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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 27, 2003
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to _______
COMMISSION FILE NUMBER 0-22632
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ASANTE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0200286
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
821 Fox Lane
San Jose, California 95131
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 435-8388
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
12, 2004, as reported on the OTC (Over-the-Counter) Bulletin Board, was
approximately $499,426. 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.
Indicated by check mark whether the Registrant is an accelerated filler (as
defined in Exchange Act Rule 12b-21). Yes____ No_X__
As of February 12, 2004, the Registrant had 10,163,302 shares of Common Stock
outstanding.
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TABLE OF CONTENTS
Page of
Report
PART I....................................................................................2
ITEM 1. BUSINESS..........................................................2
ITEM 2. PROPERTIES.......................................................13
ITEM 3. LEGAL PROCEEDINGS................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............14
PART II..................................................................................15
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS..............................................15
ITEM 6. SELECTED FINANCIAL DATA..........................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.............................................................29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................52
ITEM 9A. CONTROLS AND PROCEDURES..........................................52
PART III.................................................................................54
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............54
ITEM 11. EXECUTIVE COMPENSATION...........................................61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................67
PART IV..................................................................................68
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES...........................68
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.........................................................68
SIGNATURES...............................................................................71
i
Explanatory Note
On January 5, 2004, the Company filed an amendment to its Annual Report on Form
10-K (the "Form 10-K/A") for the fiscal year ended September 28, 2002 with the
Securities and Exchange Commission (the "SEC"). The Form 10-K/A includes
restated financial statements of Asante Technologies, Inc. as of September 28,
2002 and September 29, 2001 and for each of the three fiscal years in the period
ended September 28, 2002. For additional information regarding the restatement,
the reader should refer to the Form 10-K/A filed with the SEC.
Asante, FriendlyNET, IntraCore, IntraStack, IntraSwitch, NetStacker, AsanteTalk,
AsantePrint, FriendlyStack, AsanteFAST, GigaNix, and OpenView are registered
trademarks of Asante Technologies, Inc. Other product and brand names may be
trademarks or registered trademarks of their respective owners.
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.
Some of the statements contained in this Annual Report on Form 10-K are
forward-looking statements, including but not limited to those specifically
identified as such, that involve risks and uncertainties. The statements
contained in the Report on Form 10-K that are not purely historical are forward
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act, including, without limitation, statements
regarding our expectations, beliefs, intentions or strategies regarding the
future. All forward looking statements included in this Report on Form 10-K are
based on information available to us on the date hereof and we assume no
obligation to update any such forward-looking statements. These statements
involve known and unknown risks, uncertainties and other factors, which may
cause our actual results to differ materially from those implied by the
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," plans"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of these terms or other comparable terminology. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither any other person nor we assume responsibility
for the accuracy and completeness of such statements. Important factors that may
cause actual results to differ from expectations include those discussed in
"Factors Affecting Future Operating Results" beginning on page 23 in this
document.
PART I
ITEM 1. BUSINESS
Recent Acquisition Information
On June 13, 2003, the Company entered into an Agreement and Plan of Merger with
Oblique, Inc. ("Oblique") (the "Merger Agreement"), pursuant to which Asante
would be merged with and into Oblique, with Oblique being the surviving
corporation (the "Merger"). The Merger was conditioned upon, among other things,
approval by holders of Asante capital stock. The foregoing description of the
Merger does not purport to be complete and is qualified in its entirety by
reference to the complete text of the Merger Agreement, a copy of which was
filed with the SEC in June.
On June 13, 2003, Asante issued a press release, which was filed on June 23,
2003, with the Securities and Exchange Commission, announcing the execution of
the Merger Agreement.
On September 13, 2003, the Company terminated its Merger Agreement with Oblique,
Inc., and entered into a Letter of Intent with Acorn Campus, a venture capital
company. The offer by Acorn Campus was superior to the offer from Oblique, and
contained proven financing. However, without apparent cause, or reason, Acorn
sent a letter to Management on November 18, 2003, informing the Company of its
intent to withdraw its offer. Management is reviewing its alternatives,
including pursuing legal action against Acorn Campus for breach of contract.
Subsequent to the Company's fiscal year end, on December 18, 2003, the Company
signed a Letter of Intent with UNETEK, for the private investment of funds with
the Company for approximately $3.0 million. Additionally, on December 23, 2003,
the Company entered into a new, non-binding, Letter of Intent to merge with
Oblique, Inc. The Merger is conditioned upon, among other things, an expedited
due diligence period, and several other factors, including an expedited process
to arrive at a Definitive Merger Agreement with certain minimum acceptable terms
including a bridge funding of approximately $1.0 million. The Company plans on
proceeding with only one of these transactions, however, and the Board of
Directors is currently evaluating each of these proposals.
Overview
Founded in 1988, Asante Technologies, Inc. ("Asante" or the "Company") is a
leading provider of network solutions for small and medium-sized enterprises
(SME) and home offices (SOHO). The Company believes that it has been one of the
largest third-party providers of networking solutions for the Apple Macintosh
platform.
2
Asante's products are designed primarily for Ethernet local area networks (LAN).
Over the years, the speed of Ethernet has increased by 100X to 1000 Mbps. The
Company's key products are designed to function at speeds of 10/100/1000 Mbps to
maintain backwards compatibility with earlier Ethernet standards plus the newer
Gigabit Ethernet standard.
Another key technology, wireless LAN, is playing a larger role in connecting
computers and peripherals in the home and small businesses. Through 1993, the
most pervasive standard was the 11 Mbps 802.11b standard established by the IEEE
committee. As new wireless standards for higher speeds, security and management
become ratified, the Company expects customers to migrate some network
connections from Ethernet to variations of wireless 802.11.
In Fiscal 2003, the high-tech industry's networking sector continued to face a
significant slowdown in sales. This market-wide reduction in demand caused
prices to drop significantly as certain manufacturers attempted to reduce their
inventory levels at the expense of margins. Since the Company sells to many of
the same distributors and resellers, this price erosion has significantly
impacted the Company's business.
As the industry outlook improves, Asante anticipates many new business
opportunities that will leverage the Company's historical strengths. These
include:
o Increasing demand for digital content (including information, graphics,
photos, video, music and voice)
o Dramatic growth in storage and communications requirements as projects
move from CDs (with a capacity of 550-700 MB) to DVDs (4700-8500 MB)
o Continued growth in broadband Internet access
o Emerging use of Ethernet in new technologies in the office (printers,
storage) and home (consumer electronics, including game consoles and
personal video recorders)
As these technologies evolve, Asante's strategy is to capitalize on these trends
with a comprehensive product and service portfolio. The combination of
innovative technologies, strategic sales channels, and major account
partnerships provide the optimal environment for Asante's plans in the growing
SOHO and SME markets.
Innovative Technologies
In fiscal 2003, Asante began to see the return on its long-term investment in
multi-service networks to support converged, high-speed data, voice and video
networks. Major accounts began taking delivery on the company's Gigabit Ethernet
switches, adapters and routers. During the year, the Company's IntraCore and
FriendlyNET products received over a dozen favorable reviews by industry
analysts and publications.
3
Industry analysts anticipate a resurgence in the market for Ethernet and
wireless networking products. In January 2004, the Dell `Oro Group's Ethernet
Switch Market forecasted a 7% increase in the Ethernet switch market for 2004
and single-digit revenue growth through 2008 as the economy improves and IT
managers demand cost-effective new products.
The widespread availability of 802.11 wireless adapters, access points, routers
and notebook computers were the driving forces in this market. In-Stat/MDR
estimated a $1.7B market in 2003, up 140% from 2002. As Asante builds momentum
in this segment, analysts caution, "rapid price erosion is still a critical
factor in revenue growth within this market." Dell `Oro expects the wireless LAN
market in 2004 will grow to $2.2B. The Enterprise Wireless LAN segment is a
driving force, with a 20% CAGR and $1B revenues forecasted in 2008.
