-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UXtz2GF7mHznSS+WPxyjj4gOPShHtkRdtTPJOHaUI5euSMlBO1I9QJj0j2P/Msts po/3ceVpoukXQtzO5OEWWw== 0000908605-98-000021.txt : 19981120 0000908605-98-000021.hdr.sgml : 19981120 ACCESSION NUMBER: 0000908605-98-000021 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981002 FILED AS OF DATE: 19981119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASTELLE \CA\ CENTRAL INDEX KEY: 0000908605 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770164056 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-22020 FILM NUMBER: 98755488 BUSINESS ADDRESS: STREET 1: 3255-3 SCOTT BLVD CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4084960474 MAIL ADDRESS: STREET 1: 3255-3 SCOTT BOULEVARD CITY: SANTA CLARA STATE: CA ZIP: 95054 FORMER COMPANY: FORMER CONFORMED NAME: CASTELLE INC DATE OF NAME CHANGE: 19930702 10-Q/A 1 QUARTERLY REPORT AMENDMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Amendment No. 1 |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 2, 1998 |_| 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) 3255-3 Scott Boulevard, Santa Clara, California 95054 (Address of principal executive offices, including zip code) (408) 496-0474 (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 Common Stock outstanding as of November 13, 1998 was 4,332,448. CASTELLE FORM 10-Q/A AMENDMENT NO. 1 Note:The Form 10-Q submitted by Castelle for the period ended October 2, 1998 is hereby amended to correct omissions due to the inadvertent filing of a preliminary draft of the Form 10-Q. 2 CASTELLE FORM 10-Q/A AMENDMENT NO. 1 TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 Exhibit 27.1 - Financial Data Schedule E-1 3 PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS CASTELLE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) October 2, 1998 December 31, 1997 (unaudited) (audited) ---------------- ------------------ Assets: Cash and cash equivalents $ 4,854 $ 6,204 Restricted cash 125 125 Accounts receivable, net of allowance for doubtful accounts of $484 in 1998 and $490 in 1997 5,007 3,273 Inventories, net 2,860 3,786 Prepaid expense and other current assets 630 573 Deferred income taxes 874 874 ---------------- ------------------ Total current assets 14,350 14,835 Property, plant & equipment, net 748 938 Other non-current assets, net 254 93 Deferred income taxes 3,060 3,060 ---------------- ------------------ Total assets $18,412 $18,926 ================ ================== Liabilities & Shareholders' Equity: Current liabilities: Long-term debt, current $ 87 $ 87 Accounts payable 1,970 1,312 Accrued liabilities 2,353 2,620 ---------------- ------------------ Total current liabilities 4,410 4,019 Other long-term liabilities 130 52 ---------------- ------------------ Total liabilities 4,540 4,071 ---------------- ------------------ Shareholders' equity: Common stock, no par value: Authorized: 25,000 shares Issued and outstanding: 4,332 and 4,490 respectively 29,107 28,955 Note receivable for purchase of common stock (274) (274) Accumulated deficit (14,961) (13,826) ---------------- ------------------ Total shareholders' equity 13,872 14,855 ---------------- ------------------ Total liabilities & $18,412 $18,926 shareholders' equity ================ ==================
The accompanying notes are an integral part of these consolidated financial statements. 4
CASTELLE AND SUBSIDIARIES Consolidated Statements of Operations (in thousands, except per share amounts) (unaudited) Three months ended Nine months ended ................................. ................................. October 2, September 26, October 2, September 26, 1998 1997 1998 1997 --------------- ---------------- --------------- ---------------- Net sales $ 5,449 $ 6,597 $ 18,147 $ 20,018 Cost of sales 2,266 3,396 8,334 9,192 --------------- ---------------- --------------- ---------------- Gross profit 3,183 3,201 9,813 10,826 --------------- ---------------- --------------- ---------------- Operating expenses: Research and development 780 720 2,177 2,414 Sales and marketing 2,396 2,084 6,426 6,481 General and administrative 399 774 1,354 1,693 Amortization of intangible assets 40 -- 80 574 Restructuring Charges -- 6,224 -- 6,224 Acquisition of in-process research and development -- -- 1,124 -- --------------- ---------------- --------------- ---------------- Total operating expenses 3,615 9,802 11,161 17,386 --------------- ---------------- --------------- ---------------- Loss from operations (432) (6,601) (1,348) (6,560) Interest income, net 57 66 177 229 Other (expense), net (18) (29) (1) (72) --------------- ---------------- --------------- ---------------- Loss before benefit from income taxes (393) (6,564) (1,172) (6,403) Benefit from income taxes -- 732 37 438 =============== ================ =============== ================ Net loss $ (393) $ (5,832) $ (1,135) $ (5,965) =============== ================ =============== ================ Earnings per share: Net loss per common share - basic and diluted $(0.09) $(1.30) $(0.25) $(1.34) Shares used in per share calculation - basic and diluted 4,594 4,476 4,563 4,454
