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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 2, 1999
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
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(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
26, 1999, as reported on the OTC (Over-the-Counter) Bulletin Board, was
approximately $4,217,919. 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 26, 1999, the Registrant had 9,302,272 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders to be held on February 24, 2000 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 1
ITEM 2. PROPERTIES 15
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 19
ITEM 6. SELECTED FINANCIAL DATA 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 48
ITEM 11. EXECUTIVE COMPENSATION 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 49
SIGNATURES 52
1
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, small businesses, and homes. 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 believes it
is the largest third party provider of Ethernet connectivity for the
Macintosh(TM) platform.
The majority of the Company's products are designed for Ethernet networks.
Ethernet is a type of network topology that determines how packets, or message
units, are handled and sent across the network. Ethernet is the most widely used
communication standard in Local Area Networks ("LAN"). The majority of these
Ethernet products are designed to function at speeds of either 10 Mbps (standard
Ethernet, or 10BASE-T) or 10/100 Mbps (known as "Fast Ethernet", or 100BASE-T).
Additionally, Gigabit Ethernet has been increasingly adopted in the industry due
to increasing bandwidth requirements needed at the backbone of the network
brought about by the standardization of 10/100 Ethernet at the user level, and
also due to the present and future convergence of voice, data, and video across
the same network infrastructure.
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, Fast Ethernet and Gigabit products, 3) the use of Internet and
"Intranet" technology in corporate LAN, 4) the 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 that were the first to experience
congestion in their traditional network architectures. More recently, adoption
of switching technology has spread to smaller companies. Furthermore, many
companies are deploying switching at all layers of the network: in the LAN
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backbone, in server groups, at the workgroup level, and in direct connections to
desktop PCs. This is especially applicable to those companies that focus on high
bandwidth, graphics-intensive applications. Beginning in fiscal 1996, the
Company introduced several series of managed and unmanaged switch products
designed to meet the needs of most high bandwidth demanding applications. In the
fourth quarter of fiscal 1999, the Company announced two new scalable Gigabit
switch product lines designed to meet the needs of those customers requiring the
most bandwidth and sophisticated management capabilities. In fiscal 2000, the
Company will continue to focus research and development resources on the
development of additional switching products in order to meet the needs of the
Company's customers requiring high performance, feature-rich products, while
continuing to reduce the cost of existing lines as necessary to counter
declining prices. At the same time, the Company will aggressively pursue new
synergistic product areas.
The second trend is the adoption of Fast Ethernet (100 Mbps) technology and the
fast growing need for Gigabit solutions for certain applications. In fiscal 1997
and early 1998, users of 100 Mbps technology were predominately two different
sectors of the market: large corporations and enterprises 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 have accelerated the transition of
the industry 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 focused the majority of its efforts in
fiscal 1999 on the development and introduction of new competitively 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
that have achieved strong recognition and critical acclaim. Gigabit technology
(1,000 Mbps) has been 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. In fiscal 1999, the Company introduced the industry's
first unmanaged Gigabit products designed to meet the needs of those customers
and workgroups requiring maximum bandwidth to handle graphics, intensive
transfers between multiple users, converged voice, data, video, and voice over
IP.
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 and support for mixed PC/Macintosh(TM)/Unix
environments.
The third trend affecting the market for LAN 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
introduced several products to further capitalize on the growing trend for
companies and institutions needing 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
3
products to meet the needs of its customers to connect both to the Internet and
corporate Intranets.
The fourth trend in the 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 been 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. With this new affordability and the emergence of newer technologies such
as wireless and PNA (Phone-Net) technologies allowing easy connectivity in the
home, the reality of the true home network is nearing.
The fifth trend, which affects the LAN market and the Company in particular, is
the seasonality of the Company's business. The first factor that affects the
Company most in the market is the budgeting and purchasing cycles of certain
segments of the Company's customers. The Company has a strong presence in the
educational market that is characterized by its typically seasonal purchasing
habits due to the nature of educational seasons and by the ability for school
administrators to more easily install complex 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. Therefore, in general, peak purchasing by
educational institutions tends to occur in the June to August time period.
The sixth trend which affects the LAN market is the commoditization of the lower
end of the networking market, including adapters and unmanaged hubs and
switches. This trend 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 segment to be
a potential growth area for the Company due to the expected increase in the SOHO
and "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 Apple 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(TM), iMACs(TM), Power PCs(TM), further incorporation by
Apple of networking connectivity into their products, or additional developments
adversely affecting Apple's business could have a material adverse effect on
sales of the Company's client access products, which would materially and
adversely affect the Company's business, financial condition and results of
operations.
The Company is dependent on the development and release of new products,
specifically in the unmanaged and advanced managed system switches, Fast
Ethernet shared areas, connectivity and emerging home networking areas. Delays
4
in bringing new products to market or penetrating emerging competitive markets
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; consequently, the
Company could lose current and future sales to competitors. Alternatively, if
the Company's product sales forecasts are above actual product demand, this may
result in excess orders of components or assembled products and a build up of
inventory that would adversely affect working capital.
Restructuring
During the third quarter of fiscal 1998, the Company restructured its operations
to re-establish the strategic direction of the Company and better align its
operating expenses with anticipated revenues. Although the Company has realized
the benefit of a reduced cost structure and other benefits from the
restructuring of operations, these benefits have been offset somewhat by reduced
product sales and margins.
The Company also recorded during the third quarter of 1998 a $400,000 reserve
for personnel and related costs associated with a company-wide restructuring
plan. These costs included employee severance costs, benefits, outplacement
costs, termination costs, and employee assistance expenses related to the
realignment. The reduction in force in fiscal 1998 consisted of approximately 40
employees, primarily from the sales and marketing departments, in order to bring
the Company's operating costs in line with future expected levels of revenue. As
of October 2, 1999, the Company had utilized all of the restructuring reserves
recorded in fiscal 1998.
The Company's action plan included the release of proprietary ASIC-based
switches, development of retail channels, changes in the Company's financial
model, and realignment of its cost structure, designed to better position the
Company going forward and which the Company believes will leverage its
strengths.
Products
The Company offers both advanced, or managed, systems products (hubs and
switches) and simple, easy to use unmanaged systems products. The Company's
advanced switches and hubs allow more sophisticated users the ability for
increased administration, system analysis, identification of network
communication problems, and security among other functions. The Company's
unmanaged products feature easy to use, Plug-and-Play operation for the customer
needing convenient connectivity at a cost-effective price, or just needing to
extend an existing network.
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.
5
The IntraStack(TM) 6000 family of switches is a stackable 10/100 series of
managed switches. 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 three 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 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. These products
feature an integrated HTTP management server with Java(TM)-enabled features, as
well as other advanced functions. 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 (application specific integrated circuit, or chip)
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 IntraSwitch(TM) 5000 series switch family offers full featured manageable 10
Mbps switches for support of existing 10 Mbps networks.
In the fall of 1999 the Company introduced two new advanced systems, the
IntraStack 8000 and the IntraChassis 9000. The IntraStack 8000 is a high
performance, feature rich 10/100/1000Mbps stackable Ethernet switch capable of
expansion to 192 10/100 switched Ethernet connections in a single stack
configuration. The IntraChassis 9000 is a high performance, feature rich
10/100/1000Mbps stackable Ethernet switch capable of expansion to 192 10/100
switched Ethernet connections in a single chassis configuration. Both systems
are designed around Asante's IntraCore Architecture and offer the simplicity,
high performance and lower cost of ownership that network managers need to meet
the demands of today's multi-service networks. Current planned availability for
these systems is scheduled for early calendar 2000.
The FriendlyNet(TM) 4000E series switch family features cost effective, high
performance 10/100 Mbps unmanaged desktop switches for the smaller and midsize
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 FriendlyNet 400/4000P series switch family features low cost, high
performance 10/100 Mbps unmanaged switches for smaller networks and other users
with high bandwidth needs. The switches feature NWay auto-negotiation to
automatically determine either 10 or 100 Mbps operation and currently come in 5,
8, 16, and 24 port configurations.
The Company also offers the FS3208 FriendlyNet(TM)switch family, a 10 Mbps, 8
port unmanaged switch with 2 10/100 port uplinks.
6
Gigabit Adapters and Other Gigabit Products
The Company shipped its first Gigabit products in February 1999. These products
had a full-featured Gigabit card. Additionally, in the second quarter of fiscal
1999, the Company introduced the industry's first unmanaged Gigabit switches
designed to complement its current switch products and provide those customers
with large bandwidth needs, high-end solutions at affordable prices. The
Company's 7000 series switches feature 8, 16, and 24 port solutions. 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) Shared Systems
In addition to switches, the Company offers a strong family of dual speed 10/100
Fast Ethernet systems and adapters to allow customers to connect personal
computers and high performance servers over a corporate Intranet. 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's NetStacker II family of auto-negotiating 10/100 managed shared
hubs replaced the Company's award winning NetStacker family of managed 10 Mbps
stackable hubs. Asante's 12 and 24 port 10/100 Netstacker II stackable hubs
offer easy, cost effective migration to a managed solution via an optional
management module. The family supports up to eight unmanaged 12 or 24 port
stacked units for up to 192 ports and includes one standard MII slot on each
unit for 100Base-FX connectivity options.
The Company offers a growing family of 10/100 unmanaged hub solutions for its
customers. The Company's current products, the FriendlyNet 10/100 Dual Speed hub
family, include stand-alone 5, 8,16, and 24 port 10/100 hubs. 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.