The proliferation of broadband technologies, combined with the availability of
affordable, feature-rich networking products, has influenced both commercial and
residential real estate and building developers to incorporate networking and
broadband infrastructure equipment at the developmental stage of new
construction. The Company's technology development group spends substantial
resources integrating many advanced features into its products to differentiate
its products and to offer features similar to those of larger networking
corporations. The Company pioneered integration of Internet technology into its
network products. The Company continues to incorporate these technologies into
its managed switches and Internet access products.
The market for Internet gateways continues to grow rapidly as home and small
business users migrate to broadband Internet. Factors driving this market
include home networking, awareness and digital content. In-Stat/MDR forecasted
an overall annual growth rate of 15.5% with units topping 880 million in 2007
for all Internet access devices.
Based on its technological expertise, the Company is well positioned to take
advantage of growing markets for all-in-one products to answer the needs of the
converged network for homes and small businesses. Additionally, the Company's
products are differentiated through its strong software expertise.
Strategic Sales Channels
Through expansion of its international distribution channels and a major
corporate effort to meet the needs of emerging Internet consumers, Asante
expects to grow its sales through strategic partners and businesses that sell
products and services on the Internet, while continuing to service traditional
retail channels that provide revenue and profit opportunities. In fiscal 2003,
the Company expanded its Value Added Reseller (VAR) program aimed at attracting
additional resellers to carry the Company's products--focusing on the Company's
IntraCore products and SOHO products by adding service to the more significant
VARs while ensuring that this new level of VARs can offer the service and
technical support that many of the Company's end user customers need. The
Company anticipates adding more IntraCore VARs specializing in the Company's key
focus markets: education, MTU/MDU, digital design and Internet Service Providers
(ISPs).
4
Strategic Partnerships
In fiscal 2003, the Company successfully continued its process of seeking
strategic partnerships designed to place the Company in a leadership position in
several areas. The Company continued its relationship with Apple Computer, Inc.,
National Semiconductor, Broadcom, SwitchCore and other technology partners.
Asante expects to continue its technology innovations with new networking
products being added to the Company's sales channels.
In addition, the Company is focusing its efforts on certain strategic business
and technical relationships to increase its strength and presence in the market
and to continue to introduce cutting-edge technologies.
Products
Asante offers a range of products from simple, personal connectivity to
sophisticated, enterprise-grade network management. The FriendlyNET brand is
targeted at consumers, home businesses and small business users. Each product is
optimized to deliver outstanding value with minimal complexities. The
FriendlyNET family includes network adapters, routers, hubs and switches for
Fast Ethernet (10/100 Mbps) and Gigabit Ethernet (1000 Mbps). The IntraCore
family consists of enterprise-grade Gigabit Ethernet switches that support Layer
2, Layer 3 and Layer 4 switching and routing.
Gigabit Ethernet Switches
During FY 2003, Asante focused on delivering a comprehensive Gigabit Ethernet
solution for a wide range of its customers. Anchored by the Company's flagship
IntraCore 35516 Series of Layer 2/3/4 switches, Asante completed its aggressive
plans to deliver a complete product offering.
At the core, the Company designed and shipped a powerful Layer 2/3/4 switch that
delivers advanced routing and quality of service (QoS) features to swiftly move
data, voice and video at speeds up to 1000 Mbps. Multi-layer packet
classification and advanced routing algorithms deliver information quickly and
efficiently. By segmenting a large network into multiple subnets, broadcast
traffic can be contained while limiting the security footprint. Customers
looking for campus-wide deployment found the IntraCore platform secure,
cost-effective and complete.
Beyond the core, the Company's IntraCore 35160 Series of Layer 2 switches are
the workhorse in numerous corporations and campuses. Replacing the lower-density
IC35120 with the 16-port IC35160, Asante provided a powerful switch family that
allowed Information Technology (IT) managers to drive Gigabit technologies to
workgroups, servers and some desktops. The integrated simple network management
protocol (SNMP) combined with web and Telnet services provide a wide range of
administration and oversight capabilities. Key features include
5
jumbo frame support to efficiently move large amounts of data, virtual LAN
(VLAN) support plus redundant power supply option.
For more cost-sensitive users with smaller networks, the Company's unmanaged
FriendlyNET GX5 Series switches are a good complement to the managed IntraCore
switches. The eight models in this family span the spectrum from 2 ports to 24
ports of Gigabit Ethernet. Asante's GigaNIX adapters for computers using the
Windows, Macintosh and Linux operating systems provide the necessary interface
to existing servers and desktop computers. In a move to make high-end features
more accessible to value-oriented users, future GX5 models will offer simplified
configuration using any standard web browser.
Wireless Internet Gateways and Adapters
With the rapid acceptance of wireless networking in home and small businesses,
Asante has introduced a number of products to seamlessly integrate wireless
networks with wired networks. The Company's AeroLAN adapters conform to standard
IEEE 802.11 standards for wireless networking. Earlier products used the 802.11b
standard with bandwidth up to 11 Mbps; later models introduced in late 2003 were
compatible with 802.11b and the newer 802.11g (54 Mbps) standards.
The Company anticipates expanding its wireless product portfolio with
enterprise-grade wireless LAN access points and switches. Some of the Company's
current IntraCore switches may be upgraded to provide 802.1X RADIUS
authentication, an enhanced security for wireless clients.
Internet Gateway Products (Routers)
The Company's FriendlyNET routers are designed for SOHO users who share a single
broadband connection among others in the same home or small office. Asante has
several routers, ranging from low-cost, entry-level to more sophisticated units
with virtual private network (VPN) and wireless capabilities.
Additional products with support for IEEE 802.11 wireless standards are planned
for release during 2004.
Personal Connectivity Products
In addition to Fast Ethernet and Gigabit Ethernet, the Company also offers
personal connectivity products that utilize the Universal Serial Bus (USB)
specification. Moving data at speeds ranging from 12 Mbps to 480 Mbps, these
desktop devices frequently connect a mouse, keyboard, video camera, digital
camera or memory card reader to a single desktop.
Asante offers USB 2.0-compliant hubs, adapters and digital memory card readers
for Windows and Macintosh users.
6
Technology
The Company's core strengths are attributed to its early dominance in the
Ethernet local area networking industry. By engineering custom chips, firmware,
software, and systems, Asante was able to bring feature-rich products to market
sooner than others.
The Company differentiates its products with advanced features, enhanced
usability, personalized technical support and an established sales channel. By
seeking technical and manufacturing partners, Asante is able to focus on product
design and development. In the coming year, the Company expects to grow its
IntraCore line with higher-density Gigabit Ethernet switches, security routers,
and enterprise-class wireless solutions.
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 to a significant number of educational
institutions; and third, through a number of Original Equipment Manufacturer
(OEM) customers and several large corporate customers.
Asante's major distributors are leading wholesale distributors of computer
products in North America. To supplement the efforts of these distributors
overseas, the Company has appointed international distributors for specific
territories. All of the Company's distributors are generally appointed on a
non-exclusive basis, however, the Company has appointed a master distributor in
China on an exclusive basis in order to build the Company's channel in China.
Fulfillment of products to e-commerce customers are typically handled through
the Company's distribution channel, or directly from the Company to customers
within the United States.
From time to time, the Company pursues OEM opportunities which it believes make
sense based on the Company's current business plan. These relationships may
typically cause fluctuations in the Company's business based on the Company's
ability to locate, or maintain various OEM opportunities and the ability of the
Company to offer cutting edge, cost effective technology of interest to its OEM
customers. The Company will continue to focus resources on obtaining additional,
cost effective agreements with larger OEM customers, although there can be no
assurance that such agreements will be obtained. OEM sales were fairly flat in
fiscal 2003, compared to fiscal 2002.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for approximately 18%, 20%, and 23% of the Company's net sales in
fiscal years 2003, 2002, and 2001, respectively. From fiscal 2002 to fiscal
2003, the Company experienced reduced sales in all three geographic regions due
to the economic downturn affecting a large portion of the world economy. Of
these decreases the greatest impact was in Europe where sales declined
approximately 34% due to factors similar to those encountered domestically.
