UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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 27, 1997
OR
[ ] 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)
----------------------------------------------
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)
Issuer's telephone number, including area code: (408) 496-0474
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 1, 1997 was
4,486,123.
<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
Signatures 12
<PAGE>
Except for the historical information contained herein, the following
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 and, Form 10-KSB for the
year ended December 31, 1996 and Form 10-Q for the quarter ended March 28, 1997.
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CASTELLE
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS June 27, December 31,
1997 1996
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents ............................ $ 7,703 $ 8,161
Accounts receivable, net of allowance for
doubtful accounts of $669 in 1997 and $467 in 1996 ... 5,574 5,783
Inventories .......................................... 3,778 2,841
Prepaid expenses and other current assets ............ 776 626
Deferred income taxes ................................ 1,510 1,439
-------- --------
Total current assets ................................. 19,341 18,850
Property plant and equipment, net .................... 745 593
Other assets, net .................................... 135 84
Deferred income taxes ................................ 2,860 2,860
-------- --------
Total assets ......................................... $ 23,081 $ 22,387
======== ========
LIABILITIES
Current liabilities:
Accounts payable ..................................... $ 2,593 $ 1,862
Accrued liabilities .................................. 3,198 3,825
-------- --------
Total current liabilities ............................ 5,791 5,687
SHAREHOLDERS' EQUITY
Common stock ......................................... 23,845 23,698
Notes receivable
for purchase of common stock ......................... (296) (296)
Accumulated deficit .................................. (6,259) (6,702)
-------- --------
Total shareholders' equity ........................... 17,290 16,700
-------- --------
Total liabilities and shareholders' equity $ 23,081 $ 22,387
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
3 MONTHS ENDED 3 MONTHS ENDED
June 27, 1997 June 28, 1996
(unaudited) (unaudited)
<S> <C> <C>
Net sales .......................................... $ 7,002 $ 8,403
Cost of sales ...................................... 3,218 4,001
------- -------
Gross profit ....................................... 3,784 4,402
------- -------
Operating expenses:
Research and development ........................... 864 695
Sales and marketing ................................ 2,366 2,079
General and administrative ......................... 490 510
------- -------
Total operating expenses ........................... 3,720 3,284
------- -------
Operating income .................................. 64 1,118
Interest income, net ............................... 74 94
Other expense , net ................................ (14) (48)
------- -------
Income before provision for income taxes .......... 124 1,164
Provision for income taxes ......................... 50 177
------- -------
Net income ......................................... $ 74 $ 987
======= =======
Net income per share ............................... $ 0.02 $ 0.21
======= =======
Shares used in per share calculation ............... 4,628 4,793
======= =======
</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)
6 MONTHS ENDED 6 MONTHS ENDED
June 27, 1997 June 28, 1996
(unaudited) (unaudited)
<S> <C> <C>
Net sales .......................................... $ 13,421 $ 15,500
Cost of sales ...................................... 5,796 7,561
------- -------
Gross profit ....................................... 7,625 7,939
------- -------
Operating expenses:
Research and development ........................... 1,694 1,399
Sales and marketing ................................ 4,397 3,959
General and administrative ......................... 919 871
------- -------
Total operating expenses ........................... 7,010 6,229
------- -------
Operating income .................................. 615 1,710
Interest income, net ............................... 153 177
Other expense , net ................................ (33) (75)
------- -------
Income before provision for income taxes .......... 735 1,812
Provision for income taxes ......................... 294 226
------- -------
Net income ......................................... $ 441 $ 1,586
======= =======
Net income per share ............................... $ 0.10 $ 0.34
======= =======
Shares used in per share calculation ............... 4,628 4,741
======= =======
</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 6 MONTHS ENDED
June 27, 1997 June 28, 1996
(unaudited) (unaudited)
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income ......................................... $ 441 $ 1,586
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization ...................... 162 192
Deferred tax provision ............................. (71) 29
Write off of other assets and property and equipment 1 11
Provision for excess and obsolete inventory ........ 0 (248)
Changes in assets and liabilities:
Accounts receivable ................................ 209 185
Inventories ........................................ (936) (1,098)
Prepaid income taxes ............................... 1
Prepaid expenses and other assets .................. (157) (58)
Accounts payable ................................... 731 (768)
Accrued liabilities ................................ (626) (296)
Income tax payable ................................. 0 123
Deferred revenue ................................... 0 48
------- -------
Net cash used in operating activities .............. (246) (293)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment .............. (358) (206)
Acquisition of intangible assets ................... (1) (23)
------- -------
Net cash used in investing activities .............. (359) (229)
------- -------
Cash flows from financing activities:
Repayment of notes payable ......................... 0 (216)
Principal payments on capitalized leases ........... 0 (31)
Proceeds from issuance of common stock and warrants 147 975
Proceeds from collection of notes receivable for
Stock ...................... ....................... 83
------- -------
Net cash provided by financing activities .......... 147 811
------- -------
Net increase (decrease) in cash and cash equivalents (458) 289
Cash and cash equivalents at beginning of period ... 8,161 7,406
------- -------
Cash and cash equivalents at end of period ......... $ 7,703 $ 7,695
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
CASTELLE
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, 1997. 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, 1996.