Fast Ethernet Adapter Cards
The Company's AsanteFast 10/100 dual speed adapters provide all-in-one
compatibility to 10BASE-T and 100BASE-TX Ethernet networks for personal
computers utilizing standard PCI bus architecture. The product plugs into the
PCI slot of the computer and automatically configures itself to the system. It
utilizes an "auto-negotiating" feature that senses whether the network hub speed
is 10 Mbps or 100 Mbps and sets the adapter speed accordingly. As such, the
product allows the customer to move from the existing 10BASE-T network to a new
Fast Ethernet network. The Asante Fast 10/100 has four LED lights to assist with
trouble shooting and to indicate connection speed, link integrity and data
traffic and offer Wake-on-Lan (WoL) operability which allows system
administrators to remotely activate a particular PC, perform maintenance, then
place that workstation back in sleep mode. The Company's PCI cards ship with
Windows(TM), Linux, UNIX, Macintosh(TM), and Power PC(TM) drivers for cross
platform compatibility with most significant operating systems.
The Company also offers FriendlyNet 10/100 PC Fast Ethernet family of adapters
designed to be price/technology leaders for Linux, Unix, Windows 98/NT, and
NetWare.
7
10BASE-T Systems and Adapter Cards
In fiscal 1999, the trend for sophisticated users and many new businesses has
moved to 10/100 switched or 10/100 shared technology. However, the demand for
low cost 10 Mbps Ethernet technology from more price-sensitive and home
customers remained static. This trend is particularly strong in the kindergarten
through grade 12 education market and the smaller SOHO user in which the Company
has a strong reputation and product name recognition. The Company expects that
sales levels in the 10 Mbps market will continue to decline as pricing for
switching technology and 10/100 Mbps shared Ethernet technology have made
adoption of these standards more attractive, and the increasing use of Internet
traffic and data, voice, and video over the same cabling begins to necessitate
the use of faster speeds for some applications..
The 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 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 ultra reliable, cost effective, non-intelligent
Ethernet hubs for connecting personal computers, workstations (including UNIX),
network printers and other network resources to an Ethernet network. These
systems are used for creating small networks or extensions to existing networks.
They allow network managers to use economical unshielded twisted pair (UTP)
telephone wire instead of coaxial cable to set up their LANs and to 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 that allows older
printers to be connected to 10 Mbps networks.
Other Client Access Products. Asante offers a family of converters to connect
LocalTalk devices to an Ethernet network. These converters connect from 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.
Internet Router Products
During fiscal 1999, the Company introduced a family of routers designed to allow
multiple SOHO or home users to connect to the Internet at the same time at
increased speeds. The Company plans to introduce additional Internet routers to
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meet the changing needs of the market. This planned introduction includes DSL as
well as other emerging technologies.
The FriendlyNet(TM) ISDN router allows up to four users to connect to the
Internet via one or two ISDN lines at speeds of up to 8 times that of a standard
28.8 Kbps modem.
The FriendlyNet(TM)Dual 56K allows multiple users to simultaneously connect at
112 Kbps, or up to 168 Kbps with additional modems.
Personal Connectivity: USB & Firewire Products
With the increase of faster PCs and LAN communications comes the ability in the
SOHO and home networking market to support an advanced environment including
multiple printers and multimedia devices. USB (Universal Serial Bus) technology
offers users an inexpensive method to increase a system's number of ports, or
connectivity options. In late 1999 the Company introduced a new and growing
family of USB products. These products offer customers additional connectivity
to networks, peripherals, and other devices such as digital cameras, printers,
scanners and the like. Asante currently carries four products in its USB family,
which is one of the industry's easiest to use and most flexible technologies.
USB Hubs. The Company currently offers two FriendlyNet(TM) USB hubs to meet the
needs of its customers. The 4 and 7 port USB hubs are perfect for connecting a
variety of USB peripheral devices to a USB Macintosh(TM) or PC computer,
allowing sound, controller devices, cameras and the like to be connected easily.
Both FriendlyNet(TM) USB hubs offer auto-partitioning for isolation of
malfunctioning devices or ports and support a dual power mode.
USB to Ethernet Adapter. The Company offers yet another way to connect a true
10Base-T network through USB.
USB to Parallel Adapter. The USB to parallel adapter allows PCs to hook up a
parallel device to a USB port, freeing the port on the PC for other uses, such
as a ZIP drive, scanner, video camera, or printer.
Software Products
Software design and implementation is a key component of all Asante products.
Separately, the Company markets several cutting edge software products.
In the first quarter of fiscal 2000, the Company introduced several product
bundles in its FriendlyShare family. FriendlyShare offers home and small
business users a simple way to allow Macintoshes(TM) to share Internet
connections with other Macintoshes(TM) and PCs. FriendlyShare offers simplicity
of use, automatic server configuration, and has built-in two-way security along
with an integrated firewall to prevent other users and remote users from
accessing sensitive data.
Asante currently offers two stand-alone network management options:
IntraSpection(TM) and AsanteView(TM). In addition, to offer its customers
maximum value and cutting edge technology, the Company has integrated a
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built-in, Java-enhanced, HTTP server it all its current managed products. This
provides customers fully integrated management and security features without
added costs.
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 that 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 continued to ship products based on its
proprietary 10/100 ASIC chip allowing the Company to offer competitively priced
switches. The Company is continuing its development of new and enhanced products
for connecting to the Internet and corporate Intranets. The Company has and will
continue to focus efforts to expand its Gigabit product line.
The Company is the first to ship fully integrated management software with its
products, with powerful abilities only found in much costlier third party
software products. In addition, the Company has continued to offer cutting edge
software products over the past several years such as NetDoubler(TM) and
FriendlyShare(TM).
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.
Despite sales declines to OEM customers in fiscal 1998 and fiscal 1999, the
Company will continue to focus resources on obtaining additional, cost effective
agreements with larger OEM customers, although there can be no assurance that
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such agreements will be obtained. OEM sales are expected to continue to
constitute a smaller portion of the Company's total sales in fiscal 2000.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 24%, 22%, and 18% of the Company's net sales in
fiscal years 1999, 1998, and 1997, respectively. Although the proportion of
international sales increased in fiscal 1999, the Company experienced reduced
sales in all three areas, primarily in Canada where sales declined approximately
40% since fiscal 1998 due to factors similar to those encountered domestically.
Sales in Asia Pacific declined 54% in fiscal 1999 compared to the prior year due
primarily to the continuation of the weak Asian economy and softness in demand
in Macintosh(TM) related products that began in fiscal 1998. As a result of
continuing declines, the Company closed its sales offices in Taiwan and the
United Kingdom during fiscal 1999.
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 2, 1999, the Company supported the sales efforts of its distributors
with 25 direct sales and support related employees located throughout the United
States who promote the Company's products within assigned territories and with
14 outside sales representatives.
The Company's agreements with its distributors can generally be terminated after
an initial term of one year or on short notice without cause and do not provide
for minimum purchase commitments or preclude the distributors from offering
products that compete with those offered by the Company.
The Company grants to its distributors limited rights to return unsold
inventories of the Company's products in exchange for new purchases and provides
certain price protection to its distributors. Although the Company provides
reserves for projected returns and price decreases, any product returns or price
decreases in the future that exceed the Company's reserves will adversely affect
the Company's business, financial condition and results of operations. See Item
7: Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The distribution of products such as those offered by the Company has been
characterized by rapid change, including consolidations and financial
difficulties of some distributors and the emergence of alternative distribution
channels. In addition, there are an increasing number of product suppliers
competing for access to these channels. Distributors may, at their option and at
any time, cease marketing the Company's products without prior notice to the
Company. 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.
11
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 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. The Company plans on reviewing its warranty policy as it
brings new products to market to offer its customers competitive policies while
reducing its exposure to adverse warranty claims.
Company warranties are limited to the Company's obligation to repair or replace
the defective product. The Company attempts to further limit its liability to
end-users through disclaimers of special, consequential and indirect damages and
similar provisions in its end-user warranty. However, no assurance can be given
that such limitations of liability will be legally enforceable.
Backlog
The Company generally ships products shortly after orders are received and
consequently maintains very little backlog. Accordingly, the Company does not
believe that its backlog as of any particular date is indicative of future
sales.
Engineering and Product Development
The markets for the Company's 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 2, 1999, the Company had 15 employees engaged in engineering and
product development. During the fiscal years 1999, 1998, and 1997, the Company's
engineering and product development expenses were approximately $3.9 million,
$7.3 million, and $7.7 million, respectively. The reduction in fiscal 1999 was
due primarily to the reduction in ASIC design expenditures, personnel costs due
to the Company's ongoing restructuring efforts, and to the Company's transition
to an Original Discount Manufacturing model allowing it to leverage the
engineering expertise of certain strategic partners in bringing new products to
market.
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 1999 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
12
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
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"), an assembler of semiconductor and
printed circuit boards 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 1999, the Company
purchased $8.4 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 experiences financial or operational difficulties that result in
a reduction or interruption in the supply of products to the Company or
otherwise fails to deliver products to the Company on a timely basis, the
Company would be required to procure sufficient manufacturing supply through
alternative sources. The Company believes that alternative manufacturers are
available; however, the qualification of such alternative sources and the
commencement of volume manufacturing of the Company's products could take a
significant period of time. Accordingly, any reduction or interruption of supply
from its existing subcontractors would materially and adversely affect the
Company's business, financial condition and results of operations. In addition,
the use of OSE 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
13
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 the Company's products.
These subcontractors procure and stock components and subassemblies based on the
Company's purchase orders.
Competition
The markets for the Company's products are highly competitive, and the Company
believes that such competition will 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
14
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 1999, a smaller portion of the Company's sales represented
products sold to OEMs than in fiscal 1998. While the Company has pursued and
will continue to pursue additional OEM agreements with larger companies, there
can be no assurance that existing OEM agreements will continue or that new
agreements will be obtained. In addition, since the Company intends to seek
additional large product volume arrangements, the acquisition or loss of a
single large OEM customer or several smaller OEM customers would have a material
effect on the Company's revenues. Unless the Company signs additional large OEM
agreements in the near future, the Company expects that OEM sales will remain
flat or decrease slightly as a percentage of total revenue in fiscal 2000.
