UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-220-20
CASTELLE
(Name of small business issuer in its charter)
----------------------------------------------
California 77-0164056
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3255-3 Scott Boulevard, Santa Clara, California 95054
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (408) 496-0474
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
(Title of Class)
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 August 8, 1996 was
3,620,844.
<PAGE>
CASTELLE
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
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 7
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
<PAGE>
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. 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 document, as well as those discussed in the
Company's Form SB-2 filed November 17, 1995, as amended, Form 10-KSB for the
year ended December 31, 1995 and Form 10-QSB for the quarter ended March 29,
1996.
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CASTELLE
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS June 28, December 31,
1996 1995
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 7,416 $ 7,268
Accounts receivable, net of allowance for
doubtful accounts of $414 in 1996 and 1995 2,266 2,837
Inventories 4,988 3,637
Prepaid expenses and other current assets 558 471
-------------- ---------------
Total current assets 15,228 14,213
Property plant and equipment, net 374 334
Other assets, net 94 120
-------------- ---------------
Total assets $ 15,696 $ 14,667
============== ===============
LIABILITIES
Current liabilities:
Long-term debt, current portion $ 193
Accounts payable $ 1,869 2,723
Accrued liabilities 2,118 2,448
-------------- ---------------
Total current liabilities 3,987 5,364
Long-term debt, less current portion 4
Other long-term liabilities 10
-------------- ---------------
Total liabilities 3,987 5,378
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 3,621 shares
in 1996 and 3,469 shares in 1995 23,298 22,322
Notes receivable for purchase of common stock (296) (379)
Accumulated deficit (11,293) (12,655)
-------------- ---------------
Total shareholders' equity 11,709 9,289
-------------- ---------------
Total liabilities and shareholders' equity $ 15,696 $ 14,667
============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
2
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<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
3 MONTHS ENDED 3 MONTHS ENDED
JUNE 28, 1996 JUNE 30, 1995
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 7,225 $ 6,190
Cost of sales 3,778 3,406
----------------------------- ------------------------------
Gross profit 3,447 2,784
----------------------------- ------------------------------
Operating expenses:
Research and development 524 497
Sales and marketing 1,706 1,422
General and administrative 427 309
----------------------------- ------------------------------
Total operating expenses 2,657 2,228
----------------------------- ------------------------------
Operating income 790 556
Interest income (expense), net 94 (73)
Other expense , net (55)
----------------------------- ------------------------------
Income before provision for income taxes 829 483
Provision for income taxes (36) (18)
----------------------------- ------------------------------
Net income $ 793 $ 465
============================= ==============================
Net income per share $ 0.20 $ 0.18
============================= ==============================
Shares used in per share calculation 3,943 2,646
============================= ==============================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF INCOME
YEAR-TO-DATE
(in thousands, except per share data)
1996 1995
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 13,425 $ 11,874
Cost of sales 7,117 6,385
------------------------------ --------------------------------
Gross profit 6,308 5,489
------------------------------ --------------------------------
Operating expenses:
Research and development 1,057 996
Sales and marketing 3,199 2,785
General and administrative 718 623
------------------------------ --------------------------------
Total operating expenses 4,974 4,404
------------------------------ --------------------------------
Operating income 1,334 1,085
Interest income (expense), net 167 (192)
Other expense, net (75) 0
------------------------------ --------------------------------
Income before provision for income taxes 1,426 893
Provision for income taxes (64) (23)
------------------------------ --------------------------------
Net income $ 1,362 $ 870
============================== ================================
Net income per share $ 0.35 $ 0.34
============================== ================================
Shares used in per share calculation 3,887 2,648
============================== ================================
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
6 MONTHS ENDED JUNE 6 MONTHS ENDED JUNE 30,
28, 1996 1995
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,362 $ 870
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 174 354
Write off of other assets and property and equipment 11
Provision for doubtful accounts 2
Provision for excess and obsolete inventory and used
equipment (248) 45
Changes in assets and liabilities:
Accounts receivable 571 930
Inventories (1,103) (676)
Prepaid expenses and other assets (87) 31
Accounts payable (854) 29
Accrued liabilities and other long-term liabilities (340) 209
------------------------ --------------------------
Net cash provided by (used in) operating activities (514) 1,794
------------------------ --------------------------
Cash flows from investing activities:
Acquisition of property and equipment (176) (108)
Acquisition of intangible assets (23) (25)
------------------------ --------------------------
Net cash used in investing activities (199) (133)
------------------------ --------------------------
Cash flows from financing activities:
Decrease in restricted cash 152
Repayment of notes payable (166) (526)
Proceeds from bank borrowings 4,586
Repayment of bank borrowings (5,124)
Principal payments on capitalized leases (31) (22)
Proceeds from issuance of common stock 975
Proceeds from collection of notes receivable for
stock 83
------------------------ --------------------------
Net cash provided by (used in) financing activities 861 (934)
------------------------ --------------------------
Net increase in cash and cash equivalents 148 727
Cash and cash equivalents at beginning of period 7,268 907
------------------------ --------------------------
Cash and cash equivalents at end of period $ 7,416 $ 1,634
======================== ==========================
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, and have been
prepared in accordance with generally accepted accounting principles. All
intercompany accounts 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 results of operations for the
interim period presented are not necessarily indicative of the results for
the year ending December 31, 1996. Because all of the disclosures required
by generally accepted accounting principles are not included in the
accompanying consolidated financial statements, they should be read in
conjunction with the audited consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995.
