10-Q 1 p16630_10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 28, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to__________ Commission file number: 0-22632 ASANTE TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0200286 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 821 Fox Lane San Jose, CA 95131 (Address of principal executive offices, including zip code) Registrant's Telephone No., including area code: (408) 435-8388 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X As of December 28, 2002 there were 10,066,020 shares of the Registrant's Common Stock outstanding. ASANTE TECHNOLOGIES, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. Item 1: Financial Statements: Unaudited Condensed Balance Sheets - December 28, 2002 and September 28, 2002 3 Unaudited Condensed Statements of Operations - Three months ended December 28, 2002 and December 29, 2001 4 Unaudited Condensed Statements of Cash Flows - Three months ended December 28, 2002 and December 29, 2001 5 Notes to Unaudited Condensed Financial Statements 6-11 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 12-18 Item 3: Quantitative and Qualitative Disclosures About Market Risk 18-19 Item 4: Controls and Procedures 19 PART II. OTHER INFORMATION Item 1: Legal Proceedings 20 Item 4: Submission of Matters to a Vote of Security Holders 20 Item 5: Other Information 20 Item 6: Exhibits and Reports on Form 8-K 20 Signature 21 2 PART I. Financial Information Item 1. Financial Statements Asante Technologies, Inc. Condensed Balance Sheets (in thousands) (unaudited) December 28, September 28, 2002 2002 -------- -------- Assets Current assets: Cash and cash equivalents $ 3,021 $ 3,282 Accounts receivable, net 2,092 1,558 Inventory 1,123 1,515 Prepaid expenses and other current assets 150 141 -------- -------- Total current assets 6,386 6,496 Property and equipment, net 89 90 Other assets 172 172 -------- -------- Total assets $ 6,647 $ 6,758 ======== ======== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 2,338 $ 2,291 Accrued expenses 3,985 3,834 -------- -------- Total current liabilities 6,323 6,125 -------- -------- Stockholders' equity: Common stock 28,422 28,422 Accumulated deficit (28,098) (27,789) -------- -------- Total stockholders' equity 324 633 -------- -------- Total liabilities and stockholders' equity $ 6,647 $ 6,758 ======== ======== The accompanying notes are an integral part of these financial statements 3 Asante Technologies, Inc. Unaudited Condensed Statements of Operations (in thousands, except per share data) Asante Technologies, Inc. Condensed Statements of Operations (in thousands, except per share data) (unaudited) Three months ended, December 28, December 29, 2002 2001 -------- -------- Net sales $ 3,834 $ 3,859 Cost of sales 2,387 2,549 -------- -------- Gross profit 1,447 1,310 -------- -------- Operating expenses: Sales and marketing 898 1,041 Research and development 555 690 General and administrative 295 363 -------- -------- Total operating expenses 1,748 2,094 -------- -------- Loss from operations (301) (784) Interest and other income (expense), net (8) 28 -------- -------- Loss before income taxes (309) (756) Provision for income taxes -- -- -------- -------- Net loss $ (309) $ (756) ======== ======== Basic and diluted net loss per share $ (0.03) $ (0.08) ======== ======== Shares used in per share calculation: Basic 10,066 10,003 ======== ======== Diluted 10,066 10,003 ======== ======== The accompanying notes are an integral part of these financial statements 4 Asante Technologies, Inc. Unaudited Condensed Statements of Cash Flows (in thousands) ASANTE TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

Three ~~months~~Months ~~ended~~Ended ~~Nine months ended~~ --------------------------- -----~~----------------------~~ ~~June~~December 2928, ~~June~~December ~~30, June~~ 29, ~~June 30,~~ 2002 2001 ~~2002 2001~~ -------- -------- ~~--------~~Cash ~~--------~~flows from operating activities: Net ~~sales~~loss $ ~~4,052~~(309) $ ~~4,919~~(756) $Adjustments ~~11,866~~to $reconcile ~~16,887~~net ~~Cost~~loss ofto ~~sales~~net ~~2,625~~cash ~~3,221~~provided ~~7,692~~by ~~10,858~~(used ~~--------~~in) ~~--------~~operating ~~--------~~activities: ~~--------~~Depreciation ~~Gross~~and ~~profit~~amortization ~~1,427~~18 ~~1,698~~26 ~~4,174~~Provision ~~6,029~~for ~~--------~~doubtful ~~--------~~accounts receivable 48 --~~------~~ Loss due to write-~~-------~~off ~~Operating~~of ~~expenses:~~idle ~~Sales~~assets Changes in operating assets and ~~marketing~~liabilities: ~~973~~Accounts ~~1,234~~receivable ~~2,928~~(582) ~~3,809~~831 ~~Research~~Inventory 392 (244) Prepaid expenses and ~~development~~other ~~634~~current ~~703~~assets ~~1,953~~(9) ~~2,050~~12 ~~General~~Accounts ~~and~~payable ~~administrative~~47 ~~318~~210 ~~359~~Accrued ~~1,023~~expenses ~~1,119~~and ~~--------~~other ~~--------~~151 53 -------- -------- ~~Total~~Net ~~operating~~cash ~~expenses~~provided ~~1,925~~by ~~2,296~~(used ~~5,904~~in) ~~6,978~~operating ~~--------~~activities ~~--------~~(244) 132 -------- -------- ~~Loss~~Cash flows from ~~operations~~investing ~~(498)~~activities: ~~(598)~~Purchases ~~(1,730)~~of ~~(949)~~property ~~Interest~~ and ~~other~~equipment ~~income,~~(17) ~~net~~ (5) 41Other ~~15 126~~ --~~------~~ ~~--------~~(2) -------- -------- ~~Loss~~Net ~~before~~cash ~~income~~used ~~taxes~~in ~~(493)~~investing ~~(557)~~activities (~~1,715~~17) (~~823~~7) -------- -------- ~~-------- --------~~ Net ~~loss~~increase $ (~~493~~decrease) $in ~~(557)~~cash $and ~~(1,715)~~cash $equivalents (~~823~~261) ~~========~~125 ~~========~~Cash ~~======== ======== Basic~~ and ~~diluted~~cash ~~net~~equivalents ~~loss~~at ~~per~~beginning ~~share~~of $period ~~(0.05)~~3,282 $5,065 ~~(0.06)~~------- $------- ~~(0.17)~~Cash ~~$ (0.08) ======== ======== ======== ======== Weighted average common shares~~ and cash equivalents ~~outstanding:~~at ~~Basic~~end ~~and~~of ~~diluted~~period ~~10,024~~$ 93,~~969~~021 ~~10,015~~$ 95,~~938~~190 ======== =======~~= ======== ========~~

The accompanying notes are an integral part of these financial statements 5 ASANTE TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS Note 1. Interim Condensed Financial Statements The unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the financial position, operating results and cash flows for those periods presented. These unaudited condensed financial statements should be read in conjunction with the financial statements and notes thereto for the year ended September 28, 2002, included in the Company's 2002 Annual Report on Form 10-K. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. Note 2. Basic and Diluted Net Loss Per Share Basic net loss per share is computed by dividing net loss available to common stockholders (numerator) by the weighted-average number of common shares outstanding (denominator) during the period. Diluted net loss per share gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method. In computing diluted net loss per share, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options. 6 The following is a reconciliation of the numerators and denominators of the basic and diluted net loss per share computations for the periods presented below (in thousands, except per share data):

Three Months Ended ~~Nine~~December ~~Months Ended ------------------------ ------------------------ June 29~~28, ~~June~~December ~~30, June~~ 29, ~~June 30,~~ 2002 2001 ~~2002 2001~~ -------- ---~~-----~~ --------- -~~------~~ Net loss $ (~~493~~309) $ (~~557~~756) ~~$ (1,715) $ (823)~~ ======== ===~~=====~~ ========= =~~======~~ Weighted average common stock outstanding (basic) 10,~~024~~066 ~~9,969~~ 10,~~015~~003 ~~9,938~~Effect ~~Dilutive effect~~ of dilutive warrants and options -- -- -- -- -------- -------- --~~-------~~ ~~-------~~ Weighted average common stock outstanding (diluted) 10,~~024~~066 ~~9,969~~ 10,~~015~~003 ~~9,938~~ ======== ===~~=====~~ ========= =~~======~~ Net loss per share: Basic $ (0.0503) $ (0.~~06) $ (0.17) $ (0.~~08) ======== ===~~=====~~ ========= =~~======~~ Diluted $ (0.0503) $ (0.~~06) $ (0.17) $ (0.~~08) ======== ===~~=====~~ ========= =~~======~~

At December 28, 2002, and December 29, 2001, options and warrants outstanding of 1,718,929 and 1,585,551, respectively, were excluded since their effect was antidilutive. Note 3. Comprehensive Income (Loss) The Company had no items of other comprehensive income (loss) during any of the periods presented, and, accordingly, net loss was equal to comprehensive loss for all periods presented. Note 4. Inventory Inventory is stated at the lower of standard cost, which approximates actual cost (on a first-in, first-out basis), or market. Adjustments of the inventory values are provided for slow moving and discontinued products based upon future expected sales and committed inventory purchases. Inventories consisted of the following (in thousands): December 28, September 28, 2002 2002 ---------- ---------- Raw materials and component parts $ 206 $ 193 Work-in-process 27 54 Finished goods 890 1,268 ---------- ---------- $ 1,123 $ 1,515 ========== ========== 7 Note 5. Warranties On product sales we provide for estimated future warranty costs upon product shipment. The specific terms and conditions of those warranties vary depending upon the product sold and country in which we do business. In the case of hardware manufactured by our sub-contract manufacturers, our warranties generally start from the delivery date and continue as follows: Product Warranty Periods ------- ---------------- Managed switches Three to five years Unmanaged Gigabit Switches, Gigabit Adapters One to five years Unmanaged switches, hubs, USB hubs, routers, fiber One to five years Other - Adapters One to five years AsantePrint and AsanteTalk print routers, Gig cables Limited Lifetime Longer warranty periods are provided on a limited basis including some "lifetime" warranties on some of the Company's older legacy products. From time to time, some of the Company's