A significant percentage of the Company's sales in fiscal 1998 and fiscal 1999
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.
15
Employees
As of October 2, 1999, the Company had 86 employees, including 15 in engineering
and product development, 21 in manufacturing operations, 29 in marketing, sales
and support services, and 21 in corporate administration. The number of
employees reflects a reduction in workforce as a result of the restructuring
which began in the third quarter of fiscal 1998.
The Company's success also depends to a significant extent upon the
contributions of key sales, marketing, engineering, manufacturing, and
administrative employees, and on the Company's ability to attract and retain
highly qualified personnel, who are in great demand. None of the Company's key
employees are subject to a non-competition agreement with the Company. Unless
vacancies are promptly filled, the loss of current key employees or the
Company's inability to attract and retain other qualified employees in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations.
None of the Company's employees are represented by a labor organization, and the
Company is not a party to any collective bargaining agreement. The Company has
never had any employee strike or work stoppage and considers its relations with
its employees to be good.
ITEM 2. PROPERTIES
The Company's headquarters, including its executive offices and corporate
administration, manufacturing, marketing, sales and technical support
facilities, are located in San Jose, California. The Company occupies this
14,700 square foot facility under a lease that expires on August 31, 2004, with
an option to extend for an additional five years. During 1999 the Company closed
the majority of its leased sales offices in connection with its restructuring
activities. The Company currently has leased sales offices in Southern
California, Utah, and Oregon. The Company believes that its existing facilities
are adequate to meet its requirements for the foreseeable future and that
suitable additional or substitute space will be available as needed. See Note 8
of Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
On September 13, 1996, a complaint was filed by Datapoint Corporation against
the Company and six other companies individually and as purported
representatives of a defendant class of all manufacturers, vendors and users of
Fast Ethernet-compliant, dual protocol local-area network products, for alleged
infringement of United States letters Patent Nos. 5,077,732 and 5,008,879. The
complaint sought unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company filed a response to the complaint denying
liability. The case was consolidated, for purposes of claim interpretation only,
with similar cases filed against several other defendants, which include, among
others, Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks, and Sun
Microsystems. On April 16, 1998, the Special Master appointed by the court
16
issued a report agreeing in most material respects with the defendants'
interpretation of the alleged patent claims. Subsequently, and by order dated
November 23, 1998, the District Court adopted without modification the findings
of the Special Master and the recommendations of the Magistrate Judge regarding
claim interpretation of the patents-in-suit. The Court ordered dismissal of the
case and entered judgment in favor of the defendants. Plaintiff has filed an
appeal of the judgment to the Federal Circuit Court of Appeal, which is now
pending. A ruling on the appeal is not expected until the year 2000.
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. On May 17, 1999, the Company attended a mediation hearing
with Plaintree, whereby an agreement for settlement was made. As of July 3,
1999, all terms of the mediation settlement had been performed, and the
settlement amount was not material to the Company.
In September 1999 certain inventory having a cost of approximately $400,000 was
seized by the United States Customs for an alleged use of a counterfeit
certification mark. To contest the seizure, it is necessary for the Company to
either file an administrative petition or to challenge the matter in court. The
United States Attorney's Office is seeking the forfeiture of the merchandise,
and the Company intends to file a claim to challenge the forfeiture. It is the
Company's position that the use of this certification mark does not allow the
United States Customs to seize or forfeit the inventory. The Company also
expects the United States Customs to issue a penalty separate from the seizure
under 19 U.S.C. section 1526(f). This statute allows issuance of a penalty in
the amount of the retail value of the product had the product not been
counterfeit. The Company intends to contest such action through administrative
and/or judicial procedures.
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 1999.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages as of December 10, 1999, and
certain information regarding each of them are as follows:
17
Name Age Position with the Company
- ----------------- ----- ---------------------------------------------------
Wilson Wong 52 President and Chief Executive Officer
Rusty Callihan 50 Vice President of Sales, SOHO Product Division
Anthony Contos 36 Vice President of Finance and Administration
Jim Hsia 37 Vice President of Marketing, SOHO Product Division
John Jeng 43 Vice President of Operations
Don Miller 51 General Manager, Applied Systems Division
Mr. Wilson Wong co-founded the Company in 1988 and has served as President and
Chief Executive Officer since December 1998, when he assumed these positions
following the resignation of Jeff Lin. From 1994 to August 1997, he served as
Vice President and General Manager and Co-Chairman of the Board of Directors.
From 1993 to 1994, he served as Vice President and General Manager for the
Company's client access products. From 1988 to 1993, he served as the Company's
President and Chief Executive Officer. Mr. Wong serves as a Director of the
Board of Directors.
Mr. Rusty Callihan rejoined the Company in August 1999 and currently serves as
Vice President of Sales for the Company's SOHO Products, previously held by Mr.
Richard Strong. Mr. Callihan initially joined the Company in October 1990 and
served in various sales positions until July 1996. Prior to rejoining the
Company Mr. Callihan was the Vice President of Sales for UMAX Corporation from
June 1997 to July 1998. He also held senior sales management positions with
RasterOps Corporation and Apple Computer Inc.
Mr. Anthony Contos joined the Company in June 1994, and currently serves as Vice
President of Finance and Administration. In August, Mr. Contos assumed the
position of Vice President of Finance and Administration previously held by Mr.
Gans who had assumed that position following the resignation of Mr. Rajiv
Matthew. From October 1997 to August 1999 he served as the Company's
Controller/Director of Finance. Prior to joining the Company Mr. Contos was a
financial consultant for Electronic Arts, Inc. where he was responsible for the
international consolidation activities. Prior to that he was the financial and
operations analyst with Ross Stores.
Mr. John Jeng joined the Company in December 1998 and currently serves as Vice
President of Operations. Mr. Jeng assumed the position of Vice President of
Operations previously held by Mr. William Leung. 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.
Mr. Jim Hsia joined the Company in September 1999 and currently serves as Vice
President of Marketing for the Company. Mr. Hsia assumed the position of Vice
President of Marketing previously held by Mr. Bill Fenley. From February 1996 to
September 1999 Mr. Hsia was the Vice President of Marketing at ZNYX Corporation.
Prior to that he held various marketing positions at National Semiconductor,
Eagle Technology (a business unit of Artisoft), Accton Technology and 3Com
Corporation.
Mr. Don Miller rejoined the Company in July 1999 and currently serves as General
Manager of Advanced Systems for the Company. Mr. Miller was previously the
18
Director of Strategic Competitive Analysis at Nortel Networks. Prior to Nortel,
Mr. Miller was chief analyst for Dataquest's Networking Service Worldwide.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The following table sets forth the high and low sale prices for the Company's
Common Stock. The Company's Common Stock traded on the NASDAQ National Market
under the trading symbol ASNT until September 30, 1999, when the NASDAQ Listings
Qualifications Panel removed the Company's stock from trading on the NASDAQ NMS
System as a result of the Company's inability to maintain a net tangible asset
value of at least $4 million as required by NASDAQ National Market Maintenance
Standards to maintain its listing. Consequently, effective September 30, 1999,
the Company's Common Stock traded on the OTC (Over-the-Counter) Bulletin Board
under the trading symbol ASNT.OB. The Company has filed an appeal and is unable
to determine the ultimate outcome of this matter.
Fiscal 1999 High Low
- ---------------- --------- -----------
First quarter $2 1/2 $1
Second quarter $1 31/32 $ 13/16
Third quarter $1 $ 9/16
Fourth quarter $2 1/4 $ 3/4
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 $ 3/16
As of November 15, 1999, there were 105 stockholders of record of the Company's
Common Stock. The Company has not paid cash dividends on its Common Stock and
does not plan to pay cash dividends in the foreseeable future.
Factors such as announcements of technological innovations or new products by
the Company, its competitors and other third parties, as well as quarterly
variations in the Company's anticipated or actual results of operations and
market conditions in high technology industries generally may cause the market
price of the Company's Common Stock to fluctuate significantly. The stock market
has on occasion experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many high technology companies and
have often been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. In addition, the market price of the Company's Common Stock may
not be indicative of current or future performance.
In 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
20
intent. As of October 2, 1999, Dr. Lam was no longer a member of the Company's
Board of Directors.
Under a stock repurchase plan approved September 16, 1998, the Company could
repurchase up to 500,000 shares of its outstanding Common Stock over a period of
up to one year. Pursuant to this program, the Company had repurchased 67,000
shares of its common stock for $117,200 as of October 2, 1999 and 15,500 shares
of its common stock for $28,400 as of October 3, 1998.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data) Year ended
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 37,488 $ 51,433 $ 83,279 $ 66,990 $ 60,884
Income (loss) from operations $ (13,863) $ (12,450) $ 2,331 $ (1,338) $ (6,324)
Net income (loss) $ (14,161) $ (14,435) $ 1,926 $ (457) $ (3,705)
Diluted net income (loss) per share $ (1.53) $ (1.57) $ 0.21 $ (0.05) $ (0.45)
Balance Sheet Data:
Working Capital $ 751 $ 13,645 $ 26,727 $ 25,101 $ 24,548
Total assets $ 13,345 $ 30,359 $ 40,567 $ 39,966 $ 36,767
Stockholders' equity $ 1,682 $ 15,850 $ 29,874 $ 26,909 $ 26,119
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
21
as a percentage of net sales for the fiscal years ended October 2, 1999, October
3, 1998, and September 27, 1997, respectively:
1999 1998 1997
------ ------ ------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 86.8 69.9 63.7
-------- -------- --------
Gross profit 13.2 30.1 36.3
-------- -------- --------
Operating expenses:
Sales and marketing 33.6 32.2 20.2
Research and development 10.4 14.3 9.2
General and administrative 6.1 7.0 4.1
Restructuring - 0.8 -
-------- -------- --------
Total operating expenses 50.1 54.3 33.5
-------- ------- --------
Income (loss) from operations (37.0) (24.2) 2.8
Interest and other income (expense), net (.8) 0.9 0.8
-------- -------- --------
Income (loss) before income taxes (37.8) (23.3) 3.6
Provision (benefit) for income taxes - 4.8 1.3
-------- ------- --------
Net income (loss) (37.8)% (28.1)% 2.3 %
========= ======== ========
The Company recorded a net loss for fiscal 1999 of $14.2 million, or $(1.53) per
diluted share, compared to a net loss of $14.4 million, or $(1.57) per diluted
share, in fiscal 1998.
