UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-220-20
CASTELLE
(Exact name of Registrant as specified in its charter)
California 77-0164056
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
855 Jarvis Drive, Morgan Hill, CA 95037
(Address of principal executive offices, including zip code)
(408) 852-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
NO PAR VALUE
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 __
The number of shares of the Registrant's Common Stock outstanding as of August
3, 2001 was 4,744,795.
CASTELLE
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements: 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 99.1 - Press Release dated July 27, 2001 E-1
1
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that involve risks and
uncertainties. The Company's operating results may vary significantly from
quarter to quarter due to a variety of factors, including changes in the
Company's product and customer mix, constraints in the Company's manufacturing
and assembling operations, shortages or increases in the prices of raw materials
and components, changes in pricing policy by the Company or its competitors, a
slowdown in the growth of the networking market, seasonality, timing of
expenditures and economic conditions in the United States, Europe and Asia.
Words such as "believes," "anticipates," "expects," "intends" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. Unless the context otherwise
requires, references in this Form 10-Q to "we," "us," or the "Company" refer to
Castelle. Readers are cautioned that the forward-looking statements reflect
management's analysis only as of the date hereof, and the Company assumes no
obligation to update these statements. Actual events or results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to the risks and
uncertainties discussed herein, as well as other risks set forth under the
caption "Risk Factors" in the Company's Annual Report on Form 10-K and Form
10-K/A for the fiscal year ended December 31, 2000.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASTELLE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 29, 2001 December 31, 2000
(unaudited) (audited)
---------------------- ---------------------
Assets:
Current assets:
Cash and cash equivalents $ 3,600 $ 3,893
Restricted cash -- 125
Accounts receivable, net of allowances for doubtful
accounts of $241 in 2001 and $285 in 2000 1,192 2,083
Inventories, net 1,587 1,363
Prepaid expense and other current assets 156 209
---------------------- ---------------------
Total current assets 6,535 7,673
Property, plant & equipment, net 681 768
Other assets, net 93 102
---------------------- ---------------------
Total assets $ 7,309 $ 8,543
====================== =====================
Liabilities & Shareholders' Equity:
Current liabilities:
Long-term debt, current portion $ 9 $ 9
Accounts payable 608 1,014
Accrued liabilities 2,530 2,681
---------------------- ---------------------
Total current liabilities 3,147 3,704
Long-term debt, net of current portion 58 63
---------------------- ---------------------
Total liabilities 3,205 3,767
Shareholders' equity:
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 4,745 and 4,741, respectively 28,980 28,976
Deferred compensation (17) (17)
Accumulated deficit (24,859) (24,183)
---------------------- ---------------------
Total shareholders' equity 4,104 4,776
---------------------- ---------------------
Total liabilities & shareholders' equity $ 7,309 $ 8,543
====================== =====================
See accompanying notes to condensed consolidated financial statements.
3
CASTELLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended Six months ended
................................ ..............................
June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
--------------- --------------- --------------- --------------
Net sales $ 2,370 $ 3,760 $ 4,719 $ 7,860
Cost of sales 842 1,308 1,540 2,957
--------------- --------------- --------------- --------------
Gross profit 1,528 2,452 3,179 4,903
--------------- --------------- --------------- --------------
Operating expenses:
Research and development 481 489 866 994
Sales and marketing 1,039 1,332 2,165 2,644
General and administrative 255 416 699 882
Restructuring charges 58 -- 238 --
--------------- --------------- --------------- --------------
Total operating expenses 1,833 2,237 3,968 4,520
--------------- --------------- --------------- --------------
Income/(loss) from operations (305) 215 (789) 383
Interest income, net 25 45 58 52
Other income/(expense), net 12 (49) 55 (49)
--------------- --------------- --------------- --------------
Income/(loss) before provision for income taxes (268) 211 (676) 386
Provision for income taxes -- -- -- 6
--------------- --------------- --------------- --------------
Net income/(loss) $ (268) $ 211 $ (676) $ 380
=============== =============== =============== ==============
Earnings per share:
Net income/(loss) per common share - basic $ (0.06) $ 0.04 $ (0.14) $ 0.08
Shares used in per share calculation - basic 4,744 4,732 4,742 4,696
Net income/(loss) per common share - diluted $ (0.06) $ 0.04 $ (0.14) $ 0.07
Shares used in per share calculation - diluted 4,744 5,077 4,742 5,189
See accompanying notes to condensed consolidated financial statements.
