UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2000
|_| 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, 2000 was 4,741,060.
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CASTELLE
FORM 10-Q
TABLE OF CONTENTS
PAGE
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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 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 27.1 - Financial Data Schedule E-1
Exhibit 99.1 - Press Release dated October 31, 2000 E-2
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1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASTELLE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 29, 2000 DECEMBER 31, 1999
(UNAUDITED) (AUDITED)
---------------------- ---------------------
ASSETS:
Current assets:
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Cash and cash equivalents .............................. $ 4,483 $ 4,714
Restricted cash ........................................ 125 125
Accounts receivable, net of allowances for doubtful
accounts of $178 in 2000 and $271 in 1999 .......... 2,046 1,525
Inventories, net ....................................... 1,434 1,411
Prepaid expense and other current assets ............... 198 262
---------- ----------
Total current assets ................................ 8,286 8,037
Property, plant & equipment, net ......................... 261 387
Other assets ............................................. 115 78
---------- ----------
Total net assets .................................... $ 8,662 $ 8,502
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY:
Current liabilities:
Long-term debt, current ................................ $ 19 $ 98
Accounts payable ....................................... 1,168 1,336
Accrued liabilities .................................... 2,770 3,048
---------- ----------
Total current liabilities ........................... 3,957 4,482
---------- ----------
---------- ----------
Total liabilities ................................... 3,957 4,482
Shareholders' equity:
Common stock, no par value;
Authorized: 25,000 shares;
Issued and outstanding: 4,741 and 4,641, respectively 29,026 29,002
Deferred compensation .................................. (67)
(27)
Accumulated deficit .................................... (24,915)
(24,294)
---------- ----------
Total shareholders' equity .......................... 4,705 4,020
---------- ----------
Total liabilities & shareholders' equity ............ $ 8,662 $ 8,502
========== ==========
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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CASTELLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
.................................. .................................
SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29, OCTOBER 1,
2000 1999 2000 1999
----------------- --------------- --------------- ---------------
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Net sales ..................................... $ 3,730 $ 4,017 $ 11,591 $ 12,224
Cost of sales ................................. 1,314 1,547 4,273 6,149
--------- --------- --------- ---------
Gross profit .............................. 2,416 2,470 7,318 6,075
Operating expenses:
Research and development .................. 441 586 1,435 2,218
Sales and marketing ....................... 1,368 1,607 4,012 5,466
General and administrative ................ 383 622 1,265 1,576
Amortization of intangible assets ......... 0 0 0 40
Restructuring charges .................. 0 522 0 522
--------- --------- --------- ---------
Total operating expenses ............... 2,192 3,337 6,712 9,822
Income/(loss) from operations ................. 224 (867) 606 (3,747)
Interest income, net ...................... 52 32 143 87
Other income/(expense), net ............... (36) 37 (123) (9)
--------- --------- --------- ---------
Income/(loss) before provision for income taxes 240 (798) 626 (3,669)
Provision for income taxes ................ 0 0 6 0
--------- --------- --------- ---------
Net income/(loss) ............................. $ 240 $ (798) $ 620 $ (3,669)
========= ========= ========= =========
NET INCOME/(LOSS) PER SHARE:
Net income/(loss) per common share - basic $ 0.05 $ (0.17) $ 0.13 $ (0.80)
Shares used in per share calculation - basic 4,741 4,684 4,661 4,560
Net income/(loss) per common share - diluted $ 0.05 $ (0.17) $ 0.12 $ (0.80)
Shares used in per share calculation - 5,071 4,684 5,188 4,560
diluted
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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CASTELLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
.....................................