Sales in Asia Pacific decreased slightly in fiscal 2003, compared to the prior
year due primarily to competition from Asian competitors and softness in demand
in Macintosh related products.
7
The Company intends to continue to introduce new products through its existing
distribution channels. The Company encourages the marketing efforts of its
distributors with cooperative advertising allowances and incentive-based rebates
and promotes its products and builds brand name recognition by trade
advertising, participation in industry trade shows, and other marketing efforts.
As of September 27, 2003, the Company supported the sales efforts of its
distributors with 14 direct sales and support related employees located
throughout the United States who promote the Company's products within assigned
territories and with 9 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. In fiscal 2002, the Company terminated its relationship with Tech Data
domestically on terms mutually agreed to by both parties. Although the Company
has increased its business with its other distributors, it does not believe it
has completely offset the loss of revenues from the cessation of business with
the aforementioned distributor, however the Company has taken steps to increase
its channels which it believes has benefited the Company during fiscal 2002 and
2003. A reduction in the sales effort by any of the Company's other major
distributors or the loss of any one of these distributors would have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that future sales by the Company's
distributors will remain at current levels or that the Company will be able to
retain its current distributors on terms that are commercially reasonable to the
Company. Although the Company believes, 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.
8
Although some prior products contained lifetime, or limited lifetime warranties,
most new products contain limited warranties ranging from one year to five
years. The lifetime and limited lifetime warranties exclude from coverage the
fan and power supply included with the Company's products, due to the shorter
life expectancy of these parts. The Company has not encountered material
warranty claims, although there can be no assurance that claims will not
increase substantially over time as a result of the change to a limited warranty
for a majority of the Company's products. Future warranty claims exceeding the
Company's reserves for warranty expense could have an adverse effect on the
Company's business, financial condition and results of operations. The Company
plans on reviewing its warranty policy as it brings new products to market to
offer its customers competitive policies while reducing its exposure to adverse
warranty claims.
Company warranties are limited to the Company's obligation to repair or replace
the defective product. The Company attempts to further limit its liability to
end-users through disclaimers of special, consequential and indirect damages and
similar provisions in its end-user warranty. However, no assurance can be given
that such limitations of liability will be legally enforceable.
Backlog
The Company generally ships products shortly after orders are received and
consequently maintains very little backlog. Accordingly, the Company does not
believe that its backlog as of any particular date is indicative of future
sales.
Engineering and Product Development
The markets for the Company's products continue to be characterized by rapidly
changing technology, evolving industry standards and frequent new product
introductions. Asante believes that maintaining its market position in the Apple
Macintosh connectivity market and expanding its presence in the multi-platform
market requires continuing investment to develop new products, enhance existing
products and reduce manufacturing costs.
As of September 27, 2003, the Company had 8 employees engaged in engineering and
product development. During the fiscal years 2003, 2002, and 2001, the Company's
engineering and product development expenses were approximately $2.1 million,
$2.6 million, and $2.8 million, respectively.
The Company continues to invest significant resources in engineering 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, beginning in fiscal 2003 and going forward, the Company intends to
focus additional efforts in the areas of embedded software design, development
of additional Layer 2-7 switches and other LAN-edge devices, WAN router
products, wireless, security, and one system integration. The Company will also
continue product development efforts to expand its Gigabit product offerings.
9
The Company believes its future success will depend upon its ability to enhance
and expand its existing product offerings and to develop in a timely manner new
products that achieve rapid market acceptance. Substantially all of the
Company's products are designed to provide connectivity to Ethernet LANs. If the
Company is unable, for technological or other reasons, to modify its products or
develop new products to support Fast Ethernet or Switched Ethernet technology,
or if Ethernet's importance declines as a result of alternative technologies,
the Company's business, financial condition and results of operations would be
materially and adversely affected. There can be no assurance that the Company
will be successful in developing and marketing enhanced or new products in a
timely manner, that those products will gain market acceptance, or that the
Company will be able to respond effectively to technological changes or new
industry standards.
Manufacturing and Suppliers
The Company's manufacturing operations consist primarily of managing its
materials and inventories, purchasing certain components, performing limited
final assembly of some products, and testing and performing quality control of
certain materials, components, subassemblies and systems. The Company
subcontracts substantially all of the assembly of its products. The
subcontractors include Orient Semiconductor Electronics, Ltd. ("OSE"), an
assembler of semiconductor and printed circuit boards based in Taiwan, Delta
Networks, Edimax and Cameo Communications, as well as other manufacturers based
in California, Taiwan and China. Both OSE and Delta are stockholders of Asante.
The Company believes that its quality control procedures and the quality
standards of its manufacturing partners have been instrumental in the high
performance and reliability of the Company's products. To date, customer returns
of the Company's products due to quality issues have not been material.
OSE and the Company's other subcontract manufacturers purchase or manufacture
most components, assemble printed circuit boards and test and package products
for Asante on a purchase order, turnkey basis. In fiscal 2003, the Company
purchased $0.1 million of goods from OSE and purchased $2.7 million of goods
from Delta Networks, Inc. (See Note 5 of Notes to Financial Statements). The
Company does not have a long-term supply agreement with any of its
subcontractors. If any one of these subcontractors experiences financial or
operational difficulties that result in a reduction or interruption in the
supply of products to the Company or otherwise fails to deliver products to the
Company on a timely basis, the Company would be required to procure sufficient
manufacturing services from alternative sources. The Company believes that
alternative manufacturers are available; however, the qualification of such
alternative sources and the commencement of volume manufacturing of the
Company's products could take a significant period of time. Accordingly, any
reduction or interruption of supply from its existing subcontractors would
materially and adversely affect the Company's business, financial condition and
results of operations. In addition, the use of OSE, Delta and other offshore
subcontractors subjects the Company to certain risks of conducting business
internationally, including changes in trade policy and regulatory requirements,
tariffs and other trade barriers and restrictions, and changes in the political
or economic environment in Taiwan and other countries where the Company's
subcontractors are located.
10
Although the Company generally uses standard parts and components for its
products, certain key components used in the Company's products are available
from only one source, and others are available from only a limited number of
sources. Components currently available from only one source include, among
others, custom integrated circuits used in the Company's intelligent hubs and
certain ASICs used in the Company's Gigabit switching products, as well as
ASIC's used in several of the Company's other products including its Print
Router products. The Company does not have a long-term supply agreement with any
of its suppliers. The Company believes that certain key components remain in
short supply and from time to time receives only limited allocations of these
products, which in prior years has caused shipping delays of one or more of the
Company's products. If the Company or any of its suppliers experience component
shortages in the future or any of its competitors have long-term supply
agreements under which it is possible for them to obtain greater supplies of
such components than the Company, the Company's business, financial condition
and results of operations could be materially and adversely affected. The
Company also relies on many of its 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 remain vigorous. 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 to continue. The current slowdown in the economy has served to magnify
the effects of the competitive pressures in the industry.
The Company competes with Cisco Systems, Nortel, 3Com, Intel, Netgear, Linksys,
and many smaller companies. Competition from these and other companies,
including new entrants, is expected to intensify, particularly in the SOHO,
workgroup, and departmental user markets. Many of the Company's competitors in
these markets are more established, enjoy significant name recognition and
possess far greater financial, technological and marketing resources than the
Company.
The Company believes the principal competitive factors in the departmental
connectivity market are brand name recognition, value for price, breadth of
product line, technical features, ease of product use, reliability, customer
support and the ability to develop and introduce new or enhanced products
rapidly. The Company believes that it has established itself as a supplier of
high quality, reliable products and, as a result, currently competes favorably
with respect to these factors. There can be no assurance, however, that the
Company will be able to compete successfully in the future against current or
future competitors, or that it will be able to adapt successfully to changes in
the market for its products. The Company's inability to compete successfully in
any respect or to respond timely to market demands or changes would have a
material adverse effect on the Company's business, financial condition and
results of operations.
