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 March 30, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-220-20
CASTELLE
(Exact name of Registrant as specified in its charter)
California 77-0164056
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
855 Jarvis Drive, Suite 100, Morgan Hill, California 95037
(Address of principal executive offices, including zip code)
(408) 852-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
The number of shares of Common Stock outstanding as of May 8, 2001 was 4,742,060
CASTELLE
Form 10-Q
Table of Contents
Page
Special Note on Forward-looking statements 2
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit 99.1 - Press Release dated May 14, 2001 E-1
1
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that involve risks and
uncertainties. The Company's operating results may vary significantly from
quarter to quarter due to a variety of factors, including without limitation,
the timely development, acceptance, and pricing of new products, changes in the
Company's product and customer mix, constraints in the Company's manufacturing
and assembling operations, shortages or increases in the prices of raw materials
and components, changes in pricing policy by the Company or its competitors, a
slowdown in the growth of the networking market, seasonality, timing of
expenditures and economic conditions in the United States, Europe and Asia.
Words such as "believes," "anticipates," "expects," "intends" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. Unless the context otherwise
requires, references in this Form 10-Q to "we," "us," or the "Company" refer to
Castelle. Readers are cautioned that the forward-looking statements reflect
management's analysis only as of the date hereof, and the Company assumes no
obligation to update these statements. Actual events or results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to the risks and
uncertainties discussed herein, as well as other risks set forth under the
caption "Risk Factors" in the Company's Annual Report on Form 10-K and Form
10-K/A for the fiscal year ended December 31, 2000. We urge you to consider
these cautionary statements in evaluating our forward-looking statements. Except
as required by laws, we undertake no obligations to publicly update any
forward-looking statements to reflect subsequent events and circumstances.
2
Part I - Financial Information
Item 1. Financial Statements
CASTELLE AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
March 30, 2001 December 31, 2000
(unaudited) (audited)
---------------------- --------------------
Assets:
Current assets:
Cash and cash equivalents $ 3,571 $ 3,893
Restricted cash - 125
Accounts receivable, net of allowance for doubtful accounts
of $323 in 2001 and $285 in 2000 1,297 2,083
Inventories, net 1,513 1,363
Prepaid expense and other current assets 229 209
---------------------- --------------------
Total current assets 6,610 7,673
Property, plant & equipment, net 760 768
Other non-current assets, net 100 102
---------------------- --------------------
Total assets $ 7,470 $ 8,543
====================== ====================
Liabilities & Shareholders' Equity:
Current liabilities:
Long-term debt, current portion $ 7 $ 9
Accounts payable 523 1,014
Accrued liabilities 2,505 2,681
---------------------- --------------------
Total current liabilities 3,035 3,704
Long term debt, net of current portion 63 63
---------------------- --------------------
---------------------- --------------------
Total liabilities 3,098 3,767
---------------------- --------------------
Shareholders' equity:
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 4,742 and 4,741 respectively 28,979 28,976
Deferred compensation (16) (17)
Accumulated deficit (24,591) (24,183)
---------------------- --------------------
Total shareholders' equity 4,372 4,776
---------------------- --------------------
Total liabilities & shareholders' equity $ 7,470 $ 8,543
====================== ====================
See accompanying notes to condensed consolidated financial statements.
3
CASTELLE AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three months ended
......................................
March 30, 2001 March 31, 2000
----------------- ------------------
Net sales $ 2,349 $ 4,100
Cost of sales 698 1,649
----------------- ------------------
Gross profit 1,651 2,451
----------------- ------------------
Operating expenses:
Research and development 385 505
Sales and marketing 1,126 1,312
General and administrative 444 466
Restructuring charges 180 -
----------------- ------------------
Total operating expenses 2,135 2,283
----------------- ------------------
Income/(loss) from operations (484) 168
Interest income, net 33 37
Other income/(expense), net 43 (30)
----------------- ------------------
Income/(loss) before provision for income taxes (408) 175
Provision for income taxes - 6
----------------- ------------------
Net income/(loss) $ (408) $ 169
================= ==================
Earnings per share:
Net income/(loss) per common share - basic $ (0.09) $ 0.04
Shares used in per share calculation - basic 4,741 4,660
Net income/(loss) per common share - diluted $ (0.09) $ 0.03
Shares used in per share calculation - diluted 4,741 5,330
See accompanying notes to condensed consolidated financial statements.