The accompanying notes are an integral part of these consolidated financial statements. 5
CASTELLE AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine months ended ...................................... October 2, September 26, 1998 1997 ------------------ ------------------ Cash flows from operating activities: Net loss $ (1,135) $ (5,965) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 473 853 Provision for doubtful accounts and sales returns (307) 58 Provision for excess and obsolete inventory 148 386 Amortization of deferred compensation 27 -- Acquisition of in-process research and development 1,124 -- Write-off of intangibles for Ibex acquisition -- 5,074 Changes in assets and liabilities: Accounts receivable (1,427) (138) Inventories 778 (1,142) Prepaid expenses and other current assets (79) (128) Accounts payable 658 1,027 Accrued liabilities and other long-term liabilities (267) (124) Deferred income taxes -- (786) ------------------ ------------------ Net cash used in operating activities (7) (885) ------------------ ------------------ Cash flows from investing activities: Acquisition of property and equipment (180) (656) Acquisition of Object-Fax product line (784) -- Repurchase of common stock (384) -- Increase in other assets (82) -- ------------------ ------------------ Net cash used in investing activities (1,430) (656) ------------------ ------------------ Cash flows from financing activities: Proceeds from notes payable 142 -- Repayment of notes payable (64) -- Proceeds from collection of note receivable for stock -- 20 Proceeds from issuance of common stock and warrants, net of repurchases 9 120 ------------------ ------------------ Net cash provided by financing activities 87 140 ------------------ ------------------ Net decrease in cash and cash equivalents (1,350) (1,401) Cash and cash equivalents at beginning of period 6,204 8,161 ================== ================== Cash and cash equivalents at end of period $ 4,854 $ 6,760 ================== ================== Supplemental Information: Noncash financing activities: Issuance of common stock for acquisition of Object-Fax product line $ 500 --
The accompanying notes are an integral part of these consolidated financial statements. 6 CASTELLE AND SUBSIDIARIES Notes To 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 States, the United Kingdom and the Netherlands, and have been prepared in accordance with generally accepted accounting principles. 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, 1998. Because all of the disclosures required by generally accepted accounting principles 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 for the fiscal year-ended December 31, 1997. 2. Net Loss Per Share The Company has adopted Statement of Financial Accounting Standards No.128 (SFAS 128), "Earnings per Share," which supersedes APB Opinion No. 15 (APB No. 15), "Earnings per Share," and which is effective for all periods ending after December 15, 1997. SFAS 128 requires dual presentation of basic and diluted earnings per share (EPS) for complex capital structures on the face of the Statements of Operations. Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of other securities into common stock. For all periods presented, the effects of the exercise or conversion of other securities have been excluded from the calculation of EPS, as their effect was antidilutive. Basic and diluted earnings per share are calculated as follows for the three months and nine months ending October 2, 1998 and September 26, 1997:
(in thousands, except per share amounts) ........................................................... Three months ended Nine months ended ............................ ............................. .......................... ........................... October 2, September 26, October 2, September 26, 1998 1997 1998 1997 ----------- ---------- ----------- ---------- Basic: Weighted average common shares outstanding 4,594 4,476 4,563 4,454 =========== ========== =========== ========== Net loss $ (393) $ (5,832) $ (1,135) $ (5,965) =========== ========== =========== ========== Net loss per common share - basic $ (0.09) $ (1.30) $ (0.25) $ (1.34) =========== ========== =========== ========== Diluted: Weighted average common shares outstanding 4,594 4,476 4,563 4,454 Common equivalent shares from stock options -- -- -- -- ----------- ---------- ----------- ---------- Shares used in per share calculation - diluted 4,594 4,476 4,563 4,454 =========== ========== =========== ========== Net loss $ (393) $ (5,832) $ (1,135) $ (5,965) =========== ========== =========== ========== Net loss per common share - diluted $ (0.09) $ (1.30) $ (0.25) $ (1.34) =========== ========== =========== ==========
