. Pro forma information
regarding net income and net income per share is disclosed as
40
================================================================================
required by Statement of Financial Accounting Standards Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123).
Fair value of financial instruments
For certain of the Company's financial instruments, cash equivalents, trade
accounts receivable, receivable from related party, accounts payable and capital
lease obligations, the carrying amounts approximate fair value due to the
relatively short maturity of these instruments.
Recently issued accounting pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting comprehensive income and
its components in a financial statement. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gains/losses on available for sale securities. The disclosure
prescribed by SFAS 130 must be made beginning with the first quarter of fiscal
1999 and is not anticipated to have a material impact on the Company's financial
position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company has not yet determined the impact, if any, of adopting this new
standard. The disclosures prescribed by SFAS 131 are effective in fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at their fair
value in the statement of financial position and the corresponding gains or
losses be either reported in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
The Company has not yet determined the effect of adopting SFAS 133, which will
be effective for the Company's fiscal year 2000.
Note 2. Basic and Diluted Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share" (SFAS 128). SFAS 128 requires presentation of both
basic and diluted earnings per share (EPS) on the face of the income statement.
Basic EPS is computed by dividing net income available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period including stock options,
using the treasury stock method, and convertible preferred stock, using the
if-converted method. In computing Diluted EPS, the average stock price for the
period is used in determining the number of shares assumed to be purchased from
the exercise of stock options.
41
================================================================================
Following is a reconciliation of the numerators and denominators of the Basic
and Diluted EPS computations for the periods presented below: (in thousands,
except per share data)
1998 1997 1996
-------- ------- -------
Net income (loss) available to common shareholders $(14,435) $ 1,926 $ (457)
======== ======= =======
Weighted average common stock outstanding (basic) 9,206 8,992 8,997
Effect of dilutive warrants and options -- 210 --
-------- ------- -------
Weighted average common stock Outstanding (diluted) 9,206 9,202 8,997
======== ======= =======
Net income (loss) per share:
Basic $ (1.57) $ 0.21 $ (0.05)
======== ======= =======
Diluted $ (1.57) $ 0.21 $ (0.05)
======== ======= =======
Diluted EPS for the years ended October 3, 1998 and September 28, 1996
excludes all dilutive potential common shares as their effect is antidilutive.
At October 3, 1998, September 27, 1997, and September 28, 1996, there were
1,584,539, 1,919,607 and 1,955,786, options and warrants outstanding,
respectively, to purchase common stock at weighted average exercise prices of
$4.93, $5.72 and $5.57, respectively, per share.
Note 3. Balance Sheet Components
1998 1997
-------- --------
(in thousands)
Inventory:
Raw materials and component parts $ 2,727 $ 3,065
Work-in-process 604 2,220
Finished goods 4,342 6,795
-------- --------
$ 7,673 $ 12,080
======== ========
Property and equipment:
Computers and R&D equipment $ 7,632 $ 7,161
Furniture and Fixtures 1,562 1,456
-------- --------
9,194 8,617
Accumulated depreciation (7,190) (5,849)
-------- --------
$ 2,004 $ 2,768
======== ========
Accrued expenses:
Payroll-related expenses $ 1,186 $ 1,197
Sales promotion expenses 1,119 1,469
42
================================================================================
Warranty 572 572
Other 1,922 1,620
-------- --------
$ 4,799 $ 4,858
======== ========
Note 4. Restructuring and Other Costs
During the third quarter ended July 4, 1998, the Company restructured its
operations. This restructuring of operations was necessary to re-establish the
strategic direction of the Company and better align its operating expenses with
anticipated revenues. The Company's restructuring plan included the release of
proprietary ASIC-based switches, development of retail channels, changes in the
Company's financial model, and realignment of cost structure, designed to better
position the Company going forward and which the Company believes will leverage
its strengths. Although the Company expects to realize the immediate benefit of
a reduced cost structure and other benefits from the restructuring of
operations, there is no assurance that losses will not occur in the future.
At July 4, 1998, the Company recorded a $400,000 reserve for personnel and
related costs associated with a company-wide restructuring plan. These costs
include employee severance costs, benefits, outplacement costs, termination
costs, and employee assistance expenses related to the realignment. The
reduction in force consisted of a reduction of approximately 40 employees,
primarily from the sales and marketing departments. Through October 3, 1998,
approximately $376,000 of the reserve was paid in cash and $24,000 remains
accrued at October 3, 1998.