Net Sales
Net sales decreased 27.1% to $37.5 million in fiscal 1999 from $51.4 million in
fiscal 1998. Net sales were $83.3 million in fiscal 1997. The decrease in net
sales from fiscal 1998 to fiscal 1999 was due to several factors including a
decrease in OEM sales of $2.1 million, from $3.5 million to $1.3 million, a
decline in connectivity product sales of approximately $6.7 million due to heavy
competitive price pressures and the continued incorporation of Ethernet onto the
motherboard of Apple's newer computers causing a continued decline in older
adapter card sales, a reduction in sales for older 10 Mbps unmanaged shared hubs
of $0.5 million due primarily to pricing decreases, the reduction of
approximately $2.0 million of sales into the distributor channel, and a decrease
of approximately $5.5 million due to declining sales of the Company's older
managed system products. These decreases were partially offset by increases in
sales of the Company's 10/100 unmanaged hubs and switches of approximately $2.0
million and an increase in print router sales of $1.2 million.
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.
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 $11.1 million in fiscal
1999 from $13.1 million in fiscal 1998, due in part to Apple Computer's
22
continued incorporation of Ethernet connectivity into the motherboard of certain
of its Macintosh(TM) and PowerBook(TM) computers and the transition of many
customers to 10/100 adapter products. Sales of the Company's 10T shared products
also decreased by approximately $5.6 million, to $5.8 million in fiscal 1999
from $11.4 million in fiscal 1998, due primarily to the adoption of 10/100
technology across all markets. Sales of the Company's 10/100 and 100 Mbps ("Fast
Ethernet") shared systems products increased by $1.5 million from $2.1 million
in fiscal 1998 to $3.6 million in fiscal 1999, due primarily to the late
introduction of the Company's new NetStacker II product line and increasing
adoption of switching technology. Sales of the Company's switch products
decreased $1.9 million during fiscal 1999 to $10.3 million from $12.2 million in
fiscal 1998. Such sales relate primarily to the Company's 10/100 managed
stackable and unmanaged switches.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for 24%, 22%, and 18% of net sales in fiscal 1999, 1998, and 1997,
respectively. Although the proportion of international sales increased in fiscal
1999, the Company experienced reduced sales in all three areas, primarily in
Canada where sales declined approximately 40% since fiscal 1998 due to factors
similar to those encountered domestically. Sales in Asia Pacific declined 54% in
fiscal 1999 compared to the prior year due primarily to the continuation of the
weak Asian economy and softness in demand in Apple Macintosh(TM) related
products that began in fiscal 1998. As a result of continuing declines, the
Company closed is sales offices in Taiwan and the United Kingdom during fiscal
1999. In fiscal 1998 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 that began in fiscal 1998 and
extended through 1999 will continue during fiscal 2000. 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 and that sales of older managed products and adapter cards as a percent
of total sales will continue to decline in fiscal 2000, but sales of new
products should offset decreasing sales of the Company's existing products. The
Company will continue in its efforts to develop new products and decrease its
manufacturing costs faster than related declines in selling prices. If the
Company is unable to offset anticipated price declines in its products by
reducing its manufacturing costs and by introducing new products that gain
market acceptance, its business, financial condition and results of operations
will be materially and adversely affected.
Gross Profit
The Company's gross profit as a percentage of net sales decreased to 13.2% in
fiscal 1999 from 30.1% in fiscal 1998, and from 36.3% in fiscal 1997. The
decrease during fiscal 1999 was due primarily to the decreased sales levels and
inventory write-offs of the Company's older legacy adapter cards, managed system
products and component level inventories. The decrease in gross profit as a
23
percentage of net sales in fiscal 1998 compared to fiscal 1997 was attributable
primarily to the Company's decreased sales levels and increased competitive
pricing pressures experienced during fiscal 1998, combined with the Company's
discontinuing a number of its products resulting in write-downs of the related
inventory. During the latter half of fiscal 1999 sales prices continued to be
affected by heavy competitive pricing pressures. In response to this, the
Company has brought to market and plans to continue to bring to market lower
cost replacement products and has moved its manufacturing offshore. Although the
Company believes it is in a competitive position at present, the Company will
continue to take additional measures going forward to maintain its
competitiveness in the market place.
Sales and Marketing
Sales and marketing expenses were at $12.6 million in fiscal 1999 compared to
$16.6 million in fiscal 1998, or a decrease of 24.0%. The fiscal 1998 expenses
were consistent with fiscal 1997 with a decrease of $0.2 from $16.8 in fiscal
1997. As a percentage of net sales, sales and marketing expenses were 33.6%,
32.2%, and 20.2% in fiscal 1999, 1998, and 1997, respectively. The decrease in
sales and marketing expenses since fiscal 1998 was due primarily to decreases in
personnel and related costs, tradeshow participation, outside service related
costs, which were partially offset by increases in outside representative,
advertising and product collateral related costs and a write-off of $0.7 million
in prepaid advertising credits. The decrease in sales and marketing expenses
from fiscal 1997 to fiscal 1998 was primarily due to the Company's reduction in
the size of its marketing department and its direct sales force in the third
quarter of fiscal 1998. This decrease in the direct sales force, which was
offset partially by the addition of a number of Manufacturers Representatives,
was related to the restructuring of the Company and its distribution channels.
The Company expects that its sales and marketing expenses will decrease further
in fiscal 2000 in absolute dollars.
Research and Development
Research and development expenses decreased by 47.1% to $3.9 million in fiscal
1999 from $7.3 million in fiscal 1998. Research and development expenses were
$7.7 million in fiscal 1997. As a percentage of net sales, research and
development expenses were 10.4%, 14.3%, and 9.2%, in fiscal 1999, 1998, and
1997, respectively. The decrease in such expenses from fiscal 1998 to fiscal
1999 was due to decreases in prototype materials, personnel, and outside
consulting services primarily related to the Company's strategic direction to
leverage the engineering expertise of certain of its key suppliers. The reduced
spending in these areas resulted from decreased product development activities
for the Company's proprietary 10/100 switch ASIC and reduced recruitment related
expenses, which were partially offset by the Company's write-off of certain idle
fixed assets related to its research and development activities. The $0.4
million decrease in expenses from fiscal 1997 to fiscal 1998 resulted from
reduced payroll, consulting and outside service related expenditures.
The Company expects that spending on research and development in fiscal 2000
will remain flat or decrease slightly in comparison to fiscal 1999.
24
General and Administrative
General and administrative expenses decreased to $2.3 million in fiscal 1999
from $3.6 million in fiscal 1998. General and administrative expenses were $3.5
million in fiscal 1997. As a percentage of net sales, general and administrative
expenses were 6.1%, 7.0%, and 4.1% in fiscal years 1999, 1998, and 1997,
respectively. The decrease in general and administrative expenses in absolute
dollars in fiscal 1999 is primarily related to reduced consulting, legal,
outside service related expenditures, and personnel related costs. General and
administrative costs for fiscal 1998 increased in relation to fiscal 1997
primarily due to a $575,000 write-down of property and equipment and idle
facility costs.
The Company expects that general and administrative expenses will remain flat or
increase marginally in fiscal 2000 in absolute dollars.
Restructuring
During the third quarter of fiscal 1998, the Company restructured its operations
to re-establish the strategic direction of the Company and better align its
operating expenses with anticipated revenues. Although the Company has realized
the benefit of a reduced cost structure and other benefits from the
restructuring of operations, these benefits have been offset somewhat by reduced
product sales and margins.
The Company also recorded during the third quarter of fiscal 1998 a $400,000
reserve for personnel and related costs associated with a company-wide
restructuring plan. These costs included employee severance costs, benefits,
outplacement costs, termination costs, and employee assistance expenses related
to the realignment. The reduction in force in fiscal 1998 consisted of
approximately 40 employees, primarily from the sales and marketing departments.
As of October 2, 1999, the Company had utilized all of the restructuring reserve
recorded in fiscal 1998.
The Company's action plan included the release of proprietary ASIC-based
switches, development of retail channels, changes in the Company's financial
model, and realignment of its cost structure, designed to better position the
Company going forward and which the Company believes will leverage its
strengths.
Income Taxes
The Company recorded no provision for federal and state income taxes for fiscal
1999 due principally to a valuation allowance on deferred tax assets
established. The Company has recorded a full valuation allowance on its deferred
tax assets as sufficient uncertainty exists regarding its recoverability. The
Company's effective tax rate was (20.6%) for fiscal 1998 and 36.0% for fiscal
1997.
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
25
part on its ability to enhance existing products and introduce new high
technology products. The Company must also bring its products to market at
competitive price levels. Unexpected changes in technological standards,
customer demand and pricing of competitive products could adversely affect the
Company's operating results if the Company is unable to respond effectively and
timely to such changes. The industry is also dependent to a large extent on
proprietary intellectual property rights. From time to time the Company is
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of patents, trademarks and other
intellectual property rights. Consequently, from time to time, the Company will
be required to prosecute or defend against alleged infringements of such rights.
