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 September 28, 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 November 6, 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 Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 99.1 - Press Release dated October 31, 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)
September 28, 2001 December 31, 2000
(unaudited) (audited)
---------------------- ---------------------
Assets:
Current assets:
Cash and cash equivalents $ 4,105 $ 3,893
Restricted cash - 125
Accounts receivable, net of allowances for doubtful
accounts of $241 in 2001 $285 in 2000 666 2,083
Inventories, net 1,260 1,363
Prepaid expense and other current assets 161 209
---------------------- ---------------------
Total current assets 6,192 7,673
Property, plant & equipment, net 653 768
Other assets, net 90 102
---------------------- ---------------------
Total net assets $ 6,935 $ 8,543
====================== =====================
Liabilities & Shareholders' Equity:
Current liabilities:
Long-term debt, current portion $ 17 $ 9
Accounts payable 447 1,014
Accrued liabilities 2,244 2,681
---------------------- ---------------------
Total current liabilities 2,708 3,704
Long-term debt, net of current portion 69 63
---------------------- ---------------------
Total liabilities 2,777 3,767
Shareholders' equity:
Common stock, no par value;
Authorized: 25,000 shares;
Issued and outstanding: 4,745 and 4,741, respectively 28,981 28,976
Deferred compensation (17) (17)
Accumulated deficit (24,806) (24,183)
---------------------- ---------------------
Total shareholders' equity 4,158 4,776
---------------------- ---------------------
Total liabilities & shareholders' equity $ 6,935 $ 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 Nine months ended
---------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
----------------- --------------- --------------- ---------------
Net sales $ 2,559 $ 3,730 $ 7,278 $ 11,591
Cost of sales 770 1,314 2,310 4,273
----------------- --------------- --------------- ---------------
Gross profit 1,789 2,416 4,968 7,318
Operating expenses:
Research and development 470 441 1,336 1,435
Sales and marketing 919 1,368 3,084 4,012
General and administrative 353 383 1,052 1,265
Restructuring charges 5 - 243 -
----------------- --------------- --------------- ---------------
Total operating expenses 1,747 2,192 5,715 6,712
Income/(loss) from operations 42 224 (747) 606
Interest income, net 19 52 77 143
Other income/(expense), net (8) (36) 47 (123)
Income/(loss) before provision for income taxes 53 240 (623) 626
Provision for income taxes - - - 6
----------------- --------------- --------------- ---------------
Net income/(loss) $ 53 $ 240 $ (623) $ 620
================= =============== =============== ===============
Net Income/(Loss) per share:
Net income/(loss) per common share - basic $ 0.01 $ 0.05 $ (0.13) $ 0.13
Shares used in per share calculation - basic 4,745 4,741 4,743 4,661
Net income/(loss) per common share - diluted $ 0.01 $ 0.05 $ (0.13) $ 0.12
Shares used in per share calculation - 4,782 5,071 4,743 5,188
diluted
See accompanying notes to condensed consolidated financial statements.