products may be manufactured to customer specifications and their acceptance is based on meeting those specifications. We historically have experienced minimal warranty costs related to these products. Factors that affect our warranty liability include the number of shipped units, historical experience and management's judgment regarding anticipated rates of warranty claims and cost per claim. We assess the adequacy of our recorded warranty liabilities every quarter and make adjustments to the liability if necessary. Changes in our warranty liability, which is included as a component of "Accrued expenses" on the Condensed Balance Sheet, during the period are as follows (in thousands): Balance as of September 28, 2002 $ 469 Provision for warranty liability for sales made during the quarter ended December 28, 2002 86 Settlements made during the quarter ended December 28, 2002 (86) ----- Balance as of December 28, 2002 $ 469 ----- Note 6. Bank Borrowings On December 31, 2002, the Company renewed its bank line of credit which provides for maximum borrowings of $2.0 million, and is limited to a certain percentage of eligible accounts receivable. No borrowings have been made under the line-of-credit agreement. The line of credit is available through November 2003 and is subject to certain covenant requirements. As of December 28, 2002, the Company was in compliance with the covenants under its line of credit agreement. Note 7. Income Taxes The Company has recorded no provision or benefit for federal and state income taxes for the periods ended December 28, 2002 and December 29, 2001, due primarily to a valuation allowance being established against the Company's net deferred tax assets, which consist primarily of net operating loss carryforwards and research and development credits. The Company has recorded a full valuation allowance against its net deferred tax assets as sufficient uncertainty exists regarding their recoverability. Note 8. Litigation From time to time the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks and other intellectual property rights. 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"). It is the Company's position that the alleged improper use was simply a mistake or error. The Company may obtain the return of the inventory through settlement negotiations with either the United States Customs or United States Attorney's Office, obtaining permission from UL to use the certification marks, or being successful in trial 8 proceedings. To contest the seizure, the Company determined to seek a review with the United States Attorney's Office and filed a claim for the inventory. It is now incumbent upon the United States Attorney's Office to file in court seeking forfeiture of the inventory and to allow the Company, as claimant, to challenge such proceeding. The Company also expects that the United States Customs may issue a penalty separate from the seizure under 19 U.S.C. section 1526(f), which provides for a penalty ranging in amount from the retail value of the seized inventory had the inventory been UL approved, to twice the retail value. The Company asserts this is a first time offense. For a first time offense, the United States Customs may mitigate the penalties when challenged administratively, with such mitigation being as low as 10% of the value of the inventory. The Company intends to contest any penalty action through administrative and/or judicial procedures. Despite a recent federal case which upheld the US. Customs authority to seize and penalize for improper use of the UL certification mark, the U.S. Attorney has stated that he would still consider settlement of the Company's case due to factual differences. On December 4, 2002, the Company and it's attorneys met with the Assistant United States Attorney handling the seizure case for the Department of Justice and were informed that a formal case of forfeiture was likely to be filed against the products unless the U.S. Customs accepted the previously proffered settlement. The US Attorney has offered a settlement of the dispute. The Company has countered the offer for settlement, but has not received notification of the final resolution. Due to the long amount of time the case has been outstanding, the Company believes that the final settlement will not exceed $75,000. Note 9. Recently Issued Accounting Pronouncements In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45 ("FIN45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The company believes that the adoption of this standard will have no material impact on its financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company plans to continue to account for employee stock options in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting For Stock Issued To Employees". The company believes that the adoption of this standard will have no material impact on its financial statements. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The company believes that the adoption of this standard will have no material impact on its financial statements. 