SEPTEMBER 29, OCTOBER 1,
2000 1999
----------------- -----------------
Cash flows from operating activities:
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Net income/(loss) ...................................... $ 620 $ (3,669)
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Loss on disposal of fixed assets ..................... -- 78
Depreciation and amortization ........................ 230 422
Provision for doubtful accounts and sales returns .... (133) (1,483)
Provision for excess and obsolete inventory .......... (112)
1,376
Compensation expense related to grant of stock options 39 --
Changes in assets and liabilities:
Accounts receivable ................................. (388) 3,144
Inventory ........................................... 89 818
Prepaid expenses and other current assets ........... 65 194
Accounts payable .................................... (168) (527)
Accrued liabilities ................................. (278) 287
---------- ----------
Net cash (used in)/provided by operating activities (36) 640
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment ..................... (103) (200)
Increase/(decrease) in other assets .................... (37)
23
---------- ----------
Net cash used in investing activities ............. (140) (177)
---------- ----------
Cash flows from financing activities:
Repayment of notes payable ............................. (79) (72)
Proceeds from collection of note receivable for stock .. -- 11
Proceeds from issuance of common stock and warrants, net
of repurchases ....................................... 24 2
---------- ----------
Net cash used in financing activities ............. (55) (59)
---------- ----------
(231) 404
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period .......... 4,714 3,924
---------- ----------
Cash and cash equivalents at end of period ................ $ 4,483 $ 4,328
========== ==========
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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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 results of operations for the interim
periods presented are not necessarily indicative of the results for the
year ending December 31, 2000. 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, 1999. The year-ended condensed balance sheet
data was derived from our audited financial statements and does not include
all of the disclosures required by generally accepted accounting
principles. The income statements for the periods presented are not
necessarily indicative of results that we expect for any future period, nor
for the entire year.
2. Net Income/Loss Per Share
Basic net income/loss per share is computed by dividing net income/loss
available to common shareholders by the weighted average number of common
shares outstanding for that period. Diluted net income/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. There are warrants to
purchase 100,000 shares of common stock outstanding, which have a strike
price of $8.40 and expire in December 2000. These warrants are not included
in the diluted share calculation.
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Basic and diluted income/loss per share are calculated as follows for the
third quarter and first nine months of 2000 and 1999, respectively:
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
................................................................
THREE MONTHS ENDED NINE MONTHS ENDED
................................ ...............................
SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29, OCTOBER 1,
2000 1999 2000 1999
---------------- --------------- -------------------------------
Basic:
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Weighted average common shares
outstanding ..................... 4,741 4,684 4,661 4,560
======= ======= ======= =======
Net income/(loss) ................... $ 240 $ (798) $ 620 $(3,669)
======= ======= ======= =======
Net income/(loss) per common share - $ 0.05 $ (0.17) $ 0.13 $ (0.80)
basic
======= ======= ======= =======
Diluted:
Weighted average common shares
outstanding ..................... 4,741 4,684 4,661 4,560
Common equivalent shares from stock
options and warrants .......... 330 -- 527 --
------- ------- ------- -------
Shares used in per share calculation
- diluted ....................... 5,071 4,684 5,188 4,560
======= ======= ======= =======
Net income/(loss) ................... $ 240 $ (798) $ 620 $(3,669)
======= ======= ======= =======
Net income/(loss) per common share - $ 0.05 $ (0.17) $ 0.12 $ (0.80)
diluted
======= ======= ======= =======
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The calculation of diluted shares outstanding for the three months ended
October 1, 1999 excludes 36,739 stock options to purchase the Company's
common stock, as their effect was antidilutive in the period. The
calculation of diluted shares outstanding for the nine months ended October
1, 1999 excludes 26,313 stock options, as their effect was antidilutive in
the period. At September 29, 2000, warrants to purchase 100,000 shares of
the Company's common stock were excluded, because their exercise price is
greater than the average common stock market price for the period.
3. Inventory:
----------
Inventory is stated at the lower of standard cost (which approximates cost
on a first-in, first-out basis) or market value and net of allowances for
excess and obsolete inventory. Inventory details are as follows (in
thousands):
SEPTEMBER 29, DECEMBER 31,
2000 1999
---------------------------------
Raw material $ 327 $ 136
Work in process 287 300
Finished goods 820 975
---------------------------------
Total inventory $ 1,434 $ 1,411
=================================
4. Revenue Recognition:
Product revenue is recognized upon shipment if a signed contract exists,
the fee is fixed and determinable, collection of the resulting receivables
is probable and product returns are reasonably estimable. The Company
enters into agreements with certain of its distributors which permit
limited stock rotation rights. These stock rotation rights allow the
distributor to return products for credit but require the purchase of
additional products of equal value. Revenues subject to stock rotation
rights are reduced by management's estimates of
6
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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.