4
CASTELLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended
......................................
June 29, 2001 June 30, 2000
----------------- ------------------
Cash flows from operating activities:
Net Income/(Loss) $ (676) $ 380
Adjustment to reconcile net income/(loss) to net cash
provided by operating activities:
Loss on disposal of fixed assets 9 --
Depreciation and amortization 144 164
Provision for doubtful accounts and sales returns 52 166
Provision for excess and obsolete inventory 89 (21)
Compensation expense related to grant of stock options 4 26
Changes in assets and liabilities:
Accounts receivable 839 (555)
Inventories (313) 6
Prepaid expenses and other current assets (161) 97
Other assets 9 8
Accounts payable (192) (108)
Accrued liabilities and other long-term liabilities (151) (116)
----------------- ------------------
Net cash provided by/(used in) operating activities (347) 47
----------------- ------------------
Cash flows from investing activities:
Return of restricted cash 125 --
Purchase of property and equipment (66) (89)
----------------- ------------------
Net cash provided by/(used in) investing activities 59 (89)
----------------- ------------------
Cash flows from financing activities:
Repayment of loan (5) (59)
Proceeds from issuances of common stock, net of
repurchases -- 23
----------------- ------------------
Net cash used in financing activities
(5) (36)
----------------- ------------------
Net decrease in cash and cash equivalents (293) (78)
Cash and cash equivalents at beginning of period 3,893 4,714
----------------- ------------------
Cash and cash equivalents at end of period $3,600 $4,636
================= ==================
See accompanying notes to condensed consolidated financial statements.
5
CASTELLE AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation:
----------------------
The accompanying unaudited consolidated financial statements include the
accounts of Castelle and its wholly-owned subsidiaries in the United
Kingdom and the Netherlands, and have been prepared in accordance with
accounting principles generally accepted in the United States of America.
All intercompany balances and transactions have been eliminated. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the Company's
financial position, results of operations and cash flows at the dates and
for the periods indicated have been included. The result of operations for
the interim period presented is not necessarily indicative of the results
for the year ending December 31, 2001. Because all of the disclosures
required by accounting principles generally accepted in the United States
of America are not included in the accompanying consolidated financial
statements and related notes, they should be read in conjunction with the
audited consolidated financial statements and related notes included in the
Company's Form 10-K and Form 10-K/A for the fiscal year-ended December 31,
2000. The year ended condensed balance sheet data was derived from our
audited financial statements and does not include all of the disclosures
required by accounting principles generally accepted in the United States
of America. The income statements for the periods presented are not
necessarily indicative of results that we expect for any future period, nor
for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Net Income/(Loss) Per Share
---------------------------
Basic net income/(loss) per share is computed by dividing net income/loss
available to common shareholders by the weighted average number of common
shares outstanding for that period. Diluted net income per share reflects
the potential dilution from the exercise or conversion of other securities
into common stock that were outstanding during the period. Diluted net loss
per share excludes shares that are potentially dilutive as their effect is
anti-dilutive. Shares that are potentially dilutive consist of incremental
common shares issuable upon exercise of stock options and warrants.
6
Basic and diluted earnings per share are calculated as follows for the
second quarter and first six months of 2001 and 2000, respectively:
(in thousands, except per share amounts)
.......................................................
(Unaudited)
.......................................................
Three months ended Six months ended
.......................... ............................
