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 September 27, 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 November 6, 1996 was
3,621,908
<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 Forms 10-QSB for the quarters ended March 29,
1996 and June 28, 1996.
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CASTELLE
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS September 27, December 31,
1996 1995
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 8,254 $ 7,268
Accounts receivable, net of allowance for
doubtful accounts of $306 in 1996 and
$414 in 1995 3,812 2,837
Inventories 3,407 3,637
Prepaid expenses and other current assets 1,045 471
-------------- ---------------
Total current assets 16,518 14,213
Property plant and equipment, net 382 334
Other assets, net 90 120
-------------- ---------------
Total assets $ 16,990 $ 14,667
============== ===============
LIABILITIES
Current liabilities:
Long-term debt, current portion $ 193
Accounts payable $ 1,764 2,723
Accrued liabilities 2,655 2,448
-------------- ---------------
Total current liabilities 4,419 5,364
Long-term debt, less current portion 4
Other long-term liabilities 10
-------------- ---------------
Total liabilities 4,419 5,378
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 3,622 shares
in 1996 and 3,469 shares in 1995 23,298 22,323
Notes receivable for purchase of common stock (296) (379)
Accumulated deficit (10,431) (12,655)
-------------- ---------------
Total shareholders' equity 12,571 9,289
-------------- ---------------
Total liabilities and shareholders' equity $ 16,990 $ 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
SEPTEMBER 27, 1996 SEPTEMBER 29, 1995
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 7,925 $ 6,763
Cost of sales 4,268 3,674
----------------------------- ------------------------------
Gross profit 3,657 3,089
----------------------------- ------------------------------
Operating expenses:
Research and development 577 554
Sales and marketing 1,890 1,449
General and administrative 332 407
----------------------------- ------------------------------
Total operating expenses 2,799 2,410
----------------------------- ------------------------------
Operating income 858 679
Interest income (expense), net 79 (83)
Other expense , net (35) 0
----------------------------- ------------------------------
Income before provision for income taxes 902 596
Provision for income taxes 40 24
----------------------------- ------------------------------
Net income $ 862 $ 572
============================= ==============================
Net income per share $ 0.23 $ 0.23
============================= ==============================
Shares used in per share calculation 3,826 2,577
============================= ==============================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 27, 1996 SEPTEMBER 29, 1995
(unaudited)
<S> <C> <C>
Net sales $ 21,350 $ 18,637
Cost of sales 11,385 10,059
------------------------------ --------------------------------
Gross profit 9,965 8,578
------------------------------ --------------------------------
Operating expenses:
Research and development 1,634 1,550
Sales and marketing 5,089 4,234
General and administrative 1,050 1,030
------------------------------ --------------------------------
Total operating expenses 7,773 6,814
------------------------------ --------------------------------
Operating income 2,192 1,764
Interest income (expense), net 246 (275)
Other expense, net (110) 0
------------------------------ --------------------------------
Income before provision for income taxes 2,328 1,489
Provision for income taxes 104 47
------------------------------ --------------------------------
Net income $ 2,224 $ 1,442
============================== ================================
Net income per share $ 0.58 $ 0.57
============================== ================================
Shares used in per share calculation 3,869 2,623
============================== ================================
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 27, 1996 SEPTEMBER 29, 1995
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,224 $ 1,442
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 231 473
Write off of other assets and property and equipment 11
Provision for doubtful accounts (108) (23)
Provision for excess and obsolete inventory (218) 289
Changes in assets and liabilities:
Accounts receivable (867) (789)
Inventories 448 (462)
Prepaid expenses and other assets (574) (37)
Accounts payable (959) 220
Accrued liabilities and other long-term liabilities 197 592
------------------------ --------------------------
Net cash provided by operating activities 385 1,705
------------------------ --------------------------
Cash flows from investing activities:
Acquisition of property and equipment (237) (92)
Acquisition of intangible assets (23)
------------------------ --------------------------
Net cash used in investing activities (260) (92)
------------------------ --------------------------
