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 April 2, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-220-20
CASTELLE
(Exact name of Registrant as specified in its charter)
California 77-0164056
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3255-3 Scott Boulevard, Santa Clara, California 95054
(Address of principal executive offices, including zip code)
(408) 496-0474
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
The number of shares of Common Stock outstanding as of May 10, 1999 was
4,685,435.
CASTELLE
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Income 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 14
Item 2. Changes in Securities 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 27.1 - Financial Data Schedule E-1
Exhibit 99.1 - Press Release dated April 13, 1999 E-2
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASTELLE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
April 2, 1999 December 31, 1998
(unaudited) (audited)
---------------------- ---------------------
Assets:
Current assets:
Cash and cash equivalents $ 4,235 $ 3,924
Restricted cash 125 125
Accounts receivable, net of allowance for doubtful accounts
of $344 in 1999 and $720 in 1998 2,678 3,472
Inventories, net 3,051 3,739
Prepaid expense and other current assets 459 398
---------------------- ---------------------
Total current assets 10,548 11,658
Property, plant & equipment, net 611 666
Other non-current assets, net 129 170
---------------------- ---------------------
Total assets $ 11,288 $ 12,494
====================== =====================
Liabilities & Shareholders' Equity:
Current liabilities:
Long-term debt, current $ 96 $ 96
Accounts payable 2,456 2,084
Accrued liabilities 2,556 2,715
---------------------- ---------------------
Total current liabilities 5,108 4,895
Other long-term liabilities 75 98
---------------------- ---------------------
Total liabilities 5,183 4,993
---------------------- ---------------------
Shareholders' equity:
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 4,346 and 4,337 respectively 29,270 29,255
Note receivable for purchase of common stock (274) (274)
Deferred compensation (120) (120)
Accumulated deficit (22,771) (21,360)
---------------------- ---------------------
Total shareholders' equity 6,105 7,501
---------------------- ---------------------
Total liabilities & shareholders' equity $ 11,288 $ 12,494
====================== =====================
The accompanying notes are an integral part of these consolidated financial
statements.
2
CASTELLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
First Fiscal Quarter
Three months ended
......................................
April 2, 1999 April 3, 1998
------------------ ------------------
Net sales $ 4,468 $ 6,601
Cost of sales 2,849 3,101
------------------ ------------------
Gross profit 1,619 3,500
------------------ ------------------
Operating expenses:
Research and development 684 650
Sales and marketing 1,854 2,132
General and administrative 459 479
Amortization of intangible assets 40 --
------------------ ------------------
Total operating expenses 3,037 3,261
------------------ ------------------
Income (loss) from operations (1,418) 239
Interest income, net 30 57
Other income (expense), net (23) 8
------------------ ------------------
Income (loss) before provision for income taxes (1,411) 304
Provision for income taxes -- 121
------------------ ------------------
Net income (loss) $(1,411) $ 183
================== ==================
Earnings per share:
Net income (loss) per common share - basic $ (0.33) $ 0.04
Shares used in per share calculation - basic 4,340 4,493
Net income (loss) per common share - diluted $ (0.33) $ 0.04
Shares used in per share calculation - diluted 4,340 4,639
The accompanying notes are an integral part of these consolidated financial
statements.
3
CASTELLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
First Fiscal Quarter
Three months ended
......................................
April 2, 1999 April 3, 1998
------------------ ------------------
Cash flows from operating activities:
Net income (loss) $(1,411) $ 183
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 158 127
Provision for doubtful accounts and sales returns (677) 81
Provision for excess and obsolete inventory 878 35
Compensation expense related to grant of stock options 13 --
Changes in assets and liabilities:
Accounts receivable 1,471 (789)
Inventories (190) 1,037
Prepaid expenses and other current assets (61) (95)
Accounts payable 372 (192)
Accrued liabilities and other long-term liabilities (159) 174
------------------ ------------------
Net cash provided by operating activities 394 561
------------------ ------------------
Cash flows from investing activities:
Acquisition of property and equipment (57) (44)
Increase in other assets (5) --
------------------ ------------------
Net cash used in investing activities (62) (44)
------------------ ------------------
Cash flows from financing activities:
Proceeds from notes payable -- 142
Repayment of notes payable (23) (21)
Proceeds from issuance of common stock and warrants, net of
repurchases 2 6
------------------ ------------------
Net cash provided by (used in) financing activities (21) 127
------------------ ------------------
Net increase in cash and cash equivalents 311 644
Cash and cash equivalents at beginning of period 3,924 6,204
------------------ ------------------
Cash and cash equivalents at end of period $ 4,235 $ 6,848
================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
4
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
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,
1999. Because all of the disclosures required by generally accepted
accounting principles are not included in the accompanying consolidated
financial statements and related notes, they should be read in conjunction
with the audited consolidated financial statements and related notes
included in the Company's Form 10-K for the fiscal year-ended December 31,
1998.