June 29, June 30, June 29, 2001 June 30, 2000
2001 2000
-------------------------- ----------------------------
Basic:
Weighted average common shares outstanding 4,744 4,732 4,742 4,696
=========================== ============= ==============
Net income/(loss) $ (268) $ 211 $ (676) $ 380
=========================== ============= ==============
Net income/(loss) per common share - basic $(0.06) $0.04 $(0.14) $ 0.08
=========================== ============= ==============
Diluted:
Weighted average common shares outstanding 4,744 4,732 4,742 4,696
Common equivalent shares from stock options
and warrants -- 345 -- 493
--------------------------- ------------- --------------
Shares used in per share calculation - diluted 4,744 5,077 4,742 5,189
=========================== ============= ==============
Net income/(loss) $ (268) $ 211 $(676) $ 380
=========================== ============= ==============
Net income/(loss) per common share - diluted $(0.06) $0.04 $ (0.14) $0.07
=========================== ============= ==============
The calculation of diluted shares outstanding for the three months ended
June 29, 2001 excludes options to purchase 1,327,089 shares of the
Company's common stock, as their effect was antidilutive in the period. The
calculation of diluted shares outstanding for the six months ended June 29,
2001, excludes options to purchase 1,319,089 shares of the Company's common
stock, as their effect was antidilutive in the period. At June 30, 2000,
warrants to purchase 100,000 shares of the Company's common stock were
excluded, because the per share exercise price of each of the warrants was
greater than the average market price for a share of the Company's common
stock for the period.
3. Inventories:
------------
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market and net of reserves for
excess and obsolete inventory. Inventory details are as follows (in
thousands):
June 29, 2001 December 31, 2000
(Unaudited)
-----------------------------------------------
Raw material $ 449 $ 335
Work in process 275 201
Finished goods 863 827
-----------------------------------------------
Total inventories $ 1,587 $ 1,363
===============================================
4. Revenue Recognition:
--------------------
Product revenue is recognized upon shipment if a signed contract exists,
the fee is fixed or determinable, collection of the resulting receivables
is probable and product returns are reasonably estimable. The Company
enters into agreements with certain of its distributors which permit
limited stock rotation rights. These stock rotation rights allow the
distributor to return products for credit but require the purchase of
additional products of equal value. Revenues subject to stock rotation
rights are reduced by management's estimates of anticipated exchanges.
Provisions for estimated warranty costs and anticipated retroactive price
adjustments are recorded at the time products are shipped. The Company
recognizes revenue from the sale of extended warranty contracts ratably
over the period of the contracts. In January 2001, the Company entered into
a separate agreement with a Japanese distributor
7
to sell the Company's fax server products in Japan. The Company is entitled
to receive a royalty on sales of products by the distributor. Royalty is
not recognized as revenue by the Company until the products are sold by the
distributor.
5. Segmental Disclosure and Geographic Information:
-------------------------------------------------
The Company has determined that it operates in one segment. Revenues by
geographic area are determined by the location of the end user and are
summarized as follows (in thousands):
(Unaudited)
.......................................................
Three months ended Six months ended
.......................... ............................
June 29, June 30, June 29, June 30,
2001 2000 2001 2000
-------------------------- ----------------------------
North America $1,853 $ 3,005 $ 3,751 $5,943
Europe 158 393 477 743
Pacific Rim 359 362 491 1,174
--------------------------- ------------- --------------
Total Revenues $2,370 $ 3,760 $ 4,719 $ 7,860
=========================== ============= ==============
6. Comprehensive Income:
---------------------
Under the Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", disclosure of comprehensive income and
its components is required in financial statements. Comprehensive income is
the change in equity from transactions and other events and circumstances
other than those resulting from investments by owners and distributions to
owners. There are no significant components of comprehensive income
excluded from net income, therefore, no separate statement of comprehensive
income has been presented.