4
CASTELLE AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
......................................
March 30, 2001 March 31, 2000
----------------- ------------------
Cash flows from operating activities:
Net income (loss) $ (408) $ 169
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 64 86
Provision for doubtful accounts and sales returns 134 (122)
Provision for excess and obsolete inventory 72 (101)
Compensation expense related to grant of stock options 4 13
Changes in assets and liabilities:
Accounts receivable 652 237
Inventories (222) 207
Prepaid expenses and other current assets (20) 4
Accounts payable (491) (543)
Accrued liabilities and other long-term liabilities (176) (200)
Decrease in other assets 2 8
----------------- ------------------
Net cash used in operating activities (389) (242)
----------------- ------------------
Cash flows from investing activities:
Return of restricted cash 125 -
Acquisition of property, plant and equipment (56) (21)
----------------- ------------------
Net cash provided by/(used in) investing activities 69 (21)
----------------- ------------------
Cash flows from financing activities:
Repayment of loan (2) (26)
Proceeds from issuance of common stock and warrants, net of
repurchases - 13
----------------- ------------------
Net cash used in financing activities (2) (13)
----------------- ------------------
Net decrease in cash and cash equivalents (322) (276)
Cash and cash equivalents at beginning of period 3,893 4,714
----------------- ------------------
Cash and cash equivalents at end of period $ 3,571 $ 4,438
================= ==================
See accompanying notes to condensed consolidated financial statements.
5
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
Kingdom and the Netherlands, and have been prepared in accordance with
accounting principles generally accepted in the United States of America.
All intercompany balances and transactions have been eliminated. In the
opinion of management, all adjustments (consisting of normal recurring
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, 2001. Because all of the disclosures
required by accounting principles generally accepted in the United States
of America are not included in the accompanying consolidated financial
statements and related notes, they should be read in conjunction with the
audited consolidated financial statements and related notes included in the
Company's Form 10-K and Form 10-K/A for the fiscal year-ended December 31,
2000. The year ended condensed balance sheet data was derived from our
audited financial statements and does not include all of the disclosures
required by accounting principles generally accepted in the United States
of America. The income statements for the periods presented are not
necessarily indicative of results that we expect for any future period, nor
for the entire year. Prior year amounts have been reclassified to conform
with current presentation.
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.
6
Basic and diluted earnings per share are calculated as follows for first
quarters of 2001 and 2000:
(in thousands,
except per share amounts)
(unaudited)
.............................
March 30, March 31,
2001 2000
------------- --------------
Basic:
Weighted average common shares outstanding 4,741 4,660
============= ==============
Net income/(loss) $ (408) $ 169
============= ==============
Net income/(loss) per common share - basic $ (0.09) $ 0.04
============= ==============
Diluted:
Weighted average common shares outstanding 4,741 4,660
Common equivalent shares from stock warrants - 55
Common equivalent shares from stock options - 615
------------- --------------
Shares used in per share calculation - diluted 4,741 5,330
============= ==============
Net income/(loss) $ (408) $ 169
============= ==============
Net income/(loss) per common share - diluted $ (0.09) $ 0.03
============= ==============
The calculation of diluted shares outstanding at March 30, 2001 excludes
1,314,000 stock options, as their effect was antidilutive in the period. At
March 31, 2000 warrants totaling 100,000 were excluded, because their
exercise price was greater than the average common stock market price for
the period.
3. Inventories:
Inventories are 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)
(unaudited)
.................................
March 30, December 31,
2001 2000
---------------- ---------------
Raw material $ 354 $ 488
Work in process 315 201
Finished goods 960 773
Inventory Reserve (453) (381)
---------------- ----------------
Total Inventory $ 1,513 $ 1,363
================ ================
4. Revenue Recognition:
Product revenue is recognized upon shipment if a signed contract exists,
the fee is fixed and determinable, collection of the resulting receivables
is probable and product returns are reasonably estimable. The Company
enters into agreements with certain of its distributors which permit
limited stock rotation rights. These stock rotation rights allow the
distributor to return products for credit but require the purchase of
additional products of equal value. Revenues subject to stock rotation
rights are reduced by management's estimates of 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.
7
5. Segments Disclosure:
The Company has determined that it operates in one segment.
