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 March 28, 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 May 2,1997 was
4,465,975.
CASTELLE
INDEX
Page No.
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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 6
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 10
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
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CASTELLE
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS March 28, December 31,
1997 1996
(unaudited)
Current assets:
Cash and cash equivalents ............................ $ 8,685 $ 8,161
Accounts receivable, net of allowance for
doubtful accounts of $467 in 1997 and 1996
5,417 5,783
Inventories .......................................... 3,722 2,841
Prepaid expenses and other current assets ............ 753 626
Deferred income taxes ................................ 1,439 1,439
-------- --------
Total current assets ................................. 20,016 18,850
Property plant and equipment, net .................... 641 593
Other assets, net .................................... 118 84
Deferred income taxes ................................ 2,860 2,860
-------- --------
Total assets ......................................... $ 23,635 $ 22,387
======== ========
LIABILITIES
Current liabilities:
Accounts payable ..................................... $ 3,140 1,862
Accrued liabilities .................................. 3,335 3,825
-------- --------
Total liabilities .................................... 6,475 5,687
SHAREHOLDERS' EQUITY
Common stock ......................................... 23,791 23,698
Notes receivable
for purchase of common stock ......................... (296) (296)
Accumulated deficit .................................. (6,335) (6,702)
-------- --------
Total shareholders' equity ........................... 17,160 16,700
-------- --------
Total liabilities and shareholders' equity $23,635 $ 22,387
======== ========
The accompanying notes are an integral part of these financial statements
2
CASTELLE
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
3 MONTHS ENDED 3 MONTHS ENDED
March 28, 1997 March 29, 1996
(unaudited) (unaudited)
Net sales .......................................... $ 6,419 $ 7,097
Cost of sales ...................................... 2,578 3,560
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Gross profit ....................................... 3,841 3,537
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Operating expenses:
Research and development ........................... 830 704
Sales and marketing ................................ 2,031 1,880
General and administrative ......................... 429 361
------- -------
Total operating expenses ........................... 3,290 2,945
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Operating income .................................. 551 592
Interest income, net ............................... 89 83
Other expense , net ................................ (29) (27)
------- -------
Income before provision for income taxes .......... 611 648
Provision for income taxes ......................... 244 49
------- -------
Net income ......................................... $ 367 $ 599
======= =======
Net income per share ............................... $ 0.08 $ 0.13
======= =======
Shares used in per share calculation ............... 4,628 4,689
======= =======
The accompanying notes are an integral part of these financial statements
3
CASTELLE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
3 MONTHS ENDED 3 MONTHS ENDED
March 28, 1997 March 29, 1996
(unaudited) (unaudited)
(unaudited)
Cash flows from operating activities:
Net income ......................................... $ 367 $ 599
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................... 72 139
Provision for excess and obsolete inventory ........ 0 103
Changes in assets and liabilities:
Accounts receivable ................................ 366 (737)
Inventories ........................................ (882) (1,663)
Prepaid expenses and other assets .................. (161) (11)
Accounts payable ................................... 1,277 (112)
Accrued liabilities and other long-term liabilities (491) (436)
------- -------
Net cash provided by (used in) operating activities 548 (2118)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment .............. (117) (97)
Acquisition of intangible assets ................... 0 (51)
------- -------
Net cash (used in) investing activities ............ (117) (148)
------- -------
Cash flows from financing activities:
Repayment of notes payable ......................... 0 (218)
Principal payments on capitalized leases ........... 0 (11)
Proceeds from issuance of common stock and warrants 93 975
------- -------
Net cash provided by financing activities .......... 93 746
------- -------
Net increase (decrease) in cash and cash equivalents 524 (1,520)
Cash and cash equivalents at beginning of period ... 8,161 7,406
------- -------
Cash and cash equivalents at end of period ......... $ 8,685 $ 5,886
======= =======
The accompanying notes are an integral part of these financial statements
4
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.
SEPTEMBER 27, DECEMBER 31,
1996 1996
(unaudited)
Raw material . $2,083 $ 878
Work in process 174 212
Finished goods 1,465 1,751
------ ------
$3,722 $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 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.
5
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.