The Company's success also depends to a significant extent upon the
contributions of key sales, marketing, engineering, manufacturing, and
administrative employees, and on the Company's ability to 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's current manufacturing and sales structure is particularly subject
to various risks associated with international operations including currency
exchange rate fluctuations, changes in costs of labor and material, reliability
of sources of supply and general economic conditions in foreign countries.
Unexpected changes in foreign manufacturing or sources of supply, fluctuations
in monetary exchange rates and changes in the availability, capability or
pricing of foreign suppliers could adversely affect the Company's business,
financial condition and results of operations.
The 10/100 Mbps and 100 Mbps Ethernet technology (100BASE-T, or "Fast-Ethernet")
has become a standard networking topology in the networking and computer
industries. This standard has been adopted widely by end-user customers because
of its ability to increase the efficiency of LANs and because of its ease of
integration into existing 10BASE-T networks. Because of the importance of this
standard, the Company has focused its ongoing research and development
activities on introducing future products incorporating 100BASE-T technology.
The Company realizes the importance of bringing more 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, as well as timely product release. There can be no
assurance that the market will accept and adopt this new technology or that the
Company can meet market demand in a timely manner.
The Company commits to expense levels, including manufacturing costs and
advertising and promotional programs, based in part on expectations of future
net sales levels. If future net sales levels in a particular quarter do not meet
the Company's expectations or the Company does not bring new products timely to
market, the Company may not be able to reduce or reallocate such expense levels
on a timely basis, which could adversely affect the Company's operating results.
There can be no assurance that the Company will be able to achieve profitability
on a quarterly or annual basis in the future.
The Company's target markets include end-users, value-added resellers, systems
integrators, retailers, and OEMs. Due to the relative size of the customers in
some of these markets, particularly the OEM market, sales in any one market
could fluctuate dramatically on a quarter to quarter basis. Fluctuations in the
26
OEM market could materially adversely affect the Company's business, financial
condition and results of operations.
In summary, the Company's net sales and operating results in any particular
quarter may fluctuate as a result of a number of factors, including competition
in the markets for the Company's products, delays in new product introductions
by the Company, market acceptance of new products incorporating 100BASE-T by the
Company or its competitors, changes in product pricing, material costs or
customer discounts, the size and timing of customer orders, distributor and
end-user purchasing cycles, variations in the mix of product sales,
manufacturing delays or disruptions in sources of supply, and economic
conditions and seasonal purchasing patterns specific to the computer and
networking industries as discussed above. The Company's future operating results
will depend, to a large extent, on its ability to anticipate and successfully
react to these and other factors. Failure to anticipate and successfully react
to these and other factors could adversely affect the Company's business,
financial condition and results of operations.
Successfully addressing the factors discussed above is subject to various risks
discussed in this report, as well as other factors that generally affect the
market for stocks of high technology companies. These factors could affect the
price of the Company's stock and could cause such stock prices to fluctuate over
relatively short periods of time.
Liquidity and Capital Resources
During fiscal 1999 and 1998, the Company's operating activities utilized $3.9
million and $4.0 million, respectively, of cash and cash equivalents as compared
to net cash provided of $1.7 million in fiscal 1997. During fiscal 1999, the net
cash utilized by operating activities resulted primarily from the net loss of
$14.2 million and decreases in accounts payable and payable to stockholder of
$2.7 million and $1.1 million, respectively. Such uses were partially offset by
reductions of inventory, accounts receivable and prepaid expenses and other
current assets of $5.0 million, $3.9 million, and $2.8 million, respectively.
Depreciation and amortization and losses related to the write-off of idle assets
aggregated $1.3 million. Days of sales outstanding in accounts receivable, net
increased to 45 at the end of fiscal 1999 compared to 36 at the end of fiscal
1998, which had the effect of decreasing cash from operations.
Net cash provided by or used in investing activities and financial activities in
fiscal 1999 was insignificant. In fiscal 1998 the Company used $0.5 million in
investing activities, primarily due to purchases of property and equipment.
During fiscal 1998 and 1997, the Company's purchases of property and equipment
totaled $0.7 million and $2.3 million, respectively. The Company anticipates
that capital equipment purchases in fiscal 2000 will not be material. In fiscal
1998 the Company generated cash from financing activities of approximately $0.4
million from the exercise of employee stock options and the Company's employee
stock purchase plan. On September 23, 1998, the Company's Board of Directors
approved a stock repurchase program whereby up to 500,000 of the Company's
outstanding common stock may be repurchased in the open market from time to
time. As a result of such repurchase program the Company repurchased 51,500
shares for $89,000 in fiscal 1999 and 15,500 shares for $28,000 in fiscal 1998.
At October 2, 1999, the Company had cash, cash equivalents and short-term
investments of $4.8 million as compared to $8.9 million at October 3, 1998.
Working capital was $0.8 million at October 2, 1999, compared to $13.6 million
27
at October 3, 1998. In October 1999, subsequent to the end of fiscal 1999, the
Company obtained a bank line of credit that provides for maximum borrowings of
$5.0 million, primarily limited to a certain percentage of eligible accounts
receivable and eligible inventory and bears interest at the bank's prime rate
plus 2.0% to 2.75% dependent upon the Company's performance by the end of the
first quarter of fiscal 2000. The Company's ability to borrow under this line is
subject to compliance with covenants related to financial performance and
condition. The line of credit expires on October 26, 2000.
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 2000. However, the Company has incurred substantial operating losses over
the last two years and may seek additional financing. If additional funds are
required there can be no assurance that such funds will be available at all or
on terms favorable to the Company and its stockholders.
On September 30, 1999, the Company's stock ceased being traded on the NASDAQ
National Market System and was moved to the OTC (Over The Counter) Bulletin
Board. The NASD Appeal Committee will review the Company's position in April
2000. At present Company cannot determine the effect this will have on the
Company's ability to raise additional funding or investment, though at the
present time, the Company believes the effect will be minimal.
Year 2000 Issue
Computer programs and systems that make use of dates represented by only two
digits (99 rather than 1999) may not operate properly starting in 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 program with project team to address this
issue and achieve Year 2000 (Y2K) readiness. The program 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 has systematically performed an enterprise-wide risk
assessment and developed contingency plans to mitigate risks. The Company has
also communicated with its customers, suppliers, employees to reinforce
awareness and 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 has done this through a variety of media, including
updates to the Y2K area of the Company's web site.
The Company's Y2K program is comprised of 3 phases; Awareness and Assessment,
Renovation, and Product Readiness. The Awareness and Assessment phases of the
project has been completed, and the Renovation phase commenced in May 1998 and
was completed in November 1999. Regarding 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. Regarding Customer Readiness, the Company
28
commenced making Year 2000 compliant updates to its customers' systems through a
standard Service Update Plan process which was completed in December 1999. A
Monitoring phase of the program is in place and provides for the contingency of
customers experiencing issues with the validation and implementation phases of
the Supplier Readiness component. The Supplier Readiness component 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 have substantially been developed based upon
this assessment. Supplier issues that potentially affect the Company's products
that are mission critical were resolved by December 1999.
Internal Infrastructure Readiness: The Company has completed an assessment of
its IT and non-IT applications and its business processes. Most applications and
processes have already been made Y2K compliant, while remaining applications
have been prioritized and assigned resources based upon their importance to the
Company's ability to conduct business. All mission critical implementations were
completed by November 1999. The Company estimates that the total Year 2000 costs
will not be significant. The Company is continuing its assessment and developing
alternatives that will result in a further refinement of this estimate through
the end of the fiscal year. Although the Company is fairly certain it will
achieve its goals of minimizing costs, there can be no assurance that actual
costs will not differ materially from the current estimate due to potentially
unforeseen circumstances. If computer systems used by the Company or its
suppliers, or the software applications used in systems manufactured and sold by
the Company, fail or experience significant difficulties, the Company's results
of operations could be materially affected.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statements of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the derivative must
be highly effective in achieving offsetting changes in fair value or cash flows
of the hedged items during the term of the hedge. The Company will adopt SFAS
No. 133 in fiscal year 2001. Although the Company can not determine the impact,
if any, that the adoption of SFAS No. 133 will have on its consolidated
financial statements, the Company believes that the effect on its financial
statements will be immaterial.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of October 2, 1999, the Company's cash and investment
portfolio did not include fixed-income securities. Due to the short-term nature
of the Company's investment portfolio, an immediate 10% increase in interest
rates would not have a material effect on the fair market value of the Company's
portfolio. Since the Company has the ability to liquidate this portfolio, it
29
does not expect its operating results or cash flows to be materially affected to
any significant degree by the effect of a sudden change in market interest rates
on its investment portfolio.
Foreign Currency Exchange Risk. All of the Company's sales are denominated in
U.S. dollars, and as a result the Company has little exposure to foreign
currency exchange risk. The effect of an immediate 10% change in exchange rates
would not have a material impact on the Company's future operating results or
cash flows.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Financial Statements:
Report of Independent Accountants 31
Balance Sheets at October 2, 1999 and October 3, 1998 32
Statements of Operations for the years ended October 2, 1999,
October 3, 1998, and September 27, 1997 33
Statements of Stockholders' Equity for the years ended
October 2, 1999, October 3, 1998, and September 27, 1997 34
Statements of Cash Flows for the years ended October 2, 1999, October 3, 1998,
and September 27, 1997 35
Notes to Financial Statements 36
Quarterly Results of Operations (unaudited) 47
Financial Statement Schedule:
Report of Independent Accountants on Financial Statement Schedule 54
Schedule II - Valuation and Qualifying Accounts and Reserves 55
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.
