-----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, MKMspLj45BWgJyzzlGvTMhmUmej3Sa9sdp91wdyqzdlClV2lt7e0JHMubAvg8ct0 QPEn5fzwH36EQpEARPBp/A== 0000908605-99-000016.txt : 19991115 0000908605-99-000016.hdr.sgml : 19991115 ACCESSION NUMBER: 0000908605-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991001 FILED AS OF DATE: 19991112 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 SEC ACT: SEC FILE NUMBER: 000-22020 FILM NUMBER: 99751012 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 1 QUARTERLY REPORT 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 October 1, 1999 |_| 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 the Registrant's Common Stock outstanding as of November 8, 1999 was 4,635,435.
CASTELLE FORM 10-Q TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 4. Exhibits and Reports on Form 8-K 14 Signatures 15 Exhibit 27.1 - Financial Data Schedule E-1 Exhibit 99.1 - Press Release dated November 10, 1999 E-2
1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CASTELLE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) October 1, 1999 December 31, 1998 (unaudited) (audited) ---------------------- --------------------- Assets: Current assets: Cash and cash equivalents $ 4,328 $3,924 Restricted cash 125 125 Accounts receivable, net of allowances of $271 in 1999 and $720 in 1998 1,811 3,472 Inventory 1,545 3,739 Prepaid expense and other current assets 204 398 ---------------------- --------------------- Total current assets 8,013 11,658 Property, plant & equipment, net 463 666 Other assets 89 170 ---------------------- --------------------- 8,565 $12,494 ====================== ===================== Liabilities & Shareholders' Equity: Current liabilities: Current portion of notes payable $ 96 $ 96 Accounts payable 1,557 2,084 Accrued liabilities 3,002 2,715 ---------------------- --------------------- Total current liabilities 4,655 4,895 Notes payable 26 98 ---------------------- --------------------- Total liabilities 4,681 4,993 ---------------------- --------------------- Shareholders' equity: Common stock, no par value; authorized: 25,000 shares; Issued and outstanding: 4,635 and 4,337, respectively 28,993 29,255 Note receivable for purchase of common stock -0- (274) Deferred compensation (80) (120) Accumulated deficit (25,029) (21,360) ---------------------- --------------------- Total shareholders' equity 3,884 7,501 ---------------------- --------------------- 8,565 $12,494 ====================== =====================
See accompanying notes to condensed consolidated financial statements. 2
CASTELLE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) Three months ended Nine months ended ..................................... ..................................... October 1, 1999 October 2, 1998 October 1, 1999 October 2, 1998 ----------------- ------------------ ----------------- ------------------ Net sales $ 4,017 $ 5,449 $ 12,224 $ 18,147 Cost of sales 1,547 2,266 6,149 8,334 ----------------- ------------------ ----------------- ------------------ Gross profit 2,470 3,183 6,075 9,813 ----------------- ------------------ ----------------- ------------------ Operating expenses: Research and development 586 780 2,218 2,177 Sales and marketing 1,607 2,396 5,466 6,426 General and administrative 622 399 1,576 1,354 Amortization of intangible assets -0- 40 40 80 Restructuring charges 522 -0- 522 -0- Acquisition of in-process research and development -0- -0- -0- 1,124 ----------------- ------------------ ----------------- ------------------ Total operating expenses 3,337 3,615 9,822 11,161 ----------------- ------------------ ----------------- ------------------ Loss from operations (867) (432) (3,747) (1,348) Interest income, net 32 57 87 177 Other income (expense), net 37 (18) (9) (1) ----------------- ------------------ ----------------- ------------------ Loss before benefit from income taxes (798) (393) (3,669) (1,172) Benefit from income taxes -0- -0- -0- 37 ----------------- ------------------ ----------------- ------------------ Net loss (798) $ (393) (3,669) $ (1,135) ================= ================== ================= ================== Net Loss per share: Net loss per common share - basic and diluted $(0.17) $(0.09) $(0.80) $(0.25) Shares used in per share calculation - basic and diluted 4,684 4,594 4,560 4,563
See accompanying notes to condensed consolidated financial statements. 3