7. Restructuring:
--------------
In April 2001, the Company terminated 17 regular, temporary and contractor
positions, which constituted approximately 25% of its workforce. This
action resulted in a severance charge of $58,000 in the second quarter of
fiscal 2001. This severance charge is in addition to the restructuring
charge of $180,000 recorded in the first quarter of fiscal 2001, which
included an asset write-off and other direct expenses associated with the
consolidation of our operations in the United Kingdom and El Dorado Hills,
California.
8. New accounting pronouncements:
------------------------------
Under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," companies are required to recognize all derivatives as either
assets or liabilities in the statement of financial position and to measure
those instruments at fair value. Changes in fair value shall be recognized
currently in earnings. This standard was effective for the Company from
January 1, 2001. At that time, the Company did not have any derivative
instruments, nor has it engaged in hedging activities to date.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations." SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method.
8
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after March 15,
2001. SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption
for the reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously
reported goodwill and the testing for impairment of existing goodwill and
other intangibles. We believe that the adoption of SFAS 142 will not have a
significant impact on our financial statements.
In June 2001, the FASB issued Emerging Issues Task Force ("EITF") No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to
Reseller of the Vendor's Products", which is effective for annual or
interim financial statements beginning after December 15, 2001. The issue
addresses whether consideration from a vendor to a reseller of the vendor's
products is an adjustment of the selling price and should therefore be
deducted from revenue or a cost incurred by the vendor for assets or
services received. The Compnay is currently assessing but has not yet
determined the impact of EITF 00-25 on its statement of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that are subject to many risks
and uncertainties that could cause actual results to differ significantly from
expectations. For more information on forward-looking statements, refer to the
"Special Note on Forward-Looking Statements" at the front on this Form 10-Q. The
following discussion should be read in conjunction with the Financial Statements
and the Notes thereto included in Item 1 of this Quarterly Report on Form 10-Q
and in the Company's Form 10-K and Form 10-K/A for the fiscal year ended
December 31, 2000.
Consolidated Statements of Operations - As a Percentage of Net Sales
(Unaudited)
Three months ended Six months ended
................................ ................................
June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
---------------- -------------- ---------------- --------------
Net sales 100% 100% 100% 100%
Cost of sales 36% 35% 33% 38%
---------------- -------------- ---------------- --------------
Gross profit 64% 65% 67% 62%
---------------- -------------- ---------------- --------------
Operating expenses:
Research and development 20% 13% 18% 12%
Sales and marketing 44% 35% 46% 34%
General and administrative 11% 11% 15% 11%
Restructuring charges 2% -- 5% --
---------------- -------------- ---------------- --------------
Total operating expenses 77% 59% 84% 57%
---------------- -------------- ---------------- --------------
Income/(loss) from operations (13%) 6% (17%) 5%
Interest income, net 1% 2%
* *
Other income/(expense), net 1% 1% *
*
---------------- -------------- ---------------- --------------
Income/(loss) before provision for
income taxes (11%) 6% (14%) 5%
Provision for income taxes -- -- * *
---------------- -------------- ---------------- --------------
Net income/(loss) (11%) 6% (14%) 5%
================ ============== ================ ==============
* Less than 1%
10
Results of Operations
Net Sales
Net sales for the second quarter of fiscal 2001 were $2.4 million, as
compared to $3.8 million for the same period in fiscal 2000. The $1.4
million decrease was largely due to a shortfall in the domestic sales of
our fax server products.
Net sales for first the six months were $4.7 million and $7.9 million
for fiscal 2001 and 2000, respectively. The shortfall in sales was
primarily due to the $2.6 million decline, or 38%, in demand for our fax
server products, and a decrease in the sales of our print server products
of $549,000, or 50%.
Domestic sales in the second quarter of fiscal 2001 were $1.9 million,
as compared to $3 million in the same period in fiscal 2000. For the first
six months of fiscal 2001, domestic sales were $3.8 million, as compared to
$5.9 million, a decrease of 37%, mostly in our fax server product line.