31
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 2, 1999 and October 3, 1998, and the results of its operations and its
cash flows for each of the three years in the period ended October 2, 1999, 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 that 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
November 4, 1999
32
ASANTE TECHNOLOGIES, INC.
BALANCE SHEETS
(In thousands, except share and per share amounts)
October 2, October 3,
1999 1998
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 4,808 $ 8,852
Accounts receivable, net of allowance for doubtful accounts,
rebates and sales returns of $5,771 and $4,144 in 1999
and 1998, respectively 4,414 8,328
Inventory 2,663 7,673
Prepaid expenses and other current assets 529 3,301
--------- ----------
Total current assets 12,414 28,154
--------- ----------
Property and equipment, net 713 2,004
Other assets 218 201
--------- ----------
Total assets $ 13,345 $ 30,359
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,027 $ 7,714
Accrued expenses 5,705 4,799
Payable to stockholder 931 1,996
--------- ----------
Total current liabilities 11,663 14,509
--------- ----------
Commitments and contingencies (See Notes 8 and 9)
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;
9,301,272 and 9,270,393 shares issued and outstanding in 1999
and 1998, respectively 9 9
Additional paid-in capital 26,873 26,791
Treasury stock (117) (28)
Accumulated deficit (25,083) (10,922)
---------- -----------
Total stockholders' equity 1,682 15,850
---------- -----------
Total liabilities and stockholders' equity $ 13,345 $ 30,359
========== ===========
The accompanying notes are an integral part of these financial statements.
33
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended
-----------------------------------------------
October 2, October 3, September 28,
1999 1998 1997
----------- ----------- -----------
Net sales $ 37,488 $ 51,433 $ 83,279
Cost of sales 32,557 35,959 53,040
----------- ----------- -----------
Gross margin 4,931 15,474 30,239
----------- ----------- -----------
Operating expenses:
Sales and marketing 12,609 16.587 16,777
Research and development 3,883 7,346 7,680
General and administrative 2,302 3,591 3,451
Restructuring - 400 -
----------- ----------- -----------
Total operating expenses 18,794 27,924 27,908
----------- ----------- -----------
Income (loss) from operations (13,863) (12,450) 2,331
Interest and other income (expense), net (298) 477 678
----------- ----------- -----------
Income (loss) before income taxes (14,161) (11,973) 3,009
Provision for income taxes - 2,462 1,083
----------- ----------- -----------
Net income (loss) $ (14,161) $ (14,435) $ 1,926
=========== =========== ===========
Basic net income (loss) per share $ (1.53) $ (1.57) $ 0.21
=========== ========== ===========
Diluted net income (loss) per share $ (1.53) $ (1.57) $ 0.21
=========== ========= ===========
Weighted average common shares and equivalents outstanding:
Basic 9,282 9,206 8,992
=========== =========== ===========
Diluted 9,282 9,206 9,202
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
34
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Retained
Common Stock Additional Earnings/
--------------------- Paid-in Treasury (Accumulated
Shares Amount Capital Stock Deficit) Total
------------ -------- ------------ --------- --------------- -----------
Balances as of
September 28, 1996 8,859,990 $ 9 $ 25,313 $ - $ 1,587 $ 26,909
Common stock issued under
stock plans 256,693 996 996
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
Common stock issued under
stock plans 82,379 82 82
Repurchase of common stock (51,500) (89) (89)
Net loss (14,161) (14,161)
------------ -------- ------------ --------- --------------- -----------
Balances as of
October 2, 1999 9,301,272 $ 9 $ 26,873 $ (117) $ (25,083) $ 1,682
============ ======== ============ ========= =============== ============
The accompanying notes are an integral part of these financial statements.
35
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
----------------------------------------------
October 2, October 3, September 28,
1999 1998 1997
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (14,161) $ (14,435) $ 1,926
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 986 1,417 1,062
Provision for doubtful accounts receivable 341 528 117
Provision for losses on inventory 6,670 1,665 1,000
Loss due to write-off of idle assets 425 - -
Compensation expense upon issuance
of common stock - - 20
Deferred income taxes - 3,606 (634)
Changes in operating assets and liabilities:
Accounts receivable 3,573 (543) 1,608
Inventory (1,660) 2,742 (3,229)
Prepaid expenses and other current assets 2,755 (2,811) 2,463
Accounts payable (2,687) 2,756 (2,242)
Accrued expenses and other 906 (59) 435
Payable to stockholder (1,065) 1,119 (805)
---------- ---------- ----------
Net cash provided by (used in) operating activities (3,917) (4,015) 1,721
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (120) (653) (2,305)
Other - 178 (142)
---------- ---------- ----------
Net cash used in investing activities (120) (475) (2,447)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of common stock 82 439 996
Repurchase of common stock (89) (28) -
Other - - (32)
----------- ---------- -----------
Net cash provided by (used in) financing activities (7) 411 964
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (4,044) (4,079) 238
Cash and cash equivalent at beginning of year 8,852 12,931 12,693
---------- ---------- ----------
Cash and cash equivalent at end of year $ 4,808 $ 8,852 $ 12,931
========== ========== ==========
Supplemental disclosures of cash flow information:
Interest paid during the year $ - $ - $ 7
========== ========== ==========
Income tax paid (refunded) during the year $ (960) $ 147 $ (143)
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
36
ASANTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. The Company and Summary of Significant Accounting Policies
Asante Technologies, Inc. (the "Company" or "Asante") designs, manufactures and
markets a broad family of 10BASE-T 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(TM), 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(TM) 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.
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". At October 2, 1999 and October 3, 1998, the Company did not hold
any short-term investments.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and accounts receivable.
Accounts receivable are typically unsecured and are derived from worldwide
distributor 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
37
2, 1999 and October 3, 1998, four customers accounted for 63%, and 49%,
respectively, of the accounts receivable balance. In fiscal 1999 and 1998, one
customer accounted for 44% and 33%, respectively, of the Company's sales. In
fiscal year 1997, sales to the Company's two largest distributors accounted for
44% of the Company's sales.
Sales as a percentage of net sales by geographic region were as follows:
1999 1998 1997
---- ---- ----
United States 76 % 78 % 82 %
Europe 18 14 10
Other 6 8 8
---- ---- ----
100 % 100 % 100 %
=== === ===
Substantially all of the Company's assets are located in the United States.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis), or market. Appropriate adjustments of the
inventory values are provided for slow moving and discontinued products based
upon future expected sales and committed inventory purchases.
Property and equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is based on the straight-line method for financial reporting purposes
over the estimated useful lives of the related assets, generally three to five
years. Equipment under capital leases is amortized over the shorter of its
estimated useful life or lease term and included in depreciation expense.
Loss due to write-off of idle assets
In fiscal 1999 the Company identified certain assets used for research and
development activities that were no longer being used and the Company had no
plans to use the assets in the foreseeable future. Accordingly, the assets were
removed from service and are currently held for resale. The Company recognized a
loss due to write-off of these idle assets of $425,000, which was charged to
research and development expense, being the previous classification of
depreciation expense arising from these assets. The loss reflects the difference
between the carrying value and the expected net proceeds from sale. The Company
estimated the net proceeds based on the market value of similar used equipment,
less the cost of disposal. In the event that a buyer can not be found the
equipment will be scrapped. The Company does not expect the net proceeds from
sale or the scrap value of the assets to be significant.
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived assets
based upon undiscounted cash flows and recognizes impairment from the carrying
value of long-lived assets, if any, based on the fair value of such assets.
38
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" and related interpretations in accounting for its
employee stock options and stock purchase plan. Pro forma information regarding
net income (loss) and net income (loss) per share is disclosed as required by
Statement of Financial Accounting Standards Statement No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123).
Fair value of financial instruments
The carrying amounts for certain of the Company's financial instruments, cash
equivalents, trade accounts receivable, receivable from related party, accounts
payable and capital lease obligations approximate fair value due to the
relatively short maturity of these instruments.
Comprehensive income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components as is effective
for period beginning after December 15, 1997. The Company had no items of other
comprehensive income during any of the periods presented.
Reclassifications
Certain previously reported amounts in the fiscal 1998 and 1997 statements of
operations have been reclassified to conform to the 1999 presentation.
Segment information
In June 1997 the FASB issued SFAS No. 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, geographical areas and major customers. In
accordance with provisions of SFAS No. 131, the Company determined that it does
not have separately reportable operating segments.
Recently issued accounting pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statements of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
39
accounting. The key criterion for hedge accounting is that the derivative must
be highly effective in achieving offsetting changes in fair value or cash flows
of the hedged items during the term of the hedge. The Company will adopt SFAS
No. 133 in fiscal year 2000. Although the Company can not determine the impact,
if any, that the adoption of SFAS No. 133 will have on its consolidated
financial statements, the Company believes that the effect on its financial
statements will be immaterial.
Note 2. Basic and Diluted Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with SFAS No. 128
"Earnings per Share" (SFAS No. 128). Basic net income (loss) per share is
computed by dividing net income (loss) available to common stockholders
(numerator) by the weighted-average number of common shares outstanding
(denominator) during the period. Diluted net income (loss) per share gives
effect to all dilutive potential common shares outstanding during the period
including stock options, using the treasury stock method. In computing diluted
net income (loss) per share, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise of
stock options.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the periods
presented below (in thousands, except per share data):
1999 1998 1997
----------- ----------- --------
Net income (loss) available to common shareholders $ (14,161) $ (14,435) 1,926
============ ============ ========
Weighted average common stock outstanding (basic) 9,282 9,206 8,992
Effect of dilutive warrants and options - - 210
----------- ----------- --------
Weighted average common stock outstanding (diluted) 9,282 9,206 9,202
=========== =========== ========
Net income (loss) per share:
Basic $ (1.53) $ (1.57) $ 0.21
=========== =========== ========
Diluted $ (1.53) $ (1.57) $ 0.21
=========== =========== ========
Diluted net income (loss) per share for the years ended October 2, 1999 and
October 3, 1998 excludes all dilutive potential common shares as their effect is
antidilutive. At October 2, 1999, October 3, 1998, and September 27, 1997,
options and warrants outstanding of 1,762,512, 1,584,539, and 1,127,606,
respectively, were excluded since their effect was antidilutive.