In addition, the Company recorded a charge of $550,000 for inventory write-downs
related to the discontinuation of several of the Company's adapter card and
transceiver products, and a $575,000 charge related to write-downs of property
and equipment and idle facilities costs. These charges were recorded in cost of
sales and general and administrative expenses, respectively.
Note 5. Related Party Transactions
The Company has a supply agreement (the "OSE Agreement") with Orient
Semiconductor Electronics, Ltd., ("OSE"). OSE and one of its principal
shareholders own, in aggregate, approximately 13% of the Company's Common Stock
as of October 3, 1998. 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 October 3, 1998, the Company had firm purchase commitments under the OSE
Agreement of approximately $4.3 million.
For fiscal 1998, 1997, 1996, the Company sold, at cost, approximately $2.5
million, $3.3 million, and $5.5 million, respectively, of component parts to OSE
and purchased $8.2 million, $16.8 million, and $17.9 million, respectively, of
goods from OSE.
Note 6. Income Taxes
The provision for income taxes comprises the following (in thousands):
43
================================================================================
1998 1997 1996
------- ------- -------
Current:
Federal $(1,008) $ 1,389 $ (995)
State (136) 328 --
------- ------- -------
Total current (1,144) 1,717 (995)
------- ------- -------
Deferred:
Federal 2,689 (574) 780
State 917 (60) (61)
------- ------- -------
Total deferred 3,606 (634) 719
------- ------- -------
$ 2,462 $ 1,083 $ (276)
======= ======= =======
Deferred tax assets, net, comprise the following at October 3, 1998 (in
thousands):
1998 1997
------- -------
Deferred tax assets:
Net operating losses $ 2,643 $ --
Research and development credits 2,106 --
Receivable- and sales-related reserves 1,698 1,837
Inventory-related reserves 431 453
Compensation accruals 432 322
Depreciation 408 448
Other 967 546
------- -------
Total deferred tax assets 8,685 3,606
Valuation allowance (8,685) --
------- -------
$ -- $ 3,606
======= =======
The Company believes that sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance is
required as of October 3, 1998.
At October 3, 1998, the Company had federal and state net operating loss
carryforwards of approximately $6.3 million and approximately $3.9 million,
respectively, available to offset future taxable income which expire beginning
in 2018 and 2003 respectively. Approximately $5.4 million of losses in 1998 were
carried back to fiscal 1997 resulting in a federal tax refund of approximately
$0.9 million.
In addition, as of October 3, 1998, the Company had approximately $1.3 million
and approximately $0.8 million, respectively of available federal and state
research and development credits. Such credits will expire beginning in 2009 if
not utilized.
A reconciliation between the Company's income tax provision and the amount
computed by applying the statutory federal rate to income before taxes follows
(in thousands):
44
================================================================================
1998 1997 1996
------- ------- -------
Tax expense/(benefit) at U.S. statutory rate $(4,071) $ 1,023 $ (249)
State taxes, net of federal benefits (537) 176 (45)
Research and development credits (1,551) (264) --
Other (64) 148 18
Valuation allowance 8,685 -- --
------- ------- -------
$ 2,462 $ 1,083 $ (276)
======= ======= =======
Note 7. Stockholders' Equity
Preferred Stock
There are 2,000,000 shares of Preferred Stock authorized by the Board of
Directors. No shares of Preferred Stock have been outstanding since the
Company's public offering in December 1993.
Stock Repurchase Program
In September 1998, the Company's Board of Directors approved a stock repurchase
program whereby up to 500,000 shares of the Company's common stock may be
purchased in the open market from time to time. As of October 3, 1998, 15,500
shares have been repurchased for $28,000.
Stock Based Compensation Plans
As of October 3, 1998, the Company had four stock-based compensation plans which
are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plans and complies with the disclosure
provisions of SFAS 123 "Accounting for Stock-Based Compensation".
The 1990 Stock Option Plan allows for the issuance of options to Company
employees and consultants to purchase a maximum of 4,597,333 shares of common
stock.