11
In the Macintosh client access market, Apple(R) 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(R)
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(R) in connection with the Company's
product development efforts. Apple(R) 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(R) will not pursue a more aggressive strategy with respect to
competitive products, or in other ways attempt to make the sale of add-on
products by third party developers and vendors such as the Company more
difficult. If Apple(R) takes any of such actions, the Company's business,
financial condition and results of operations would be materially and adversely
affected. See Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company's sales to OEMs represented 8% and 9% of its total revenue in fiscal
2003 and fiscal 2002 respectively. 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 high
volume product 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 fairly flat as a
percentage of total revenue in fiscal 2004.
A significant percentage of the Company's sales in fiscal 2003 and fiscal 2002
were derived from products designed for use with Macintosh G series Computers,
Power PC, and iMAC computers. Sales of these products as a percentage of total
Company revenue, excluding OEM sales, have steadily declined over the last
several years due to Apple(R)'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(R)'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(R)'s business could have a
material adverse effect on sales of the Company's client access products, which
would materially and adversely affect the Company's business, financial
condition and results of operations. See Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Proprietary Rights
The Company is currently evaluating several domestic and foreign patent
applications relating to its software and systems technology. The Company is
currently filing renewals on several of its existing patents.
12
The Company has received in the past and may receive in the future
communications from third parties asserting intellectual property claims against
the Company. Claims made in the future could include assertions that the
Company's products infringe, or may infringe on the proprietary rights of third
parties or requests for indemnification against such infringement. There can be
no assurance that any claim will not result in litigation, which could involve
significant expense to the Company. If the Company is required or deems it
appropriate to obtain a license relating to one or more products or future
technologies, there can be no assurance that the Company would be able to do so
on commercially reasonable terms, or at all.
The Company relies on a combination of patents, trade secrets, copyright and
trademark law, nondisclosure agreements and technical measures to establish and
protect its proprietary rights in its products. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's technology is difficult,
and there can be no assurance that the measures being taken by the Company will
be successful. Moreover, the laws of some foreign countries do not protect the
Company's proprietary rights in its products to the same extent as do the laws
of the United States. See Item 3: Legal Proceedings.
Employees
As of September 27, 2003, the Company had 45 employees, including 8 in
engineering and product development, 9 in manufacturing operations, 18 in
marketing, sales and support services, and 10 in corporate administration. The
number reflects a decrease in all areas. In 2003, the Company reduced
approximately 29% of its regular and contractor headcount as part of its cost
reduction efforts.
The Company's success 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 a 44,700
square foot facility under a lease that expires on August 31, 2004, with an
option to extend for an additional five years. In fiscal 2002, the
13
Company closed its leased sales office in Oregon and moved its inside sales
activities into its San Jose location. The Company currently has a leased sales
office in Utah with an original lease expiration of January 2004. The Company
has recently signed a one-year lease extension on its Utah facility. The Company
believes that its existing facilities are more than adequate to meet its
requirements for the foreseeable future and believes that suitable additional or
substitute space will be available as needed. See Note 9 of Notes to Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights.
In September 1999, certain inventory having a cost of approximately $400,000 was
seized by the United States Customs for the alleged improper use of
certification marks owned by Underwriters Laboratories Inc. ("UL"). In March
2003, the US Attorney and the Company entered into a final settlement under
which the seized inventory was returned to the Company and the Company was
obligated to pay $57,000 and remove improper marks from the product.
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 2003.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock traded on the NASDAQ National Market System under the
trading symbol ASNT until September 30, 1999 at which time the Company's Common
Stock commenced trading on the Over-the-Counter (OTC) Bulletin Board under the
trading symbol ASNT.OB. Due to the restatement of fiscal 2002 and prior
financial statements, the Company was late in filing its fiscal 2003 10-K, and
therefore had been trading under the trading symbol ASNT.PK. Upon filing its
fiscal 2003 10-K, the Company expects its trading symbol to be ASNT.OB going
forward and for the foreseeable future.
The following table sets forth the high and low bid prices for the Company's
Common Stock for each quarter during the last two fiscal years. The quotations
set forth below reflect inter-dealer prices, without retail mark-up, mark-downs,
or commissions and may not represent actual transactions.
Fiscal 2003 High Low
- ---------------------------------------------------------------------
First quarter $ 2/16 $ 1/16
Second quarter $ 2/16 $ 1/16
Third quarter $ 5/16 $ 2/16
Fourth quarter $ 7/16 $ 4/16
Fiscal 2002 High Low
- ---------------------------------------------------------------------
First quarter $ 7/16 $ 3/16
Second quarter $ 3/8 $ 2/8
Third quarter $ 5/16 $ 3/16
Fourth quarter $ 3/16 $ 1/16
As of November 22, 2003, there were 98 stockholders of record of the Company's
Common Stock. This number does not include shares held in street name. 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
15
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.
Asante Equity Compensation Plan Information
As of September 27, 2003
Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
(a) (b) (c)
Equity compensation plans 54,400 (1) 0.4722 (1) 945,600 (1)
approved by security holders 195,000 (2) 1.0320 (2) 50,474 (2)
185,000 (3) 2.8242 (3) 0 (3)
1,036,793 (5) 1.2846 (5) 0 (5)
Equity compensation plans 20,150 (4) 0.8125 (4) 129,850 (4)
not approved by security
holders
Total 1,491,343 1,125,924
- ---------------------
(1) the 2001 Stock Option Plan
(2) the Key Executive Option Plan
(3) the 1993 Directors' Stock Option Plan
(4) the 2000 Non-Statutory Stock Option Plan
(5) the 1990 Stock Option Plan
ITEM 6. SELECTED FINANCIAL DATA
On January 5, 2004, the Company filed an amendment to its Form 10-K (the "Form
10-K/A") for the fiscal year ended September 28, 2002 with the SEC. The Form
10-K/A includes restated
16
financial statements of Asante Technologies, Inc. as of September 28, 2002 and
September 29, 2001 and for each of the three fiscal years in the period ended
September 28, 2002. The Five Year Financial Summary in this Item 6 includes the
effects of such restatement on fiscal 2002 and prior periods.
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company and the notes to the
financial statements included elsewhere in this Annual Report on Form 10-K
(In thousands, except per share data) Year ended
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Statement of Operations:
Net sales $ 12,008 $ 15,237 $ 21,732 $ 29,001 $ 39,555
Loss from operations $ (2,170) $ (2,219) $ (2,087) $ (517) $(10,638)
Net loss $ (2,245) $ (2,208) $ (1,859) $ (325) $(10,936)
Basic and diluted net loss per share $ (0.22) $ (0.22) $ (0.19) $ (0.03) $ (1.18)
Balance Sheet Data:
Working Capital $ 1,610 $ 3,811 $ 5,982 $ 7,660 $ 5,877
Total assets $ 4,662 $ 8,021 $ 10,711 $ 14,674 $ 15,332
Stockholders' equity $ 1,833 $ 4,073 $ 6,271 $ 8,088 $ 6,808
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion, other than the historical financial information, may consist of
forward-looking statements that involve risks and uncertainties, including
quarterly and yearly fluctuations in results, the timely availability of new
products, including switch products, the impact of competitive products and
pricing, and the other risks detailed from time to time in the Company's SEC
reports, including this report. These forward-looking statements speak only as
of the date 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.
17
Recent Developments
On January 5, 2004, the Company filed an amendment to its Annual Report on Form
10-K (the "Form 10-K/A") for the fiscal year ended September 28, 2002 with the
SEC. The Form 10-K/A includes restated financial statements of Asante
Technologies, Inc. as of September 28, 2002 and September 29, 2001 and for each
of the three fiscal years in the period ended September 28, 2002. For additional
information regarding the restatement the reader should refer to the Form 10-K/A
previously filed with the SEC.