9 Note 10. Segment Information The Company has determined that it does not have separately reportable operating segments. Sales as a percent of total sales by geographic region for the first three months of each fiscal year are as follows: 2002 2001 ---- ---- United States 83% 78% Europe 11% 14% Other 6% 8% Substantially all of the Company's assets are located in the United States of America. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion, other than the historical financial information, may consist of forward-looking statements that involve risks and uncertainties, including quarterly fluctuations in results, the timely availability of new products, including new switch products, the impact of competitive products and pricing, and the other risks set forth from time to time in the Company's SEC filings, including this report on Form 10-Q for the three months ended December 28, 2002, and the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 2002. These forward looking statements speak only as of the date thereof and should not be given undue reliance. Actual results may vary significantly from those projected. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. RESULTS OF OPERATIONS Net sales for the first quarter of fiscal 2003 were $3.8 million, a decrease of $0.1 million, or 1%, from net sales of $3.9 million for the first quarter of fiscal 2002. Sales of the Company's products continued to be negatively impacted by the ongoing economic slowdown affecting the industry, a continued reduction in unit volume sales of network adapter products to Apple Computer specific platforms due to Apple's continued incorporation of Ethernet onto the motherboard of their new systems, and heavy competitive pressures negatively impacting selling prices of networking products. Sales continued to be negatively affected across substantially all of the Company's product lines, however, these declines were partially offset by an increase in sales of the Company's IntraCore(TM) managed products and sales of original equipment manufacturers (OEM) products. During the quarter, the Company introduced several products including a new Internet router, and its new 16-port, Layer 2/4 Gigabit switch. OEM sales for the first quarter of fiscal 2003 were approximately $0.4 million, compared to OEM sales in the first quarter of fiscal 2002 of $0.3 million. One customer, a distributor, accounted for 48% and 40% of the Company's total sales in the first quarter of fiscal 2003 and 2002, respectively. International sales, primarily to customers in Europe, Canada and Asia Pacific, accounted for approximately 17% of net sales for the first quarter of fiscal 2003. This percentage compares to 22% for the first quarter of fiscal 2002. The decrease in international sales for the first quarter of fiscal 2003 as compared to fiscal 2002 was due primarily to the continuing economic downturn in the international market, the discontinuation of one of the Company's primary distributors in Canada, and increased pricing pressures from Asian networking companies. The Company's gross profit as a percentage of net sales increased to 38% for the first quarter of fiscal 2003 as compared to 34% for the same period in fiscal 2002. This increase was due primarily to increased sales of the Company's managed switches and reduced reserves for inventory obsolescence. Sales and marketing expenses decreased by $0.1 million, or 14%, to $0.9 million in the first quarter of fiscal 2003 compared to $1.0 million in the first quarter of fiscal 2002. As a percentage of sales, these expenses were 23% in the first quarter of fiscal 2003, compared with 27% in the first quarter of fiscal 2002, respectively. The lower sales and marketing expenditures were due primarily to decreases in personnel and related costs, and reduced reserves for bad debts. The Company believes that sales and marketing expenses overall will remain approximately flat for the remainder of fiscal 2003. Research and development expenses decreased by $0.1 million, or 19%, to $0.6 million in the first quarter of fiscal 2003 compared to $0.7 million in the first quarter of fiscal 2002. As a percentage of sales, these expenses were 14% in the first quarter of fiscal 2003, compared with 18% in the first quarter of fiscal 2002. The decreases were due primarily to lower non-recurring engineering related costs, and reduced overhead and personnel related costs. The Company expects that future spending on research and development will remain flat in absolute dollars for the remainder of fiscal 2003. General and administrative expenses decreased by $0.1 million, or 19%, to $0.3 million in the first quarter of fiscal 2003 compared to $0.4 million in the first quarter of fiscal 2002. As a percentage of net sales, these expenses were 8% for the first quarter of fiscal 2003, as compared with 9% for the first quarter of fiscal 2002. The decrease was primarily due to the Company continuing its executive salary reduction program during this quarter. The Company expects that general and administrative spending will remain constant or decrease slightly for the remainder of fiscal 2003. 