The Directors' Stock Option Plan allows for the issuance of options to directors
of the Company who are not employees of, or consultants to, the Company or any
affiliate of the Company. The Directors' Stock Option Plan allows for the
issuance of options to Non-Employee Directors to purchase a maximum of 300,000
shares of common stock.
The Key Executive Option Plan allows for the issuance of options to "Key"
employees of the Company who are not recognized under the Directors' Stock
Option Plan. The Key Executive Option Plan allows for the issuance of options to
Key Employees to purchase a maximum of 404,999 shares of common stock.
Individuals owning more than 10% of the Company's stock are not eligible to
participate in the Plans unless the option's exercise price is at least 110% of
the fair market value of the common stock at the date of grant. Incentive stock
options issued to holders of less than 10% of the Company's stock shall be
issued at no less than fair market value per share on the date of grant and with
expirations not to exceed ten years from the grant date. Under the terms of the
Plans, options issued are granted at prices of 100% of the fair market value of
the common stock at the date of grant with expirations of ten years from the
45
================================================================================
date of grant. Initial options granted generally become vested over a period of
four years from the date of hire, commencing on the date one year after the date
of grant of the initial option. Unexercised options will terminate three months
after such Optionee's termination of all service with the Company and its
affiliates.
Activity under the 1990 Stock Option Plan, Directors' Stock Option Plan and the
Key Executive Option Plan are summarized as follows:
1998 1997 1996
---------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Price per of Price per of Price per
Shares Share Shares Share Shares Share
---------- -------- ---------- -------- --------- --------
Beginning Balance 1,919,607 $ 5.72 1,955,786 $ 5.58 1,532,608 $ 4.77
Granted 743,010 $ 3.03 606,296 $ 5.81 1,048,938 $ 6.47
Exercised (27,978) $ 4.61 (138,776) $ 3.81 (165,983) $ 3.76
Canceled (1,050,100) $ 5.08 (503,699) $ 5.80 (459,777) $ 5.37
---------- ---------- ----------
Ending Balance 1,584,539 $ 4.93 1,919,607 $ 5.72 1,955,786 $ 5.58
========== ========== ==========
The following table summarizes information about stock options outstanding at
October 3, 1998:
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- --------------- ----------- ------------- ----- ----------- -----
$0.105 - $0.165 2,000 2.6 $0.135 2,000 $0.135
$1.875 - $2.344 328,196 9.7 $1.910 74,146 $1.905
$3.000 - $4.250 285,087 7.5 $4.048 169,373 $4.167
$4.563 - $6.625 671,563 7.5 $5.560 446,444 $5.466
$6.875 - $9.000 297,693 6.6 $7.697 245,723 $7.772
--------- -------
$0.105 - $9.000 1,584,539 7.8 $4.927 937,686 $5.542
========= =======
46
==============================================================================================================
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions used for
grants during fiscal 1998, 1997 and 1996, risk free interest rates ranging from
5.39% to 6.79% respective of grant date; expected average volatility of 67%; an
expected option life of 4 years, and no expected dividends. The weighted average
fair value of stock options granted under the plans for fiscal 1998, 1997, and
1996 was $1.68, $3.02 and $3.35, respectively.
In 1993, the Company adopted the Employee Stock Purchase Plan (the "Purchase
Plan") covering an aggregate of 500,000 shares of common stock. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the commencement
of the Purchase Plan. Employees who participate in the Purchase Plan can have up
to 10% of their earnings withheld and used to purchase shares of common stock on
specified dates as determined by the Board. The price of common stock purchased
under the Purchase Plan is equal to 85% of the lower of the fair market value of
the common stock determined by the closing price on the Nasdaq National Market
System, at the commencement date or the ending date of each six month offering
period.
Sales under the Purchase Plan in fiscal 1998, 1997 and 1996 were 136,314,
118,187 and 81,587 shares of common stock, respectively, at an average price of
$2.27, $3.85 and $4.68 respectively. On October 3, 1998, 58,979 shares of common
stock were available for future purchase.
The fair value of the employee's purchase rights under SFAS 123, which was
estimated using the Black-Scholes model with the following assumptions used for
grants during fiscal 1998 and 1997: risk free interest rates ranging from 5.42%
to 6.40%, respective of commencement date of the offering period, expected
volatility of 60%, an expected option life of 6 months for both years, and no
expected dividends. The weighted average fair value of stock purchased under the
Purchase Plan for fiscal 1998 and 1997, was $2.27 and $3.85, respectively.