4
CASTELLE AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months ended
-------------------------------------
September 28, September 29,
2001 2000
----------------- ------------------
Cash flows from operating activities:
Net income/(loss) $ (623) $ 620
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Loss on disposal of fixed assets 9 --
Depreciation and amortization 208 230
Provision for doubtful accounts and sales returns 93 (133)
Provision for excess and obsolete inventory 120 (112)
Compensation expense related to grant of stock options 5 39
Changes in assets and liabilities:
Accounts receivable 1,324 (388)
Inventory (17) 89
Prepaid expenses and other current assets 48 65
Accounts payable (567) (168)
Accrued liabilities (437) (278)
Other assets 12 (37)
----------------- ------------------
Net cash provided by/(used in) operating activities 175 (73)
----------------- ------------------
Cash flows from investing activities:
Return of restricted cash 125 --
Purchase of property and equipment (77) (103)
----------------- ------------------
Net cash provided by/(used in) investing activities 48 (103)
----------------- ------------------
Cash flows from financing activities:
Repayment of notes payable (11) (79)
Proceeds from issuance of common stock and warrants, net
of repurchases - 24
----------------- ------------------
Net cash used in financing activities (11) (55)
----------------- ------------------
212 (231)
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period 3,893 4,714
----------------- ------------------
Cash and cash equivalents at end of period $ 4,105 $ 4,483
================= ==================
Supplemental information:
Cash paid for interest $ 8 $ 5
Note payable for fixed asset acquisition $ 25 $ -
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
adjustments) 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 results of operations for
the interim periods presented are 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 income/loss per share are calculated as follows for the
third quarter and first nine months of 2001 and 2000, respectively:
(in thousands, except per share amounts)
---------------------------------------------------------------------------
(Unaudited)
---------------------------------------------------------------------------
Three months ended Nine months ended
------------------------------------ ----------------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
Basic:
Weighted average common shares
outstanding 4,745 4,741 4,743 4,661
================ ================ =============== ================
Net income/(loss) $ 53 $ 240 $ (623) $ 620
================ ================ =============== ================
Net income/(loss) per common share -
basic $ 0.01 $ 0.05 $(0.13) $ 0.13
================ ================ =============== ================
Diluted:
Weighted average common shares
outstanding 4,745 4,741 4,743 4,661
Common equivalent shares from stock
options and warrants 37 330 - 527
---------------- ---------------- --------------- ----------------
Shares used in per share calculation
- diluted 4,782 5,071 4,743 5,188
================ ================ =============== ================
Net income/(loss) $ 53 $ 240 $ (623) $ 620
================ ================ =============== ================
Net income/(loss) per common share - $ 0.01 $ 0.05 $(0.13) $ 0.12
diluted ================ ================ =============== ================
The calculation of diluted shares outstanding for the nine months ended
September 28, 2001 excludes 75,304 stock options, as their effect was
antidilutive in the period. At September 29, 2000, warrants to purchase
100,000 shares of the Company's common stock were excluded, because their
exercise price is greater than the average common stock market price for
the period.
3. Inventory:
Inventory is stated at the lower of standard cost (which approximates cost
on a first-in, first-out basis) or market value and net of allowances for
excess and obsolete inventory. Inventory details are as follows (in
thousands):
September 28, 2001
(Unaudited) December 31, 2000
------------------ -----------------
Raw material $ 443 $ 335
Work in process 167 201
Finished goods 650 827
----------------- -----------------
Total inventory $ 1,260 $ 1,363
================= =================
4. Revenue Recognition:
Product revenue is recognized upon shipment if a signed contract exists,
the fee is fixed and 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
7
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 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. Segments Disclosure:
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 Nine months ended
-------------------------------- -------------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
--------------- ------------- ------------- -------------
North America $2,129 $ 2,867 $ 5,880 $8,811
Europe 232 251 709 994
Pacific Rim 198 612 689 1,786
--------------- ------------- ------------- -------------
Total Revenues $2,559 $ 3,730 $ 7,278 $ 11,591
=============== ============= ============= =============
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 our workforce. This
action resulted in a severance charge of $243,000 in the first nine months
of fiscal 2001. The restructuring 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.
Of the total restructuring charge of $243,000, approximately $213,000
represented cash charges and the remaining $30,000 represented the
write-down of assets in the Company's UK operations. The restructuring
activities were as follows:
8
Accrued
restructuring
Non-cash charges as of
Total charge charges Cash payments September 28, 2001
------------ -------- ------------- ------------------
Severance and benefits $ 100 - $ (63) $ 37
Facilities 89 $(30) (35) 24
Other 54 - (15) 39
------------ -------- ------------- ------------------
$ 243 $(30) $ (113) $ 100
------------ -------- ------------- ------------------
The remaining restructuring charges largely relate to additional costs to
be incurred following the closure of the UK operations as well as the final
severance payments to certain employees. There was no restructuring charge
in fiscal 2000.
8. Commitments and contingencies:
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company
accrues contingent liabilities when it is probable that future expenditures
will be made and such expenditures can be reasonably estimated. In the
opinion of management, there are no pending claims of which the outcome is
expected to result in a material adverse effect in the financial position
or results of operations of the Company.
9. 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 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 paid by a vendor to a reseller for 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 Company is currently assessing but has not
yet determined the impact of EITF 00-25 on its statement of operations.