11 For the first quarter ended December 28, 2002, the Company recorded a loss from operations of $309,000, compared to a loss of $756,000 for the first quarter of fiscal 2002. While net sales were similar, a reduction of $346,000, or 17%, in total operating expenses for the first quarter of fiscal 2003 resulted in the reduced loss for the current quarter as compared to the first quarter of fiscal 2002. Income Taxes The Company has recorded no provision or benefit for federal and state income taxes for the periods ended December 28, 2002 and December 29, 2001, due primarily to a valuation allowance being established against the Company's net deferred tax assets which consist primarily of net operating loss carry-forwards and research and development credits. The Company has recorded a full valuation allowance against its net deferred tax assets as sufficient uncertainty exists regarding their recoverability. Liquidity and Capital Resources Net cash used in operating activities was $0.2 million for the three months ended December 28, 2002, compared to cash provided of $0.1 million for the three months ended December 29, 2001. During the first three months of fiscal 2003, the net cash used in operating activities resulted primarily from the Company's net loss and an increase in accounts receivable of $0.6 million. These cash outflows were partially offset by net cash inflows from reduced inventory of approximately $0.4 million, and increased accrued expenses of $0.2 million. Net cash used in investing activities for the first three months of fiscal 2003 and fiscal 2002 was insignificant. In December 2002, the Company renewed its bank line of credit that provides for maximum borrowings of $2.0 million, and is limited to a certain percentage of eligible accounts receivable. The Company has not drawn on this line of credit. The line of credit is available through November 2003 and is subject to certain covenant requirements. As of December 28, 2002, the Company was in compliance with the covenants under its line of credit agreement. The Company has an operating lease for its main facility that expires on August 31, 2004. Future minimum lease payments under this lease at December 28, 2002 are as follows (in thousands): Year ---- 2003 749 2004 909 -------- $ 1,658 ======== In the first quarter of fiscal 2003, fiscal years 2002 and 2001, the Company incurred net losses and negative cash flows from operations and as of December 28, 2002, the Company had an accumulated deficit of $28 million. Based upon the Company's operating budget and cash flow projections the Company expects to continue to experience negative cash flows from operations through fiscal year 2003. The Company anticipates that its existing cash and its ability to borrow under its line of credit will be sufficient to meet its working capital and operating expense requirements at least through September 30, 2003. The Company's expectations as to its cash flows, and as to future cash balances, are subject to a number of assumptions, including assumptions regarding anticipated revenues, customer purchasing and payment patterns, and improvements in general economic conditions, many of which are beyond the Company's control. If revenues do not match projections and if losses exceed the Company's expectations, the Company will implement cost saving initiatives in order to preserve cash. If the Company experiences a decrease in demand for it's products from the level experienced during fiscal year 2002, then it would need to reduce expenditures to a greater degree than anticipated, or raise additional funds if possible. The Company operates in a highly competitive market characterized by rapidly changing technology, together with competitors and distributors that have significantly greater financial resources than the Company. The Company intends to incur significant expenses to develop and promote new products as well as to support existing product sales. Failure to generate sufficient revenues from new and existing products, or reduce discretionary expenditures would have a material adverse effect on the Company's ability to continue as a going concern and achieve its intended business objectives. 