7 3. Inventories: Inventories are stated at the lower of standard cost (which approximates cost on a first-in, first-out basis) or market. Inventory details are as follows:
(in thousands) ................................. October 2, December 31, 1998 1997 --------------- ---------------- Raw material $ 942 $ 1,544 Work in process 418 486 Finished goods 1,500 1,756 =============== ================ Inventories, net $ 2,860 $ 3,786 =============== ================
4. Revenue Recognition: Product revenue is recognized upon shipment provided no significant vendor obligations remain and collection of the resulting receivable is deemed probable by management. 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, insignificant vendor obligations and anticipated retroactive price adjustments are recorded at the time products are shipped. 5. Segments Disclosure: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131 - "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"). Although the Company adopted SFAS 131 beginning January 1, 1998, Castelle has elected not to report segment information in interim financial statements in the first year of application consistent with the provisions of the statement. 6. Comprehensive Income: As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 - "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS 130 had no impact on the Company, as there is no comprehensive income to report. 7. Software Revenue: In October 1997, the Accounting Standards Executive Committee issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which delineates the accounting for software product and maintenance revenues. SOP 97-2 supersedes the Accounting Standards Executive Committee Statement of Position 91-1, "Software Revenue Recognition," and is effective for the Company beginning in fiscal 1998. The Company has recognized revenue for the first nine months of 1998 in accordance with this new SOP. 8 In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2 - Software Revenue Recognition." The SOP defers for one year the application of several paragraphs in SOP 97-2, which limit what is considered vendor-specific objective evidence of the fair value relating to various elements in a multiple-element software arrangement. Based on its reading and interpretation of SOP 97-2, the Company believes it is currently in compliance with the final standard. However, once detailed implementation guidelines are issued, such detailed implementation guidance could lead to unanticipated changes in the Company's current revenue accounting practices, and such changes could be material to the Company's revenue and earnings. 8. Acquisition: In April 1998, the Company completed its acquisition of the Object-Fax NT product line, a facsimile software application designed for LAN's, WAN's and Internet-based networks, from Tolvusamskipti HF, an Icelandic corporation, in exchange for $300,000 in cash and 100,000 shares of Castelle common stock and the right to receive the number of additional shares of Castelle common stock on the date six months after the acquisition necessary to make the fair market value of the common stock received in the transaction not less than $500,000 (the "Acquisition"). In connection with the Acquisition, Castelle also entered into asset acquisition agreements with Traffic USA, Inc. and Traffic Software USA, Inc. in which Castelle acquired fixed assets and intellectual property rights associated with the marketing, sales, distribution and support of the Object-Fax NT software. In exchange for these assets Castelle paid $135,000 and agreed to pay a royalty on sales of the Object-Fax NT software, not to exceed $75,000 or to be paid beyond 24 months after the Acquisition. Additionally, Castelle entered into consulting and non-competition agreements with key employees of Traffic USA, Inc. and Traffic Software USA, Inc. The Acquisition has been accounted for as a purchase of assets and is valued at approximately $1.4 million including acquisition-related expenses. A portion of the purchase price was allocated to in-process research and development, and, accordingly, the Company recorded a one-time charge against earnings in the third quarter of 1998 of $1.1 million. Further, the Company recorded intangible assets of $160,000, which are being amortized over 12 months. 9. Subsequent Events: None. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties, in particular the statements regarding the Year 2000 issue. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, including but not limited to the impact on the Company's business of Year 2000 problems in internal systems or systems of suppliers or other third parties adversely affected by Year 2000 problems, or claims due to Year 2000 issues allegedly related to the Company's products or Year 2000 remediation efforts, as well as those discussed in the Company's Form SB-2 filed November 17, 1995, as amended, and Form 10-K for the year-ended December 31, 1997.