Cash flows from financing activities:
Decrease in restricted cash 389
Repayment of notes payable (166) (807)
Repayment of bank borrowings (163)
Principal payments on capitalized leases (31) (33)
Proceeds from issuance of common stock and warrants 975 1
Proceeds from collection of notes receivable for
stock 83
------------------------ --------------------------
Net cash provided by (used in) financing activities 861 (613)
------------------------ --------------------------
Net increase in cash and cash equivalents 986 1,000
Cash and cash equivalents at beginning of period 7,268 907
------------------------ --------------------------
Cash and cash equivalents at end of period $ 8,254 $ 1,907
======================== ==========================
</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 periods 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. Business Combination
Pursuant to an Agreement and Plan of Reorganization and Merger dated as of
August 22, 1996 ("the Agreement"), the Company will issue 850,000 shares of
its common stock for all of the outstanding common stock (all reserved for
issuance under exercise of options), preferred stock and common stock
options of Ibex Technologies, Inc. ("Ibex") at an exchange rate to be
determined by the price of the Company's stock on the date the transaction
closes. The agreement is subject to shareholder approval and certain other
conditions. If consummated, the combination will be accounted for as a
pooling of interests. In connection with the proposed combination, the
Company filed a Registration Statement on Form S-4 with the Securities and
Exchange Commission on October 25, 1996. Ibex, a privately held company
based in California, designs, develops and markets fax-on-demand,
fax-gateway, fax broadcast and Web/fax applications that are sold direct
and through value-added resellers. Ibex reported total net assets of
$986,000 at December 31, 1995 and net revenues of $3.1 million for the year
then ended.
3. Net Income Per Share
Net income per share is based upon the weighted average number of common
and common equivalent shares outstanding.
4. Inventories
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
SEPTEMBER 27, DECEMBER 31,
1996 1995
(unaudited)
Raw material $ 1,857 $ 2,320
Work in process 23 419
Finished goods 1,527 898
---------------- -------------------
$ 3,407 $ 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 Forms 10-QSB for the quarters ended March 29,
1996 and June 28, 1996.
Quarterly Results
As a percentage of Net Revenues
3 MONTHS ENDED 3 MONTHS ENDED
SEPTEMBER 27, 1996 SEPTEMBER 29, 1995
(unaudited) (unaudited)
Net sales 100 % 100 %
Cost of sales 54 54
---------------- -----------------
Gross profit 46 46
---------------- -----------------
Operating expenses:
Research and development 7 8
Sales and marketing 24 22
General and administrative 4 6
---------------- -----------------
Total operating expenses 35 36
---------------- -----------------
Operating income 11 10
Interest income (expense), net 1 (1)
Other expense, net (1)
---------------- -----------------
Income before provision
for income taxes 11 9
Provision for income taxes
---------------- -----------------
Net income 11 % 9 %
================ =================
7
<PAGE>
Results as a percentage of Net Revenues
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 27, 1996 SEPTEMBER 29, 1995
(unaudited)
Net sales 100 % 100 %
Cost of sales 53 54
---------------- ------------------
Gross profit 47 46
---------------- ------------------
Operating expenses:
Research and development 8 8
Sales and marketing 24 23
General and administrative 5 6
---------------- ------------------
Total operating expenses 37 37
---------------- ------------------
Operating income 10 9
Interest income (expense), net 1 (1)
Other expense, net
---------------- ------------------
Income before provision
for income taxes 11 8
Provision for income taxes (1)
---------------- ------------------
Net income 10 % 8 %
================ ==================
Net Sales
Net sales for the quarter ended September 27, 1996 increased $1.2 million
or 17% from the comparable quarter a year earlier. Net sales were $21.4 million
for the first 9 months of fiscal 1996, up 15% from the $18.6 million reported
for the same period last year. The increase in net sales resulted primarily from
higher sales of the Company's fax server products. Fax server product sales
increased by 22% to $9.5 million in the nine month period ended September 27,
1996 from $7.8 million during the comparable period in fiscal 1995. Sales were
also augmented by an increase in print server sales. Print server sales
increased by 5%, to $11.3 million in the nine month period ended September 27,
1996 from $10.8 million during the comparable period in fiscal 1995. Sales of
the Company's products outside North America totaled $4.1 million or 52% of net
sales for the third quarter of 1996 as compared with $3.4 million or 51% of net
sales for the same period last year.
