8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

_______________________

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): January 16, 2007

_______________________

Castelle

(Exact Name of Registrant as Specified in Its Charter)

California

(State or Other Jurisdiction of Incorporation)

000-22020	77-0164056
(Commission File Number)	(IRS Employer Identification No.)
855 Jarvis Drive Suite 100 Morgan Hill, California	95037
(Address of Principal Executive Offices)	(Zip Code)

(408) 852-8000

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

    o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

    o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

    o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-(b))

    o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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Section 2.02.         Results of Operations and Financial Condition.

On January 16, 2007, Castelle issued a press release regarding its financial results for its fiscal year ended December 31, 2006. A copy of Castelle’s press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference.

The information contained in this Current Report on Form 8-K, including the exhibit hereto, are being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and shall not be deemed incorporated by reference in any filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

Section 9.01.         Financial Statements and Exhibits.

(d)          Exhibits

The following exhibit is being furnished herewith:

Exhibit Number	Description
99.1	Text of press release issued by Castelle dated January 16, 2007.

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SIGNATURE

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.

Date: January 16, 2007

	Castelle
By:	/s/ Paul W. Cheng
	Paul W. Cheng
	Vice President, Chief Financial Officer and Secretary

EXHIBIT INDEX

Exhibit Number	Description
99.1	Text of press release issued by Castelle dated January 16, 2007. *

                *              This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed incorporated by reference in any filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934 or the Securities Act of 1933, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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EX-99.1

 

Contact Information:
Scott C. McDonald	Karin Reak
President & Chief Executive Officer	Director of Marketing
Tel 408-852-8009	Tel 408-852-8034
Fax 408-852-8109	Fax 408-852-8134
smcdonald@castelle.com	kreak@castelle.com

FOR IMMEDIATE RELEASE  FEBRUARY 16, 2007

Castelle Reports Financial Results for Fourth Quarter and Full Year 2006

MORGAN HILL, CA – February 16, 2007 –  Castelle^® (Nasdaq: CSTL), a leader in ‘all-in-one’ network fax solutions for the business and enterprise markets, today announced financial results for the Company’s fourth quarter and full fiscal year ended December 31, 2006.

Revenues for the fourth quarter ended December 31, 2006, totaled $2.57 million, down 4% from $2.69 million in the fourth quarter of 2005. Net income for the fourth quarter of 2006 was $260,000, or $0.06 per fully diluted share, compared to a net loss of $120,000, or $0.03 per fully diluted share, in the fourth quarter of 2005, which included a tax provision of $395,000, or $0.10 per fully diluted share.

Revenues for the full year ended December 31, 2006 totaled $10.59 million, down 2% from $10.83 million in 2005. Net income for fiscal 2006 was $669,000, or $0.15 per fully diluted share, up 16% from $579,000, or $0.13 per fully diluted share, in 2005, which included the tax provision as stated above.

The Company recognized share-based payment expenses of $109,000 and $345,000 in the fourth quarter and fiscal 2006, respectively. No comparable expenses were included in 2005.

Castelle increased its cash position by 22% during 2006, reporting cash and cash equivalents of $8.26 million as of December 31, 2006, compared to $6.77 million as of December 31, 2005. The cash and cash equivalents at the end of 2006 amounted to $1.85 per fully diluted share. The company remains free of long-term debt.

“We look back on 2006 as a year of steady progress for Castelle and its fax server family,” said Scott McDonald, President and CEO of Castelle. “We made a strategic shift in our product mix with the introduction of FaxPress Premier™, FaxPress Enterprise™ and, most recently, FaxPress Enterprise Redundant fax servers, which collectively accounted for more than 55% of Castelle’s fax server installations. We are seeing an increase in enterprise-level installations as fax is becoming mission critical for many companies, and intend to introduce our newest generation of IP fax servers next month at the Spring VON show. Castelle’s new IP fax servers will enable customers to employ faxing in a VoIP environment and dramatically reduce the cost of large scale fax applications. This ongoing transition clearly highlights our success in meeting customer needs in their evolving network infrastructures. Looking ahead at 2007, I believe we are well positioned for top line growth.”

Use of Pro Forma Operating Results

Castelle’s GAAP results reflect the adoption of SFAS No. 123R, effective January 1, 2006. On a non-GAAP basis, net income, excluding share-based payment expenses, was $369,000 for the fourth quarter of 2006 and $1.01 million for the full year, compared to reported net loss of $120,000 in the fourth quarter of 2005 and net income of $579,000 for all of 2005. Prior to 2006, Castelle did not report share-based payments in the determination of its GAAP operating results. Castelle discloses non-GAAP financial measures of net income and net income per share and believes that this non-GAAP information provides historical comparability of its operating results over multiple reporting periods due to the absence of share-based payment expenses in comparative prior year periods. These non-GAAP financial measures should not be considered an alternative to earnings and earnings per share presented in conformity with U.S. GAAP. Further, these non-GAAP financial measures are unlikely to be comparable to non-GAAP information provided by other companies. In accordance with SEC regulations, reconciliation of the Castelle statements of earnings to the non-GAAP information is provided in the tables attached to this press release.