2. Net 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 is
computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential shares consist of
incremental common shares issuable upon exercise of stock options and
warrants.
Basic and diluted earnings per share are calculated as follows for first
quarters of 1999 and 1998:
(in thousands,
except per share amounts)
.............................
April 2, April 3,
1999 1998
-------------- --------------
Basic:
Weighted average common shares outstanding 4,340 4,493
============= ==============
Net income (loss) $ (1,411) $ 183
============= ==============
Net income (loss) per common share - basic $ (0.33) $0.04
============= ==============
Diluted:
Weighted average common shares outstanding 4,340 4,493
Common equivalent shares from stock options -- 146
------------- --------------
Shares used in per share calculation - diluted 4,340 4,639
============= ==============
Net income (loss) $ (1,411) $ 183
============= ==============
Net income (loss) per common share - diluted $ (0.33) $0.04
============= ==============
5
The calculation of diluted shares outstanding at April 2, 1999 and April 3,
1998 excludes 1,532,000 and 978,000 stock options, respectively, as their
effect was antidilutive in 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)
.................................
April 2, December 31,
1999 1998
---------------------------------
Raw material $ 754 $ 1,282
Work in process 205 130
Finished goods 2,092 2,327
---------------------------------
Total Inventory $ 3,051 $ 3,739
=================================
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.
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 uses
one measurement of profitability of its business for internal reporting.
6. Comprehensive Income:
Castelle has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1,
1998. This statement requires the disclosure of comprehensive income and
its components in a full set of general-purpose financial statements.
Comprehensive income is the change in equity from transactions and other
events and circumstances other than those resulting from investments by
owners and distributions to owners. There are no significant components of
comprehensive income excluded from net income, therefore, no separate
statement of comprehensive income has been presented.
6
7. New accounting pronouncements:
In June of 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair
value. Management has not yet evaluated the effects of this change on its
operations. The Company will adopt SFAS No. 133 as required for its first
quarterly filing of fiscal 2000.
In December 1998, the Accounting Standards Executive Committee ("AcSEC")
released Statement of Position 98-9 ("SOP 98-9"), Modification of SOP 97-2,
"Software Revenue Recognition," with Respect to Certain Transactions. SOP
98-9 amends SOP 97-2 to require that an entity recognize revenue for
multiple element arrangements by means of the "residual method" when (1)
there is vendor-specific objective evidence ("VSOE") of the fair values of
all the undelivered elements that are not accounted for by means of
long-term contract accounting, (2) VSOE of fair value does not exist for
one or more of the delivered elements, and (3) all revenue recognition
criteria of SOP 97-2 (other than the requirement for VSOE of the fair value
of each delivered element) are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP
97-2 and SOP 98-9 will be effective for transactions that are entered into
in fiscal years beginning after March 15, 1999. Retroactive application is
prohibited. The Company is evaluating the requirements of SOP 98-9 and the
effects, if any, on the Company's current revenue recognition policies.