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. We believe that the adoption of
SFAS 141 will not have a significant impact on our financial statements.
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.
9
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30. SFAS 144 develops one accounting model for
long-lived assets that are to be disposed of by sale. SFAS 144 requires
that long-lived assets that are to be disposed of by sale be measured at
the lower of book value or fair value less cost to sell. Additionally, SFAS
144 expands the scope of discontinued operations to include all components
of an entity with operations that (1) can be distinguished from the rest of
the entity and (2) will be eliminated from the ongoing operations of the
entity in a disposal transaction. SFAS 144 is effective for the Company for
all financial statements issued in fiscal 2002. The Company is currently
assessing but has not yet determined the impact of SFAS 144 on its
statement of operations.
10
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
Three months ended Nine months ended
----------------------------------------------------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Net sales 100% 100% 100% 100%
Cost of sales 30% 35% 32% 37%
---------------- ---------------- ---------------- ----------------
Gross profit 70% 65% 68% 63%
Operating expenses:
Research and development 18% 12% 18% 12%
Sales and marketing 36% 37% 42% 35%
General and administrative 14% 10% 15% 11%
Restructuring charges * -- 3% --
---------------- ---------------- ---------------- ----------------
Total operating expenses 68% 59% 78% 58%
---------------- ---------------- ---------------- ----------------
Income/(loss) from operations 2% 6% (10%) 5%
1% *
Interest income, net * *
Other income/(expense), net * * * *
---------------- ---------------- ---------------- ----------------
Income/(loss) before provision for
income taxes 2% 6% (9%) 5%
Provision for income taxes -- -- -- *
---------------- ---------------- ---------------- ----------------
Net income/(loss) 2% 6% (9%) 5%
================ ================ ================ ================
* Less than 1%
11
Results of Operations
Net Sales
Net sales for the third quarter of fiscal 2001 were $2.6 million,
as compared to $3.7 million for the same period in fiscal 2000. The
shortfall in net sales was primarily due to a reduction in the sales of our
fax server products of $800,000, or 25%, and the continued decline in the
sales of the print server products by $371,000, or 73%.
Net sales were $7.3 million and $11.6 million for the first nine
months of fiscal 2001 and 2000, respectively. The decrease in net sales
over the previous year was mostly attributable to the $3.4 million decline,
or 34%, in demand for our fax server products, and a decrease in the sales
of our print server products of $920,000, or 58%.
Domestic sales in the third quarter of fiscal 2001 were $2.1
million, as compared to $2.9 million in the same period in fiscal 2000,
representing 83% and 77%, respectively, of total net sales. For the first
nine months of fiscal 2001, domestic sales were $5.9 million, as compared
to $8.8 million in the same nine months of fiscal 2000, representing 81%
and 76%, respectively, of total net sales. The decrease in domestic sales
in the first nine months of fiscal 2001 was primarily due to lower demand
for products in the fax server product line.
International sales in the third quarter of fiscal 2001 were
$430,000, as compared to $863,000 for the same period in 2000, representing
17% and 23%, respectively, of total net sales. International sales for the
first nine months of fiscal 2001 and 2000 were $1.4 million and $2.8
million, respectively, representing 19% and 24%, respectively, of total net
sales. This decline in international sales in the first nine months of
fiscal 2001 was mainly the result of reduced demand for our fax server
product line of $478,000, or 30%, and our print server products of
$904,000, or 75%.
Cost of Sales; Gross Profit
Gross profit of $1.8 million, or 70% of net sales, for the third
quarter of fiscal 2001, decreased, as compared to gross profit of $2.4
million, or 65%, for the same period in fiscal 2000. The higher gross
profit percentage in the third quarter of fiscal 2001 was largely due to
the increasingly favorable mix from the sales of our fax server products,
which has a higher gross profit contribution, as compared to the sales of
our print server products, which yields a lower gross margin.