CASTELLE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine months ended ...................................... October 1, 1999 October 2, 1998 ------------------ ------------------ Cash flows from operating activities: Net loss $ (3,669) $ (1,135) Adjustment to reconcile net loss to net cash provided by operating activities: Loss on disposal of fixed assets 78 -- Depreciation and amortization 422 500 Provision for doubtful accounts and sales returns (1,483) (307) Provision for excess and obsolete inventory 1,376 148 Acquisition of in-process research and development -- 1,124 Changes in assets and liabilities: Accounts receivable 3,144 (1,427) Inventory 818 778 Prepaid expenses and other current assets 194 (79) Accounts payable (527) 658 Accrued liabilities 287 (267) ------------------ ------------------ Net cash provided by operating activities 640 (7) ------------------ ------------------ Cash flows from investing activities: Purchase of property and equipment (200) (180) Acquisition of Object-Fax product line -- (784) Repurchase of common stock -- (384) Increase in other assets 23 (82) ------------------ ------------------ Net cash (used in) investing activities (177) (1,430) ------------------ ------------------ Cash flows from financing activities: Proceeds from notes payable -- 142 Repayment of notes payable (72) (64) Proceeds from collection of note receivable for stock 11 -- Proceeds from issuance of common stock and warrants, net of repurchases 2 9 ------------------ ------------------ Net cash provided by (used in) financing activities (59) 87 ------------------ ------------------ Net increase in cash and cash equivalents 404 (1,350) Cash and cash equivalents at beginning of period 3,924 6,204 ------------------ ------------------ Cash and cash equivalents at end of period 4,328 $ 4,854 ================== ================== Supplemental Information: Noncash financing activities: Issuance of common stock for acquisition of Object-Fax product line $ -- $ 500
See accompanying notes to condensed consolidated financial statements. 4 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 generally accepted accounting principles. 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 result of operations for the interim period presented is not necessarily indicative of the results for the year ending December 31, 1999. 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, 1998. 2. Net Loss Per Share Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for that period. Diluted net income loss per share reflects the potential dilution from the exercise or conversion of other securities into common stock that were outstanding during the period. Shares that are potentially dilutive consist of incremental common shares issuable upon exercise of stock options and warrants. Basic and diluted earnings per share are calculated as follows for the third quarter and first nine months ending of 1999 and 1998:
(in thousands, except per share amounts) ............................................................ Three months ended Nine months ended ............................. ............................. October 1, October 2, October 1, October 2, 1999 1998 1999 1998 -------------- -------------- -------------- -------------- Basic: Weighted average common shares outstanding 4,684 4,594 4,560 4,563 ============== ============== ============== ============== Net loss $(798) $(393) $(3,669) $(1,135) ============== ============== ============== ============== Net loss per common share - basic $ (0.17) $ (0.09) $ (0.80) $ (0.25) ============== ============== ============== ============== Diluted: Weighted average common shares outstanding 4,684 4,594 4,560 4,563 Common equivalent shares from stock options -- -- -- -- ============== ============== ============== ============== Shares used in per share calculation - diluted 4,684 4,594 4,560 4,563 ============== ============== ============== ============== Net loss $(798) $(393) $(3,669) $(1,135) ============== ============== ============== ============== Net loss per common share - diluted $ (0.17) $ (0.09) $ (0.80) $ (0.25) ============== ============== ============== ==============
The calculation of diluted shares outstanding for the three months ended October 1, 1999 and October 2, 1998 excludes 36,739 and 34,966 stock options, respectively, as their effect was antidilutive in the period. The calculation of diluted shares outstanding for the nine months ended October 1, 1999 and October 2, 1998 excludes 26,313 and 108,244 stock options, respectively, as their effect was antidilutive in the period. 5 CASTELLE AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. Inventory: Inventory is 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): October 1, December 31, 1999 1998 --------------- ----------------- Raw material $ 252 $ 1,282 Work in process 271 130 Finished good 1,022 2,327 =============== ================= $ 1,545 $ 3,739 =============== ================= 4. Restructuring: The Company recognized a one-time restructuring charge of $522,000 in the third quarter of fiscal 1999. The restructuring charge includes expenses associated with the Company's exit from certain lines of business, a reduction in the company's workforce, and expenses related to the write off of excess office space. 5. 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 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. 6. Segments Disclosure: The Company has adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 31, 1997. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 changes current practice under SFAS No. 14 by establishing a new framework on which to base segment reporting and introduces requirements for interim reporting of segment information. The Company has determined that it uses one measurement of profitability of its business for internal reporting. 