12 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. The industry is also dependent to a large extent on proprietary intellectual property rights. From time to time the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of patents, trademarks and other intellectual property rights. Consequently, from time to time, the Company will be required to prosecute or defend against alleged infringements of such rights. The Company's success also depends to a significant extent upon the contributions of key sales, marketing, engineering, manufacturing, and administrative employees, and on the Company's ability to attract and retain highly qualified personnel, who are in great demand. None of the Company's key employees are subject to a non-competition agreement with the Company. High employee turnover in the technology industry is typical. Although the Company has reduced its workforce during fiscal 2002 and in the first quarter of fiscal 2003, vacancies in the workforce must be promptly filled, because the loss of current key employees or the Company's inability to attract and retain other qualified employees in the future could have a material adverse effect on the Company's business, financial condition and results of operations. The job market in the San Francisco Bay Area is characterized by significant competition, rapidly changing salary structures, and a need for very specialized experience. These conditions could affect the Company's ability to retain and recruit a sufficiently qualified workforce. The Company's current manufacturing structure is particularly subject to various risks associated with its use of offshore contract manufacturers including changes in costs of labor and materials, reliability of sources of supply and general economic conditions in foreign countries. Unexpected changes in foreign manufacturing or sources of supply, and changes in the availability, capability or pricing of foreign suppliers could adversely affect the Company's business, financial condition and results of operations. The networking industry and technology markets in general continue to adjust to a widespread reduction in demand for products due to financial problems experienced by many Internet Service Provider's (ISP's), and the failure of many Internet companies. The duration, or long-term effect on the Company's operations is difficult to measure, but the inability to alter its strategic markets, or react properly to this slowdown could have an adverse effect on the Company's financial position. The 10/100 Mbps and 100 Mbps Ethernet technology (100BASE-T, or "Fast-Ethernet") has become a standard networking topology in the networking and computer industries. This standard has been adopted widely by end-user customers because of its ability to increase the efficiency of LANs and because of its ease of integration into existing 10BASE-T networks. Because of the importance of this standard, the Company has focused its ongoing research and development activities on introducing future products incorporating 100BASE-T technology. The Company realizes the importance of bringing more 10/100BASE-T (10 Mbps) switching and 100BASE-T switching to market in order to complement its existing 100BASE-T shared products. In addition, Gigabit (1000BASE-T, or 1000Mbps) Ethernet technology is increasingly being adopted in the backbone of large enterprises and educational institutions. In that regard, the Company's future operating results may be dependent on the market acceptance and the rate of adoption of these technologies, as well as timely product releases. There can be no assurance that the market will accept, adopt, or continue to use this new technology or that the Company can meet market demand in a timely manner. The Company's success will depend in part on its ability to accurately forecast its future sales due to the lead time required to order components and assemble products. If the Company's product sales forecasts are below actual product demand, there may be delays in fulfilling product orders; consequently, the Company could lose current and future sales to competitors. Alternatively, if the Company's product sales forecasts are above actual product demand, this may result in excess orders of components or assembled products and a build-up of inventory that would adversely affect working capital. The Company 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 13 dramatically on a quarter to quarter basis. Fluctuations in the OEM market could materially adversely affect the Company's business, financial condition and results of operations. Additionally, the Company's revenues and results of operations could be adversely affected, if the Company were to lose certain key distribution partners. In summary, the Company's net sales and operating results in any particular quarter may fluctuate as a result of a number of factors, including competition in the markets for the Company's products, delays in new product introductions by the Company, market acceptance of new products incorporating 100BASE-T by the Company or its competitors, changes in product pricing, material costs or customer discounts, the size and timing of customer orders, distributor and end-user purchasing cycles, fluctuations in channel inventory levels, variations in the mix of product sales, manufacturing delays or disruptions in sources of supply, the current economic downturn and seasonal purchasing patterns specific to the computer and networking industries. The Company's future operating results will depend, to a large extent, on its ability to anticipate and successfully react to these and other factors. Failure to anticipate and successfully react to these and other factors could adversely affect the Company's business, financial condition and results of operations. In addition to the above, the Company is also susceptible to other factors that generally affect the market for stocks of technology companies. These factors could affect the price of the Company's stock and could cause such stock price to fluctuate over relatively short periods of time. 