6. Comprehensive Income:
Under SFAS No. 130, "Reporting Comprehensive Income" disclosure of
comprehensive income and its components is required in financial
statements. Comprehensive income is the change in equity from transactions
and other events and circumstances other than those resulting from
investments by owners and distributions to owners. There are no significant
components of comprehensive income excluded from net income, therefore, no
separate statement of comprehensive income has been presented.
The Company recognized a restructuring charge of $180,000 in the first
quarter of fiscal 2001, which included an asset write-off and other direct
expenses associated with the consolidation of our operations in the United
Kingdom and El Dorado Hills, California. In addition, the Company made an
announcement in April 2001 to eliminate 17 regular, temporary and
contractor positions, which constitutes approximately 25% of our workforce.
This action will result in a severance charge of approximately $100,000 in
the second quarter of fiscal 2001.
7. New accounting pronouncements:
Under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," companies are required to recognize all derivatives as either
assets or liabilities in the statement of financial position and to measure
those instruments at fair value. Changes in fair value shall be recognized
currently in earnings. This standard was effective for the Company from
January 1, 2001. At that time, the Company did not have any derivative
instruments, nor has it engaged in hedging activities to date.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that are subject to many risks
and uncertainties that could cause actual results to differ significantly from
expectations. For more information on forward-looking statements, refer to the
"Special Note on Forward-Looking Statements" at the front on this Form 10-Q. The
following discussion should be read in conjunction with the Financial Statements
and the Notes thereto included in Item 1 of this Quarterly Report on Form 10-Q
and in the Company's Form 10-K and Form 10-K/A for the fiscal year ended
December 31, 2000.
Consolidated Statements of Income - As a Percentage of Net Sales
(unaudited)
Three months ended
......................................
March 30, 2001 March 31, 2000
------------------ ------------------
Net sales 100% 100%
Cost of sales 30% 40%
------------------ ------------------
Gross profit 70% 60%
------------------ ------------------
Operating expenses:
Research and development 16% 13%
Sales and marketing 48% 32%
General and administrative 19% 11%
Restructuring charges 8% --
------------------ ------------------
Total operating expense 91% 56%
Income/(loss) from operations (21%) 4%
Interest income, net 2% *
Other income/(expense), net 2% *
------------------ ------------------
Income/(loss) before provision for income taxes (17%) 4%
Provision for income taxes -- *
------------------ ------------------
Net Income/(loss) (17%) 4%
================== ==================
* Less than 1%
9
Results of Operations
Net Sales
Net sales for the first quarter of fiscal 2001 were $2.3 million, as
compared to $4.1 million for the same period in fiscal 2000. The $1.8
million reduction was primarily attributable to continued decline in the
sales of print server products which amounted to $624,000 mostly
attribuatble to a decline in sales in international channels and a
shortfall in the sales of fax server products of $1.1 million domestically.
International sales in the first quarter of fiscal 2001 were $451,000
as compared to $1.2 million for the same period in fiscal 2000,
representing 19% and 28%, respectively, of total net sales. The decline was
largely due to reduced demand of print server products in the Asia Pacific
Region. In addition, beginning in the first quarter of fiscal 2001, we
changed from a model of selling our print server products directly to our
distributor in Japan to a royalty collection model. The royalty amounts
received by us in the first quarter of fiscal 2001 were not significant.
Domestic sales in the first quarter of fiscal 2001 were $1.9 million
as compared to $2.9 million for the same period in fiscal 2000,
representing 81% and 72%, respectively, of total net sales. The decrease
was principally due to a weaker demand of fax server products.
Cost of Sales; Gross Profit
Gross profit was $1.7 million, or 70% of net sales, for the first
quarter of fiscal 2001 as compared to $2.5 million, or 60% for the same
period in fiscal 2000. The higher gross profit percentage in the first
quarter of fiscal 2001 was mostly due to the mix of products sold at a
higher average selling price. The change in the first quarter of fiscal
2001 to a royalty collection model from directly selling our print server
products to our distributor in Japan also contributed to the higher gross
profit. However, the amount of royalties received was not significant.
Research & Development
Research and product development expenses were $385,000 or 16% of net
sales for the first quarter of fiscal 2001, as compared to $505,000 or 13%
of net sales for the same period in fiscal 2000. The decrease was primarily
due to lower compensation and outside consulting expenses.