Quarterly Results
As a percentage of Net Revenues
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 28, 1997 MARCH 29, 1996
(unaudited) (unaudited)
Net sales ................ 100 100
Cost of sales ............ 40 50
--- ---
Gross profit ............. 60 50
--- ---
Operating expenses:
Research and development . 13 10
Sales and marketing ...... 31 27
General and administrative 7 5
--- ---
Total operating expenses . 51 42
--- ---
Operating income ........ 9 8
Interest income, net ..... 1 1
Other expense, net ....... 0 0
--- ---
Income before provision
for income taxes ........ 10 9
Provision for income taxes 4 1
--- ---
Net income ............... 6 8
=== ===
6
Net Sales
Net sales for the first fiscal quarter of 1997 were $6.4 million,
a decrease of 10% from the $7.1 million recorded in first quarter of 1996. Net
sales from fax servers increased 11% compared to the same period last year.
However net sales from the fax-on-demand and print server product lines declined
33% and 20% respectively. Sales of the Company's products outside North America
totaled $3.3 million or 52% of net sales for the first quarter of 1997 as
compared with $3.7 million or 52% of net sales for the same period last year.
Gross Profit
Gross profit for the first quarter of 1997 was 60% versus 50%
for the same period in 1996. The increase in gross profit percentage is mainly
due to lower cost of components incorporated in the Company's products, selling
an increased proportion of fax servers which have a higher gross profit and
selling an increased proportion of products with lower sales discounts.
Research and Development
Research and development expenses were $830,000 and $704,000 in the first
quarters of 1997 and 1996, or 13% and 10% of net sales, respectively. The
increase in spending is primarily attributable to an increase in the number of
engineers employed by the Company.
Sales and Marketing
Sales and marketing expenses were $2.0 million in the first quarter of
1997, or 31% of net sales as compared with $1.9 million, or 27% of net sales,
for the same period last year. The increase was primarily a result of an
increase in the number of sales and marketing employees.
General and Administrative
General and administrative expenses were $429,000 in the first quarter of
1997, or 7% of net sales, as compared with $361,000 or 5% of net sales, for the
same period last year.
Interest Income, net
Interest income, net, was $89,000 or 1% of net sales in the first quarter
of 1997 as compared with interest income, net of interest expense, of $83,000 or
1% of net sales for the same period last year.
Liquidity and Capital Resources
Net cash provided by operating activities was $548,000 for the first
quarter of 1997, primarily as a result of net income, an increase in accounts
payable and a decrease in accounts receivable, offset to some extent by an
increase in inventories and a decrease in accrued liabilities. This compares to
net cash used in operating activities of $2.1 million for the first quarter of
1996, primarily as a result of an increase in inventories and accounts
receivable, offset to some extent by net income. Cash used in investing
activities in the first quarter of 1997 was $117,000 and primarily from
acquisition of computer equipment as compared to $148,000 in 1996 which was
associated with purchases of computer equipment and an intangible asset. Net
cash provided by financing activities in the first quarter of 1997 was $93,000
from the exercise of stock options as compared to $746,000 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 a note
payable. As of March 28, 1997, the Company had $8.7 million of cash and cash
equivalents. Working capital increased to $13.5 million at March 28, 1997 from
$13.2 million at December 31, 1996. 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 March 28, 1997 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.
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 March 28, 1997.
Management believes that, for the periods presented, inflation has not had a
material effect on the Company's operations.
7
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
March 28, 1997.
8
Exhibit 11.1
CASTELLE
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share amounts)
3 MONTHS ENDED 3 MONTHS ENDED
March 28, 1997 March 29, 1996
(unaudited) (unaudited)
Primary and Fully Diluted:
Weighted average common shares outstanding for the period 4,425 4,430
Common equivalentshares assuming conversion of stock
options under the treasury stock method
203 259
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Shares used in per share calculation .................... 4,628 4,689
===== =====
Net income .............................................. 367 598
----- -----
Net income per share .................................... 0.08 0.13
===== =====
9
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 12, 1997
Arthur H. Bruno
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Randall I. Bambrough Date: May 12, 1997
Randall I. Bambrough
Vice President of Finance and Administration
Chief Financial Officer
(Principal Financial and Accounting Officer)
10