2. Net Income Per Share
Net income per share is based upon the weighted average number of common
and common equivalent shares outstanding.
3. Inventories
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
JUNE 27, DECEMBER 31,
1996 1996
(unaudited)
Raw material . $2,170 $ 878
Work in process 386 212
Finished goods 1,222 1,751
------ ------
$3,778 $2,841
====== ======
4. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share,"
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS 128 supersedes Accounting Principles Board Opinion No.
15 and is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 requires restatement of all prior-period earnings
per share data presented after the effective date. Management does not expect
the adoption of SFAS 128 to have a material impact on the Company's financial
position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS130), " Reporting Comprehensive
Income." This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS131)," Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise." The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
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
and, Form 10-KSB for the year ended December 31, 1996 and Form 10-Q for the
quarter ended March 28, 1997.
Quarterly Results
As a percentage of Net Revenues
3 MONTHS ENDED 3 MONTHS ENDED
JUNE 27, 1997 JUNE 28, 1996
(unaudited) (unaudited)
Net sales ................ 100 100
Cost of sales ............ 46 48
--- ---
Gross profit ............. 54 52
--- ---
Operating expenses:
Research and development . 12 8
Sales and marketing ...... 34 25
General and administrative 7 6
--- ---
Total operating expenses . 53 39
--- ---
Operating income ........ 1 13
Interest income, net ..... 1 1
Other expense, net ....... 0 0
--- ---
Income before provision
for income taxes ........ 2 14
Provision for income taxes 1 2
--- ---
Net income ............... 1 12
=== ===
7
<PAGE>
Results as a percentage of Net Revenues
6 MONTHS ENDED 6 MONTHS ENDED
JUNE 27, 1997 JUNE 28, 1996
(unaudited) (unaudited)
Net sales ................ 100 100
Cost of sales ............ 43 49
--- ---
Gross profit ............. 57 51
--- ---
Operating expenses:
Research and development . 12 9
Sales and marketing ...... 33 25
General and administrative 7 6
--- ---
Total operating expenses . 52 40
--- ---
Operating income ........ 5 11
Interest income, net ..... 1 1
Other expense, net ....... 0 0
--- ---
Income before provision
for income taxes ........ 6 12
Provision for income taxes 3 2
--- ---
Net income ............... 3 10
=== ===
Net Sales
Net sales for the second quarter and first six months of fiscal 1997 of $7.0
million and $13.4 million, respectively, decreased compared with $8.4 million
and $15.5 million, respectively, for the corresponding periods of fiscal 1996.
The decrease in net sales was a result of lower sales of the Company's
fax-on-demand and print server products which were offset, in part, by an
increase in the Company's fax server product line. Net sales from the
fax-on-demand and print server product lines declined 75% and 20% for the second
quarter and 57% and 20%, respectively, for the first six months of 1997 compared
with the same periods of the previous year. Net sales for fax servers increased
9% in the second quarter and 10%, respectively, for the first six months of 1997
compared to the same periods in the previous year. Sales of the Company's
products outside North America totaled $3.5 million and $6.8 million or 50% and
51%, respectively, for the second quarter and first six months of 1997 of total
net sales. Sales of the Company's products outside North America during the same
periods in 1996 was $4.1 million and $7.8 million, respectively, or 49% and 50%
of total net sales.
Gross Profit
Gross profit of 54% and 57%, respectively, for the second quarter and first six
months of fiscal 1997 increased compared to gross profit of 52% and 51%,
respectively, for the same periods in 1996. The increase in gross profit is
primarily attributable to the lower cost of components incorporated in the
Company's products and to the sole of a higher proportion of fax servers which
have higher gross margins than do print servers; however this increase in the
gross profit margin was partially offset by a decrease in sales of fax-on-demand
products which have historically enjoyed higher gross profit margins.