About Castelle

Castelle (Nasdaq: CSTL), a market leader in ’all-in-one’ network fax solutions for business and enterprise, offers organizations every possible network fax option: desktop faxing, production faxing, fax and email integration, workflow application integration, and tools for developing custom fax applications. FaxPress™, FaxPress Premier™ and FaxPress Enterprise™ network fax servers include the FaxPress or FaxPress Plus™ software suite that enables administrators and users to perform functions such as managing fax queues, creating reports, and viewing fax archives.

Castelle products are designed to be easy to use and maintain, and provide an economical way for companies to share resources over the network. Castelle was founded in 1987 and is headquartered in Morgan Hill, California. Its products are available through a worldwide network of distributors, resellers, and online retailers. Visit Castelle online at www.castelle.com.

FaxPress™, FaxPress Premier™, FaxPress Enterprise™ and FaxPress Plus™ are trademarks of Castelle.

If you would like to be added to Castelle’s investor email list, please contact Karin Reak at kreak@castelle.com.

Forward-Looking Statements

This press release may contain forward-looking statements, including but not limited to references to revenue growth, long-term growth prospects and our ability to successfully expand our product offerings to penetrate new and current markets. These statements are subject to risks and uncertainties, including but not limited to the impact on our results from fluctuations in demand for our products, our ability to maintain and increase market share, the timely development, acceptance and pricing of our products, our ability to deliver our newest generation of IP fax servers at the VON show due to delays in product development, the impact on EPS from future non-cash tax provisions or benefits and general economic conditions as they affect our customers. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements as contained in our reports to the Securities and Exchange Commission, including our Forms 10-K and 10-Q. The Company assumes no obligation to update the forward-looking information.

CASTELLE

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

	Three Months Ended					Twelve Months Ended
	December 31, 2006		December 31, 2005			December 31, 2006		December 31, 2005
Revenues:
Products	$	1,697	$	1,936		$	7,253	$	7,891
Services		874		755			3,337		2,941
Total net revenues		2,571		2,691			10,590		10,832
Cost of revenues:
Products		731		706			2,931		2,694
Services		225		257			1,025		1,035
Total cost of revenues		956		963			3,956		3,729
Gross profit		1,615		1,728			6,634		7,103
Operating expenses:
Research and development		416		431			1,782		1,683
Sales and marketing		561		644			2,502		2,506
General and administrative		433		412			1,931		2,045
Total operating expenses		1,410		1,487			6,215		6,234
Operating income		205		241			419		869
Other income, net		84		34			279		105
Income before income taxes		289		275			698		974
Provision for income taxes		29		395			29		395
Net income	$	260	$	(120	)	$	669	$	579
Net income per common share :
Basic	$	0.06	$	(0.03	)	$	0.17	$	0.15
Diluted	$	0.06	$	(0.03	)	$	0.15	$	0.13
Shares used in per share calculation:
Basic		4,040		3,984			4,023		3,904
Diluted		4,468		3,984			4,475		4,488

CASTELLE

GAAP to Pro Forma Reconciliation of Statements of Operations

Excluding 123R Share Based Payment Expenses

(in thousands, except per share data)

(Unaudited)

	Three Months Ended December 31, 2006							Twelve Months Ended December 31, 2006
	GAAP		Share based payment expenses			Pro forma		GAAP		Share based payment expenses			Pro forma
Revenues:
Products	$	1,697	$	—		$	1,697	$	7,253	$	—		$	7,253
Services		874		—			874		3,337		—			3,337
Total net revenues		2,571		—			2,571		10,590		—			10,590
Cost of revenues:
Products		731		(7	)		724		2,931		(13	)		2,918
Services		225		(10	)		215		1,025		(34	)		991
Cost of revenues		956		(17	)		939		3,956		(47	)		3,909
Gross profit		1,615		17			1,632		6,634		47			6,681
Operating expenses:
Research and development		416		(41	)		375		1,782		(122	)		1,660
Sales and marketing		561		(11	)		550		2,502		(35	)		2,467
General and administrative		433		(40	)		393		1,931		(141	)		1,790
Total operating expenses		1,410		(92	)		1,318		6,215		(298	)		5,917
Operating income		205		109			314		419		345			764
Other income, net		84		—			84		279		—			279
Income before income taxes		289		109			398		698		345			1,043
Provision for income taxes		29		—			29		29		—			29
Net income	$	260	$	109		$	369	$	669	$	345		$	1,014
Net income per common share:
Basic	$	0.06	$	0.03		$	0.09	$	0.17	$	0.08		$	0.25
Diluted	$	0.06	$	0.02		$	0.08	$	0.15	$	0.08		$	0.23
Shares used in per share calculation:
Basic		4,040					4,040		4,023					4,023
Diluted		4,468					4,468		4,475					4,475

CASTELLE

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

(Unaudited)

	December 31, 2006		December 31, 2005
Assets:
Current assets:
Cash and cash equivalents	$	8,259	$	6,766
Accounts receivable, net		932		1,137
Inventories		1,016		1,156
Prepaid expenses and other current assets		238		135
Deferred taxes		185		212
Total current assets		10,630		9,406
Property and equipment, net		280		200
Other assets		125		140
Deferred taxes		944		928
Total assets	$	11,979	$	10,674
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt	$	—	$	14
Accounts payable		349		286
Accrued liabilities		825		824
Deferred revenue		1,710		1,498
Total current liabilities		2,884		2,622
Long-term debt		—		—
Total liabilities		2,884		2,622
Shareholders’ equity		9,095		8,052
Total liabilities and shareholders’ equity	$	11,979	$	10,674

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