6 CASTELLE AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7. Comprehensive Income: Castelle has adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998. This statement requires the disclosure of comprehensive income and its components in a full set of general-purpose 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. 8. New accounting pronouncements: In June of 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. There is no effect of this change on the Company's operations. In December 1998, the Accounting Standards Executive Committee ("AcSEC") released Statement of Position 98-9 ("SOP 98-9"), Modification of SOP 97-2, "Software Revenue Recognition," with Respect to Certain Transactions. SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue for multiple element arrangements by means of the "residual method" when (1) there is vendor-specific objective evidence ("VSOE") of the fair values of all the undelivered elements that are not accounted for by means of long-term contract accounting, (2) VSOE of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of each delivered element) are satisfied. The provisions of SOP 98-9 that extend the deferral of certain paragraphs of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that are entered into in fiscal years beginning after March 15, 1999. Retroactive application is prohibited. This pronouncement will not have an impact on the Company's current revenue recognition policies. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements may be deemed to the adequacy of anticipated sources of cash to fund the Company's future capital requirements through March 31, 2000, and the costs of the Company's Year 2000 compliance efforts and dates by which the Company believes it will complete such efforts. 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. 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 for the fiscal year ended December 31, 1998. 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 for the fiscal year ended December 31, 1998.
Consolidated Statements of Operations - As a Percentage of Net Sales Three months ended Nine months ended .................................... ..................................... October 1, 1999 October 2, 1998 October 1, 1999 October 2, 1998 ----------------- ----------------- ----------------- ------------------ Net sales 100% 100% 100% 100% Cost of sales 39% 42% 50% 46% ----------------- ----------------- ----------------- ------------------ Gross profit 61% 58% 50% 54% ----------------- ----------------- ----------------- ------------------ Operating expenses: Research and development 15% 14% 18% 12% Sales and marketing 40% 44% 45% 35% General and administrative 15% 7% 13% 8% Amortization of intangible assets -- 1% * * Restructuring charges 13% -- 5% -- Acquisition of in-process research and development -- -- -- 6% ----------------- ----------------- ----------------- ------------------ Total operating expenses 83% 66% 81% 61% ----------------- ----------------- ----------------- ------------------ Loss from operations (22%) (8%) (31%) (7%) Interest income, net 2% 1% 1% 1% Other income (expense), net * * * * ----------------- ----------------- ----------------- ------------------ Loss before benefit from income taxes (20%) (7%) (30%) (6%) Benefit from income taxes -- -- -- * ----------------- ----------------- ----------------- ------------------ Net loss (20%) (7%) (30%) (6%) ================= ================= ================= ==================
* Less than 1% 8 Results of Operations Net Sales Net sales for the third quarter of 1999 decreased to $4 million from $5.4 for the same period in 1998. The reduction in net sales was primarily the result of a $0.4 million (33%) decrease in print server product sales, as well as, $1.0 million (24%) decrease in sales of the Company's fax server products to distributors to maintain manageable inventory levels in the channel. Net sales were $12.2 million and $18.1 million for the first nine months of 1999 and 1998, respectively. The lower net sales were the result of a 56% reduction in print server product sales, primarily due to reduced demand for the Company's print server products in Asia and a 22% reduction in fax server products, primarily due to decreased sales of the Company's fax server products to distributors to maintain manageable inventory levels in the channel. International sales in the third quarter of 1999 decreased to $1.2 million from $1.9 million for the same period in 1998, representing 30% and 35%, respectively, of total net sales. This 35% decline in international sales was mainly the result of the decrease in fax server product sales to United Kingdom distributors to maintain manageable inventory levels in the European channel. International sales were $3.9 million and $6.9 million for the first nine months of 1999 and 1998, respectively, representing 32% and 