8
<PAGE>
Research & Development
Research and development expenses were $864,000 and $1.7 million or 12%,
respectively, of net sales for the second quarter and first six months of fiscal
1997 as compared to $695,000 and $1.4 million or 8% and 9%, respectively, of net
sales for the same periods in 1996. The increase in the interim periods of 1997
compared to the interim periods of 1996 is primarily due to an increase in the
number of engineers employed by the Company.
Sales and Marketing
Sales and marketing expenses were $2.4 million and $4.4 million or 34% and 33%,
respectively, of net sales for the second quarter and first six months of fiscal
1997 as compared to $2.1 million and $4.0 million or 25%, respectively, of net
sales for the same periods in 1996. The increase in the interim periods of 1997
compared to the interim periods of 1996 is primarily due to an increase in the
number of sales and customer service employees and travel expense.
General and Administrative
General and administrative expenses were $490,000 and $919,000 or 7%,
respectively, of net sales for the second quarter and first six months of fiscal
1997 as compared to $510,000 and $871,000 or 6%, respectively, of net sales for
the same periods in 1996.
Interest income and Other expense, net
Interest income, net of other expense, was $60,000 and $120,000 or 1%,
respectively, of net sales for the second quarter and first six months of fiscal
1997 as compared to $46,000 and $102,000 or 1% respectively, of net sales for
the same periods in 1996.
Liquidity and Capital resources.
Net cash used in operating activities was $246,000 for the first six months of
fiscal 1997, primarily as a result of an increase in inventories and a decrease
in accrued liabilities, offset to some extent by an increase in accounts payable
and net income. This compares to net cash used in operating activities of
$293,000 for the first six months of fiscal 1996, primarily as a result of an
increase in inventories and a decrease in accounts payable, offset to some
extent by net income. Cash used in investing activities in the first six months
of fiscal 1997 was $359,000 and primarily from acquisition of computer equipment
as compared to $229,000 in 1996 which was associated with purchases of computer
equipment and an intangible asset. Net cash provided by financing activities in
the first six months of fiscal 1997 was $147,000 due to the exercise of stock
options as compared to $811,000 in 1996 which included proceeds from an
over-allotment of common stock associated with the Company's initial public
offering offset somewhat by repayment of notes payable. As of June 27, 1997, the
Company had $7.7 million of cash and cash equivalents. Working capital increased
to $13.6 million at June 27, 1997 from $13.2 million at December 31, 1996. The
Company is in the process of entering into a $3.0 million secured revolving line
of credit with a bank.
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.
The Company had no material capital commitments at June 27, 1997. Management
believes that, for the periods presented, inflation has not had a material
effect on the Company's operations.
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 27, 1997.
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
June 27, 1997 June 28, 1996
(unaudited) (unaudited)
Primary and Fully Diluted:
<S> <C> <C>
Weighted average common shares outstanding for the period 4,536 4,471
Common equivalent shares assuming conversion of stock
options under the treasury stock method
92 322
----- -----
Shares used in per share calculation .................... 4,628 4,793
===== =====
Net income .............................................. 74 987
----- -----
Net income per share .................................... 0.02 0.21
===== =====
6 MONTHS ENDED 6 MONTHS ENDED
June 27, 1997 June 28, 1996
(unaudited) (unaudited)
Primary and Fully Diluted:
<S> <C> <C>
Weighted average common shares outstanding for the period 4,480 4,451
Common equivalentshares assuming conversion of stock
options under the treasury stock method
148 290
----- -----
Shares used in per share calculation .................... 4,628 4,741
===== =====
Net income .............................................. 441 1,586
----- -----
Net income per share .................................... 0.10 0.34
===== =====
</TABLE>
11
<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/ Roy V. Prasad Date: Aug 11, 1997
Roy V. Prasad
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Randall I. Bambrough Date: Aug 11, 1997
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 27, 1997 included
in the Company's Form 10-Q filed August 11, 1997 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-31-1997
<PERIOD-END> JUN-27-1997
<CASH> 7,703
<SECURITIES> 0
<RECEIVABLES> 6,243
<ALLOWANCES> 669
<INVENTORY> 3,778
<CURRENT-ASSETS> 19,341
<PP&E> 3,182
<DEPRECIATION> 2,437
<TOTAL-ASSETS> 23,081
<CURRENT-LIABILITIES> 5,791
<BONDS> 0
0
0
<COMMON> 23,845
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,081
<SALES> 13,421
<TOTAL-REVENUES> 13,421
<CGS> 5,796
<TOTAL-COSTS> 5,796
<OTHER-EXPENSES> 7,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 735
<INCOME-TAX> 294
<INCOME-CONTINUING> 441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 441
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