Throughout the following Management's Discussion and Analysis of Financial
Condition and Results of Operations, all referenced amounts reflect the balances
and amounts on a restated basis.
Results of Operations
The following table sets forth certain selected financial information expressed
as a percentage of net sales for the fiscal years ended September 27, 2003,
September 28, 2002, and September 29, 2001, respectively:
2003 2002 2001
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 64.5 64.0 65.2
Gross profit 35.5 36.0 34.8
Operating expenses:
Sales and marketing 26.2 25.5 23.2
Research and development 17.4 16.7 12.7
General and administrative 9.7 8.4 8.5
----- ----- -----
Total operating expenses 53.3 50.6 44.4
----- ----- -----
Loss from operations (17.8) (14.6) (9.6)
Interest and other income (expense), net (0.6) 0.1 1.0
----- ----- -----
Loss before income taxes (18.4) (14.5) (8.6)
Provision (benefit) for income taxes -- -- --
Net loss (18.4)% (14.5)% (8.6)%
===== ===== =====
Net Sales
Net sales decreased 21.2% to $12.0 million in fiscal 2003, from $15.2 million in
fiscal 2002. Net sales were $21.7 million in fiscal 2001. The decrease in net
sales in fiscal 2003 compared to fiscal 2002, was due to several factors
including the continued economic downturn in the high tech industry and network
industry, heavy competitive pressures particularly for unmanaged products,
continued incorporation of Ethernet onto the motherboard of Apple's newer
computers and to a reduction in revenues in some previously stronger sales
channels in which the Company sells many of its products. During fiscal 2003,
sales of unmanaged products decreased across most existing product lines, except
for unmanaged Gigabit switch sales, which increased to $1.5
18
million from $0.8 million. In addition, a significant portion of the Company's
OEM sales were of unmanaged Gigabit products.
The decrease in net sales in fiscal 2002 compared to fiscal 2001 was due to
several factors including the economic downturn in the high tech industry.
Additionally, heavy competitive pressures for unmanaged 10/100 products
including cable/DSL routers and, to some extent, the continued incorporation of
Ethernet onto the motherboard of Apple's newer computers negatively affected the
Company's results. This continued incorporation of Ethernet onto the
motherboard, has caused a reduction in revenues and volume of product sold for
Apple specific applications. Mac(R) specific products are expected to comprise a
much smaller portion of the Company's revenues going forward. During fiscal
2002, the Company experienced a decrease in sales across most product lines,
except for Gigabit switch products, which increased both due to the recent
transition of some customers to Gigabit product and to sales of Gigabit product
to OEM and major customer accounts.
In fiscal 2003, 2002, and 2001, one customer, a US based distributor, accounted
for 33%, 40%, and 43%, respectively, of the Company's total sales.
International sales, primarily to customers in Europe, Canada and Asia Pacific,
accounted for 18%, 20%, and 23% of net sales in fiscal 2003, 2002, and 2001,
respectively. The reduction in international sales during fiscal 2003, compared
to fiscal 2002, was due primarily to financial issues related to one of the
Company's primary distributors in Germany and decreased sales in Canada.
International revenue as a percentage of net sales declined during fiscal 2002,
compared to fiscal 2001, due partially to the elimination of Merisel as a major
distributor in the US and Canada. The Company continues to believe there is
potential demand in certain of the Company's foreign target markets, including
broadband, digital media, and medical equipment providers. To that end, the
Company has focused its sales efforts in these areas to strengthen its channels.
However, there cannot be any assurance that its efforts will be successful.
The Company believes that the economic downturn beginning just prior to fiscal
2001, will continue during fiscal 2004, and that any improvement will be minor.
The Company's declines in revenues have been offset partially by increased sales
of the Company's managed and unmanaged Gigabit switches. 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
systems products and adapter cards as a percentage of total sales will continue
to decline in fiscal 2004. The Company has continued to focus on introducing
newer managed systems products such as its new IntraCore 35516 Layer 3/4+ and
35160 Layer 2/4 switches, which it believes should help offset the declines in
revenues of its older systems products. The Company will continue to focus on
those markets in which it believes it can increase its revenues and will
continue to seek to increase its OEM revenues, compared to fiscal 2002.
19
Cost of Sales and Gross Profit
Cost of sales in fiscal 2003 decreased by 20% to $7.7 million compared to $9.7
million in fiscal 2002 and $14.2 million in fiscal 2001. The decreasing cost of
sales generally reflect the decreased sales revenue.
The Company's gross profit as a percentage of net sales decreased marginally to
35.5% in fiscal 2003, from 36.0%, in fiscal 2002. The decrease in fiscal 2003,
compared to fiscal 2002 was due primarily to steep pricing declines of broadband
and wireless products during the year, which the Company was not completely
successful offsetting by reducing manufacturing costs. During fiscal 2003, sales
prices continued to be affected by heavy competitive pricing pressures and
reduced volumes for many of the Company's products. The Company has brought to
market and plans to continue to bring to market lower cost replacement products
and is focusing its product development efforts on introducing additional
unmanaged Gigabit products and managed IntraCore products to help offset those
products which are under the most significant margin pressure. The Company will
continue to take additional measures going forward to maintain its
competitiveness in the market place.
The increase in gross margin in fiscal 2002 compared to fiscal 2001, was
primarily due to reduced write downs of inventories due to tighter inventory
controls and successful cost reductions of a large portion of the Company's
products. During fiscal 2002, sales prices continued to be affected by heavy
competitive pricing pressures.
The Company will continue in its efforts to develop new products and decrease
its manufacturing costs faster than related declines in selling prices. If the
Company is unable to offset anticipated price declines in its products by
reducing its manufacturing costs and by introducing new products that gain
market acceptance, its business, financial condition and results of operations
will be materially and adversely affected.
Sales and Marketing
Sales and marketing expenses were $3.1 million in fiscal 2003 compared to $3.9
million in fiscal 2002, or a decrease of 20%. Fiscal 2002 sales and marketing
expenses decreased $1.2 million, or 23%, compared to $5.0 million in fiscal
2001. As a percentage of net sales, sales and marketing expenses were 26.2%,
25.5%, and 23.2%, in fiscal 2003, 2002, and 2001, respectively. The reduced
fiscal 2003 expenditures in absolute dollars and increase as of percentage of
sales reflect reduced sales levels during fiscal 2003 and reduced expenditures
for outside representative commissions, personnel related costs, co-operative
advertising, and trade advertising activities. The reduced fiscal 2002
expenditures as compared to fiscal 2001 primarily reflect reduced sales levels
and related sales based activity expenditures.
The Company expects that its sales and marketing expenses will remain at current
levels, or increase slightly in fiscal 2004 in absolute dollars. As a percent of
total sales, the Company believes these expenditures should decrease slightly
compared to fiscal 2003.
20
Research and Development
Research and development expenses decreased by 19% to $2.1 million in fiscal
2003, from $2.6 million in fiscal 2002. Research and development expenses were
$2.8 million in fiscal 2001. As a percentage of net sales, research and
development expenses were 17.7%, 16.7%, and 12.7%, in fiscal 2003, 2002, and
2001, respectively. The decrease in research and development expenses in
absolute dollars in fiscal 2003 compared to fiscal 2002 was due primarily to
decreases in personnel related expenditures as a result of salary and headcount
reductions implemented by the Company. The increase in research and development
expenses as a percentage of sales was due to the decline in revenue. The
decrease in research and development expenses from fiscal 2001 to fiscal 2002
was due to decreases in personnel related expenditures as a result of salary
reductions and lower depreciation expense during fiscal 2002.
The Company expects that spending on research and development in fiscal 2004
will remain fairly flat or decrease slightly in comparison to fiscal 2003 in
absolute dollars, while the Company continues to leverage the engineering
expertise of its strategic partners.