International sales in the second quarter of fiscal 2001 decreased to
$517,000 from $755,000 for the same period in fiscal 2000, representing 22%
and 20%, respectively, of total net sales. International sales for the
first six months of fiscal 2001 and 2000 were $968,000 and $1.9 million,
representing 21% and 24%, respectively, of total net sales. This decline in
international sales was mainly the result of reduced demand for our print
server products in the Asia Pacific Region and the change made earlier this
year from a model of selling our print server products directly to our
distributor in Japan to a royalty collection model. The royalty amounts
received by us in the first six months of this year were not significant.
Cost of Sales; Gross Profit
Gross profit of $1.5 million, or 64% of net sales, for the second
quarter of fiscal 2001 decreased, as compared to $2.5 million, or 65% of
net sales for the same period in fiscal 2000. The gross profit percentage
in the second quarter of fiscal 2001 was comparable to the second quarter
of fiscal 2000.
Gross profits for the first six months of fiscal 2001 and 2000 were
$3.2 million, or 67% of net sales and $4.9 million, or 62% of net sales,
respectively. The increase in gross profit for the six months of fiscal
2001 was primarily due to the mix of products that were sold at a higher
average selling price. The change in the first quarter of fiscal 2001 to a
royalty collection model from directly selling our print server products to
our distributor in Japan also contributed to the higher gross profit, even
though the amount of royalties received was not significant.
Research & Development
Research and product development expenses were $481,000, or 20% of net
sales for the second quarter of fiscal 2001, as compared to $489,000, or
13% of net sales for the same period in fiscal 2000. Research and product
development expenses for the first six months were $866,000, or 18% of net
sales in fiscal 2001, as compared to $994,000, or 13% of net sales for the
same period in fiscal 2000. This reduction of $128,000 in the six-month
period was mostly due to lower compensation expenses. Research and product
development spending in the second quarter of fiscal 2001, however,
increased sequentially by $96,000, primarily due to higher external
consulting and compensation expenses.
11
Sales & Marketing
Sales and marketing expenses were $1 million, or 44% of net sales for
the second quarter of fiscal 2001, as compared to $1.3 million, or 35% of
net sales for the same period in fiscal 2000. The reduction of $293,000 was
mostly contributable to lower promotional expenses of $101,000, lower
consulting of $29,000 and a decrease in other general expenses of $133,000.
For the first six months of fiscal 2001, the expenses were $2.2 million, or
46% of net sales, as compared to $2.6 million, or 34% of net sales for the
same period in fiscal 2000. This reduction of sales and marketing spending
by $479,000 was mostly attributable to lower promotional expenses of
$103,000, lower compensation of $65,000 and a decrease in other expenses of
$230,000.
General & Administrative
General and administrative expenses were $255,000, or 11% of net sales
for the second quarter of fiscal 2001, as compared to $416,000, or 11% of
net sales for the same period in fiscal 2000. The reduction of $161,000 in
the second quarter in fiscal 2001 was principally due to a lower provision
for doubtful accounts of $73,000 and lower legal and consulting expenses of
$47,000. General and administrative expenses for the first six months of
fiscal 2001 were $699,000, or 15% of net sales in fiscal 2001, as compared
to $882,000, or 11% of net sales for the same period in fiscal 2000. The
reduction in general and administration expenses of $183,000 was primarily
due to lower legal and consulting expenses of $97,000 and a $59,000
decrease in other general administrative expenses.
Restructuring
In April 2001, we terminated 17 regular, temporary and contractor
positions, which constituted approximately 25% of our workforce. This
action resulted in a severance charge of $58,000 in the second quarter of
fiscal 2001. This severance charge is in addition to the restructuring
charge of $180,000 recorded in the first quarter of fiscal 2001, which
included an asset write-off and other direct expenses associated with the
consolidation of our operations in the United Kingdom and El Dorado Hills,
California. There was no restructuring charge in fiscal 2000.
