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 March 29, 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 May 8, 1996
was 3,619,931.
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CASTELLE
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets .............................. 2
Consolidated Statements of Income ........................ 3
Consolidated Statemens of Cash Flows ..................... 4
Notes to Consolidated Financial Statements ............... 5
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations ..................... 6
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................... 8
<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 dated December 20, 1995 and the Form 10-KSB for the
year ended December 31, 1995.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED BALANCE SHEETS
(in thousands)
_____
<S> <C> <C>
ASSETS MARCH 29, DECEMBER 31,
1996 1995
(unaudited)
Current assets:
Cash and cash equivalents $ 5,722 $ 7,268
Accounts receivable, net of
allowance for doubtful accounts of
$414 in 1996 and 1995 3,387 2,837
Inventories 5,199 3,637
Prepaid expenses and other
current assets 483 471
Total current assets 14,791 14,213
Property plant and equipment, net 342 334
Other assets, net 115 120
Total assets $ 15,248 $ 14,667
LIABILITIES
Current liabilities:
Long-term debt, current portion $ 193
Accounts payable $ 2,482 2,723
Accrued liabilities 1,934 2,448
Total current liabilities 4,416 5,364
Long-term debt, less current portion 4
Other long-term liabilities 10
Total liabilities 4,416 5,378
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding:
3,620 shares in 1996 and
3,469 shares in 1995 23,297 22,323
Notes receivable for purchase
of common stock (379) (379)
Accumulated deficit (12,086) (12,655)
Total shareholders' equity 10,832 9,289
Total liabilities and
shareholders' equity $ 15,248 $ 14,667
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
_____
<S> <C> <C>
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 29, 1996 MARCH 31, 1995
(unaudited) (unaudited)
Net sales $ 6,200 $ 5,684
Cost of sales 3,339 2,979
Gross profit 2,861 2,705
Operating expenses:
Research and development 533 499
Sales and marketing 1,493 1,363
General and administrative 291 314
Total operating expenses 2,317 2,176
Operating income 544 529
Interest income (expense), net 73 (119)
Other expense, net (20)
Income before provision for
income taxes 597 410
Provision for income taxes (28) (5)
Net income $ 569 $ 405
Net income per share $ 0.15 $ 0.16
Shares used in per share
calculation 3,832 2,649
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
_____
<S> <C> <C>
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 29, 1996 MARCH 31, 1995
(unaudited) (unaudited)
Cash flows from operating
activities:
Net income $ 569 $ 405
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation and amortization 97 171
Provision for doubtful accounts 9
Provision for excess and obsolete
inventory and used equipment 103 91
Changes in assets and liabilities:
Accounts receivable (550) 238
Inventories (1,665) (969)
Prepaid expenses and other
current assets (12) 108
Accounts payable (241) 112
Accrued liabilities and other
long-term liabilities (524) 118
Net cash provided by (used in)
operating activities (2,223) 283
Cash flows from investing activities:
Acquisition of property and equipment (80) (36)
Acquisition of intangible assets (20) (9)
Net cash used in investing activities (100) (45)
Cash flows from financing activities:
Decrease in restricted cash 297
Repayment of notes payable (166) (269)
Proceeds from bank borrowings 3,100
Repayment of bank borrowings (3,531)
Principal payments on
capitalized leases (31) (10)
Proceeds from issuance of
common stock 974
Net cash provided by (used in)
financing activities 777 (413)
Net decrease in cash and
cash equivalents (1,546) (175)
Cash and cash equivalents at
beginning of period 7,268 907
Cash and cash equivalents at
end of period $ 5,722 $ 732
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE>
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 inluded 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.
<TABLE>
<S> <C> <C>
MARCH 29, DECEMBER 31,
1996 1995
Raw material $ 2,929 $ 2,320
Work in process 936 419
Finished goods 1,334 898
$ 5,199 $ 3,637
</TABLE>
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<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 dated December 20, 1995 and the Form 10-KSB for the
year ended December 31, 1995.