8. Subsequent Events:
In April 1998, the Company completed its acquisition of the Object-Fax NT
product line, a facsimile software application designed for LAN's, WAN's
and Internet-based networks, from Tolvusamskipti HF, an Icelandic
corporation, in exchange for $300,000 in cash, 100,000 shares of Castelle
common stock and the right to receive either additional cash or the number
of shares of Castelle common stock on the date six months after the
acquisition necessary to make the fair market value of the common stock and
additional cash received in the transaction not less than $500,000. Since
the value of the Castelle common stock received in the transaction was less
than $500,000 on the date six months after the acquisition, additional
339,560 shares of Castelle Common Stock were issued to Tolvusamskipti HF on
April 9, 1999.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis contains forward-looking statements
that involve risks and uncertainties. Such forward-looking statements may be
deemed to the adequacy of anticipated sources of cash to fund the Company's
future capital requirements through March 31, 2000, and the costs of the
Company's Year 2000 compliance efforts and dates by which the Company believes
it will complete such efforts. Words such as "believes," "anticipates,"
"expects," "intends" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying such
statements. Readers are cautioned that the forward-looking statements reflect
management's analysis only as of the date hereof, and the Company assumes no
obligation to update these statements. Actual events or results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to the risks and
uncertainties discussed herein, as well as other risks set forth under the
caption "Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998. The following discussion should be read in
conjunction with the Financial Statements and the Notes thereto included in Item
1 of this Quarterly Report on Form 10-Q and in the Company's Form 10-K for the
fiscal year ended December 31, 1998.
Consolidated Statements of Income - As a Percentage of Net Sales
FIRST FISCAL QUARTER
THREE MONTHS ENDED
......................................
April 2, 1999 April 3, 1998
----------------- ------------------
Net sales 100% 100%
Cost of sales 64% 47%
----------------- ------------------
Gross profit 36% 53%
----------------- ------------------
Operating expenses:
Research and development 15% 10%
Sales and marketing 42% 32%
General and administrative 10% 7%
Amortization of intangible assets 1% --
----------------- ------------------
Total operating expense 68% 49%
----------------- ------------------
Income (loss) from operations (32%) 4%
Interest income, net 1% 1%
Other income (expense), net (1%) 0%
----------------- ------------------
Income (loss) before provision for income taxes (32%) 5%
Provision for income taxes -- 2%
----------------- ------------------
Net Income (loss) (32%) 3%
================= ==================
8
Results of Operations
Net Sales
Net sales for the first quarter of 1999 decreased to $4.5 million
from $6.6 for the same period in 1998. The reduction in net sales was the
result of a $1.2 million (53%) decrease in print server product sales, as
well as, $0.9 million (22%) decrease in sales of the Company's fax server
products to distributors to maintain manageable inventory levels in the
channel.
International sales in the first quarter of 1999 decreased to $1.7
million from $2.8 million for the same period in 1998, representing 37% and
42%, respectively, of total net sales. This 41% decline in international
sales was mainly the result of reduced demand for the Company's print
server products in Asia.
Gross Profit
Gross profit of 36% for the first quarter of fiscal 1999 decreased
compared to gross profit of 53% for the same period in 1998. The decrease
in fiscal 1999 gross profit is primarily attributable to an additional
$880,000 excess inventory provision recorded in the first quarter of 1999.
This provision is mainly associated with excess print server products
targeted for the Asian market and fax server products expected to be
replaced by newly introduced FaxPress models.
Research & Development
Research and product development expenses increased slightly to
$684,000 or 15% of net sales for the first quarter of 1999 as compared to
$650,000 or 10% of net sales for the same period in 1998. The increase was
due to the additional engineering costs related to Object-Fax NT product
line which was acquired in April 1998.
Sales & Marketing
Sales and marketing expenses were $1.9 million or 42% of net sales
for the first quarter of 1999, as compared to $2.1 million or 32% of net
sales for the same period in 1998. The reduction of sales and marketing
expenses is associated with lower sales personnel costs and advertising
expenses in the distribution channel.
General & Administrative
General and administrative expenses were $459,000 or 10% of net
sales for the first quarter of 1999, as compared to $479,000 or 7% of net
sales for the same period in 1998.
Amortization of intangible assets
Expenses for amortization of intangible assets were $40,000 or 1%
of net sales for the first quarter of 1999. This expense reflects the
amortization of intangible assets for the acquisition of the Object-Fax
products in 1998.
9
Interest & Other income/expense, net
Interest and other income/expenses, net, comprised income of
$7,000 for the first quarter of 1999, as compared to income of $65,000 or
1% of net sales for the same period in 1998. This reduction in income is
the result of lower interest earned on the Company's investments.