47
================================================================================
If compensation expense under these plans had been determined pursuant to SFAS
No. 123, the Company's net income (loss) and net income (loss) per share for
fiscal 1998, 1997 and 1996 would have been as follows (in thousands, except per
share amounts):
1998 1997 1996
-------- -------- --------
Net income (loss):
As reported $(14,435) $ 1,926 $ (457)
Pro forma $(15,433) $ 891 $ (1,165)
Net income (loss) per share
As reported
Basic $ (1.57) $ 0.21 $ (0.05)
Diluted $ (1.57) $ 0.21 $ (0.05)
Pro forma
Basic $ (1.68) $ 0.10 $ (0.13)
Diluted $ (1.68) $ 0.10 $ (0.13)
The pro forma amounts include compensation expense related to fiscal 1998, 1997
and 1996 stock option grants and sales of common stock under the Purchase Plan
only. In future years, the annual compensation expense will increase relative to
the fair value of stock options granted in those future years.
Note 8. Debt Obligations, Commitments and Contingencies
The Company has a bank line of credit that provides for maximum borrowings of
$5.0 million, limited to a certain percentage of eligible accounts receivable,
and bears interest at the bank's base rate. The Company's ability to borrow
under this line is subject to compliance with covenants related to financial
performance and condition. As of October 3, 1998, there were no borrowings under
the line of credit and the Company was in compliance with all financial
covenants. The line of credit expires on February 15, 1999.
The Company has entered into an operating lease for its main facility which
expires on August 31, 1999. Various other leases for sales offices expire
through 1999. Rent expense under operating leases aggregated approximately
$1,012,000, $912,000, and $901,000, for fiscal 1998, 1997, and 1996,
respectively. Certain leases require the Company to pay a portion of facility
operating expenses.
The Company collected approximately $226,200 and $217,000 during fiscal 1998 and
1997, respectively, under a sublease agreement which expired in September 1998.
The Company continues to sublease the same portion of its headquarters building
on a month to month basis.
Note 9. Litigation
48
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From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
On September 13, 1996, a complaint was filed by Datapoint Corporation against
the Company and six other companies individually and as purported
representatives of a defendant class of all manufacturers, vendors and users of
Fast Ethernet-compliant, dual protocol local-area network products, for alleged
infringement of United States letters Patent Nos. 5,077,732 and 5,008,879. The
complaint seeks unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company has filed a response to the complaint denying
liability. The case has been consolidated, for purposes of claim interpretation
only, with similar cases filed against several other defendants, which include,
among others, Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks,
and Sun Microsystems. Plaintiff has served claim charts purporting to set forth
its basis for its claims that products compliant with an IEEE standard infringe
its patents. On April 16, 1998, the Special Master appointed by the court issued
a report agreeing in most material respects, with the defendants' interpretation
of the alleged patent claims.
On October 16, 1998, the Company received a letter from Dunn and Bradstreet,
Receivable Management Services, on behalf of Plaintree Systems Corporation
("Plaintree"). The letter claims that the Company owes Plaintree $197,400 and
demands immediate payment. The Company believes Plaintree's claim stems from the
OEM Purchase and Manufacturing License Agreement between Plaintree and the
Company, dated June 1, 1996, under which the Company purchased certain products.
The Company has determined the products were defective and has demanded
arbitration against Plaintree pursuant to the Agreement, for monies already paid
to Plaintree, a minimum of $300,000. Management believes the ultimate resolution
of this matter will not have a material effect on the Company's financial
position or cash flows.
Note 10. Subsequent Events
Through December 15, 1998, the Company had repurchased 67,000 shares of its
common stock for $117,000 under its stock repurchase program described in Note
7.
On November 16, 1998, the Board of Directors approved a repricing of its then
outstanding options issued pursuant to the 1990 Stock Option Plan and the Key
Executive Option Plan. The repricing includes a new 4 year vesting schedule
commencing on November 23, 1998 for those who elect to reprice. Such options
were repriced to the closing price on November 23, 1998.