Sales & Marketing
Sales and marketing expenses were $1.1 million or 48% of net sales for
the first quarter of fiscal 2001 as compared to $1.3 million or 32% of net
sales for the same period in fiscal 2000. The reduction of sales and
marketing expenses was primarily associated with lower compensation
expenses.
General & Administrative
General and administrative expenses were $444,000 or 19% of net sales
for the first quarter of fiscal 2001, comparable to $466,000 or 11% of net
sales for the first quarter of fiscal 2000.
10
Restructuring
We recognized a restructuring charge of $180,000 in the first quarter
of fiscal 2001, which included an asset write-off and other direct expenses
associated with the consolidation of our operations in the United Kingdom
and El Dorado Hills, California. In addition, we made an announcement in
April 2001 to eliminate 17 regular, temporary and contractor positions,
which constitutes approximately 25% of our workforce. This action will
result in a severance charge of approximately $100,000 in the second
quarter of fiscal 2001.
Liquidity and Capital Resources
As of March 30, 2001, we had $3.6 million of cash and cash equivalents, a
decrease of $322,000 from December 31, 2000. Working capital decreased to $3.6
million at March 30, 2001, from $4.0 million at December 31, 2000. The decrease
in working capital was primarily due to the overall decrease in sales.
The restricted cash of $125,000 appearing on our balance sheet as of
December 31, 2000, which was a certificate of deposit to collateralize a loan,
was returned to us in February 2001. The loan was completely paid off as of
December 31, 2000.
We have a $3.0 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.
Borrowings under this line of credit agreement are collateralized by all of our
assets. This loan agreement has been renegotiated and its term has been extended
until March 17, 2002. As of March 30, 2001, we had not borrowed against this
line.
In December 2000, as a source of capital asset financing, we entered into a
loan and security agreement with a finance company for an amount of $75,000.
This loan is subject to interest of 12.8% and is repayable by December 2006. As
of March 30, 2001, the future minimum payments were $99,000.
In April 2001, as a source of capital asset financing, we entered into a
loan and security agreement with a finance company for an amount of $25,000.
This loan is subject to interest of 12.5% and is repayable by April 2004. As of
April 30, 2001, the future minimum payments were $30,000.
As of March 30, 2001, net accounts receivable were $1.3 million, down from
$2.1 million at December 31, 2000. The decrease in net accounts receivable was
chiefly attributed to improved collection of outstanding balances and reduced
sales in the first quarter of fiscal 2001. The number of days for which payment
for sales is outstanding was reduced from 58 days at December 31, 2000 to 50
days at March 30, 2001.
Net inventories as of March 30, 2001 were $1.5 million, up from $1.3
million at December 31, 2000. The increase was largely attributable to the
slower sales in the first quarter of fiscal 2001. Inventory turnover for this
current quarter slowed to an equivalent of 1.8 turns per year from 3.5 turns per
year in the prior quarter.
Although we believe that our existing capital resources, anticipated cash
flows from operations and available lines of credit will be sufficient to meet
our capital requirements for at least the next 12 months, we may be required to
seek additional equity or debt financing. The timing and amount of such capital
requirements cannot be determined at this time and will depend on a number of
factors, including demand for our existing and new products and the pace of
technological change in the networking industry. There can be no assurance that
such additional financing will be available on satisfactory terms when needed,
if at all.
We believe that, for the periods presented, inflation has not had a
material effect on our operations.
11
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, 2000. These and other risk factors are discussed in more detail in our Form
10-K and Form 10-K/A for the fiscal year ended December 31, 2000 under the
section "Risk Factors".
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
In April 2001, we announced a worldwide restructuring of the Company and
consolidated our operations in the United Kingdom and El Dorado Hills,
California. We recognized a restructuring charge of $180,000 in the first
quarter of fiscal 2001, which included an asset write-off and other direct
expenses associated with this consolidation. We also eliminate 17 regular,
temporary and contractor positions, which constitutes approximately 25% of our
workforce, which will result in a severance charge of approximately $100,000 in
the second quarter of fiscal 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Press Release dated May 14, 2001
(b) Reports on Form 8-K
None
12
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: May 14, 2001
Donald L. Rich
Chairman of the Board and Director
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Paul Cheng Date: May 14, 2001
Paul Cheng
Vice President of Finance and Administration
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
Secretary
13