5. 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
operates in one segment.
6. Comprehensive Income:
---------------------
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/loss, therefore, no separate
statement of comprehensive income has been presented.
7. New accounting pronouncements:
------------------------------
In June of 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS 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. Changes in fair value shall be
recognized currently in earnings. The Company is currently evaluating the
potential impact of this change on the Company's operations.
In December 1999 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements" together with a series of frequently asked questions, which
provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. Management are
evaluating the impact of SAB 101 on the Company but believes the impact of
SAB 101 will not have a material impact on the financial position or
results of operations of the Company.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of
APB Opinion No.25" ("FIN 44"). This Interpretation clarifies (i) the
definition of employee for purposes of applying APB Opinion No. 25, (ii)
the criteria for determining whether a plan qualifies as a noncompensatory
plan, (iii) the accounting consequence of various modifications to the
terms of the previously fixed stock option or award, and (iv) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in
this Interpretation cover specific events that occur after either December
15, 1998, or January 12, 2000. To the extent that FIN 44 covers events
occurring during the period after December 15, 1998, or January 12, 2000,
but before the effective date of July 1, 2000, the effects of applying this
Interpretation are recognized on a prospective basis from July 1, 2000. The
Company has adopted FIN 44 and believes that there is no effect of this
change on the Company's operations.
7
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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. The Company's operating
results may vary significantly from quarter to quarter due to a variety of
factors, including changes in the Company's product and customer mix,
constraints in the Company's manufacturing and assembling operations,
shortages or increases in the prices of raw materials and components,
changes in pricing policy by the Company or its competitors, a slowdown in
the growth of the networking market, seasonality, timing of expenditures
and economic conditions in the United States, Europe and Asia. Words such
as "believes," "anticipates," "expects," "intends" and similar expressions
are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. 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, 1999. 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, 1999.
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CONSOLIDATED STATEMENTS OF OPERATIONS - AS A PERCENTAGE OF NET SALES
THREE MONTHS ENDED NINE MONTHS ENDED
.................................. ..................................
SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29, OCTOBER 1,
2000 1999 2000 1999
---------------- ---------------- ---------------- ---------------
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Net sales 100% 100% 100% 100%
Cost of sales 35% 39% 37% 50%
---------------- ---------------- ---------------- ---------------
---------------- ---------------- ---------------- ---------------
Gross profit 65% 61% 63% 50%
Operating expenses:
Research and development 12% 15% 12% 18%
Sales and marketing 37% 40% 35% 45%
General and administrative 10% 15% 11% 13%
Amortization of intangible assets -- -- * *
Restructuring charges -- 13% -- 5%
---------------- ---------------- ---------------- ---------------
Total operating expenses 59% 83% 58% 81%
---------------- ---------------- ---------------- ---------------
Income/(loss) from operations 6% (22%) 5% (31%)
*
Interest income, net * 2% 1%
Other income/(expense), net * * * *
---------------- ---------------- ---------------- ---------------
Income/(loss) before provision for
income taxes 6% (20%) 5% (30%)
Provision for income taxes -- -- * --
---------------- ---------------- ---------------- ---------------
---------------- ---------------- ---------------- ---------------
Net income/(loss) 6% (20%) 5% (30%)
================ ================ ================ ===============
* Less than 1%
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RESULTS OF OPERATIONS
NET SALES
Net sales for the third quarter of 2000 were $3.7 million as
compared to $4 million for the same period in 1999. The shortfall in net
sales was primarily due to the continued decline in the sales of the print
server products by $430,000, or 46%, mainly to customers in the Asia
Pacific Region, partially offset by an increase in sales of enhanced fax
server products of $143,000, or 5%.
Net sales were $11.6 million and $12.2 million for the first nine
months of 2000 and 1999, respectively. The decrease in net sales was
largely due to the continued reduction in demand for our print server
products of $920,000, or 37%, mainly to customers in the Asia Pacific
Region, partially offset by an increase in the sales of the enhanced fax
server products of $288,000, or 3%.