Consolidated Statements of Operations - As a Percentage of Net Sales Three months ended Nine months ended ................................. ................................. October 2, September 26, October 2, September 26, 1998 1997 1998 1997 --------------- ---------------- --------------- ---------------- Net sales 100% 100% 100% 100% Cost of sales 42% 51% 46% 46% --------------- ---------------- --------------- ---------------- Gross profit 58% 49% 54% 54% --------------- ---------------- --------------- ---------------- Operating expenses: Research and development 14% 11% 12% 12% Sales and marketing 44% 32% 35% 32% General and administrative 7% 12% 8% 9% Amortization of intangible assets 1% -- * 3% Restructuring charges -- 94% -- 31% Acquisition of in-process research and development -- -- 6% -- --------------- ---------------- --------------- ---------------- Total operating expenses 66% 149% 61% 87% --------------- ---------------- --------------- ---------------- Loss from operations (8%) (100%) (7%) (33%) Interest income, net 1% 1% 1% 1% Other (expense), net * * * * --------------- ---------------- --------------- ---------------- Loss before benefit from income taxes (7%) (99%) (6%) (32%) Benefit from income taxes -- 11% * 2% =============== ================ =============== ================ Net loss (7%) (88%) (6%) (30%) =============== ================ =============== ================ * Less than 1%
Results of Operations Net Sales Net sales in the third quarter of 1998 decreased to $5.4 million from $6.6 million for the same period in 1997. The reduction in net sales was primarily the result of a $1.7 million (55%) decrease in print server product sales, which was partially offset by increased fax server product sales. 10 Net Sales (continued) Net sales were $18.1 million and $20.0 million for the first nine months of 1998 and 1997, respectively. The lower net sales were the result of a $3.3 million (36%) reduction in print server product sales, which were partially offset by increased fax server product sales and higher service and warranty revenues. International sales in the third quarter of 1998 decreased to $1.9 million from $3.5 million for the same period in 1997, representing 35% and 53%, respectively, of total net sales. The reduction in international sales was mainly the result of significantly reduced demand for the Company's products in Asia due to competitive pressures and the economic downturn in that market. International sales were $6.9 million and $10.3 million for the first nine months of 1998 and 1997, respectively, representing 38% and 51%, respectively, of total net sales. The decrease in international sales was the result of lower demand for the Company's products in Asia due to competitive pressures and the economic downturn in that market and in Europe from competitive pressures experienced during the first six month of 1998. Gross Profit Gross profit of 58% for the third quarter of 1998 improved compared to gross profit of 49% for the same period in 1997. The increase in gross profit is primarily due to increased sales of the Company's fax server products which carry higher gross margins along with lower manufacturing variances. Gross profit for the first nine months of 1998 and 1997 were unchanged at 54%. The lack of change in gross profit is the result of increased gross profits from sales of fax server products which have historically enjoyed higher gross margins, off-set by higher manufacturing variances and lower gross profit in print server products as a result of price decreases and a decline in sales. Research and Development Research and development expenses increased 8% to $780,000 or 14% of net sales for the third quarter of 1998 as compared to $720,000 or 11% of net sales for the same period in 1997. This increase is primarily the result of higher personnel-related expenses associated with Object-Fax product development during the third fiscal quarter. Research and development expenses for the first nine months declined 10% to $2.2 million or 12% of net sales in 1998 as compared to $2.4 million or 12% of net sales for the same period in 1997. This decline is the result of lower personnel-related expenses in the 1998 period. Sales and Marketing Sales and marketing expenses increased 15% to $2.4 million or 44% of net sales for the third quarter of 1998, as compared to $2.1 million or 32% of net sales for the same period in 1997. This increase is primarily due to higher channel marketing expenses in the 1998 period. 11 Sales and Marketing (continued) Sales and marketing expenses were $6.4 million or 35% of net sales for the first nine months of 1998, as compared to $6.5 million or 32% of net sales for the same period in 1997. General and Administrative General and administrative expenses were $399,000 or 7% of net sales for the third quarter of 1998, as compared to $774,000 or 12% of net sales for the same period in 1997. The decrease is due to lower personnel-related and legal expenses in the 1998 period. General and administrative expenses for the first nine months decreased slightly to $1.4 million or 8% of net sales in 1998, as compared to $1.7 million or 9% of net sales for the same period in 1997. The decrease is due to lower personnel-related and legal expenses in the 1998 period. Amortization of intangible assets and Acquisition of in-process research and development In April 1998, the Company completed its acquisition of the Object-Fax NT product line from Tolvusamskipti HF, an Icelandic corporation. The purchase, valued at approximately $1.4 million, included the exchange of $300,000 in cash and 100,000 shares of Castelle common