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.
<PAGE>
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
<PAGE>
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
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
CASTELLE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 2, 1998 December 31, 1997
(unaudited) (audited)
---------------- ------------------
Assets:
<S> <C> <C>
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 ================ ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
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
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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<TABLE>
<CAPTION>
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:
<S> <C> <C>
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 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
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:
<TABLE>
<CAPTION>
(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:
<S> <C> <C> <C> <C>
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)
=========== ========== =========== ==========
</TABLE>
7
<PAGE>
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:
<TABLE>
<CAPTION>
(in thousands)
.................................
October 2, December 31,
1998 1997
--------------- ----------------
<S> <C> <C>
Raw material $ 942 $ 1,544
Work in process 418 486
Finished goods 1,500 1,756
=============== ================
Inventories, net $ 2,860 $ 3,786
=============== ================
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-02-1998
<CASH> 4,854
<SECURITIES> 0
<RECEIVABLES> 5,491
<ALLOWANCES> 484
<INVENTORY> 2,860
<CURRENT-ASSETS> 14,350
<PP&E> 4,629
<DEPRECIATION> (3,881)
<TOTAL-ASSETS> 18,412
<CURRENT-LIABILITIES> 4,410
<BONDS> 0
0
0
<COMMON> 29,107
<OTHER-SE> (15,235)
<TOTAL-LIABILITY-AND-EQUITY> 18,412
<SALES> 0
<TOTAL-REVENUES> 18,147
<CGS> 8,334
<TOTAL-COSTS> 8,334
<OTHER-EXPENSES> 11,161
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (177)
<INCOME-PRETAX> (1,172)
<INCOME-TAX> (37)
<INCOME-CONTINUING> (1,135)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,135)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