Gross profits for the first nine months of fiscal 2001 and 2000
were $5 million, or 68% of net sales and $7.3 million, or 63% of net sales,
respectively. The increase in gross profit percentage for the nine 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 from directly selling our print server products to our distributor in
Japan to a royalty collection model 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 $470,000, or 18%,
of net sales for the third quarter of fiscal 2001, as compared to $441,000,
or 12%, of net sales for the same period in fiscal 2000. Research and
product development expenses for the first nine months of 2001 were $1.3
million, or 18% of net sales, as compared to $1.4 million, or 12% of net
sales, for the same period in fiscal 2000. This reduction of $99,000 in the
nine-month period was mostly due to lower compensation expenses.
12
Sales & Marketing
Sales and marketing expenses were $919,000 or 36%, of net sales
for the third quarter of fiscal 2001, as compared to $1.4 million, or 37%
of net sales for the same period in fiscal 2000. The reduction of $449,000
was mostly attributable to lower operating expenses of $107,000 in our
United Kingdom operation as a result of our consolidation efforts earlier
in the year, lower compensation and consulting expenses of $136,000, and
decreased promotional expenses of $127,000. For the first nine months of
fiscal 2001, sales and marketing expenses were $3.1 million, or 42% of net
sales, as compared to $4 million, or 35% of net sales, for the same period
in fiscal 2000. This reduction of sales and marketing spending by $928,000
was mostly attributable to lower operating expenses of $107,000 in the
United Kingdom, lower compensation and consulting expenses of $260,000,
decreased promotional expenses of $260,000 and a reduction in other general
expenses of $217,000.
General & Administrative
General and Administrative expenses were $353,000 and $383,000, or
14% and 10%, respectively, of net sales for the third quarter of fiscal
2001 and 2000, respectively. General and administrative expenses for the
first nine months of fiscal 2001 decreased to $1.1 million, or 14% of net
sales, as compared to $1.3 million, or 11%, of net sales for the same
period in fiscal 2000. The reduction in general and administration expenses
of $213,000 was primarily due to lower legal and consulting expenses of
$77,000, decreased recruiting expenses of $45,000 and lower bad debt and
collection expenses of $76,000.
Restructuring
In April 2001, we terminated 17 regular, temporary and contractor
positions, which constituted approximately 25% of our workforce. This
action resulted in a restructuring charge of $243,000 in the nine months of
fiscal 2001. The restructuring 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 September 28, 2001, we had approximately $4.1 million of cash and
cash equivalents as compared to $3.9 million at December 31, 2000. Working
capital improved slightly to $3.5 million at September 28, 2001 from $3.3
million at June 29, 2001, but decreased from $4 million at December 31, 2000.
The improvement in cash and cash equivalents from the second quarter of fiscal
2001 was mostly attributable to improved collection of outstanding balances owed
to us by our customers, reduced inventory to meet the current revenue
projections, offset in part by more timely payments to our vendors. The
reduction in working capital, compared to December 31, 2000, was primarily due
to the fiscal 2001 year to date net loss, partially offset by improved
collections from customers and reduced inventory.
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
September 28, 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
13
interest of 12.8% and is repayable by December 2006. As of September 28, 2001,
the future minimum payments were $90,000.
In April 2001, 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 2003. As of September 28, 2001, the future
minimum payments were $25,000.
As of September 28, 2001, net accounts receivable were $666,000, down
from $2.1 million at December 31, 2000. The September 28, 2001 balance was net
of allowances for doubtful accounts, estimated product returns and price
protection of $760,000, which is in compliance with our revenue recognition
policies, as compared to allowances of $667,000 at December 31, 2000. The
decrease in net accounts receivable was largely attributed to improved
collection of outstanding balances and reduced sales in the nine months of this
year.
Net inventory as of September 28, 2001 was $1.3 million, compared to
$1.4 million at December 31, 2000 and $1.6 million as of June 29, 2001. The
planned inventory reductions were in line with current revenue projections.
Inventory turnover reduced from an equivalent of 3.5 turns per year at December
31, 2000 to 2.4 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 continues 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.
14
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 September 28, 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 restructuring charge of $243,000 in the nine months of fiscal
2001. The restructuring 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 October 31, 2001
(b) Reports on Form 8-K
None
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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: November 9, 2001
Donald L. Rich
Chairman of the Board and Director
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Paul Cheng Date: November 9, 2001
Paul Cheng
Vice President of Finance and Administration
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
Secretary
16