<TABLE>
<CAPTION>
Percentage of Net Revenues
<S> <C> <C>
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 29, MARCH 31,
1996 1995
Net sales 100 % 100 %
Cost of sales 54 52
Gross profit 46 48
Operating expenses:
Research and development 9 9
Sales and marketing 24 24
General and administrative 5 6
Total operating expenses 38 39
Operating income 8 9
Interest income (expense), net 1 (2)
Other expense, net
Income before provision for
income taxes 9 7
Provision for income taxes
Net income 9 % 7 %
</TABLE>
Net Sales
Net sales for the quarter ended March 29, 1996 increased $516,000 or 9%
from the comparable quarter a year earlier. This increase in net sales
resulted primarily from higher sales of the Company's fax server products.
Fax server product sales increased by 35% to $2.7 million in the three month
period ended March 29, 1996 from $2.0 million during the comparable period in
fiscal 1995. These increases in fax server sales were partially offset by a
slight decrease in print server sales. Print server sales decreased by 8%,
to $3.4 million in the three month period ended March 29, 1996 from $3.7 million
during the comparable period in fiscal 1995. Other sales totaled $0.1 million
in the first quarter of 1996.
Gross Profit
Gross profit decreased as a percentage of net sales to 46% in the first
quarter of 1996, compared to 48% in the comparable period in fiscal 1995. This
decrease was primarily attributable to recognition of deferred revenue of
$200,000 in the first quarter of 1995 relating to the provision of free
upgrades, the associated costs being insignificant.
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<PAGE>
Research and Development
Research and development expense was $533,000 and $499,000 in the first
quarter of 1996 and 1995, or 9% of revenue each year, respectively. The
Company intends to continue to invest substantial amounts in research and
development in order to develop new products, as well as to improve product
functionality, cost and performance of existing products.
Sales and Marketing
Sales and marketing expenses were $1.5 million in the first quarter of
1996, or 24% of net sales as compared with $1.4 million, or 24% of net sales,
for the same period last year. The increase in absolute dollars was due
primarily to increases in personnel in key areas and higher spending on
advertising in Europe.
General and Administrative
General and administrative expenses were $291,000 in the first quarter of
1996, or 5% of net sales, as compared with $314,000, or 6% of net sales, for
the same period last year.
Interest Income/(Expense), net
Interest income, net, was $73,000 in the first quarter of 1996 as
compared with interest expense, net, of $119,000 for the same period last
year, due primarily to investment balances related to funds generated by the
Company's initial public offering in December 1995 and the decrease in
interest expense realized by eliminating the Company's bank borrowings and
long-term debt.
Liquidity and Capital Resources
As of March 29, 1996, the Company had $5.7 million of cash and cash
equivalents. Working capital increased to $10.4 million at March 29, 1996
from $8.8 million at December 31, 1995. The Company has a letter of commitment
for a $6.0 million secured revolving line of credit with a bank that has a
one year expiration, 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 pre-approved accounts receivable and 40% of export-related inventory.
Under the terms of the agreement, the Company is required to maintain 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' approval. The line of credit prohibits the payment of cash dividends
and contains certain restrictions on the Company' ability to loan money or
assets or purchase interests in other entities without the prior written
consent of the lender. At March 29, 1996, the line of credit had a zero
balance. 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. The interest rate
for this loan is prime plus 1.5% per annum.
The Company believes that exisiting sources of liquidity, capital
resources and funds from operations will satisfy the Company' anticipated cash
needs for the next 12 months. There can be no assurance, however, that the
Company' 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.
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<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 1. Computation of Net Income Per Share
(b) None
Exhibit 1
<TABLE>
<CAPTION>
CASTELLE
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share amounts)
_____
<S> <C> <C>
Quarter Ended Quarter Ended
March 29, 1996 March 31, 1995
(unaudited) (unaudited)
Primary and Fully Diluted:
Weighted average common shares
outstanding for the period 3,581 453
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 251 152
Shares used in per share
calculation 3,832 2,649
Net income 569 405
Income addback under modified
treasury stock method 14
Adjusted net income 569 419
Net income per share 0.15 0.16
</TABLE>
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<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: May 13, 1996
Arthur H. Bruno
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Randall I. Bambrough
----------------------------
Date: May 13, 1996
Randall I. Bambrough
Vice President of Finance and Administration
Chief Financial Officer
(Prinipal Financial and Accounting Officer)