38%, respectively, of total net sales. The 43% decrease in international sales was the result of lower demand for the Company's print server products in Asia and the decrease in the Company's fax server product sales to United Kingdom distributors to maintain manageable inventory levels in the European channel. Gross Profit Gross profit of 61% for the third quarter of fiscal 1999 increased compared to gross profit of 58% for the same period in 1998. The increase in the third quarter 1999 gross profit is primarily attributable to the increase in the gross margin of print server products. Gross profit for the nine months of 1999 and 1998 were 50% and 54%, respectively. The reduction in gross profit is primarily attributable to an additional $1,248,000 excess inventory provision recorded in the first nine months of 1999. This provision is primarily associated with excess print server products targeted for the Asian market and fax server products expected to be replaced by newly introduced FaxPress models. Research & Development Research and product development expenses decreased to $586,000 or 15% of net sales for the third quarter of 1999 as compared to $780,000 or 14% of net sales for the same period in 1998. The decrease is due to the lower personnel-related expenses. Research and product development expenses for the first nine months was $2.2 million or 18% of net sales in 1999 as compared to $2.2 million or 12% of net sales for the same period in 1998. 9 Sales & Marketing Sales and marketing expenses were $1.6 million or 40% of net sales for the third quarter of 1999, as compared to $2.4 million or 44% of net sales for the same period in 1998. The decrease in sales and marketing expenses is associated with lower advertising expenses in the distribution channel and personnel-related expenses during the third quarter of 1999. Sales and marketing expenses decreased to $5.5 million or 45% of net sales for the first nine months of 1999 from $6.4 million or 35% of net sales for the same period in 1998. This decrease is attributable to lower personnel-related expenses. General & Administrative General and administrative expenses were $622,000 and $399,000 or 15% and 7%, of net sales for the third quarter of 1999 and 1998, respectively. General and administrative expenses for the first nine months of fiscal 1999 increased to $1.6 million or 13% of net sales in 1999 as compared to $1.4 million or 8% of net sales for the same period in 1998. The increase in the interim periods of 1999 compared to the interim periods of 1998 is primarily due to higher personnel-related and legal expenses. Restructuring The Company recognized a one-time restructuring charge of $522,000 in the third quarter of fiscal 1999. The restructuring charge includes expenses associated with the Company's exit from certain lines of business, a reduction in the company's workforce, and expenses related to the write off of excess office space. Amortization of intangible assets & Acquisition of in-process research and development The intangible assets were fully amortized in the first quarter of 1999. The expense was $40,000 or 1% of net sales for the same period in 1998. It reflects the amortization of intangible assets for the acquisition of the Object-Fax NT product line in April 1998. 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. The purchase, valued at approximately $1.4 million, included the exchange of $300,000 in cash, 100,000 shares of Castelle common stock, and the right to receive either additional cash or the number of shares of Castelle common stock on the date six months after the acquisition necessary to make the fair market value of the common stock and additional cash received in the transaction not less than $500,000. Since the value of the Castelle common stock received in the transaction was less than $500,000 on the date six months after the acquisition, an additional 339,560 shares of Castelle common stock were issued to Tolvusamskipti HF on April 9, 1999. 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 second quarter of 1998. Interest & Other income (expense), net Interest and other income (expense), net, comprised income of $69,000 or 1.7% of net sales for the third quarter of 1999, as compared to income of $39,000 or 0.7% of net sales for the same period in 1998. This increase in income is the result of an exchange gains from the UK subsidiary and increase in miscellaneous income. Interest income and other income (expenses) for the first nine months of 1999 decreased to $78,000, as compared to $176,000 or 1% of net sales for the same period in 1998. This reduction in income is primarily the result of lower interest earned on the Company's investments. 10 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 1, 1999, the Company had approximately $4.3 million of cash and cash equivalents, up from $3.9 million at December 31, 1998. The increase is due to faster collection of account receivables. Working capital decreased to $3.4 million at October 1, 1999 from $6.8 million at December 31, 1998. The decrease in working capital is primarily due to the Company's net loss for the first nine months of 1999. 