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 April 2, 1999,
the Company had $4.2 million of cash and cash equivalents, up from $3.9 million
at December 31, 1998. Working capital decreased to $5.4 million at April 2, 1999
from $6.8 million at December 31, 1998. The increase in cash and cash
equivalents is primarily due to cash derived from collection of outstanding
accounts receivable balances, partially off-set by the net loss incurred during
the first quarter of 1999.
The Company has a $3.0 million secured revolving line of credit with a
bank, which expires in March 17, 2000 and at April 2, 1999 had no borrowings
under the line of credit.
In December 1997, the Company entered into a loan and security
agreement with a finance company for an amount of $288,000. The amounts borrowed
are subject to interest of 10.11%, are repayable by December 2000, and are
partially collateralized by a certificate of deposit of $125,000, which is
classified as restricted cash on the Company's balance sheet. As of April 2,
1999, the outstanding balance of the loan under the agreement was $171,000.
As of April 2, 1999, net accounts receivable were $2.7 million, down
from $3.5 million at December 31, 1998. The decrease in net accounts receivable
is attributed to improved collection of outstanding balances in the first
quarter of 1999, which resulted in an improvement in days sales outstanding from
87 at the end of 1998 to 54 days at April 2, 1999.
Net inventories as of April 2, 1999 were $3.1 million, down from $3.7
million at December 31, 1998. The decrease was mainly attributable to an
additional $880,000 excess inventory provision recorded in the first quarter of
1999. This provision is mainly associated with excess print server products
targeted for the Asian market and fax server products expected to be replaced by
newly introduced FaxPress models.
The Company had not made any material capital commitments during the
first quarter ended April 2, 1999.
Although the Company believes that its existing capital resources,
anticipated cash flows from operations and available lines of credit will be
sufficient to meet its capital requirements at least through the next 12 months,
the Company may be required to seek additional equity or debt financing. The
timing and amount of such capital requirements cannot be determined at this time
and will depend on a number of factors, including demand for the Company's
existing and new products and the pace of technological change in the networking
industry. There can be no assurance that such additional financing will be
available on satisfactory terms when needed, if at all.
Management believes that, for the periods presented, inflation has not
had a material effect on the Company's operations.
10
Year 2000 Compliance
The Company has completed a comprehensive review of its business
applications, computer systems and infrastructure and products. In addition,
Castelle is in the process of conducting a comprehensive review of its key
business partners to identify those that could be adversely affected by the Year
2000 issue and is developing and implementing a plan to resolve issues
identified. The Year 2000 issue refers to the inability of many computer systems
to process accurately dates later than December 31, 1999. Date codes in many
programs are abbreviated to allow only two digits for the year, e.g. "98" for
the year 1998. Unless these programs are modified to handle the century date
change, they will likely interpret the year "00", that is, the year 2000, as the
year 1900. The Year 2000 issue creates risk for the Company from unforeseen
problems in its own computer systems as well as in computer systems of third
parties with whom the Company does business worldwide, including banks and
credit processing entities, factories, customers and others.
Business Applications, Computer Systems and Infrastructure
Castelle has completed a comprehensive review and inventory of its
business applications and computer systems, including servers and network
infrastructure, to insure that they are Year 2000 compliant. To date, the
Company has installed and/or upgraded all computer network file servers and
infrastructure (hubs, switches, modems and access devices) to hardware and
software that is certified to be Year 2000 compliant by its vendors. In
addition, Castelle's main business application from Computer Associates
International, Inc. (Computer Associates) has been upgraded to a Year 2000
compliant version as certified by Computer Associates. The Company has
substantially completed an upgrade of all desktop (including laptop)
computers to Microsoft NT software certified by Microsoft Corporation as
Year 2000 compliant. The Company presently believes that the Year 2000
issue will not pose significant operational problems for the Company due to
planned modifications to existing software and conversions to new software
which have been implemented or are being implemented by the Company during
the year.