International sales in the third quarter of 2000 were $852,000 as
compared to $1.3 million for the same period in 1999, representing 23% and
32%, respectively, of total net sales. International sales for the first
nine months of 2000 and 1999 were $2.9 million and $3.9 million,
respectively, representing 25% and 32%, respectively, of total net sales.
This decline in international sales was mainly the result of reduced demand
for our print server products.
Domestic sales in the third quarter of 2000 were $2.9 million, as
compared to $2.7 million in the same period in 1999, representing 77% and
68%, respectively, of total net sales. For the first nine months of 2000,
domestic sales were $8.7 million, as compared to $8.4 million in the same
nine months of 1999, representing 75% and 68%, respectively, of total net
sales. The increase in domestic sales in the first nine months of 2000 was
primarily due to higher demand for products in the fax server product line.
GROSS PROFIT
Gross profit was $2.4 million, or 65%, for the third quarter of
fiscal 2000 as compared to gross profit of $2.5 million, or 61%, for the
same period in 1999. The higher gross profit percentage in the third
quarter of 2000 was chiefly due to the increasingly favorable mix from the
sales of our fax server products, which has a higher gross profit
contribution as compared to the sales of our print server products, which
yields a lower gross margin.
Gross profits for the first nine months of 2000 and 1999 were $7.3
million, or 63% and $6.1 million, or 50%, respectively. Excluding an excess
inventory provision of $1.2 million recorded in 1999, the gross profit in
the first nine months of 1999 would have been $7.3 million, or 60%. The
excess inventory provision was primarily associated with excess inventory
of print server products targeted for the Asian market and of fax server
products made obsolete by the newer FaxPress models. The increase in gross
profit percentage for the first nine months of 2000 compared to the same
period of 1999 was principally due to the favorable mix from the sales of
our fax server products with higher gross profit as compared to the print
server products with lower gross profit.
RESEARCH & DEVELOPMENT
Research and product development expenses were $441,000, or 12%,
of net sales for the third quarter of 2000 as compared to $586,000, or 15%,
of net sales for the same period in 1999. Research and product development
expenses for the first nine months of 2000 were $1.4 million, or 12% of net
sales, as compared to $2.2 million, or 18% of net sales for the
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same period in 1999. The decrease was mainly attributed to staff reductions
in the third quarter of 1999, resulting in lower operating expenses in
subsequent periods.
SALES & MARKETING
Sales and marketing expenses were $1.4 million, or 37%, of net
sales for the third quarter of 2000, as compared to $1.6 million, or 40% of
net sales for the same period in 1999. For the first nine months of 2000,
the expenses were $4 million, or 35% as compared to $5.5 million, or 45% of
the same period in 1999. The decrease in sales and marketing expenses was
mostly associated with lower personnel costs in 2000.
GENERAL & ADMINISTRATIVE
General and Administrative expenses were $383,000 and $622,000, or
10% and 15%, respectively, of net sales for the third quarter of 2000 and
1999, respectively. General and administrative expenses for the first nine
months of fiscal 2000 decreased to $1.3 million, or 11% of net sales, as
compared to $1.6 million, or 13% of net sales for the same period in 1999.
The decrease was primarily due to lower legal expenses and personnel
related costs in 2000.
RESTRUCTURING
We recognized a one-time restructuring charge of $522,000 in the third
quarter of fiscal 1999. The restructuring charge included expenses
associated with our exit from certain lines of business, a reduction in our
workforce, and expenses related to the write off of excess office space.
Substantially all of this amount has been utilized. There were no such
expenses in fiscal year 2000.
AMORTIZATION OF INTANGIBLE ASSETS
The intangible assets referenced as of the nine months ended
October 1, 1999, were fully amortized in the first quarter of 1999. The
number listed on the Company's statement of operations for the nine months
ended October 1, 1999 reflected the amortization of intangible assets from
the Company's acquisition of the Object-Fax NT product line in April 1998.
10
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LIQUIDITY AND CAPITAL RESOURCES
As of September 29, 2000, we had approximately $4.5 million of cash and
cash equivalents as compared to $4.7 million at December 31, 1999. However,
working capital increased to $4.3 million at September 29, 2000 from $4.1
million at June 30, 2000 and $3.6 million at December 31, 1999. The increase in
working capital was primarily due to the Company's net income for the first nine
months of 2000 and focus on controlling expenses.