stock, as well as entering into various agreements in support of the acquisition. A portion of the purchase price was allocated to in-process research and development, and, accordingly, the Company recorded a one-time charge against earnings in the second quarter of 1998 of $1.1 million. Further, the Company recorded intangible assets of $160,000, which are being amortized over 12 months, resulting in a $40,000 charge in the third quarter of 1998. See "Notes to Consolidated Financial Statements - Note 8" thereto included elsewhere in this report. The amortization expense associated with intangible assets occurring in the third quarter of 1997, and appearing in the results for the nine months ended September 26, 1997 represents charges associated with the write-down to fair market value of assets acquired in the merger with Ibex Technologies, Inc. ("Ibex") completed in November 1996. Restructuring charges In the third quarter of 1997, the Company recorded a total restructuring charge of $6.2 million to restructure its operations to streamline activities and focus on key products to reduce ongoing costs. Of the total restructuring charge, $1.2 million was to account for implementing and completing the restructuring plan which included relocation of the Company's European office, exit from certain lines of business, a workforce reduction, the write-off of certain assets relating to Ibex and other estimated restructuring costs. This was in addition to a charge of $5.0 million associated with the write-off of the Ibex goodwill and related intangibles. 12 Interest income and Other expense, net Interest income and other expenses was $39,000 or 1% of net sales for the third quarter of 1998, as compared to $37,000 or 1% of net sales for the same period in 1997. Interest income and other expenses for the first nine months of 1998 increased slightly to $176,000 or 1% of net sales in 1998, as compared to $157,000 or 1% of net sales for the same period in 1997. Benefit from income taxes During the second quarter ended July 3, 1998 the Company revised its projected annualized effective tax rate. As a result of this revision, the Company has recorded a benefit from income taxes for the nine months ended October 2, 1998. The Company recorded a net benefit from income taxes in the third quarter ended September 26, 1997 of $732,000. This amount reflects the recognition of various deductible deferred assets, business tax credits and various temporary accounting differences. Liquidity and Capital Resources Since its inception in 1987, Castelle has funded its operations primarily through the sale of capital stock and bank debt. As of October 2, 1998, the Company had $4.9 million of cash and cash equivalents, down from $6.2 million at December 31, 1997. The decrease in cash and cash equivalents is due to higher accounts receivable resulting from an increase in 1998 in the time it takes for accounts receivable to be converted into cash, the costs associated with the acquisition by the Company of its Object-Fax NT product line and the repurchase of common shares, partially off-set by cash derived from a reduction in inventory on hand. Working capital decreased to $9.9 million at October 2, 1998 from $10.8 million at December 31, 1997. The reduction in working capital is mainly due to the costs associated with the acquisition by the Company of its Object-Fax NT product line from Tolvusamskipti HF, as described above. The Company has a $3.0 million secured revolving line of credit with a bank, which expires in December 1998, and at October 2, 1998 had no borrowings against the line of credit. In December 1997, as a source of capital asset financing, the Company entered into a loan and security agreement with a finance company, which allowed loans to the Company of up to $288,000. As of October 2, 1998, the Company had drawn down the entire $288,000. The loans are repayable by December 2000 and are collateralized by a certificate of deposit of $125,000, which is classified as restricted cash on the Company's balance sheet. As of October 2, 1998, net accounts receivable were $5.0 million, up from $3.3 million at December 31, 1997. The increase in accounts receivable is attributed to an increase in days sales outstanding from 55 at the end of 1997 to 83 days at October 2, 1998. Net inventories as of October 2, 1998 were $2.9 million, down from $3.8 million at December 31, 1997. The decrease was the result of decreasing inventory levels commensurate with lower revenue expectations, which improved the level of inventory turnover in the first nine months of 1998 compared to the end of 1997. The Company had not made any material capital commitments during the nine months ended October 2, 1998. 13 Liquidity and Capital Resources (continued) Although the Company believes that its existing capital resources, anticipated cash flows from operations and available lines of credit will be sufficient to meet its capital requirements at least through the next 12 months, the Company 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 the Company's 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. Management believes that, for the periods presented, inflation has not had a material effect on the Company's operations. Year 2000 Issue The Company is in the process of conducting a comprehensive review of its business applications, computer systems and infrastructure, key business partners and products to identify those that could be adversely affected by the Year 2000 issue and is developing and implementing a plan to resolve issues identified. The Year 2000 issue refers to the inability of many computer systems to process