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, 100,000 shares of Castelle common stock and the right to receive either additional cash or the number of shares of Castelle common stock on the date six months after the acquisition necessary to make the fair market value of the common stock and additional cash received in the transaction not less than $500,000. Since the value of the Castelle common stock received in the transaction was less than $500,000 on the date six months after the acquisition, an additional 339,560 shares of Castelle common stock were issued to Tolvusamskipti HF on April 9, 1999. The Company has a $3.0 million secured revolving line of credit with a bank, which expires in March 17, 2000. At October 1, 1999, the Company had no borrowings under the line of credit. In December 1997, the Company entered into a loan and security agreement with a finance company for an amount of $288,000. The amounts borrowed are subject to interest of 10.11%, are repayable by December 2000, and are partially collateralized by a certificate of deposit of $125,000, which is classified as restricted cash on the Company's balance sheet. As of October 1, 1999, the outstanding balance of the loan under the agreement was $122,000. As of October 1, 1999, net accounts receivable were $1.8 million, down from $3.5 million at December 31, 1998. The decrease in net accounts receivable is attributed to a decrease in net sales and the improved collection of outstanding balances in the third quarter of 1999, which resulted in an improvement in days sales outstanding from 87 at the end of 1998 to 41 days at October 1, 1999. Net inventory as of October 1, 1999 was $1.5 million, down from $3.7 million at December 31, 1998. The decrease was primarily attributable to an additional $1,248,000 inventory provision recorded in the first nine months of 1999. This provision is mainly associated with excess print server products targeted for the Asian market and fax server products expected to be replaced by newly introduced FaxPress models. The Company had not made any material capital commitments during the first nine months ended October 1, 1999. 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. 11 Year 2000 Compliance The Company has completed a comprehensive review of its business applications, computer systems and infrastructure and products. In addition, Castelle is in the process of conducting a comprehensive review of its key business partners 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 Company anticipates that its review will be completed by December 10, 1999. 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. The Company has substantially completed an upgrade of all desktop (including laptop) computers to Microsoft NT software certified by Microsoft Corporation as Year 2000 compliant. All of the Company's engineering, manufacturing, final test, and repair computer systems have been upgraded and tested for Y2k compliance. 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 during the year. 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 anticipates that its review will be completed by November 30, 1999. 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. 12 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, which to date have been approximately $110,000. The Company estimates the remaining cost associated with the installation and upgrading of the equipment will be approximately $25,000. 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 its products 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 the products will perform functions correctly when processing dates later than December 31, 1999. In order to avoid difficulties, users will need to install the Year 2000 compliant versions of the Company's software or apply appropriate patches to prior versions of software. Full details on Year 2000 compliance of the Company's various product lines and software version releases are available on the Company's web site. Necessary patches are available on the web site 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 95/98/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 or any other third party software with which Castelle software interfaces. If modifications or upgrades to these 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. Contingency Plans The Company has developed contingency plans in the event that the Company's systems or products prove to not be Year 2000 compliant. The Company has contingency plans in place for all specific client, server, hardware, and general network infrastructure Year 2000 issues. Company has currently reviewed its key business activities and developed plans to support ongoing business operations in the event of a disruption. Based on its assessment to date, the Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company. Although the Company has detailed contingency plans, ongoing evaluating and testing of the Company's network infrastructure will continue up to and past the year 2000 to ensure a smooth transition to the new millennium. 13 PART II - OTHER INFORMATION ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule 99.1 Press Release dated November 10, 1999 (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: November 12, 1999 Donald L. Rich President, Chief Executive Officer and Director By: /s/ Laurie Gee Date: November 12, 1999 Laurie Gee Vice President of Finance and Administration (Principal Financial and Accounting Officer) 15 EX-27 2 ART. 5 FOR 3RD QUARTER 10-Q