Gross Profit
Gross profit for the third quarters of 1996 and 1995 was 46%. For the first
nine months of of fiscal 1996, the Company's gross margin was 47% compared to
46% for the same period last year. This increase in gross margin 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 $577,000 and $554,000 in the third
quarters of 1996 and 1995, or 7% and 8% of net sales, respectively. Research and
development expenses were $1.6 million for the first nine months of 1996 and
1995, or 8% of net sales 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 $1.9 million in the third quarter of
1996, or 24% of net sales as compared with $1.4 million, or 22% of net sales,
for the same period last year. Sales and marketing expenses increased to $5.1
million in the first nine months of fiscal 1996 from $4.2 million in the
comparable period last year. The increases were primarily a result of higher
expenditures on advertising and marketing materials as well as an increase in
headcount.
General and Administrative
General and administrative expenses were $332,000 in the third quarter of
1996, or 4% of net sales, as compared with $407,000, or 6% of net sales, for the
same period last year. General and administrative expenses were $1.1 million and
$1.0 million for the first nine months of 1996 and 1995, or 5% and 6% of net
sales, respectively.
Interest Income/(Expense), net
Interest income, net, was $79,000 in the third quarter of 1996 as compared
with interest expense, net, of $83,000 for the same period last year. For the
first nine months of fiscal 1996, the Company's interest income, net, was
$246,000 compared to interest expense, net, of $275,000 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 September 27, 1996, the Company had
$8.3 million of cash and cash equivalents. Working capital increased to $12.1
million at September 27, 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. Under the foreign accounts receivable
and inventory line, 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 September 27, 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 September 27, 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
The Company filed a report on Form 8-K dated September 3, 1996
announcing the Company's merger with Ibex Technologies, Inc., a
California company.
10
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
CASTELLE
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share amounts)
3 Months Ended 3 Months Ended
September 27, 1996 September 29, 1995
(unaudited) (unaudited)
Primary and Fully Diluted:
<S> <C> <C>
Weighted average common shares outstanding for the period 3,621 447
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 205 86
------------------- -------------------
Shares used in per share calculation 3,826 2,577
=================== ===================
Net income 862 572
Income addback under modified treasury stock method 15
------------------- -------------------
Adjusted net income 862 587
=================== ===================
Net income per share 0.23 0.23
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
Year-to-date Year-to-date
September 27, 1996 September 29, 1995
(unaudited)
Primary and Fully Diluted:
<S> <C> <C>
Weighted average common shares outstanding for the period 3,608 451
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 261 128
-------------------- -------------------
Shares used in per share calculation 3,869 2,623
==================== ===================
Net income 2,224 1,442
Income addback under modified treasury stock method 51
-------------------- -------------------
Adjusted net income 2,224 1,493
==================== ===================
Net income per share 0.58 0.57
==================== ===================
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: November 11, 1996
Arthur H. Bruno
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Randall I. Bambrough Date: November 11, 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 September 27, 1996 included
in the Company's Form 10-QSB filed November 11, 1996 and is qualified in its
entirety by reference to such statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-27-1996
<CASH> 8,254
<SECURITIES> 0
<RECEIVABLES> 4,118
<ALLOWANCES> 306
<INVENTORY> 3,964
<CURRENT-ASSETS> 16,518
<PP&E> 2,966
<DEPRECIATION> 2,584
<TOTAL-ASSETS> 16,990
<CURRENT-LIABILITIES> 4,419
<BONDS> 0
0
0
<COMMON> 23,298
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,990
<SALES> 21,350
<TOTAL-REVENUES> 21,350
<CGS> 11,385
<TOTAL-COSTS> 11,385
<OTHER-EXPENSES> 7,883
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (246)
<INCOME-PRETAX> 2,328
<INCOME-TAX> 104
<INCOME-CONTINUING> 2,224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,224
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
</TABLE>