Key business partners
The Company is in the process of conducting a comprehensive review
of its key business partners, including customers, suppliers and vendors,
to identify those critical to the success of the Company's operations that
may have Year 2000 issues which could adversely affect the operations of
the Company. The Company 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, which to date have been
approximately $95,000. The Company estimates the remaining cost associated
with the installation and upgrading of the equipment will be approximately
$15,000. However, the Company cannot give any assurance that significant
costs associated with unforeseen circumstances will not significantly
affect the future results of the Company.
11
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 the products will
perform functions correctly when processing dates later than December 31,
1999. In order to avoid difficulties, users will need to install the
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. Full
details on Year 2000 compliance of the Company's products are available on
the Company's Web site. 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 95/98/NT, and while these products appear to be Year 2000
compliant, the Company cannot accept responsibility for Year 2000
compliance of any network operating system. 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.
Contingency Plans
The Company is in the process of developing contingency plans in
the event that the Company's systems or products prove to not be Year 2000
compliant. The Company has contingency plans in place for specific desktop
and server based Year 2000 issues. The Company is currently reviewing its
key business activities to develop plans to support ongoing business
operations in the event of a disruption and expects these plans to be
completed by the end of the third quarter of 1999. Based on its assessment
to date, the Company presently believes that the Year 2000 Issue will not
pose significant operational problems for the Company. However, the Company
cannot give any assurance that these contingency plans will be effective in
preventing Year 2000 related disruptions in the business which could have a
material adverse impact on the Company's business, operating results and
financial condition.
12
Other Matters
The Company participated in a hearing with The Nasdaq Listing
Qualifications Panel (the "Panel") on March 5, 1999 for the purpose of
determining whether the Company's common stock would continue to be listed on
The Nasdaq National Market. The hearing was scheduled because the minimum bid
price of the Company's common stock and the market value of the public float of
the Company's outstanding common stock failed to meet the $1.00 per share
minimum and $5.0 million minimum, respectively, as required by The Nasdaq
National Market listing maintenance standards. On April 12, 1999, the Panel
notified the Company that its request to be moved to The Nasdaq SmallCap Market
had been approved and effective at the open of business on April 14, 1999, the
listing of the Company's Common Stock would be transferred to The Nasdaq
SmallCap Market pursuant to the following exception. On or before July 14, 1999,
the Company must evidence a minimum closing bid price of $1.00 per share and
immediately thereafter, the Company's closing bid price must meet or exceed
$1.00 per share for a minimum of ten consecutive trading days. The Company must
also be able to demonstrate compliance with all requirements for continued
listing on The Nasdaq SmallCap Market. In the event the Company is unable to
meet the terms of the exception, the Company's common stock will be delisted
from The Nasdaq SmallCap Market. The Company can give no assurance that it will
be able to meet the foregoing requirements by July 14, 1999. If the Company's
common stock is delisted from The Nasdaq SmallCap Market, the Company's common
stock would be listed on the OTC Bulletin Board. There can be no assurance that
an active trading market for the Company's common stock will develop on The
Nasdaq SmallCap Market or if delisted, on the OTC Bulletin Board. Lack of an
active trading market would have an adverse effect on a shareholder's ability to
liquidate an investment in the Company's common stock easily and quickly at a
reasonable price. It might also contribute to volatility in the market price of
the Company's common stock. Because the Company's common stock is listed on The
Nasdaq SmallCap Market, or in the event that the Company's common stock is
delisted from The Nasdaq SmallCap Market, it may be difficult to raise
additional equity or debt financing with reasonable terms or at all. Failure to
obtain desired financing on acceptable terms could adversely affect the
Company's business, financial condition and results of operations. These and
other risk factors are discussed in more detail in the Company's Form 10-K for
the fiscal year ended December 31, 1998 under the section "Risk Factors."
On April 21, 1999, the Board of Directors increased the size of the
Board to seven members and elected Peter R. Tierney and Scott C. McDonald to the
Board.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
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 April 13, 1999
(b) Reports on Form 8-K
None
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASTELLE
By: /s/ Donald L. Rich Date: May 14, 1999
Donald L. Rich
President, Chief Executive Officer and Director
By: /s/ Laurie Gee Date: May 14, 1999
Laurie Gee
Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
15