2. Net Income Per Share
Net income per share is based upon the weighted average number of common
and common equivalent shares outstanding. Common equivalent shares, options
and warrants are included in the per share calculation where the effect of
their inclusion would be dilutive.
3. Inventories
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
JUNE 28, DECEMBER 31,
1996 1995
Raw material $ 2,801 $ 2,320
Work in process 768 419
Finished goods 1,419 898
---------------- -------------------
$ 4,988 $ 3,637
================ ===================
6
<PAGE>
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. 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, as well as those discussed in the
Company's Form SB-2 filed November 17, 1995, as amended, Form 10-KSB for the
year ended December 31, 1995 and Form 10-QSB for the quarter ended March 29,
1996.
Quarterly Results
As a percentage of Net Revenues
3 MONTHS ENDED 3 MONTHS ENDED
JUNE 28, 1996 JUNE 30, 1995
Net sales 100 % 100 %
Cost of sales 52 55
---------------- -----------------
Gross profit 48 45
---------------- -----------------
Operating expenses:
Research and development 7 8
Sales and marketing 24 23
General and administrative 6 5
---------------- -----------------
Total operating expenses 37 36
---------------- -----------------
Operating income 11 9
Interest income (expense), net 1
(1)
Other expense, net (1)
---------------- -----------------
Income before provision
for income taxes 11 8
Provision for income taxes
---------------- -----------------
Net income 11 % 8 %
================ =================
7
<PAGE>
Year-to-date results
As a percentage of Net Revenues
1996 1995
Net sales 100 % 100 %
Cost of sales 53 54
---------------- ------------------
Gross profit 47 46
---------------- ------------------
Operating expenses:
Research and development 8 8
Sales and marketing 24 24
General and administrative 5 5
---------------- ------------------
Total operating expenses 37 37
---------------- ------------------
Operating income 10 9
Interest income (expense), net 1 (2)
Other expense, net (1)
---------------- ------------------
Income before provision
for income taxes 10 7
Provision for income taxes
---------------- ------------------
Net income 10 % 7 %
================ ==================
Net Sales
Net sales for the quarter ended June 28, 1996 increased $1.0 million or 17%
from the comparable quarter a year earlier. Net sales were $13.4 million for the
first half of fiscal 1996, up 13% from the $11.9 million reported for the same
period last year. The increase in net sales during the second quarter resulted
primarily from higher sales of the Company's fax server products. Fax server
product sales increased by 28% to $3.2 million in the three month period ended
June 28, 1996 from $2.5 million during the comparable period in fiscal 1995.
Sales were also augmented by an increase in print server sales during the
quarter. Print server sales increased by 8%, to $4.0 million in the three month
period ended June 28, 1996 from $3.7 million during the comparable period in
fiscal 1995. Sales of the Company's products outside North America totaled $3.3
million or 46% of net sales for the second quarter of 1996 as compared with $2.9
million or 47% of net sales for the same period last year.
Gross Profit
Gross profit for the second quarter of 1996 was 48% as compared with 45%
for the same period last year. For the first half of fiscal 1996 the Company's
gross margin was 47% compared to 46% for the same period last year. The increase
in gross margin in the second quarter was primarily attributable to increased
sales of the Company's fax server products, which carry higher gross margins.
8
<PAGE>
Research and Development
Research and development expenses were $524,000 and $497,000 in the second
quarter of 1996 and 1995, or 7% and 8% of net sales, respectively. Research and
development expenses were $1.1 million and $1.0 million for the first half of
1996 and 1995, respectively, or 8% each year, reflecting the Company's continued
emphasis on research and development in order to develop new products, as well
as to improve product functionality, reduce cost and enhance performance of
existing products.
Sales and Marketing
Sales and marketing expenses were $1.7 million in the second quarter of
1996, or 24% of net sales as compared with $1.4 million, or 23% of net sales,
for the same period last year. Sales and marketing expenses increased to $3.2
million in the first half of fiscal 1996 from $2.8 million in the comparable
period last year. The increases were primarily a result of higher expenditures
on advertising and marketing materials.
General and Administrative
General and administrative expenses were $427,000 in the second quarter of
1996, or 6% of net sales, as compared with $309,000, or 5% of net sales, for the
same period last year. General and administrative expenses were $718,000 and
$623,000 for the first half of 1996 and 1995, or 5% of net sales, respectively.