40
Note 3. Balance Sheet Components
1999 1998
---------- -----------
(in thousands)
Inventory:
Raw materials and component parts $ 177 $ 2,727
Work-in-process 173 604
Finished goods 2,313 4,342
--------- ---------
$ 2,663 $ 7,673
========= =========
Property and equipment:
Computers and R&D equipment $ 6,246 $ 7,632
Furniture and Fixtures 1,480 1,562
--------- ---------
7,726 9,194
Accumulated depreciation (7,013) (7,190)
--------- ------
$ 713 $ 2,004
========= =========
Accrued expenses:
Payroll-related expenses $ 1,227 $ 1,186
Sales promotion expenses 2,059 1,119
Warranty 572 572
Other 1,847 1,922
--------- ---------
$ 5,705 $ 4,799
========== =========
Note 4. Restructuring and Other Costs
During the third quarter of fiscal 1998, the Company restructured its operations
to re-establish the strategic direction of the Company and better align its
operating expenses with anticipated revenues. The Company's restructuring plan
included the realignment of cost structure designed to better position the
Company going forward.
The Company also recorded during the third quarter of fiscal 1998 a $400,000
reserve for personnel and related costs associated with a company-wide
restructuring plan. These costs include employee severance costs, benefits,
outplacement costs, termination costs, and employee assistance expenses related
to the realignment. The reduction in force consisted of a reduction of
approximately 40 employees, primarily from the sales and marketing departments.
As of October 2, 1999, the Company had utilized all of the restructuring
reserves recorded in fiscal 1998.
In addition, the Company recorded in fiscal 1998 charges of $550,000 for
inventory write-downs related to the discontinuation of several of the Company's
adapter card and transceiver products and $575,000 for write-downs related to
property and equipment and idle facilities costs. These charges were recorded in
cost of sales and general and administrative expenses, respectively.
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 13.6% of the Company's Common
41
Stock as of October 2, 1999. 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 2, 1999, the Company had firm purchase commitments under the OSE
Agreement of approximately $1.2 million.
For fiscal 1999, 1998, and 1997 the Company sold, at cost, approximately $0.8
million, $2.5 million, and $3.3 million, respectively, of component parts to OSE
and purchased $8.4 million, $8.2 million, and $16.8 million, respectively, of
goods from OSE. Amounts classified as "payable to stockholder" in the
accompanying balance sheets are solely related to the purchases of inventory
from OSE.
Note 6. Income Taxes
The provision for income taxes comprises the following (in thousands):
1999 1998 1997
--------- --------- --------
Current:
Federal $ - $ 1,008 $ 1,389
State - (136) 328
--------- --------- --------
Total current - (1,144) 1,717
--------- --------- --------
Deferred:
Federal - 2,689 (574)
State - 917 (60)
--------- --------- --------
Total Deferred - 3,606 (634)
--------- --------- --------
$ - $ 2,462 $ 1,083
========= ========= ========
Deferred tax assets, net, comprise the following at October 2, 1999 and October
3, 1998 (in thousands):
1999 1998
--------- ---------
Deferred tax assets :
Net operating losses $ 5,554 $ 2,643
Research and development credits 2,131 2,106
Receivable- and sales-related reserves 2,277 1,698
Inventory-related reserves 2,180 431
Compensation accruals 206 432
Depreciation 109 408
Other 1,478 967
--------- ---------
Total deferred tax assets 13,935 8,685
Valuation allowance (13,935) (8,685)
---------- ---------
$ - $ -
========== =========
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 2, 1999.
At October 2, 1999, the Company had federal and state net operating loss
carryforwards of approximately $14.8 million and approximately $9.7 million,
respectively, available to offset future taxable income which expire beginning
42
in 2018 and 2003, respectively. In addition, as of October 2, 1999, the Company
had approximately $1.3 million and approximately $0.8 million of federal and
state research and development credits, respectively. The federal credits will
expire beginning in 2012 if not utilized.
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period.
A reconciliation between the Company's income tax provision and the amount
computed by applying the statutory federal rate to income before taxes for the
recorded provisions follows (in thousands):
1999 1998 1997
---------- ---------- --------
Tax expense/(benefit) at U.S. statutory rate $ (4,815) $ (4,071) $ 1,023
State taxes, net of federal benefits (776) (537) 176
Research and development credits (25) (1,551) (264)
Other 366 (64) 148
Valuation allowance 5,250 8,685 -
---------- ----------- ----------
$ - $ 2,462 $ 1,083
========== =========== ==========
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 2, 1999 and
October 3, 1998, 67,000 shares and 15,500 shares, respectively, have been
repurchased for $117,000 and $28,000, respectively.
Stock Based Compensation Plans
As of October 2, 1999, the Company had four stock-based compensation plans that
are described below.
The 1990 Stock Option Plan allows for the issuance of options to Company
employees and consultants to purchase a maximum of 4,597,333 shares of common
stock.
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
43
Key Employees to purchase a maximum of 404,999 shares of common stock.
Individuals owning more than 10% of the Company's stock are not eligible to
participate in the above three Plans unless the exercise price of the option is
at least 110% of the fair market value of the common stock at the date of grant.
Incentive stock options issued to holders of less than 10% of the Company's
stock shall be issued at no less than fair market value per share on the date of
grant and with expirations not to exceed ten years from the grant date. Under
the terms of the Plans, options issued are granted at prices of 100% of the fair
market value of the common stock at the date of grant with expirations of ten
years from the date of grant. Initial options granted generally become vested
over a period of four years from the date of hire, commencing on the date one
year after the date of grant of the initial option. Unexercised options will
terminate three months after such Optionee's termination of all service with the
Company and its affiliates.
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 20, 1998.
Activity under the 1990 Stock Option Plan, Directors' Stock Option Plan and the
Key Executive Option Plan are summarized as follows:
1999 1998 1997
------------------------ ------------------------ --------------------------
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 1,584,539 $4.93 1,919,607 $5.72 1,955,786 $5.58
Granted 1,663,005 $1.45 743,010 $3.03 606,296 $5.81
Exercised - - (27,978) $4.61 (138,776) $3.81
Canceled (1,485,032) $4.48 (1,050,100) $5.08 (503,699) $5.80
----------- --------- -----------
Ending Balance 1,762,512 $2.03 1,584,539 $4.93 1,919,607 $5.72
=========== ========= =========
44
The following table summarizes information about stock options outstanding at
October 2, 1999:
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
------------------ -------------- -------------- ---------- ------------ ----------
$0.1650 - $0.8750 221,400 9.57 $0.8718 2,041 $0.5271
$0.9375 - $0.9375 209,320 9.81 $0.9375 206 $0.9375
$1.0320 - $1.0320 600,000 9.83 $1.0320 75,000 $1.0320
$1.8750 - $2.3443 179,716 8.94 $1.9052 57,086 $1.9086
$2.3750 - $2.5000 265,358 8.37 $2.4748 95,156 $2.4920
$3.8750 - $8.0000 286,718 5.77 $5.4714 260,286 $5.4595
$0.1650 - $8.0000 1,762,512 8.82 $2.0291 489,775 $3.7686
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 1999, 1998, and 1997, risk free interest rates ranging from
4.6% to 6.79% respective of grant date; expected average volatility of 57%, 67%,
and 60%, respectively; 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 1999, 1998, and 1997 was $0.73, $1.68, and $3.02, respectively.
In 1993, the Company adopted the Employee Stock Purchase Plan (the "Purchase
Plan") covering an aggregate of 500,000 shares of common stock. During Fiscal
1999 the Stockholders approved an amendment increasing the number of shares
available for issuance under the Purchase Plan by 100,000 shares. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the commencement
of the Purchase Plan. Employees who participate in the Purchase Plan can have up
to 10% of their earnings withheld and used to purchase shares of common stock on
specified dates as determined by the Board. The price of common stock purchased
under the Purchase Plan is equal to 85% of the lower of the fair market value of
the common stock determined by the closing price on the Nasdaq National Market
System, at the commencement date or the ending date of each six month offering
period.
Sales under the Purchase Plan in fiscal 1999, 1998, and 1997 were 82,380,
136,314, and 118,187 shares of common stock, respectively, at an average price
of $1.00, $2.27, and $3.85, respectively. On October 2, 1999, 143,600 shares of
common stock were available for future purchase.
The fair value of the employee's purchase rights under SFAS No. 123, which was
estimated using the Black-Scholes model with the following assumptions used for
grants during fiscal 1999, 1998, and 1997: risk free interest rates ranging from
4.55% to 6.40%, respective of commencement date of the offering period, expected
volatility of 57%, 60%, and 60%, respectively, 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 1999, 1998, and 1997
was $1.00, $2.27, and $3.85, respectively.