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 is based on historical sell-through rates. Should these product lives vary significantly from our estimates, or should a particular selling channel experience a higher than estimated return rate, or a slower sell-through rate causing inventory build-up, then our estimated returns, which net against revenue, may need to be revised. Reductions to revenue for expected and actual payments to resellers for volume rebates and pricing protection are based on actual expenses incurred during the period and on estimates for what is due to resellers for estimated credits earned during the period. If market conditions were to decline, the Company may take action to increase promotional programs resulting in incremental reductions in revenue at the time the incentive is offered based on our estimate of inventory in the channel that is subject to such pricing actions. Accounts Receivable. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from our customers. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of our customers should deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory. The Company maintains reserves for estimated excess and obsolete inventory based on projected future shipments using historical selling rates, and taking into account market conditions, inventory on-hand, purchase commitments, product development plans and life expectancy, and competitive factors. If markets for the Company's products and corresponding demand were to decline, then additional reserves may be deemed necessary. Warranty. The Company provides for the estimated cost of warranties at the time revenue is recognized. Should actual failure rates and material usage differ from our estimates, revisions to the warranty obligation may be required. Recent Accounting Pronouncements In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45 ("FIN45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance 14 of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company believes that the adoption of this standard will have no material impact on its financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company plans to continue to account for employee stock options in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting For Stock Issued To Employees". The Company believes that the adoption of this standard will have no material impact on its financial statements. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes that the adoption of this standard will have no material impact on its financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk. As of December 28, 2002, the Company's cash and investment portfolio did not include fixed-income securities. Due to the short-term nature of the Company's investment portfolio, an immediate 10% increase or decrease in interest rates would not have a material effect on the fair market value of the Company's portfolio. Since the Company has the ability to liquidate this portfolio, it does not expect its operating results or cash flows to be materially affected to any significant degree by the effect of a sudden change in market interest rates on its investment portfolio. Foreign Currency Exchange Risk. All of the Company's sales are denominated in U.S. dollars, and as a result the Company has little exposure to foreign currency exchange risk. The effect of an immediate 10% change in exchange rates would not have a material impact on the Company's future operating results or cash flows. Item 4. Controls and Producedures Within 90 days prior to the date of this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in this Form 10-Q. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect the internal controls subsequent to the date the Company carried out its evaluation. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks and other intellectual property rights. Information regarding current litigation is set forth in Note 8 of the Notes to Unaudited Condensed Financial Statements included in Part I, Item 1 of this report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a.) Exhibits: Exhibit 99.1 - CERTIFICATION OF CEO Exhibit 99.2 - CERTIFICATION OF CFO Exhibit 99.3 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (b.) Reports on Form 8-K: None 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 11, 2003 ASANTE TECHNOLOGIES, INC. (Registrant) By: ANTHONY CONTOS Anthony Contos Vice President, Finance and Administration (Authorized Officer and Principal Financial Officer) 17

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