Interest Income/(Expense), net
Interest income, net, was $94,000 in the second quarter of 1996 as compared
with interest expense, net, of $73,000 for the same period last year. For the
first half of fiscal 1996, the Company's interest income, net, was $167,000
compared to interest expense, net, of $192,000 for the same period last year.
The increase in 1996 was due primarily to interest earned on investment balances
related to funds generated by the Company's initial public offering in December
1995 and the decrease in interest expense realized by paying off the Company's
bank borrowings and long-term debt.
Liquidity and Capital Resources
As of June 28, 1996, the Company had $7.4 million of cash and cash
equivalents. Working capital increased to $11.2 million at June 28, 1996 from
$8.8 million at December 31, 1995. The Company has a $6.0 million secured
revolving line of credit with a bank which expires in June 1997, pursuant to
which the Company may borrow 75% of eligible domestic accounts receivable at the
bank's prime rate. In addition, the Company has a $3.0 million foreign accounts
receivable and inventory line which is part of the overall $6.0 million
commitment. The Company may borrow 90% of eligible accounts receivable and 40%
of eligible inventory. Under the terms of the agreement, the Company is required
to comply with covenants, including a certain minimum quick ratio and tangible
net worth and maximum debt to tangible net worth, and is also restricted from
entering into any mergers or acquisitions where the total annual consideration
exceeds $15,000,000 without the bank's approval. The Company is in compliance
with these covenants and at June 28, 1996 the line of credit had a zero balance.
The line of credit prohibits the payment of cash dividends and contains certain
restrictions on the Company's ability to loan money or assets or purchase
interests in other entities without the prior written consent of the lender. In
addition, the Company has a $500,000 equipment term loan credit facility with a
bank that allows the Company to borrow 80% of invoice cost of new equipment.
This facility has a 12-month draw-down period followed by a 36-month
amortization period and terminates in August 1999. This facility had a zero
balance at June 28, 1996. The interest rate for this loan is prime plus 1.5% per
annum.
The Company believes that existing sources of liquidity, capital
resources and funds from operations will satisfy the Company's anticipated cash
needs for the next 12 months. There can be no assurance, however, that the
Company's actual needs will not exceed anticipated levels, or that the Company
will generate sufficient sales to fund its operations in the absence of other
sources. There also can be no assurance that any additional required financing
will be available through bank borrowings, debt or equity offerings or otherwise
or that, if such financing is available, it will be available on terms favorable
to the Company.
9
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 28, 1996.
10
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
CASTELLE
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share amounts)
Quarter Ended Quarter Ended
June 28, 1996 June 30, 1995
(unaudited) (unaudited)
Primary and Fully Diluted:
<S> <C> <C>
Weighted average common shares outstanding for the period 3,621 454
Weighted average shares from assumed conversion of preferred stock 1,970
Common equivalent shares pursuant to Staff Accounting Bulletin No. 83 74
Common equivalent shares assuming conversion of stock options under
the treasury stock method 322 148
------------------- -------------------
Shares used in per share calculation 3,943 2,646
=================== ===================
Net income 793 465
Income addback under modified treasury stock method 23
------------------- -------------------
Adjusted net income 793 488
=================== ===================
Net income per share 0.20 0.18
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
Year-to-date Year-to-date
June 28, 1996 June 30, 1995
(unaudited) (unaudited)
Primary and Fully Diluted:
<S> <C> <C>
Weighted average common shares outstanding for the period 3,601 454
Weighted average shares from assumed conversion of preferred stock 1,970
Common equivalent shares pursuant to Staff Accounting Bulletin No. 83 74
Common equivalent shares assuming conversion of stock options under
the treasury stock method 286 150
----------------------------------------
Shares used in per share calculation 3,887 2,648
========================================
Net income 1,362 870
Income addback under modified treasury stock method 37
----------------------------------------
Adjusted net income 1,362 907
========================================
Net income per share 0.35 0.34
========================================
11
</TABLE>
<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: August 12, 1996
Arthur H. Bruno
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Randall I. Bambrough Date: August 12, 1996
Randall I. Bambrough
Vice President of Finance and Administration
Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Financial Statements for the period ending June 28, 1996 included in
the Company's Form 10-QSB filed August 12, 1996 and is qualified in its entirety
by reference to such statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-28-1996
<CASH> 7,416
<SECURITIES> 0
<RECEIVABLES> 2,680
<ALLOWANCES> 414
<INVENTORY> 4,988
<CURRENT-ASSETS> 15,228
<PP&E> 2,812
<DEPRECIATION> 2,438
<TOTAL-ASSETS> 15,696
<CURRENT-LIABILITIES> 3,987
<BONDS> 0
0
0
<COMMON> 23,298
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,696
<SALES> 13,425
<TOTAL-REVENUES> 13,425
<CGS> 7,117
<TOTAL-COSTS> 7,117
<OTHER-EXPENSES> 5,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (167)
<INCOME-PRETAX> 1,426
<INCOME-TAX> 64
<INCOME-CONTINUING> 1,362
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,362
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