45
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 1999, 1998, and 1997 would have been as follows (in thousands, except per
share amounts):
1999 1998 1997
----------- ----------- --------
Net income (loss):
As reported $ (14,161) $ (14,435) $ 1,926
Pro forma $ (14,614) $ (15,433) $ 891
Net income (loss) per share
As reported
Basic $ (1.53) $ (1.57) $ 0.21
Diluted $ (1.53) $ (1.57) $ 0.21
Pro forma
Basic $ (1.57) $ (1.68) $ 0.10
Diluted $ (1.57) $ (1.68) $ 0.10
The pro forma amounts include compensation expense related to fiscal 1999, 1998,
and 1997 stock option grants and sales of common stock under the Purchase Plan
only. Such pro forma disclosures may not be representative of future
compensation cost because options vest over several years and additional grants
are made each year.
Note 8. Commitments and Contingencies
The Company has an operating lease for its main facility that expires on August
31, 2004. Various other leases for sales offices expire through 2001. Rent
expense under such operating leases aggregated approximately $970,800,
$1,012,000, and $912,000 for fiscal 1999, 1998, and 1997, respectively. Certain
leases require the Company to pay a portion of facility operating expenses.
Approximate future minimum lease payments under these leases at October 2, 1999,
are as follows (in thousands):
Year
----
2000 $ 1,114
2001 1,118
2002 1,101
2003 1,134
2004 1,068
---------
$ 5,535
=========
The Company recorded income of approximately $150,800, $226,200 and $217,000
during fiscal 1999, 1998 and 1997, respectively, under sublease agreements, the
last of which expired in June 1999. None of the Company's existing facilities
are being subleased.
46
Note 9. Litigation
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
On September 13, 1996, a complaint was filed by Datapoint Corporation against
the Company and six other companies individually and as purported
representatives of a defendant class of all manufacturers, vendors and users of
Fast Ethernet-compliant, dual protocol local-area network products, for alleged
infringement of United States letters Patent Nos. 5,077,732 and 5,008,879. The
complaint sought unspecified damages in excess of $75,000 and permanent
injunctive relief. The Company filed a response to the complaint denying
liability. The case was consolidated, for purposes of claim interpretation only,
with similar cases filed against several other defendants, which include, among
others, Intel Corporation, IBM Corporation, Cisco Systems, Bay Networks, and Sun
Microsystems. On April 16, 1998, the Special Master appointed by the court
issued a report agreeing in most material respects, with the defendants'
interpretation of the alleged patent claims. Subsequently, and by order dated
November 23, 1998, the District Court adopted without modification the findings
of the Special Master and the recommendations of the Magistrate Judge regarding
claim interpretation of the patents-in-suit. The Court ordered dismissal of the
case and entered judgment in favor of the defendants. Plaintiff has filed an
appeal of the judgment to the Federal Circuit Court of Appeal, which is now
pending. A ruling on the appeal is not expected until sometime next year.
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. On May 17, 1999, the Company attended a
mediation hearing with Plaintree, whereby an agreement for settlement was made.
As of July 3, 1999, all terms of the mediation settlement had been performed,
and the settlement amount was not material to the Company.
In September 1999 certain inventory having a cost of approximately $400,000 was
seized by the United States Customs for an alleged use of a counterfeit
certification mark. To contest the seizure, it is necessary for the Company to
either file an administrative petition or to challenge the matter in court. The
United States Attorney's Office is seeking the forfeiture of the merchandise,
and the Company intends to file a claim to challenge the forfeiture. It is the
Company's position that the use of this certification mark does not allow the
United States Customs to seize or forfeit the inventory. The Company also
expects the United States Customs to issue a penalty separate from the seizure
under 19 U.S.C. section 1526(f). This statute allows issuance of a penalty in
the amount of the retail value of the product had the product not been
counterfeit. The Company intends to contest such action through administrative
and/or judicial procedures.
47
Note 10. Subsequent Event
In October 1999, subsequent to the end of fiscal 1999, the Company obtained a
bank line of credit that provides for maximum borrowings of $5.0 million,
primarily limited to a certain percentage of eligible accounts receivable and
eligible inventory. Borrowings under the line of credit bear interest at the
bank's prime rate plus 2.0% to 2.75% dependent upon the Company's performance by
the end of the first quarter of fiscal 2000, and interest shall not be less than
$5,000 per month. Furthermore, borrowings are collateralized by inventory,
equipment, receivables, and bank balances. The Company's ability to borrow under
this line is subject to compliance with covenants related to financial
performance and condition. The line of credit expires on October 26, 2000.
Unaudited Quarterly Results of Operations (in thousands except net income (loss)
per share):
Fiscal 1999 Quarter Ended
- -------------------- --------------------------------------------------
October 2 July 3 April 3 January 2
--------- --------- ---------- ---------
Net sales $ 9,102 $ 7,914 $ 8,867 $ 11,605
Gross profit $ 3,108 $ (629) $ 1,000 $ 1,452
Net loss $ (432) $(4,641) $ (4,670) $ (4,418)
Net loss per share $ (.05) $ (.50) $ (.50) $ (.48)
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
48
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 1999 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 2,
1999.
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.
49
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 30 of
this Form 10-K.
(2) Financial Statement Schedules - See Index to Financial
Statements and Financial Statement Schedule at page 30 of
this Form 10-K.
(3) Exhibits - See Exhibit Index at page 50 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 2, 1999.
(c) See Exhibit Index at page 50 of this Form 10-K.
(d) See Index to Financial Statements, Financial Statements and
Financial Statement Schedule at page 30 of this Form 10-K.
50
EXHIBIT INDEX
Number Description of Document
2.1 Agreement and Plan of Merger between Registrant and Asante
Technologies, Inc., a California corporation, effective
October 12, 1993.(1)
3.1 Certificate of Incorporation of Registrant. (1)
3.1A Certificate of Amendment of Certificate of Incorporation of
Registrant. (1)
3.1B Certificate of Retirement of Stock of Registrant.
3.2 By Laws of Registrant. (1)
4.1 Form of Common Stock certificate.(1)
10.1* 1990 Stock Option Plan and form of Option Agreement.(1)
10.2* 1993 Directors' Stock Option Plan and form of Option
Agreement.(1)
10.3* 1993 Employee Stock Purchase Plan and form of
subscription agreement thereunder.(1)
10.4* Form of Key Executive Stock Plan Agreement.(1)
10.5 Form of Indemnification Agreement entered into between
Registrant and its directors and officers.(1)
10.6 Registration Rights Agreement dated July 10, 1992 between
Registrant and certain holders of Common Stock and Series E
Preferred Stock.(1)
10.7 Lease dated July 16, 1992 for facilities located at 821
Fox Lane in San Jose, California.(1)
10.8 Manufacturing Payment Agreement dated October 1, 1990
between Registrant and Orient Semiconductor Electronics,
Ltd.(1)
10.9 Distribution Agreement dated November 2, 1989 between
Registrant and Ingram Micro, Inc., as amended.(1)(2)
10.10 Distribution Agreement dated June 19, 1989 between
Registrant and Merisel, Inc. (formerly Macamerica), as
amended.(1)(2)
10.11 Distribution Agreement dated August 30, 1990 between
Registrant and TechData Corporation, as amended.(1)(2)
10.12 Volume Purchase Agreement dated April 15, 1992 between
Registrant and National Semiconductor Corporation.(1)(2)
10.13 Sublease agreement dated August 21, 1995 for facilities
located at 821 Fox Lane in San Jose, California, and
amendments pertaining thereto.(1)(2)
10.14 Extension of Sublease Agreement dated June 10, 1997.(2)
10.15 Distribution Agreement dated September 30, 1992 between
Registrant and MicroWarehouse.(4)
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
51
* The item listed is a compensatory plan.
(1) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-70300).
(2) Confidential treatment granted as to certain portions of these exhibits.
(3) Previously filed as an Exhibit to the Registrant's Form 10-K for the fiscal
year ended September 30, 1994.
(4) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 3, 1998.
52
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 31, 1999
ASANTE TECHNOLOGIES, INC.
By: /s/ WILSON WONG
----------------------
Wilson Wong,
President and
Chief Executive Officer
By: /s/ ANTHONY CONTOS
-----------------------
Anthony Contos
Vice President of
Finance and
Administration, and
Secretary
53
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wilson Wong and Anthony Contos, and each of them,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Dates
- -------------------------------------- ---------------------------------------------- ---------------------
/s/ WILSON WONG President, and Chief Executive Officer December 15, 1999
- --------------------------------------
(Wilson Wong) (Principal Executive Officer) and Director
/s/ ANTHONY CONTOS Vice President of Finance and Administration December 15, 1999
- --------------------------------------
(Anthony Contos) (Principal Finance and Accounting Officer)
/s/ MICHAEL KAUFMAN (Director) December 15, 1999
- --------------------------------------
(Michael Kaufman)
/s/ EDMOND TSENG (Director) December 15, 1999
- --------------------------------------
(Edmond Tseng)
/s/ JEFF YUAN KAI LIN (Director) December 15, 1999
- --------------------------------------
(Jeff Yuan Kai Lin)
54
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Asante Technologies, Inc.
Our audits of the financial statements referred to in our report dated November
4, 1999, 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
November 4, 1999
55
SCHEDULE II
ASANTE TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charge to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- --------------------------------------------------- ----------- ------------- ------------- ----------
Year ended September 27, 1997:
Allowance for doubtful accounts,
price protection and distributor rebates $ 2,157 $ 3,056 $ (1,896) $ 3,317
Allowance for sales returns 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 returns 1,405 (17) (229) 1,159
--------- --------- ---------- --------
$ 4,722 $ 3,391 $ (3,969) $ 4.144
========= ======== ========== ========
Year ended October 2, 1999:
Allowance for doubtful accounts,
price protection and distributor rebates $ 2,985 $ 3,128 $ (1,506) $ 4,607
Allowance for sales returns 1,159 927 (922) 1,164
--------- -------- ---------- --------
$ 4,144 $ 4,055 $ (2,428) $ 5,771
========= ======== ========== ========