accurately dates later than December 31, 1999. Date codes in many programs are abbreviated to allow only two digits for the year, e.g. "98" for the year 1998. Unless these programs are modified to handle the century date change, they will likely interpret the year "00", that is, the year 2000, as the year 1900. The Year 2000 issue creates risk for the Company from unforeseen problems in its own computer systems as well as in computer systems of third parties with whom the Company does business worldwide, including banks and credit processing entities, factories, customers and others. Business Applications, Computer Systems and Infrastructure Castelle has completed a comprehensive review and inventory of its business applications and computer systems, including servers and network infrastructure, to insure that they are Year 2000 compliant. To date, the Company has installed and/or upgraded all computer network file servers and infrastructure (hubs, switches, modems and access devices) to hardware and software that is certified to be Year 2000 compliant by its vendors. In addition, Castelle's main business application from Computer Associates International, Inc. (Computer Associates) has been upgraded to a Year 2000 compliant version as certified by Computer Associates. During the next three months the Company expects to complete an upgrade of all desktop (including laptop) computers to Microsoft NT software certified by Microsoft Corporation as Year 2000 compliant. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company due to planned modifications to existing software and conversions to new software which have been implemented or are being implemented by the Company over the next year. 14 Key business partners The Company is in the process of conducting a comprehensive review of its key business partners, including customers, suppliers and vendors, to identify those critical to the success of the Company's operations that may have Year 2000 issues which could adversely affect the operations of the Company. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company due to planned modifications by our key business partners to their existing systems and conversions to new software which have been implemented or are being implemented by the Company's key business partners over the next year. However, if such modifications and conversions are not completed in a timely manner, the Year 2000 issue may have a material adverse impact on the operations of the Company. The Company cannot give assurance the third parties with whom it does business will address any Year 2000 issues in their own systems on a timely basis. Costs The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the Company's financial position. At the present time, all costs associated with the installation and upgrading of equipment and software have been related to routine upgrades of the Company's business systems. However, the Company cannot give any assurance that significant costs associated with unforeseen circumstances will not significantly affect the future results of the Company. Products The Company has completed a comprehensive review of its products, both firmware and software, to insure that they are Year 2000 compliant. This was done to insure that the Company's products are free of any Year 2000 issues discussed above. The Company believes that the more recent versions of its products are Year 2000 compliant, meaning that users of its products should not experience performance difficulties as a result of the need to process dates later than December 31, 1999. In order to avoid difficulties, users will need to install the versions of the Company's software that are Year 2000 compliant. For example, FaxPress systems require the use of a software and firmware release of at least version 3.7.3 and InfoPress requires that at least version 2.0 be installed for compliance with Year 2000 requirements. The Company provides upgrade kits to allow customers to install these versions. The Company's products work in conjunction with network operating systems such as Novell NetWare and Microsoft Windows 95/NT, and while these products appear to be Year 2000 compliant, the Company cannot accept responsibility for Year 2000 compliance of any network operating system. If modifications or upgrades to these network operating systems are not completed in a timely fashion, the Year 2000 issue may have a material adverse impact on the Company's business, operating results and financial condition. 15 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None. (b) None. (c) None. (d) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule (b) Reports on Form 8-K None. 16 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/ Arthur H. Bruno Date: November 19, 1998 Arthur H. Bruno Chairman of the Board, Chief Executive Officer and Director By: /s/ Randall I. Bambrough Date: November 19, 1998 Randall I. Bambrough Vice President of Finance and Administration Chief Financial Officer (Principal Financial and Chief Accounting Officer) 17 EX-27 2 ART.5 FOR 2ND QUARTER 10-Q
5 E-1 Exhibit 27.1 CASTELLE AND SUBSIDIARIES FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the Company's Financial Statements for the nine month period ending October 2, 1998 included in the Company's Form 10-Q/A filed November 19, 1998 and is qualified in its entirety by reference to such statements. 1,000 9-MOS DEC-31-1998 OCT-02-1998 4,854 0 5,491 484 2,860 14,350 4,629 (3,881) 18,412 4,410 0 0 0 29,107 (15,235) 18,412 0 18,147 8,334 8,334 11,161 0 (177) (1,172) (37) (1,135) 0 0 0 (1,135) (0.25) (0.25)
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