General and Administrative
General and administrative expenses decreased to $1.2 million in fiscal 2003
from $1.3 million in fiscal 2002. General and administrative expenses were $1.8
million in fiscal 2001. As a percentage of net sales, general and administrative
expenses were 9.7%, 8.4%, and 8.5% in fiscal years 2003, 2002, and 2001,
respectively. The decrease in general and administrative expenses in absolute
dollars in fiscal 2003 is primarily related to reduced personnel related
expenditures. The increase in general and administrative expenses as of
percentage of sales was due to the decline in revenue. The decrease in general
and administrative expenses in absolute dollars in fiscal 2002 compared to
fiscal 2001, was primarily related to reduced personnel related expenditures.
The Company expects that general and administrative expenses will remain
constant or decrease somewhat in fiscal 2004 in absolute dollars.
Off-Balance Sheet Arrangements
During fiscal year 2003 the Company did not engage in any off-balance sheet
arrangements as defined in Item 303 (a) (4) of the SEC's Regulation S-K.
Income Taxes
The Company recorded no provision or benefit for federal and state income taxes
for fiscal 2003, 2002, or 2001 due principally to the fact that the Company
incurred losses and a full valuation allowance was recorded against net
operating losses and other tax credits generated in those
21
years. The Company has recorded a full valuation allowance on its deferred tax
assets as it is more likely than not that these assets will not be realized.
Liquidity and Capital Resources
During fiscal 2003, the Company's operating activities used cash of $1.5
million. During fiscal 2002, the Company's operating activities used cash of
$1.7 million. During fiscal 2001, the Company's operating activities used cash
of $1.4 million.
During fiscal 2003, net cash used in operations resulted primarily from the
Company's net operating loss of $2.2 million and decreases in accounts payable
and accrued expenses of $1.0 million and $0.2 million, respectively. These uses
were offset primarily by decreases in accounts receivable and inventory of $1.1
million and $0.6 million, respectively.
During fiscal 2002, net cash used in operations resulted primarily from the
Company's net operating loss of $2.2 million, and a combined decrease in both
accounts payable and accrued expenses of $0.4 million. These uses were partially
offset by decreases of $0.3 million in each of accounts receivable, inventory,
and prepaid expenses. Days of sales outstanding in accounts receivable, net, was
53 at the end of fiscal 2003.
Net cash used in investing activities, including purchases of property and
equipment, in fiscal 2003, fiscal 2002 and fiscal 2001 was insignificant.
In fiscal 2003, fiscal 2002 and fiscal 2001, net cash provided by financing
activities was insignificant.
At September 27, 2003, the Company had cash and cash equivalents of $1.7 million
compared to $3.3 million at September 28, 2002, which represents a 48% decline.
Working capital was $1.6 million at September 27, 2003, compared to $3.8 million
at September 28, 2002.
The Company has a bank line of credit that provides for maximum borrowings of up
to $2.0 million and is limited to a certain percentage (60%) of eligible
accounts receivable. The Company has not drawn on this line of credit. The line
of credit is subject to certain covenant requirements, including maintaining
certain net tangible worth amounts. The line of credit agreement was set to
expire in November 2003. However, the parties entered into an amendment to
extend the line of credit term to January 31, 2004 during which time the Company
negotiated a renewal of the line of credit with the bank. On February 11, 2004,
the line of credit was renewed with a new maturity date of January 30, 2005. As
of February 11, 2004, approximately $500,000 was available on this line of
credit and the Company was in compliance with the covenants of the line of
credit agreement.
On September 30, 1999, the Company's stock ceased to be traded on the NASDAQ
National Market System and was moved to the Over-The-Counter (OTC) Bulletin
Board. During fiscal 2000, the Company successfully completed a $1.5 million
private placement of 500,000 shares
22
of common stock, however the Company's access to further equity financing could
be affected by the level of the Company's share price and the Company's listing
status.
The Company has an operating lease for its main facility that expires on August
31, 2004. Future minimum lease payments under all leases at September 27, 2003
are as follows (in thousands):
Year
----
2004 821
2005 9
-----
$ 830
The Company operates in a highly competitive market characterized by rapidly
changing technology, together with competitors and distributors that have
significantly greater financial resources than Asante.
For the fiscal year ended September 27, 2003, the Company recorded a loss from
operations of $2.2. million and cash used in operating activities was $1.5
million. In the fiscal years 2002 and 2001, the Company also incurred
substantial losses and negative cash flows from operations. As of September 27,
2003, the Company had an accumulated deficit of $26.6 million. Based upon the
Company's operating budget and cash flow projections the Company expects to
continue to experience negative cash flows from operations through fiscal year
2004.
The Company is currently pursuing additional equity financing and has renewed
its line of credit agreement through January 30, 2005. The Company is also
considering other corporate transactions as a means of providing additional
financing. Failure to raise additional capital, secure other sources of
financing or enter into a corporate transaction in the near-term would have a
material adverse effect on the Company's ability to achieve its intended
business objectives and raises substantial doubt about its ability to continue
as a going concern.
Factors Affecting Future Operating Results
The Company operates in a rapidly changing industry, which is characterized by
intense competition from both established companies and start-up companies. The
market for the Company's products is extremely competitive both as to price and
capabilities. The Company's success depends in part on its ability to enhance
existing products and introduce new technology products. This requires the
Company to accurately predict future technology trends and preferences. The
Company must also bring its products to market at competitive price levels.
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.
23
The industry is also dependent to a large extent on proprietary intellectual
property rights. From time to time the Company is subject to legal proceedings
and claims in the ordinary course of business, including claims of alleged
infringement of patents, trademarks and other intellectual property rights.
Consequently, from time to time, the Company will be required to prosecute or
defend against alleged infringements of such rights.
The Company's success also depends to a significant extent upon the
contributions of key sales, marketing, engineering, manufacturing, and
administrative employees, and on the Company's ability to attract and retain
highly qualified personnel, who are in great demand. None of the Company's key
employees are subject to a non-competition agreement with the Company. High
employee turnover in the technology industry is typical. Although the Company
has reduced its workforce during fiscal 2002 and fiscal 2003, vacancies in the
workforce must be promptly filled, because the loss of current key employees or
the Company's inability to attract and retain other qualified employees in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's current manufacturing and sales structure is particularly subject
to various risks associated with international operations including changes in
costs of labor and materials, reliability of sources of supply and general
economic conditions in foreign countries. Unexpected changes in foreign
manufacturing or sources of supply, and changes in the availability, capability
or pricing of foreign suppliers could adversely affect the Company's business,
financial condition and results of operations. The networking industry and
technology markets in general continue to adjust to a widespread reduction in
demand for products due to financial problems experienced by many Internet
Service Provider's (ISP's), and the failure of many Internet companies. The
duration, or long-term effect on the Company's operations is difficult to
measure, but the inability to alter its strategic markets, or react properly to
this slowdown could have an adverse effect on the Company's financial position.
The 10/100 Mbps and 100 Mbps Ethernet technology (100BASE-T, or "Fast-Ethernet")
has become a standard networking topology in the networking and computer
industries. This standard has been adopted widely by end-user customers because
of its ability to increase the efficiency of LANs and because of its ease of
integration into existing 10BASE-T networks. Over the years, the speed of
Ethernet has increased by 100X to 1000 Mbps. The company's key products are
designed to function at speeds of 10/100/1000 Mbps to maintain backwards
compatibility with earlier Ethernet standards plus the newer Gigabit Ethernet
standard. In addition, Gigabit (1000BASE-T, or 1000Mbps) Ethernet technology is
increasingly being adopted in the backbone of large enterprises and educational
institutions. In that regard, the Company's future operating results may be
dependent on the market acceptance and the rate of adoption of these
technologies, as well as timely product releases. There can be no assurance that
the market will accept, adopt, or continue to use this new technology or that
the Company can meet market demand in a timely manner.
The Company's success will depend in part on its ability to accurately forecast
its future sales due to the lead time required to order components and assemble
products. If the Company's
24
product sales forecasts are below actual product demand, there may be delays in
fulfilling product orders; consequently, the Company could lose current and
future sales to competitors. Alternatively, if the Company's product sales
forecasts are above actual product demand, this may result in excess orders of
components or assembled products and a build-up of inventory that would
adversely affect working capital.