We have a $3 million secured revolving line of credit with a bank from
which we may borrow 100% against pledges of cash at the bank's prime rate and
expires in March 2001. At September 29, 2000, we had no borrowings under the
line of credit.
In December 1997, we 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 our balance sheet. As of September 29, 2000, the outstanding
balance of the loan under the agreement was $19,000.
As of September 29, 2000, net accounts receivable were $2 million, up
from $1.5 million at December 31, 1999. The increase in net accounts receivable
was largely attributed to an increase in net sales in the first quarter of this
year and slower collections in the second and third quarters resulting in a
lengthening of the number of days for which payment for sales is outstanding
from 35 days at December 31, 1999 to 49 days at September 29, 2000.
Net inventory as of September 29, 2000 was $1.4 million, comparable to
that of December 31, 1999.
We did not make any material capital commitments during the first nine
months ended September 29, 2000. In December 2000, we will be relocating our
headquarters to a new facility in Morgan Hill, California. In addition to the
tenant improvements subsidized by the landlord to build out this facility, we
will be investing approximately $500,000 of our available cash in leasehold
improvements.
Although we believe that our 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, we may be
required to seek additional equity or debt financing. The timing and amount of
such capital requirements cannot be determined at this time and will depend on a
number of factors, including demand for our existing and new products and the
pace of technological change in the networking industry. There can be no
assurance that such additional financing will be available on satisfactory terms
when needed, if at all.
We believe that, for the periods presented, inflation has not had a
material effect on our operations.
OTHER MATTERS
In October 2000, we signed a five year lease for a facility in Morgan
Hill, California where we will be occupying an aggregate of approximately 16,600
square feet of floor space of a 26,800 square feet new building. We will be
relocating our headquarters, including our executive offices and corporate
administration, development, manufacturing, marketing, sales and technical
support facilities to this new location in December 2000. In addition to the
tenant improvements to build out this facility paid for by the landlord, we will
be investing approximately $500,000 of our available cash in leasehold
improvements.
11
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Our Common Stock has been listed on the Nasdaq SmallCap Market since
April 1999. In order to maintain its listing on the Nasdaq SmallCap Market, we
must maintain total assets, capital and public float at specified levels, and
generally must maintain a minimum bid price of $1.00 per share. If we fail to
maintain the standard necessary to be quoted on the Nasdaq SmallCap Market, our
Common Stock could become subject to delisting. If the Common Stock is delisted,
trading in the Common Stock could be conducted on the OTC Bulletin Board or in
the over-the-counter market in what is commonly referred to as the "pink
sheets." If this occurs, a shareholder will find it more difficult to dispose of
the Common Stock or to obtain accurate quotations as to the price of the Common
Stock. Lack of any active trading market would have an adverse effect on a
shareholder's ability to liquidate an investment in our Common Stock easily and
quickly at a reasonable price. It might also contribute to volatility in the
market price of our Common Stock and could adversely affect our ability to raise
additional equity or debt financing on acceptable terms or at all. Failure to
obtain desired financing on acceptable terms could adversely affect our
business, financial condition and results of operations. The Company believes
that there have been no material changes in the reported market risks faced by
the Company since the fiscal year ended December 31, 1999. These and other risk
factors are discussed in more detail in our Form 10-K for the fiscal year ended
December 31, 1999 under the section "Risk Factors."
12
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes that there have been no material changes in the
reported market risks faced by the Company since the fiscal year
ended December 31, 1999. These and other risk factors are discussed
in more detail in our Form 10-K for the fiscal year ended December
31, 1999 under the section "Risk Factors."
ITEM 4. SUBMISSION OF MATTERS 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
99.1 Press Release dated October 31, 2000
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASTELLE
By: /s/ Donald L. Rich Date: November 14, 2000
Donald L. Rich
President, Chief Executive Officer,
Chief Financial Officer and Director
(Principal Executive Officer and
Principal Finance and Accounting Officer)
14
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