In connection with the Datapoint litigation described in Note 9, by order dated
November 23, 1998, the District Court adopted without modification the findings
of the Special Master and the recommendations of the Magistrate Judge regarding
claim interpretation of the patents-in-suit. The Court noted that plaintiff
Datapoint had conceded that the Special Master's claim interpretation would
result in a finding of no infringement for the accused products, and therefore
ordered the case dismissed on the merits effective December 30, 1998.
49
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Unaudited Quarterly Results of Operations (in thousands except net income (loss)
per share):
Fiscal 1998 Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
October 3 July 4 April 4 December 27
--------- -------- ------- -----------
Net sales $ 14,516 $ 9,314 $ 10,083 $ 17,520
Gross profit $ 4,686 $ 1,040 $ 2,614 $ 7,134
Net income (loss) $ 12 $ (9,110) $ (5,507) $ 170
Net income (loss) per share $ 0.00 $ (0.99) $ (0.60) $ 0.02
Fiscal 1997 Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
September 27 June 28 March 29 December 28
------------ -------- -------- -----------
Net sales $ 22,010 $ 22,602 $ 21,187 $ 17,480
Gross profit $ 8,123 $ 7,826 $ 7,533 $ 6,757
Net income $ 710 $ 617 $ 448 $ 151
Net income per share $ 0.08 $ 0.07 $ 0.05 $ 0.02
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
50
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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 1998 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 October 3,
1998.
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.
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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 33 of this
Form 10-K.
(2) Financial Statement Schedules - See Index to Financial
Statements and Financial Statement Schedule at page 33
of this Form 10-K.
(3) Exhibits - See Exhibit Index at page 53-54 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 October 3,
1998.
(c) See Exhibit Index at page 53-54 of this Form 10-K.
(d) See Index to Financial Statements, Financial Statements and
Financial Statement Schedule at page 33 of this Form 10-K.
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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)
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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.(1)(3)
10.16 Extension of Sublease Agreement dated June 10, 1997 (3)
10.17 Distribution Agreement dated 09/30/92 between Registrant and
MicroWarehouse
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.
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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 30, 1998
ASANTE TECHNOLOGIES, INC.
By: /s/ JEFF YUAN-KAI LIN
---------------------------
Jeff Yuan-Kai Lin,
President and Chief
Executive Officer, and
Secretary
By: /s/ RAJIV MATTHEW
---------------------------
Rajiv Matthew
Vice President of Finance
and Administration
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeff Yuan-Kai Lin and Rajiv Matthew, 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 30, 1998
- -------------------------------------- (Principal Executive Officer) and Director
(Jeff Yuan-Kai Lin)
/s/ RAJIV MATTHEW Vice President of Finance and Administration December 30, 1998
- -------------------------------------- (Principal Finance and Accounting Officer)
(Rajiv Matthew)
/s/ MICHAEL KAUFMAN (Director) December 30, 1998
- --------------------------------------
(Michael Kaufman)
/s/ DAVID LAM (Director) December 30, 1998
- --------------------------------------
(David Lam)
/s/ EDMOND TSENG (Director) December 30, 1998
- --------------------------------------
(Edmond Tseng)
/s/ CYRUS TSUI (Director) December 30, 1998
- --------------------------------------
(Cyrus Tsui)
/s/ WILSON WONG (Director) December 30, 1998
- --------------------------------------
(Wilson Wong)
56
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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
30, 1998 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.
PricewaterhouseCoopers LLP
San Jose, California
October 30, 1998
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S-1
ASANTE TECHNOLOGIES, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Balance at Charged to Balance
Beginning Costs and at End of
Description of Period Expenes Deductions Period
- ------------------------------------------------- --------- ------- ---------- ------
Year ended September 30, 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
======= ======= ======= =======
Year ended September 27, 1997:
Allowance for doubtful accounts, price protection
and distributor rebates $ 2,157 $ 3,056 $(1,896) $ 3,317
Allowance for sales return 1,017 754 (366) 1,405
------- ------- ------- -------
3,174 3,810 (2,262) 4,722
======= ======= ======= =======
Year ended October 3, 1998:
Allowance for doubtful accounts, price protection
and distributor rebates $ 3,317 $ 3,408 $(3,740) $ 2,985
Allowance for sales return 1,405 (17) (229) 1,159
------- ------- ------- -------
$ 4,722 $ 3,391 $(3,969) $ 4,144
======= ======= ======= =======
58
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