The Company commits to expense levels, including manufacturing costs and
advertising and promotional programs, based in part on expectations of future
net sales levels. If future net sales levels in a particular quarter do not meet
the Company's expectations or the Company does not bring new products timely to
market, the Company may not be able to reduce or reallocate such expense levels
on a timely basis, which could adversely affect the Company's operating results
and cash position. There can be no assurance that the Company will be able to
achieve profitability on a quarterly or annual basis in the future.
The Company's target markets include end-users, value-added resellers, systems
integrators, retailers, education, Multiple Tenant Unit/Multiple Dwelling Unit
(MTU/MDU) providers, and OEMs. Due to the relative size of the customers in some
of these markets, particularly the OEM market, sales in any one market could
fluctuate dramatically on a quarter to quarter basis. Fluctuations in the OEM
market could materially adversely affect the Company's business, financial
condition and results of operations. Additionally, the Company's revenues and
results of operations could be adversely affected if the Company were to lose
certain key distribution partners.
The Company has incurred net losses during its last three fiscal years and has
an accumulated deficit at September 27, 2003 of $26.6 million. These recurring
losses and accumulated deficit raise substantial doubts about the Company's
ability to continue as a going concern. The Company is currently pursuing
additional equity financing and has renewed its line of credit agreement that
expired January 31, 2004. The Company is also considering other corporate
transactions as a means of providing additional financing. The Company believes
it must be current with its filings with the Securities and Exchange Commission
at the earliest opportunity to complete such a transaction. Failure to raise
additional capital, secure other sources of financing or enter into a corporate
transaction would have a material adverse effect on the Company's ability to
achieve its intended business objectives and sustain its desired levels of
operation.
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 by the Company or its
competitors, changes in product pricing, material costs or customer discounts,
the size and timing of customer orders, distributor and end-user purchasing
cycles, fluctuations in channel inventory levels, variations in the mix of
product sales, manufacturing delays or disruptions in sources of supply, the
current economic downturn and seasonal purchasing patterns specific to the
computer and networking industries. The Company's future operating results will
depend, to a large extent, on its ability to anticipate and
25
successfully react to these and other factors. Failure to anticipate and
successfully react to these and other factors could adversely affect the
Company's business, financial condition and results of operations.
In addition to the above, the Company is also susceptible to other factors that
generally affect the market for stocks of technology companies. These factors
could affect the price of the Company's stock and could cause such stock prices
to fluctuate over relatively short periods of time.
Due to the time required to determine the restated balances included in the
Company's recent Amended Annual Report on Form 10-K (Form 10-K/A) for the fiscal
year ended September 28, 2002 which included a restatement of each of the three
fiscal years then ended, the Company recently filed its Form 10-Q for the period
ended June 28, 2003 on January 28, 2004. The Company believes that once it files
this report on Form 10-K and its Form 10-Q for the quarter ended December 27,
2003, it will be current in its SEC filings and in compliance with the OTCBB
listing requirements. However, the Company has no assurances this would occur
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon Asante Technologies, Inc. financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management bases estimates and judgments on historical experience and on various
other factors that are believed to be reasonable under the circumstances; the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from these estimates under
different assumptions or conditions. Management believes the following critical
accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its financial statements.
Revenue Recognition. The Company recognizes revenue net of estimated product
returns, expected payments to resellers for customer programs including
cooperative advertising and marketing development funds, volume rebates, and
special pricing programs. Product returns are provided for at the time revenue
is recognized, based on historical return rates, at what stage the product is in
its expected life cycle, and assumptions regarding the rate of sell-through to
end users from our various channels, which again, is based on historical
sell-through rates. Should these product lives vary significantly from our
estimates, or should a particular selling channel experience a higher than
estimated return rate, or a slower sell-through rate causing inventory build-up,
then our estimated returns, which net against revenue, may need to be revised.
Reductions to revenue for expected and actual payments to resellers for
cooperative advertising and marketing development funds, volume rebates and
pricing protection are based on actual expenses incurred during the period and
on estimates for what is due to resellers for estimated credits earned during
the period. If market conditions were to decline, the Company may take
26
action to increase promotional programs resulting in incremental reductions in
revenue at the time the incentive is offered based on our estimate of inventory
in the channel that is subject to such pricing actions.
Accounts Receivable. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of our customers should deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Inventory. The Company records write-downs for estimated excess and obsolete
inventory based on projected future shipments using historical selling rates,
and taking into account market conditions, inventory on-hand, purchase
commitments, product development plans and life expectancy, and competitive
factors. If markets for the Company's products and corresponding demand were to
decline, then additional write-downs may be deemed necessary.
Warranty. The Company provides for the estimated cost of warranties at the time
revenue is recognized. Should actual failure rates and material usage differ
from our estimates, revisions to the warranty obligation may be required.
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of EITF Issue No.
00-21 will have on its results of operations, financial condition and cash
flows.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires certain guarantees to be recorded at fair value and requires a
guarantor to make disclosures, even when the likelihood of making any payments
under the guarantee is remote. For those guarantees and indemnifications that do
not fall within initial recognition and measurement requirements of FIN 45, the
Company must continue to monitor the conditions that are subject to the
guarantees and indemnifications, as required under existing generally accepted
accounting principles, to identify if a loss has been incurred. If the Company
determines that it is probable that a loss has been incurred, any such estimable
loss would be recognized. The initial recognition and measurement requirements
do not apply to the Company's product warranties or to the provisions contained
in the majority of the Company's software license agreements that indemnify
licensees of the Company's software from damages and costs resulting from claims
alleging that the Company's software infringes the intellectual property rights
of a third party. The Company has adopted the provisions of FIN 45 for the
fiscal year ended September 27, 2003.
27
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. However, in October
2003, the FASB deferred the effective date of FIN 46 to the end of the first
interim or annual period ending after December 15, 2003 for those arrangements
entered into prior to February 1, 2003. In December 2003, the FASB further
deferred the effective date of FIN 46 to the end of the first interim or annual
reporting period ending after March 15, 2004 for those non-special purpose
entity arrangements created prior to February 1, 2003. The Company believes that
the adoption of this standard will have no material impact on its financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. In particular, this
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. This Statement is generally effective for contracts entered into
or modified after June 30, 2003 and is not expected to have a material impact on
the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The new Statement requires that
those instruments be classified as liabilities in statements of financial
position. This statement is effective for interim periods beginning after June
15, 2003. The Company does not expect that the adoption of SFAS 150 will have a
material effect on its financial position.
In December 2003, the Financial Accounting Standard Board issued SFAS No. 132
(Revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits. This Statement amends Statements No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions. However,
the Statement does not change the recognition and measurement requirements of
those Statements. This Statement retains the disclosure requirements contained
in SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces and requires additional disclosure. Additional new
disclosure includes actual mix of plan assets by category, a description of
investment strategies and policies used, a
28
narrative description of the basis for determining the overall expected
long-term rate of return on asset assumption and aggregate expected
contributions. The Company does not expect that the adoption of SFAS 132 will
have a material affect on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. As of September 27, 2003, the Company's cash and investment
portfolio did not include fixed-income securities. Due to the short-term nature
of the Company's investment portfolio, an immediate 10% increase or decrease in
interest rates would not have a material effect on the fair market value of the
Company's portfolio. Since the Company has the ability to liquidate this
portfolio, it does not expect its operating results or cash flows to be
materially affected to any significant degree by the effect of a sudden change
in market interest rates on its investment portfolio.