5 CASTELLE AND SUBSIDIARIES FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the Company's Financial Statements for the three month period ending October 1, 1999 included in the Company's Form 10-Q filed November 12, 1999 and is qualified in its entirety by reference to such statements. 1,000 3-MOS DEC-31-1999 OCT-01-1999 4,453 0 2,082 (271) 1,545 8,013 1,633 (1,170) 8,565 4,655 0 0 0 28,993 (25,109) 8,565 4,017 4,017 1,547 1,547 3,337 0 4 (798) 0 (798) 0 0 0 (798) (0.17) (0.17)
EX-99 3 PRESS RELEASE EXHIBIT 99.1 FOR IMMEDIATE RELEASE November 10, 1999 CONTACT: Donald L. Rich, President & CEO (408) 496-0474 Castelle announces third quarter of 1999 results SANTA CLARA, Calif., November 10, 1999 - CASTELLE (Nasdaq: CSTL) today announced financial results for the third fiscal quarter ended October 1, 1999. Net sales were $4.0 million for the three months ended October 1, 1999 versus $5.4 million in the same period of 1998. The Company reported a net loss of $798,000 or $0.17 per share compared to a net loss of $393,000 or $0.09 per share in the third quarter of 1998. The results of the third quarter of 1999 include a one-time restructuring charge of $522,000 or $0.11 per share. The restructuring charge includes expenses associated with the Company's exit from certain lines of business, a reduction in the Company's workforce, and expenses related to the write-off of excess office space. If adjusted to exclude this charge, results of the third quarter of 1999 would have shown a net loss of $276,000 or $0.06 per share. Net sales for the first nine months of 1999 were $12.2 million compared with $18.1 million for the same period of 1998. Net loss for the nine-month period was $3,669,000 or $0.80 per share compared to a net loss of $1,135,000 or $0.25 per share for the 1998 period. Excluding the above-mentioned one-time charge of $522,000 and the excess inventory provision of $1,248,000 in the first nine months of 1999, the net loss for the first nine months of 1999 would have shown a net loss of $1,899,000 or $0.42 per share. The net losses reflect the continuing decline in print server sales, primarily due to the business conditions in the Asia Pacific region, and the decline in shipments to distributors to support the Company's continued effort to manage down inventory levels in the distribution channel. The cash balance increased to $4.3 million at the end of the third quarter of 1999 from $3.9 million at the end of the fourth quarter of 1998 and days sales outstanding improved to 41 days at October 1, 1999 from 87 days at the end of 1998. Donald L. Rich, President and CEO, stated: "Over the course of the past year we have implemented cost reduction programs resulting in lower operating expenses and higher margins. We continue to develop new products and by the end of this year will have replaced our entire Fax Server product line with new enhanced hardware models and software releases. We believe we are well positioned and our objective is to turn the corner and achieve profitability in the upcoming fourth quarter of 1999." Founded in 1987, Castelle is an industry leader and pioneer of network fax and print servers that increase productivity in workgroups and the enterprise. Castelle products are available through a worldwide network of distributors and Value Added Resellers. Castelle is headquartered in Santa Clara, Calif. and can be reached at 1-800-289-7555; (408) 496-0474; or www.castelle.com. This press release contains forward-looking statements that involve risks and uncertainties, relating to the future events, including the Company's objective to achieve profitability in the fourth quarter of 1999, the timing of the replacement of the Company's Fax Server product line with new enhanced hardware models and software releases and the effect of improved business conditions in the Asia Pacific Region on the Company's results of their print server sales. Actual events or the Company's results may differ materially from the events or results discussed in the forward-looking statements for a number of reasons including, without limitation, the timely development, acceptance and pricing of new products and the general economic conditions as they affect the Company's customers. The Company assumes no obligation to update the forward-looking information. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the Company's 10-K for the fiscal year ended December 31, 1998. E-2 -----END PRIVACY-ENHANCED MESSAGE-----