Liquidity and Capital Resources
As of June 29, 2001, we had approximately $3.6 million of cash and cash
equivalents, as compared to $3.9 million at December 31, 2000. The decrease in
cash and cash equivalents of $293,000 was primarily due to the overall decline
in sales, the severance charge in April 2001 and the net loss for the first six
months of fiscal 2001.
The restricted cash of $125,000 appearing on our balance sheet as of
December 31, 2000, was a certificate of deposit to collateralize a loan and was
returned to us in February 2001. The loan was completely paid off as of December
31, 2000.
We have a $3 million secured revolving line of credit with a bank from
which we may borrow 100% against pledges of cash at the bank's prime rate. As of
June 29, 2001, we had no borrowings under this line of credit.
In December 2000, as a source of capital asset financing, we entered into a
loan and security agreement with a finance company for an amount of $75,000.
This loan is subject to interest of 12.8% and is repayable by December 2006. As
of June 29, 2001, the future minimum payments were $94,000.
12
In April 2001, as a source of capital asset financing, we entered into a
loan and security agreement with a finance company for an amount of $25,000.
This loan is subject to interest of 12.5% and is repayable by April 2004. As of
June 29, 2001, the future minimum payments were $30,000.
As of June 29, 2001, net accounts receivable were $1.2 million, down from
$2.1 million at December 31, 2000. The decrease in net accounts receivable was
largely attributable to improved collection of outstanding balances and reduced
sales in the first six months of fiscal 2001. The number of days for which
payment for sales is outstanding improved from 58 days at December 31, 2000 to
45 days at June 29, 2001.
Net inventory as of June 29, 2001 was $1.6 million, an increase from the
$1.4 million at December 31, 2000. The higher inventory level was partly due to
a planned increase for a small build-up of our best selling fax server models to
ensure quick turn-around to our customers. The slower than expected sales in
some other fax server products also contributed to the overall increase.
Inventory turnover improved from an equivalent of 1.9 turns per year in the
first quarter of fiscal 2001 to 2.1 turns per year in this current quarter.
Although we believe that our existing capital resources, anticipated cash
flows from operations and available lines of credit will be sufficient to meet
our capital requirements for at least the next 12 months, we may be required to
seek additional equity or debt financing. The timing and amount of such capital
requirements cannot be determined at this time and will depend on a number of
factors, including demand for our existing and new products and the pace of
technological change in the networking industry. There can be no assurance that
such additional financing will be available on satisfactory terms when needed,
if at all. In order to maximize shareholder value, the Board of Directors
contunues to evaluate various strategic alternatives that may be available to
us.
We believe that, for the periods presented, inflation has not had a
material effect on our operations.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." We had no
holdings of derivative financial or commodity instruments at June 29, 2001.
However, we are exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. While much of our revenue is
transacted in U.S dollars, some revenues and capital spending are transacted in
Pounds Sterling. These amounts are not currently material to our financial
statements; therefore we believe that foreign currency exchange rates should not
materially affect our overall financial position, results of operations or cash
flows. The fair value of our money market account or related income would not be
significantly impacted by increases or decreases in interest rates due mainly to
the highly liquid nature of this investment. However, sharp declines in interest
rates could seriously harm interest earnings on this account.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In April 2001, we terminated 17 regular, temporary and contractor
positions, which constituted approximately 25% of our workforce. This action
resulted in a severance charge of $58,000 in the second quarter of fiscal 2001.
This severance charge is in addition to the restructuring charge of $180,000
recorded in the first quarter of fiscal 2001, which included an asset write-off
and other direct expenses associated with the consolidation of our operations in
the United Kingdom and El Dorado Hills, California. There was no restructuring
charge in fiscal 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Press Release dated July 27, 2001
(b) Reports on Form 8-K
None
14
SIGNATURES
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.
CASTELLE
By: /s/ Donald L. Rich Date: August 10, 2001
Donald L. Rich
Chairman of the Board and Director
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Paul Cheng Date: August 10, 2001
Paul Cheng
Vice President of Finance and Administration
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
Secretary
15