Foreign Currency Exchange Risk. All of the Company's sales are denominated in
U.S. dollars, and as a result the Company has little exposure to foreign
currency exchange risk. The effect of an immediate 10% increase or decrease in
exchange rates would not have a material impact on the Company's future
operating results or cash flows.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Financial Statements:
Report of Independent Registered Public Accounting Firm 31
Report of Independent Accountants 32
Balance Sheets at September 27, 2003 and September 28, 2002 33
Statements of Operations for the years ended September 27, 2003,
September 28, 2002 and September 29, 2001 34
Statements of Stockholders' Equity for the years ended
September 27, 2003, September 28, 2002, and September 29, 2001 35
Statements of Cash Flows for the years ended September 27, 2003,
September 28, 2002 and September 29, 2001 36
Notes to Financial Statements 37
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 63
All other schedules are omitted because they are not required, are not
applicable or the information is included in the financial statements and notes
thereto.
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
January 26, 2004, except for Note 7,
which is as of February 11, 2004
The Board of Directors and Stockholders of
Asante Technologies, Inc.
We have audited the accompanying balance sheet of Asante Technologies, Inc. at
September 27, 2003, and the related statements of operations, stockholders'
equity, and cash flows for the fiscal year then ended. Our audit also included
the accompanying financial statement schedule for the fiscal year ended
September 27, 2003. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the financial position of Asante Technologies, Inc. at
September 27, 2003, and the results of its operations and its cash flows for the
fiscal year then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, based on our
audit, the financial statement schedule referred to in the first paragraph of
our report, presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has suffered recurring operating losses and negative cash flows from operations,
and has an accumulated deficit that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ODENBERG, ULLAKKO, MURANISHI & CO. LLP
San Francisco, California
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Asante Technologies, Inc.
In our opinion, the financial statements listed in the accompanying index under
Item 8 present fairly, in all material respects, the financial position of
Asante Technologies, Inc. at September 28, 2002, and the results of its
operations and its cash flows for each of the two years in the period ended
September 28, 2002 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index under Item 8 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has suffered recurring losses and negative cash flows from operations, and has
an accumulated deficit which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
November 1, 2002, except for Note 10,
as to which the date is March 13, 2003,
Note 7, as to which the date is November 30, 2003
and Note 1, as to which the date is
December 30, 2003
32
ASANTE TECHNOLOGIES, INC
BALANCE SHEETS
(In thousands, except share and per share amounts)
September 27, September 28,
2003 2002
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 1,723 $ 3,282
Accounts receivable, net of allowance for doubtful accounts,
rebates and sales returns of $1,196 and $1,770 in 2003
and 2002, respectively 1,759 2,821
Inventory 930 1,515
Prepaid expenses and other current assets 27 141
-------- --------
Total current assets 4,439 7,759
Property and equipment, net 51 90
Other assets 172 172
-------- --------
Total assets $ 4,662 $ 8,021
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,050 $ 2,016
Accrued expenses 1,779 1,932
-------- --------
Total current liabilities 2,829 3,948
-------- --------
Commitments (Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued or outstanding in 2003 and 2002 -- --
Common stock, $0.001 par value; 25,000,000 shares authorized;
10,149,521 and 10,066,020 shares issued and outstanding in
2003 and 2002, respectively 10 10
Additional paid-in capital 28,417 28,412
Accumulated deficit (26,594) (24,349)
-------- --------
Total stockholders' equity 1,833 4,073
-------- --------
Total liabilities and stockholders' equity $ 4,662 $ 8,021
======== ========
The accompanying notes are an integral part of these financial statements.
33
ASANTE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Fiscal Year Ended
----------------------------------------------------------
September 27, September 28, September 29,
2003 2002 2001
-------- -------- --------
Net sales $ 12,008 $ 15,237 $ 21,732
Cost of sales 7,757 9,750 14,177
-------- -------- --------
Gross profit 4,251 5,487 7,555
-------- -------- --------
Operating expenses:
Sales and marketing 3,154 3,873 5,040
Research and development 2,099 2,552 2,756
General and administrative 1,168 1,281 1,846
-------- -------- --------
Total operating expenses 6,421 7,706 9,642
-------- -------- --------
Loss from operations (2,170) (2,219) (2,087)
Interest and other income (expense), net (75) 11 228
-------- -------- --------
Net loss $ (2,245) $ (2,208) $ (1,859)
======== ======== ========
Basic and diluted loss per share $ (0.22) $ (0.22) $ (0.19)
======== ======== ========
Shares used in per share calculation
Basic and diluted 10,138 10,024 9,948
======== ======== ========
The accompanying notes are an integral part of these financial statements
34
ASANTE TECHNOLOGIES, INC
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Common Stock Additional
-------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- ---------- ---------- ---------- ----------
Balances as of September 30, 2000, 9,912,463 $ 10 $ 28,360 $ (20,282) $ 8,088
Common stock issued under stock plans 90,718 -- 42 -- 42
Net loss -- -- -- (1,859) (1,859)
---------- ---------- ---------- ---------- ----------
Balances as of September 29, 2001 10,003,181 10 28,402 (22,141) 6,271
Common stock issued under stock plans 62,839 -- 10 -- 10
Net loss -- -- -- (2,208) (2,208)
---------- ---------- ---------- ---------- ----------
Balances as of September 28, 2002 10,066,020 10 28,412 (24,349) 4,073
Common stock issued under stock plans 83,501 -- 5 -- 5
Net loss -- -- -- (2,245) (2,245)
---------- ---------- ---------- ---------- ----------
Balances as of September 27, 2003 10,149,521 $ 10 $ 28,417 $ (26,594) $ 1,833
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
35
ASANTE TECHNOLOGIES, INC
STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year ended
----------------------------------------------
September 27, September 28, September 29,
2003 2002 2001
------- ------- -------
Cash flows from operating activities:
Net loss $(2,245) $(2,208) $(1,859)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 56 88 184
Provision for doubtful accounts receivable,
rebates and sales returns 1,257 939 1,010
Changes in operating assets and liabilities:
Accounts receivable (196) (651) 696
Inventory 585 333 627
Prepaid expenses and other current assets 114 259 123
Accounts payable (968) (171) (1,178)
Accrued expenses (152) (313) (646)
Payable to stockholder -- (8) (322)
------- ------- -------
Net cash used in operating activities (1,547) (1,732) (1,365)
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (17) (61) (40)
Other -- -- (5)
------- ------- -------
Net cash used in investing activities (17) (61) (45)
------- ------- -------
Cash flows from financing activities:
Issuance of common stock 5 10 42
------- ------- -------
Net cash provided by financing activities 5 10 42
------- ------- -------
Net decrease in cash and cash equivalents (1,559) (1,783) (1,368)
Cash and cash equivalents at beginning of fiscal year 3,282 5,065 6,433
------- ------- -------
Cash and cash equivalents at end of fiscal year $ 1,723 $ 3,282 $ 5,065
======= ======= =======
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, 100BASE-T ("Fast Ethernet") and 1000BASE-T
(Gigabit Ethernet) network and connectivity products. Asante's client access
products (which include adapter cards and media access adapters) connect PCs,
Macintoshes, iMAC's and peripheral devices (such as printers) to Ethernet
networks. The Company's network system products, which include intelligent and
non-intelligent switches, hubs, bridge modules, internet access devices
(routers), and network management software for Macintoshes and PCs, interconnect
users within and between departmental networks.
The Company operates in a highly competitive market characterized by rapidly
changing technology, together with competitors and distributors that have
significantly greater financial resources than Asante.
For the fiscal year ended September 27, 2003, the Company incurred a loss from
operations of $2.2 million and cash used in operating activities was $1.5
million. In fiscal years 2002 and 2001, the Company also incurred substantial
operating losses and negative cash flows from operations. As of September 27,
2003, the Company had an accumulated deficit of $26.6 million. Based upon the
Company's operating budget and cash flow projections, the Company expects to
continue to experience negative cash flows from operations through fiscal year
2004.
At September 27, 2003, the Company had cash and cash equivalents of $1.7 million
compared to $3.3 million at September 28, 2002, which represents a 48% decline.
Working capital was $1.6 million at September 27, 2003, compared to $3.8 million
at September 28, 2002. On February 11, 2004, the Company renewed its bank line
of credit agreement which pr